A division bench of the Allahabad High Court recently ruled that the benefit of Section 80IB of the Income Tax Act, 1961 is not available to assessee for the purchase of business unit including plant & machinery from a separate entity to form a separate industrial undertaking.
Assessee purchased a unit of M/s. M.C. Roller Flour Mills Limited as a whole including its plant and machinery. For the year under consideration, the assessee claimed deduction of the amount spent on the above transaction under Section 80-IB of the Act which provides for certain percentage of deductions in computing the total income of the assessee from its profits and gains.
However, the claim was rejected by the department on an impression that the transfer of the entire business unit to the assessee includes transfer of plant and machinery which was in use by the said unit or the previous owner ie. M.C. Roller Flour Mills Ltd., for establishing a new business by the assesse and therefore, in view of clause (ii) of Sub-section (2) of the benefit of Section 80-IB of the Act cannot be granted to the assessee.
The Tribunal sustained the order of the department by finding that there is transfer of plant and machinery of the unit Shri Ram Flour Mills of M/s. M.C. Roller Flour Mills Limited to the assesse company. The plant and machinery of the said unit was in use by the previous company. Therefore, the assessee company is not an industrial undertaking formed by the purchase of a new plant and machinery rather than by the transfer of previously used plant and machinery. Thus, transfer may not have amounted to splitting or reconstruction of business already in existence. Nonetheless, it amounts to constituting a new industrial undertaking by the transfer of used plant and machinery.
On appeal, the assesse contended that as the entire business of one particular unit has been taken over by the assessee, there is no reconstruction of the business already in existence and the business of the assessee is not formed by the transfer of machinery and plant previously used for any purpose, in as much as, the whole of the business was taken over and has continued as such by the assessee.
The bench accepted the contentions of the department and held that the transfer of the used plant and machinery may not result in splitting and reconstruction of the existing industrial undertaking but nevertheless when an unit as a whole is transferred, it includes the transfer of plant and machinery which was in use by the existing unit of a separate legal entity for the formation of a separate industrial undertaking. “This kind of transfer is clearly hit by clause (iii) of Sub-section (2) of Section 10 A of the Act may not be by clause (ii) of Sub-section 2 of Section 10A of the Act,” the bench said.
The bench further opined that “the purpose behind permitting the deduction under Section 80-IB of the Act is to promote setting up of a new industrial undertaking by purchasing new plant and machinery. In the event, setting up of an industrial unit by purchase of old/used plant and machinery is permitted, it would defeat the entire purpose of allowing deductions under Section 80-IB of the Income Tax Act.”
Read the full text of the Judgment below.
