SC upholds Deduction of Gains derived by 100% Export-oriented undertaking as Assessee set up only an expansion of Old Unit and not a New Unit [Read Order]

The Supreme Court has upheld the deduction of gains derived by 100% export-oriented undertaking as assessee set up only an expansion of old units and not a new unit.

In arriving at the conclusion that the respondent-assessee was entitled to the benefit of the provisions of Section 10B of the Income Tax Act 1961, the Income Tax Appellate Tribunal1, by its decision dated 24 March 2011, applied the tests which have been formulated in the decision of this Court in Textile Machinery Corporation Ltd v CIT.

These tests which have been formulated in the decision of this Court are Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter. The fact that an assessee by the establishment of a new industrial undertaking expands his existing business which he certainly does would not on that score, deprive him of the benefit. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is, all the same, a new and identifiable undertaking separate and distinct from the existing business. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit that may exist on its own as a viable unit. The new unit may produce the same commodities as the old business or it may produce some other distinct marketable products, even commodities that may feed the old business. The products produced by the new unit may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced.

The Tribunal has noted that the new unit was fully an independent unit with a production capacity of 15 lakh tons per annum as compared to the earlier production capacity of 2 lakh tons per annum of the old unit.

The Tribunal has also dealt with the reasons which were furnished by the CIT in coming to the conclusion that what was set up was only an expansion of the old unit and not a new unit. Ex facie, the reasons which weighed with the CIT were not compliant with the tests which have been formulated in the judgments of this Court.

The division bench of Justice D.Y.Chandrachud and Justice Sanjiv Khanna while upholding the decision of the Tribunal held that the judgment of the Division Bench of the High Court of Bombay at Goa dated 22 October 2020 affirming the judgment of the Tribunal does not suffer from any error.