Commissioner of Income Tax vs Shri Renuga Textiles Mills Ltd.

Mrs. Chitra Venkataraman, J.—The Revenue is on appeal as against the order passed by Tribunal relating to the asst. yr. 1994-95. Following are the questions of law raised for consideration:

(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amalgamated company is eligible for the benefit of exemption under s. 10B which was granted to the amalgamating company in respect of an export-oriented unit set up by it ?

(ii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that development of software is a revenue expenditure and not a capital expenditure ?

As far as the second question of law involved in development of software is concerned, in the decision reported in Commissioner of Income Tax Vs. Southern Roadways Ltd., this Court considered the similar question. In the said decision, following the decision of the apex Court reported in Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat, his Court held that upgradation of computers by changing certain parts, thereby enhancing the configuration of the computers for improving their efficiency, was only a revenue expenditure. The said view was again followed by this Court in Commissioner of Income Tax Vs. Soutehrn Roadways Ltd., ). Following the above decisions, we confirm the order of the Tribunal in respect of second question of law.

As far as the first question of law on the claim on s. 10B of the IT Act, is concerned, following details need to be seen. The assessment year under consideration is 1994-95. The assessee herein was the holding company and Renuga Soft-X Towels (P) Ltd. was a 100 per cent subsidiary of the holding company. By a scheme of merger effective from 1st Jan., 1993, the subsidiary company stood merged with the assessee company herein. The scheme of amalgamation was sanctioned by this Court under order dt. 7th April, 1993. Consequent to the merger, Renuga Soft X Towels Ltd. continues to have the 100 per cent EOU status as an undertaking of the assessee company vide E.O. 254 of 1992, dt. 8th April, 1994 received from Government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals (EOU section). Based on the said recognition granted, the assessee sought for exemption of income earned by 100 per cent EOU under s. 10B of the Act. The ITO rejected the contention of the assessee for claim of exemption under s. 10B of the Act on the ground that there was no provision for granting of the allowance on the basis of the ownership of the new undertaking. Further, the subsidiary company had opted out the exemption granted under s. 10B of the Act for the asst. yr. 1993-94. Thus, when once the assessee claimed deduction under s. 80I, there could be no further claim under s. 10B. Thus, the claim of the assessee was rejected. Aggrieved by this, the assessee went on appeal before the CIT(A). The CIT(A) pointed out that consequent on the amalgamation, the EOU status has passed on from the amalgamating company to the hands of the amalgamated company. This arrangement was approved by the Government by its order dt. 8th April, 1994. Referring to s. 10B(2)(iii) of the Act, the CIT(A) held that there was no violation of the said provision. Hence, the only question was as to whether the assessee was granted deduction under s. 80I of the Act. The CIT(A) directed the AO to verify the same. Otherwise, it agreed with the assessee''s contention that it was entitled to claim under s. 10B of the Act. Aggrieved by this, the Revenue went on appeal before the Tribunal, which upheld the order of the CIT(A). The Tribunal pointed out that Renuga Soft X Towels (P) Ltd. had amalgamated with the assessee company. The amalgamating company was 100 per cent EOU and after amalgamation, Ministry of Industries, Government of India recognised the status of the assessee as 100 per cent EOU. Considering the fact that the relief was attached to the industrial undertaking, there being no violation of the provisions of s. 10B of the Act too, the Tribunal allowed the claim. Apart from that, it also referred to the Commissioner of Income Tax, Delhi-I Vs. Durga Enterprises (P.) Ltd., and held that benefit was attached to the undertaking and not to the ownership, thus, the claim was allowed. Aggrieved by this, present appeal by the Revenue.

As far as the grant of relief under s. 10B of the Act is concerned, sub-s. (2) of s. 10B as it stood at the relevant time, gives the conditions to be fulfilled to get the exemption. The said section reads as under:

10(B)(2) This section applies to any undertaking which fulfils all the following conditions, namely:

(i) it manufactures or produces any articles or things or computer software;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

As far as the present case is concerned, there is no denial of the fact that the assessee is engaged in the manufacture of cotton yam which is not formed by splitting up or reconstruction of business already in existence. The second requirement which is emphasised by the Revenue is that the assessee must show that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

The Revenue contends that as far as this aspect is concerned, on the amalgamation, the amalgamating company is wound up and the entire business is transferred to the assessee''s company. The machinery and plant previously used by the amalgamating company is used by the amalgamated company. The assessee, which actually engaged in the manufacture of cotton yarn, thus carrying on a new business is not entitled to relief under s. 10B of the Act.

Learned standing counsel for the Revenue also pointed out to s. 10B(7A) of the Act, inserted by the Finance Act, 2003 w.e.f. 1st April, 2004 that in the case of amalgamation or the demerger, no deduction shall be admissible for the previous year in which the amalgamation or the demerger takes place and the provisions of s. 10B of the Act would apply to the amalgamated or resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or the demerger had not taken place. Having regard to the specific provisions thus introduced w.e.f. 1st April, 2004 and the said provisions of law not being available to the assessee for the asst. yr. 1994-95, the Tribunal committed serious error in granting the relief to the assessee.

Per contra, learned counsel for the assessee referred to the CBDT circular which pointed out that the benefit attaches to the undertaking and not to the owner and the successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern. Considering the fact that the amalgamating company is 100 per cent subsidiary of the amalgamated company, in the case merger there being no transfer to new business, the relief is rightly granted to the assessee. Quite apart from that, the assessee is recognised as 100 per cent EOU by the Central Government and after such recognition, it is not open to the Revenue to dispute the claim of the assessee.

Heard learned standing counsel for the Revenue as well as learned counsel for the assessee.

We agree with the contention of the assessee herein that it is entitled to get the benefit under s. 10B of the Act. As already seen in the preceding para, the subsidiary company amalgamated with the holding company w.e.f. 1st Jan., 1993 and as a result of the merger, the business of the amalgamating company became the business of the assessee company. Given the fact that the assessee is a holding company of the subsidiary company, when the assets stood transferred to the amalgamated company, evidently, the export business done by the assessee is not a business formed by splitting up or reconstruction of a business already in existence. As far as sub-cl. (iii) of s. 10B(2) is concerned, the criteria for grant of the relief is that the undertaking is not formed by transfer to a new business of machinery or plant previously used for any purpose.

In the decision of the apex Court reported in Saraswati Industrial Syndicate Ltd. Vs. Commissioner of Income Tax, relied on by the Revenue, the apex Court held that in order to attract the provisions of s. 41(1) of the IT Act, 1961, the identity of the assessee in the earlier year in which deduction was granted in relation to a trading liability and in the subsequent year in which benefit is derived must be the same. In other words, if there is change in the identity of the assessee, s. 41 would not be applicable. As far as the fact therein was concerned, the assessee was a subsidiary of ISGEC, the holding company. On amalgamation, the holding company stood dissolved and ceased to be in existence and the subsidiary company was to meet the liabilities of the holding company. After amalgamation, the assessee company derived benefit of the sum which was claimed as trading liability at the hands of the amalgamated company. But, then It was not liable to tax under s. 41(1) of the IT Act, 1961. The apex Court pointed out that upon amalgamation, the amalgamating company ceased to exist and the assessee company was a separate entity. Hence, the amalgamating company would not liable to pay tax under s. 41(1) on the benefit derived by it in relation to the deduction allowed to the amalgamated company. The apex Court pointed out that when two companies are merged or so joined as to form a third company or one is absorbed into the other or blended with another, the amalgamating company loses its identity.

Extending the said decision to sub-cl. (iii) of s. 10B(2) of the Act, it is clear that as a result of the merger of the subsidiary company with the holding company, there is no new business formed by transfer of machinery or plant previously used for any business, as pointed out by the apex Court that "strictly amalgamation does not cover the mere acquisition by a company of the share capital of the other company which remains in existence and continues its undertaking but the context in which the term is used may show that it is intended to include such an acquisition", it is no doubt true as per the law laid down by the apex Court that on merger, the amalgamating company looses its entity But, then by such merger there is no formation of new business to disqualify the claim of the assessee for deduction under s. 10B of the Act. As already pointed out and rightly relied on by the assessee, the CBDT Circular dt. 13th Dec, 1963, referred the benefit of s. 84 as available to successor for remaining years. In the said circular, the Board pointed out that the benefit under s. 84 is attached to the undertaking and not to the owner and the successor would be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern and continues its business as an EOU.

After the deletion of s. 84 from the statute book, and insertion of 80J and thereafter benefit under s. 10B being attached to the undertaking, we do not find any ground to reject the assessee''s claim for 100 per cent deduction attached to the undertaking. Apart from the reason as stated above, as already seen, the assessee''s status as 100 per cent EOU was approved by the Government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals (EOU section). In the background of the said recognition too, we agree with the assessee''s counsel, thereby upheld the order of the Tribunal.

In the light of the above-said view, it is not necessary for us to go into the question as to whether sub s. (7A) of s. 10B which is introduced subsequent to the assessment year under the Finance Act, would have relevance to understand the claim of the assessee''s claim. In the result, the tax case (appeal) is dismissed. No costs.