The Punjab and Haryana High Court has held that deduction section 80-I under Income Tax Act benefit available upon conversion of proprietorship concern to private limited company.
The bench of Justice Sanjeev Prakash Sharma and Justice Sanjay Vashisth has observed that the benefit under section 80-IB of the Act is available to the partnership firm and the conditions imposed under section 80-IB(2)(i) does not come in the way.
Section 80-IB(2)(i) of the Income Tax Act applies to any industrial undertaking which fulfils the condition for availing the benefit of deduction in respect of profits and gains that it is not formed by splitting up, or the reconstruction, of a business already in existence.
Background
The appellant/assessee was formed by conversion of a partnership into a Private Limited Company. All the assets and liabilities of the firm as on 31st March, 1989 were taken over by the appellant – company and the balance of machinery was also taken over by the appellant – company, which is reflected from the audited accounts of the Assessment Year 1990-91, stating clearly that there was no revaluation of the assets.
As per the Memorandum of Association (MoA) of the appellant-company, it was to take over the existing business of the Micromation of the partnership concern.
Section 80-I allows deduction in respect of profits and gains to a firm or a proprietorship concerning upto 20% of the such profits and gains, while deductions on the profits is available upto 25% to a Private Limited Company. Apparently, the partnership concern was therefore, converted into a Private Limited Company with the aforesaid aspect in mind.
The appellant company filed the return declaring income, which was selected for scrutiny and the respondents disallowed the deduction claimed by the appellant under Section 80(I) of the Income Tax Act, 1961 on the ground that out of the total plant and machinery worth Rs. 2,41,922/-, the machinery taken over by M/s Micromation company was of the value of Rs. 1,03,163/- and the explanation to sub-section 80(I)(2) of the Income Tax Act and the proviso thereto provided that the total value of plant and machinery transferred should not exceed 20% of its value used for machinery or plant for business.
The appeal preferred by the appellant against the order by the Assessing Officer was rejected holding that benefit of Section 80(I) of the Income Tax Act was to be given only if the undertaking was not found by splitting up or reconstruction of business already in existence or by transfer to new business machinery or plant previously used for any purpose. Appeal before the ITAT by the appellant-assessee also failed. It was dismissed.
The appeal preferred by the appellant was rejected by CIT(A), Chandigarh and the ITAT has also dismissed the appeal.
Issue Raised
The issue raised was whether the appellant Company could be legally denied deduction under Section 80-I for the unexpired period merely because the partnership concern carrying on the same activity was converted into a Private Limited Company, which too continued and carried on the same activity.
Conclusion
The court relied on the decision of the Allahabad High Court in the case of Commissioner of Income-Tax vs. Prisma Electronics in which it was held that section 84 is more or less the same as provided in section 80- IB of the Act. The Central Board of Direct Taxes issued a Circular F. No. 15/5/63-IT(A), dated December 13, 1963, indicating that the benefit of section 84 is attached to the undertaking and not to the owner thereof and, consequently, 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.
The court allowed the appeal of the assessee.
Case title: M/s Micromation Pvt. Ltd. V/S Commissioner of Income Tax
Citation: ITA-53-2002 (O&M) & connected cases
Counsel for the Petitioner: Alok Mittal
Counsel for the Respondent: Yogesh Putney, Sr. Standing Counsel
Decision Date: 03.09.2024
