Income Tax Officer, Trivandrum v. M/s Stabilix Solutions Pvt. Ltd, Trivandrum

ITA 848/COCH/2007 | misc
Pronouncement Date: 05-10-2010

Appeal Details

RSA Number 84821914 RSA 2007
Assessee PAN AAGCS0083C
Bench Cochin
Appeal Number ITA 848/COCH/2007
Duration Of Justice 40 year(s) 9 month(s) 3 day(s)
Appellant Income Tax Officer, Trivandrum
Respondent M/s Stabilix Solutions Pvt. Ltd, Trivandrum
Appeal Type Income Tax Appeal
Pronouncement Date 05-10-2010
Appeal Filed By Department
Assessment Year misc
Appeal Filed On 01-01-1970
Judgment Text
IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN JM AND SANJAY AR ORA AM I.T.A. NO. 848/COCH/2007 & C.O. NO. 76/COCH/2007 ASSESSMENT YEAR : 2004-05 I.T.O. WARD-1(1) RANGE-1 TRIVANDRUM. VS. M/S. STABILIX SOLUTIONS PVT. LTD. 212 NILA TECHNOPARK CAMPUS KARIAVATTOM TRIVANDRUM - 695 581 [PAN: AAGCS 0083C] (REVENUE -APPELLANT) (ASSESSEE- RESPONDENT) REVENUE BY SHRI T.J.VINCENT DR ASSESSEE BY SHRI T.M.SREEDHARAN ADVOCATE-AR O R D E R PER SANJAY ARORA AM: THIS IS AN APPEAL BY THE REVENUE AND CROSS OBJECTI ON (CO) BY THE ASSESSEE ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-I TRIVANDRUM (CIT(A)FOR SHORT) DATED 29.5.2007 AND THE ASSESSMENT YEAR (A Y) UNDER REFERENCE IS 2004-05. 2. THE APPEAL RAISES SEVERAL GROUNDS EVEN AS IT AG ITATES TWO ISSUES WITH THE ASSESSEES CO BEING ONLY SUPPORTIVE IN NATURE; ITS APPEAL HAVING BEEN ALLOWED BY THE LD. CIT(A). 3.1 THE PRINCIPAL ISSUE RAISED BY THE REVENUE IS WI TH REGARD TO THE ASSESSEES CLAIM FOR EXEMPTION/DEDUCTION U/S. 10B OF THE INCOME-TAX ACT 1961 ('THE ACT' HEREINAFTER) IN RELATION TO ITS PROFITS; ITS ENTIRE TURNOVER BEING EXPORT TURNO VER. THE ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS WAS FOUND TO HAVE ADVANCED A SUM OF RS. 12 LAKHS TO ITS SISTER CONCERN M/S. STABILIX TECHNOLOGIES PVT. LTD (`STPL FOR SHORT) WHICH WAS EXPLAINED TO BE BY WAY OF ADVANCE RENT FOR 4000 SQ. FT. OF BUILT-UP AR EA SUB-LEASED BY IT FROM STPL WHICH HELD LEASE-HOLD RIGHTS THEREIN; THE SAID CONCERN HAVING ITSELF PAID LIKE ADVANCE TO THE OWNER - TECHNOPARK. THE LEASE WAS FOR RS. 62 000/- PER MONT H (INCREASED TO RS. 64 000/- WITH EFFECT FROM JANUARY 2004) INCLUDING RS. 10 000/- FOR INT ERIORS AND EQUIPMENT SO THAT THE LOWER ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 2 LEASE CHARGES PAID BY STPL IT WAS EXPLAINED WERE ONLY INDICATIVE AND NOT VERY RELEVANT. THE ARRANGEMENT ALLOWED THE ASSESSEE USER OF A SET OF 1 5 OLD COMPUTERS WORK STATIONS AND CHAIRS BESIDES FURNITURE OF STPL. THE DETAILS OF THE LEAS ED ASSETS REVEALED THE SAME TO HAVE BEEN PURCHASED BY STPL DURING AUGUST/SEPTEMBER 2000 AT A COST RS. 17.66 LAKHS (THE COST OF COMPUTERS THOUGH STANDS WRONGLY MENTIONED IN THE ASSESSEMENT ORDER AT RS. 5.63 LACS AS AGAINST THE CORRECT VALUE OF RS. 8.63 LACS/REFER AN N 1 AT PB-II PG. 18). THE BALANCE-SHEET (AS ON 31.3.2004) REFLECTED PLANT AND MACHINERY AS AT T HE BEGINNING OF THE YEAR (31/3/2003) AT RS. 3.33 LAKHS TO WHICH ADDITIONS FOR RS. 16.48 LAKHS STOOD MADE DURING THE YEAR RESULTING IN A TOTAL INVESTMENT THEREIN AT RS. 19.81 LAKHS. AS AGAINST THIS THE COMPANY HAD LEASED PLANT AND MACHINERY WORTH RS. 17.66 LAKHS. THE RATIO OF THE L EASED MACHINERY TO THE TOTAL THUS WORKED TO OVER 47%. FURTHER THE TOTAL INVESTMENT IN PLAN T AND MACHINERY I.E. COMPUTERS SOFTWARE ACCESSORIES ETC. BY STPL WAS AT RS. 95.45 LAKHS. THE ASSESSING OFFICER (A.O.) THUS OBSERVED THE RATIO OF THE PLANT & MACHINERY LEASED BY STPL T O BE HIGHLY INCONGRUENT WITH OR DISPROPORTIONATE TO THE SPACE LEASED OUT BY IT I.E . 4000 SQ. FT. OF THE TOTAL 6000 SQ. FT. AREA AVAILABLE WITH IT I.E. AT 66.66% OF ITS TOTAL ARE A. THAT IS IN HIS VIEW THE CORRESPONDING VALUE OF THE MACHINERY GIVEN ON LEASE TO OR ALLOWED USER BY THE ASSESSEE OUGHT TO BE TO THE TUNE OF RS. 66 LAKHS I.E. 2/3 RD OF 95.45 LAKHS. IN OTHER WORDS HE INFERRED THAT THE ENTIRE SPACE WAS BEING UTILIZED BY STPL FOR ITS PURPOSES WITH PART RENTED OUT TO THE ASSESSEE ON `AS IS WHERE IS BASIS OR INVOLVING ONLY MINOR ADJUSTMENTS I.E. A S AGAINST A WHOLE-SALE DISLOCATION OF ITS PLANT AND MACHINERY WHICH THE FIGURES/DETAILS AS SUBMITT ED IMPLIED. 3.2 FURTHER A LEASE TRANSACTION WOULD QUALIFY TO B E A `TRANSFER WITHIN THE MEANING OF THE TERM AS USED IN SECTION 10B(2)(III) WHICH PROVIDES THAT AN ELIGIBLE UNDERTAKING UNDER THE SECTION SHOULD NOT BE FORMED BY THE TRANSFER TO A N EW BUSINESS OF PLANT AND MACHINERY THAT STANDS PREVIOUSLY USED FOR ANY PURPOSE. RELIANCE F OR THE SAME WAS PLACED BY HIM ON THE DECISION IN THE CASE OF CIT VS. NARANG DAIRY PRODUCTS (1996) 219 ITR 478 (SC) WHERERIN THE HONBLE APEX COURT HELD THAT THE DEFINITION OF TRAN SFER U/S. 2(47) IS AN INCLUSIVE ONE AND SHOULD NOT THEREFORE BE READ IN EXCLUSION TO ITS CONTEXTUA L OR ORDINARY MEANING. ACCORDINGLY LETTING OUT OF MACHINERY WOULD STAND TO BE CONSIDERED AS `O THERWISE TRANSFERRED WHICH STOOD PROSCRIBED BY THE SECTION AS AN IMPERMISSIBLE COURS E AS USER THEREOF IS THEREBY GIVEN OVER TO ONE BY AND TO THE EXCLUSION OF ANOTHER AND THE W ITHDRAWAL OF DEVELOPMENT REBATE U/S. 34(3) ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 3 (B) OF THE ACT ON THAT ACCOUNT I.E. LETTING OUT O F MACHINERY BY THE ASSESSEE WAS UPHELD. THE A.O. WAS THUS OF THE CLEAR VIEW THAT THE LEASE OF THE MACHINERY DISQUALIFIED THE ASSESSEE FROM BEING ELIGIBLE FOR ITS CLAIM U/S. 10B (1) AS THE AS SESSEE THROUGH THE INSTRUMENTALITY OF A LEASE COULD NOT CIRCUMVENT THE SAID PROVISION [S. 10B (2) (III)] WHICH REPRESENTS AN ESSENTIAL CONDITION FOR ALLOWABILITY OF ITS CLAIM. 3.3 IN APPEAL THE ASSESSEE PLACED RELIANCE ON THE DECISION IN THE CASE OF BAJAJ TEMPO LTD. V. CIT (1992) 196 ITR 188 (SC). THE DISENTITLEMENT TO TH E BENEFIT UNDER THE SECTION IN CASE OF TRANSFER OF PLANT AND MACHINERY IS NOT TO BE VIEWED WITH REFERENCE TO `TRANSFER PER SE BUT WHERE THERE IS FORMATION OF A NEW UNDERTAKING THERE BY I.E. AS A RESULT OF SUCH TRANSFER; THE EMPHASIS OF THE CONDITION PROVIDED THEREUNDER BEING ON THE `FORMATION AND NOT ON `TRANSFER AND WHICH IS THE KEY TO ITS INTERPRETATION. IN THE FACTS OF THE CASE IT WAS FOUND BY THE LD. CIT(A) THAT THE ASSESSEES UNIT COULD NOT BE SAID T O HAVE BEEN FORMED BY THE TRANSFER OF SECOND-HAND MACHINERY. HE ACCORDINGLY DELETED THE DISALLOWANCE OF THE ASSESSEES CLAIM FOR DEDUCTION U/S. 10B(1). AGGRIEVED THE REVENUE IS I N APPEAL. 4.1 BEFORE US THE LD. DR WOULD SUBMIT THAT THE ASS ESSEES CASE FELL TO BE DISQUALIFIED U/S. 10B(2)(II). AS WOULD BE APPARENT THE ASSESSEES UN DERTAKING STANDS SET UP ONLY BY LEASING OUT SPACE AND OTHER ESSENTIAL INFRASTRUCTURE FROM ANOTH ER FIRM STPL. THE FACT THAT THE LEASE AMOUNTS TO A TRANSFER IS NO LONGER RES INTEGRA HAVING BEEN SETTLED BY THE HONBLE APEX COURT IN AMONG OTHERS THE CASE OF CIT V . NARANG DAIRY PRODUCTS (SUPRA). THE LD. CIT(A) HAD BRUSHED ASIDE THE POSITIVE FINDINGS BY THE AO BASE D ON MATERIALS ON RECORD AND RENDERED HIS OWN WITHOUT ANY COGENT BASIS ALSO ACCEPTING EVIDEN CE/S WITHOUT COMPLYING WITH THE PROCEDURE UNDER RULE 46A INCLUDING AFFORDING AN OP PORTUNITY TO THE AO TO MEET THE SAME. 4.2 THE LD. AR ON THE OTHER HAND VEHEMENTLY OBJEC TED TO THE SAME. THE AO HAD NOT MADE OUT ANY CASE WITH REGARD TO A SPLIT-UP OF A BU SINESS ALREADY IN EXISTENCE WHICH WOULD STAND TO FALL U/S. 10B(2)(II) BUT ONLY UNDER SECTI ON 10B(2)(III). THE ARGUMENT OF THE LD. DR WOULD AMOUNT TO A NEW CASE WHICH CANNOT BE ALLOWED TO BE MADE AT THIS STAGE. FURTHER IT IS NOT DENIED THAT A `LEASE AMOUNTS TO A `TRANSFER AS THE TERM IS USED AND IS TO BE UNDERSTOOD IN SECTION 10B(2)(III) EVEN AS CONCEDED TO BEFORE THE LD. CIT(A) WITH REFERENCE TO THE DECISION IN ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 4 THE CASE OF BAJAJ TEMPO LTD . V. CIT (SUPRA) WHEREIN IT STANDS HELD THAT THE EMPHASIS OF THE DISQUALIFICATION ENSHRINED U/S. 15C (OF THE 1922 AC T WHICH STOOD WORDED SIMILARLY AS S. 10B(2)(III) AND FURTHER CORRESPONDED TO S. 80J OF THE ACT) IS NOT ON THE USER OR THE TRANSFER AS SUCH BUT ON THE FORMATION OF THE UNDERTAKING THERE BY. IT IS ONLY WHERE THE TRANSFER OF THE PLANT AND MACHINERY LEADS TO THE FORMATION OF THE NEW UND ERTAKING THAT THE CONDITION PRESCRIBED BY THE SECTION WOULD STAND TO BE SATISFIED BARRING TH E ELIGIBILITY FOR EXEMPTION U/S. 10B(1). THERE IS NO FINDING BY THE AO WITH REGARD TO `FORMATION WHO HAS MERELY PROCEEDED ON AND GUIDED BY THE FACT OF TRANSFER ALONE THE FACTUM OF WHICH IS NOT DENIED. SECONDLY IT NEEDS TO BE APPRECIATED THAT THE `THING BEING MANUFACTURED BY THE ASSESSEE IS `COMPUTER SOFTWARE. THE SAME BY ITS VERY NATURE REQUIRES INPUT OF INTELLECT UAL RATHER THAN TANGIBLE RESOURCES. THE FOCUS THEREFORE IS MUCH MORE ON HUMAN CAPITAL THA N ON PLANT AND MACHINERY AS IN A MANUFACTURING UNIT WHERE THE CAPACITY IS DIRECTLY O R EVEN LINEARLY RELATED TO THE PLANT AND MACHINERY AND WHICH IS THE RATIONALE BEHIND THE IN CLUSION OF A CONDITION OF NON-EMPLOYMENT OF THE USED PLANT AND MACHINERY IN THE SECTION WIT H A VIEW TO ENSURE THAT THERE IS A FORMATION OF A NEW OR SUBSTANTIALLY NEW UNDERTAKING FIXING S TATUTORILY THE RATIO OF SUCH OLD MACHINERY TO A MAXIMUM OF 20% OF THE TOTAL. THIS VIEW STANDS APP RECIATED AND ACCEPTED BY THE TRIBUNAL IN THE CASE OF I.T.O. VS. TECH DRIVE (INDIA) PVT. LTD. (2010) 124 ITD 249 (DEL.) HOLDING THAT THERE IS IN FACT NO REQUIREMENT FOR SUCH AN ASSESSE E TO EVEN OWN PLANT AND MACHINERY OR EQUIPMENT (WHICH WAS THE ISSUE IN THAT CASE) TO PRO DUCE COMPUTER SOFTWARE SO THAT WHERE THE SAME WAS DONE BY CONTRACTING IT FROM OUTSIDE PARTIE S UNDER THE ASSESSEES SUPERVISION THE SAME WOULD QUALIFY FOR EXEMPTION U/S. 10B(1). 5. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD AS WELL AS THE CASE LAW CITED. 5.1 THE REVENUES CASE IS THAT THE LEASE OF PLA NT AND MACHINERY BEING A SET OF 15 COMPUTERS AND WORKSTATIONS ALONG WITH OTHER ALLIED EQUIPMENT INCLUDING FURNITURE OUT OF ITS EXISTING PORTFOLIO OF ASSETS BY STPL TO THE ASSESSEE ITS S ISTER CONCERN WOULD CONSTITUTE A `TRANSFER WITHIN THE MEANING OF THE TERM AS USED IN SECTION 1 0B(2)(III) SO THAT THE ASSESSEES UNDERTAKING WHICH STANDS FORMED AS A RESULT IS NO T QUALIFIED FOR THE BENEFIT OF DEDUCTION U/S. 10B(1) OF THE ACT; THE RATIO OF THE LEASED PLANT AN D MACHINERY BEING AT OVER 47% OF THE TOTAL PLANT AND MACHINERY WITH THE ASSESSEE AS AT THE END OF THE YEAR OF FORMATION OF ITS UNDERTAKING. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 5 RELIANCE STANDS PLACED BY IT FOR THE PURPOSE ON THE DECISION IN THE CASE OF CIT V . NARANG DAIRY PRODUCTS (SUPRA). THE ASSESSEE ON THE OTHER HAND DOES NOT DISPUTE THAT THE LEASE OF THE MACHINERY CONSTITUTES A `TRANSFER WITHIN THE MEANI NG OF THE TERM UNDER THE SAID PROVISION. HOWEVER EVEN SO THE SAME SHOULD BE TOWARD FORMATI ON OF THE UNDERTAKING UNDER REFERENCE. IN-SO-FAR AND TO THE EXTENT IT DOES NOT THE CONDIT ION OF SECTION 10B(2)(III) CANNOT BE SAID TO BE UNCOMPLIED WITH SO AS TO DISQUALIFY AN UNDERTAKING FOR THE BENEFIT U/S. 10B FOR WHICH RELIANCE STANDS PLACED BY IT ON THE DECISION IN THE CASE OF BAJAJ TEMPO LTD. V. CIT (SUPRA). IT HOWEVER STOPS THERE AND DOES NOT LINK THE SAID ST ATEMENT OF LAW WITH THE FACTS OF ITS CASE I.E. APART FROM APPEALING TO THE PECULIAR NATURE OF ITS TRADE/INDUSTRY SO THAT DE HORS THE SAME IT TACITLY ADMITS TO BEING HIT BY THE CONDITION OF S. 10B(2)(III). SO HOWEVER THAT BEING THE SUBJECT MATTER OF THE DISPUTE WE SHALL EXAMINE THE SAME THREAD-BARE AND THE FOREGOING OBSERVATION WAS MADE WITH A VIEW TO HIGHLIGHT THE R ESPECTIVE CASES OF BOTH THE PARTIES BEFORE THE AUTHORITIES BELOW AND AS URGED BEFORE US. WE B EGIN BY REPRODUCING THE RELEVANT PROVISION; THE SAME READS AS UNDER:- 10B (2) THIS SECTION APPLIES TO ANY UNDERTAKING WH ICH FULFILS ALL THE FOLLOWING CONDI TIONS NAMELY:- (I) IT MANUFACTURES OR PRODUCES ANY ARTICLES OR THINGS OR COMPUTER SOFTWARE; (II) IT IS NOT FORMED BY THE SPLITTING UP OR THE RECONS TRUCTION OF A BUSINESS ALREADY IN EXISTENCE: PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RES PECT OF ANY UNDERTAKING WHICH IS FORMED AS A RESULT OF THE RE-ESTABLISHME NT RECONSTRUCTION OR REVIVAL BY THE ASSESSEE OF THE BUSINESS OF ANY SUCH UNDE RTAKING AS IS REFERRED TO IN SECTION 33B IN THE CIRCUMSTANCES AND WITHIN THE PERIO D 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. EXPLANATION - THE PROVISIONS OF EXPLANATION 1 AND EXPLANATION 2 TO SUB-SECTION (2) OF SECTION 80-I SHALL APPLY FOR THE PURPOSES OF CLAUSE (III) O F THIS SUB-SECTION AS THEY APPLY FOR THE PURPOSES OF CLAUSE (II) OF THAT SUB-SECTION. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 6 5.2 THERE IS THUS FIRSTLY NO DISPUTE WITH REGARD TO THE FACT THAT A LEASE IS A TRANSFER FOR THE PURPOSES OF SEC. 10B(2)(III). THIS ISSUE OR ASPECT OF THE MATTER STANDS SETTLED IN THE CONTEXT OF DIFFERENT PROVISIONS SIMILARLY OR IDENTICALLY WORD ED AND BEARING AS SUCH THE SAME CONDITION AS IN SECTION 10B(2)(III) BY THE HIGHER COURTS OF LAW INCLUDING THE APEX COURT AS IN THE CASES OF CIT V . NARANG DAIRY PRODUCTS (SUPRA) AND BAJAJ TEMPO LTD. V. CIT (SUPRA); THE LATTER BEING RELIED UPON BY THE ASSESSEE ITSELF. IN FACT IT (A SSESSEE) DOES NOT CONTEST THE SAME; IT ONLY STATES THAT IN THE FACTS AND CIRCUMSTANCES OF ITS CASE TH E SAME DOES NOT LEAD TO OR RESULT IN THE FORMATION OF AN UNDERTAKING FOR THE SAID CONDITION TO HAVE AN APPLICATION . THE LAW IN THE MATTER IS AMPLY CLEAR. TO RESTATE AS CLARIFIED IN BAJAJ TEMPO LTD. V. CIT (SUPRA) THE DENIAL OF THE BENEFIT UNDER THE INCENTIVE PROVISION ARISES NO T BY THE TRANSFER ITSELF BUT WHEN THE TRANSFEREE UNDERTAKING IS FORMED BY SUCH A TRANSFER AND WHICH FACT ALONE IS CRUCIAL BEING THE BASIS OF THE APPLICATION OF THE PROVISION. IT IS O NLY WHERE THE TRANSFER IS FOUND TO HAVE RESULTED IN THE FORMATION OF A NEW UNDERTAKING THAT WOULD LEAD TO THE DENIAL OF RELIEF OR BENEFIT SOUGHT. AS SUCH THE TRANSFER OF THE PLANT AND MAC HINERY TO TAKE THE TRANSFEREE-ASSESSEE OUTSIDE THE PURVIEW OF THE SECTION MUST BE SUCH TH AT THE NEW UNDERTAKING WOULD NOT HAVE COME INTO BEING BUT FOR THE TRANSFER. THAT IS WHAT IS RELEVANT AND TO BE SEEN IS WHETHER THE PART PLAYED BY THE LEASED PREVIOUSLY USED PLANT AND MA CHINERY WAS DOMINANT OR NOT IN THE FORMATION OF THE NEW UNDERTAKING SO THAT WHERE IT WAS NOT THE BENEFIT TO THE UNDERTAKING COULD NOT BE DENIED. FURTHER AS EXPLAINED THE WOR DS ` PREVIOUSLY USED IN ANY OTHER BUSINESS COULD NOT BE CONSTRUED SO NARROWLY SO AS TO CONFINE THEIR MEANING TO A USER BY THE ASSESSEE ONLY. THIS STIPULATION IN FACT IS NO LONGER RELEV ANT AS THE AMBIT (OF THE CONDITION) STANDS FURTHER BROADENED UNDER THE EXTANT PROVISION BY THE USE OF THE WORDS ` PREVIOUSLY USED FOR ANY PURPOSE INSTEAD. IN THE INSTANT CASE IT IS NOT UNDER DIS PUTE THE LEASED ASSETS WERE PREVIOUSLY USED BY THE LESSOR-TRANSFEROR FOR THE PURPOSES OF I TS OWN BUSINESS. WHAT THEREFORE IS RELEVANT AND CRUCIAL TO DECIDE THE INSTANT CASE IS WHETHER T HE ASSESSEES UNDERTAKING COULD BE SAID TO HAVE BEEN FORMED BY THE TRANSFER OF THE PLANT AND MACHINERY TAKEN O N LEASE FROM ITS OWNER ITS SISTER CONCERN STPL WHICH WAS USING IT PREVIOUSLY FOR THE PURPOSES OF ITS BUSINESS . THE ISSUE AT LARGE THUS IS PRIMARILY FACTUAL WITH THE LAW IN THE MATTER HAVING BEEN EXAMINED AND SETTLED BY INTER ALIA THE APEX COURT. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 7 5.3 TOWARD THE FOREGOING THE FACT THAT NEEDS TO BE DETERMINED IS IF THE ASSESSEES RELEVANT WHICH IS ITS SOLE UNDERTAKING STOOD FORMED EITHER WHOLLY OR SUBSTANTIALLY BY THE TRANSFER (LEASE) OF THE ASSETS BEING MACHINERY OR PLANT; TH E SAME EXCEEDING THE THRESHOLD LIMIT OF 20% OF THE TOTAL PLANT AND MACHINERY EMPLOYED. AS NOTED EARLIER THE ASSESSEE APART FROM STATING ITS CASE I.E. IN TERMS OF THE LAW IN THE MATTER HAS NOT SUBSTANTIATED IT IN ANY MANNER SO THAT THE SAME ON FACTS IS NO MORE THAN A BALD ASSERTION. T HE FINDINGS OF THE LD. CIT(A) IN THIS REGARD ARE AS UNDER (PAGE 3 OF THE APPELLATE ORDER): 1. HAVING CONSIDERED THE REASONS STATED BY THE ASS ESSING OFFICER AND THE ARGUMENTS OF THE ADVOCATE I AM INCLINED TO HOLD THAT THE APPELLANT IS ENTITLED FOR THE CLAIM FOR EXEMPTION. THE OBJECT OF SECTION 10B IS TO ALLOW DEDUCTION FOR PRO FITS AND GAINS DERIVED BY 100% EXPORT- ORIENTED UNDERTAKINGS FROM THE EXPORT OF ARTICLES A ND THINGS OR COMPUTER SOFTWARE. THE ASSESSEE IN THE PRESENT CASE IS LOCATED IN THE TECH NOPARK CAMPUS TRIVANDRUM. THE ASSESSEE IS REGISTERED A 100% EOU WITH THE SOFTWARE TECHNOLO GY PARK OF INDIA. THE ENTIRE TURNOVER DECLARED FOR A.Y. 2004-05 IS FROM EXPORT. THE COMP UTATION OF NET PROFIT OF RS. 55 32 103/- AS PROFIT FROM EXPORTS IS ALSO NOT IN DISPUTE. THE BA LANCE SHEET OF THE ASSESSEE REFLECTS THE INVESTMENT IN COMPUTERS AND ACCESSORIES. THE ASSES SEE TOOK ON LEASE 4000 SQ. FT. OF FURNISHED OFFICE SPACE IN THE TECHNOPARK CAMPUS WITH WORKSTAT IONS WIRING FLOORING AND COMPUTERS. IN THE CONTEXT OF THE ABOVE FACT SITUATION IT CANNOT BE HELD THAT THE UNIT OF THE ASSESSEE WAS FORMED BY TRANSFER OF SECOND HAND MACHINERY. ON THE OTHER HAND THE ASSESSEE HAS FULFILLED THE CONDITIONS OF SECTION 10B TO BECOME ELIGIBLE FOR DE DUCTION OF THE EXPORT PROFITS. 2. THE ADVOCATE REFERRED TO THE DECISION CITED BY T HE ASSESSING OFFICER NAMELY CIT VS. NARANG DAIRY PRODUCTS 219 ITR 478 WHERE THE ISSUE WAS WHETHER FOR THE PURPOSE OF WITHDRAWAL OF DEVELOPMENT REBATE LEASE OF MACHINER Y AMOUNTED TO TRANSFER WITHIN THE MEANING OF THE DEFINITION CONTAINED IN SECTION 2(47 ). I FIND THAT THE REFERENCE TO THE ABOVE DECISION IS MISCONCEIVED. THE SAME HAS NO RELEVANC E TO THE QUESTION WHETHER THE ASSESSEE HEREIN IS FORMED BY THE TRANSFER OF SECOND HAND MAC HINERY AND IN THE LIGHT OF THAT FINDING THE REASONING OF THE ASSESSING OFFICER BASED ON THE ABO VE DECISION HAS TO BE REJECTED. FOR THESE REASONS I UPHOLD THE CLAIM FOR EXEMPTION U/S. 10B AND DELETE THE ADDITION OF RS. 55 32 103/- TO THE DECLARED INCOME. THE LD. CIT(A) HAS THUS RENDERED TWO FINDINGS. ONE THAT THE RELIANCE ON THE DECISION IN THE CASE CIT VS. NARANG DAIRY PRODUCTS (SUPRA) BY THE AO IS MISCONCEIVED AS THE ISSUE INV OLVED IN THE INSTANT CASE IS THE FORMATION OF THE ASSESSE ES UNDERTAKING BY THE TRANSFER OF THE SECOND- HAND MACHINERY (AND BY IMPLICATION NOT OF THE `LE ASE AS CONSTITUTING A `TRANSFER OR NOT) AND SECONDLY THAT IN THE FACT-SITUATION OF THE CASE I T COULD NOT BE SAID THAT THE ASSESSEES UNDERTAKING CAME TO BE FORMED BY THE TRANSFER OF SE COND-HAND MACHINERY; THE SAME HAVING ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 8 BEEN SET UP BY TAKING ON LEASE FURNISHED OFFICE SPA CE PROPERLY EQUIPPED WITH COMPUTERS WORKSTATIONS ACCESSORIES ETC. ALSO THE ASSESSEES ACTIVITY BEING A SPECIFIED ONE AND ITS PROFITS BEING ONLY FROM EXPORT OF ITS OUTPUT THE E LIGIBILITY OF THE SAME IS NOT IN QUESTION. 5.4 WE SHALL CONSIDER BOTH THE FINDINGS OF THE LD. CIT( A) FOR THEIR VALIDITY. WITH REGARD TO THE FIRST ONE IT IS DIFFICULT NAY IMPOSSIBLE TO AGREE WITH THE LD. CIT(A) GIVEN THAT THE APEX COURT IN THE CASE RELIED UPON ( CIT VS. NARANG DAIRY PRODUCTS ) HAS HELD THE SCOPE OF THE WORD `TRANSFER TO INCLUDE A LEASE AND ONLY IN THE CONT EXT OF AN INCENTIVE PROVISION ALSO EXPLAINING ITS RATIONALE (REFER PARA 3.2) SO THAT THE RATIO OF THE SAID DECISION IS FULLY APPLICABLE TO THE INSTANT CASE WHEREIN AGAIN THERE IS A LEASE OF P LANT AND MACHINERY. THE FIRST QUESTION THAT WOULD ARISE AS SUCH FOR THE APPLICATION OF THE SE CTION 10B(2)(III) IS: WHETHER THE TERM TRANSFER THEREIN WOULD COVER A LEASE TRANSACTION OR NOT? THE DECISION BY THE APEX COURT IN THE CASE OF BAJAJ TEMPO LTD. V. CIT (SUPRA) IS AGAIN DIRECTLY ON THE POINT AND THE SAME. THE COURT IN THAT CASE WAS EXAMINING THE PROVISION OF S . 15C(2)(I) (OF THE INCOME-TAX ACT 1922) WHICH BORE A COMPOSITE CONDITION CONTAINING THE EL EMENTS OF CLAUSES (II) AND (III) OF S. 10B(2) READING AS: 15C (2) THIS SECTION APPLIES TO ANY INDUSTRIAL UNDE RTAKING WHICH - (I) IS NOT FORMED BY THE SPLITTING UP OR THE RECON STRUCTION OF A BUSINESS ALREADY IN EXISTENCE OR BY THE TRANSFER TO A NEW BUSINESS OF BUILDING MACH INERY OR PLANT PREVIOUSLY USED IN ANY OTHER BUSINESS THE ASSET LEASED OUT IN THAT CASE WAS A `BUILDING SO IT WAS ESSENTIALLY CONCERNED WITH THE SECOND LIMB OF THE SECTION CORRESPONDING TO S. 10B (2)(III). THE LEASE WAS UNDERSTOOD AS A TRANSFER EVEN AS AS AFORE-STATED IT EMPHASIZED O N THE PURPOSE OF THE TRANSFER I.E. TOWARD FORMATION OF THE UNDERTAKING AS BEING THE ESSENCE OF THE SECTION. THE JURISDICTIONAL HIGH COURT IN THE CASE OF KERALA STATE CASHEW DEVELOPMENT CORPORATION VS. CIT (1994) 205 ITR 19 (KER.) CONSIDERED THIS ISSUE WITH REFERENCE TO A LE ASED UNIT QUA THE ANALOGOUS PROVISION OF S. 80J PRESCRIBING THE SAME CONDITION AS IN S. 10B (2 )(III) TO HOLD THE `LEASE TO BE A `TRANSFER SO THAT THE CONDITION(S) PRESCRIBED U/S.80J(4) STOO D NOT SATISFIED. WE REPRODUCE HEREINBELOW A PART OF THE RELEVANT PART OF THE ORDER: (HEAD NOTE) ` THE OBJECT WITH WHICH SECTION 80J OF THE INCOME-TAX ACT 1961 HAS BEEN ENACTED ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 9 IS TO ENCOURAGE THE ESTABLISHMENT OF NEW INDUSTRIES IN THE COUNTRY. THE HEADING OF THE SECTION REFERS TO NEWLY ESTABLISHED INDUSTRIAL UND ERTAKINGS AND THE CONDITIONS LAID DOWN BY SUB-SECTION (4) FOR THE APPLICABILITY OF THE SECTION EMPHASISE THE NEWLY ESTABLISHED NATURE OF THE UNDERTAKINGS. IT IS TRUE THAT THE TERM NEWLY ESTABLISHED DOES NOT OCCUR IN THE BODY OF THE SECTION BUT IT IS IMP LICIT IN ITS VERY OBJECT AND PURPOSE. A NECESSARY COROLLARY OF THIS IS THAT THE UNDERTAKING ITSELF MUST BE A NEWLY ESTABLISHED ONE AND NOT A NEW UNDERTAKING TO THE PERSON ACQUIR ING THE SAME FROM ANOTHER. THE EMPHASIS IS ON THE ESTABLISHMENT OF THE UNDERTAKING AND NOT ON THE PERSON WHO ACQUIRES IT AFTERWARDS. OTHERWISE AN UNDERTAKING HAVING ENJOYED THE SPECI AL DEDUCTION CAN CONTINUE TO CLAIM THE DEDUCTION VIRT UALLY FOR ALL TIME TO COME BY MERE CHANGE OF HANDS WHICH IS NOT THE OBJECT OR THE PUR POSE OF THE PROVISION. ACCORDINGLY A LEASE WAS HELD TO BE A TRA NSFER WITHIN THE MEANING OF THE SECTION SO THAT THERE WAS A VIOLATION OF THE BASIC CONDITIONS OF S. 80J(4) WHICH IS IDENTICALLY WORDED TO S. 10B(2). THE SAID CONDITION IN FACT FINDS MENTION IN MANY A PROVISION SO THAT THE DECISIONS RENDERED THEREON HOLDING LIKEWISE ARE ALSO RELEVA NT AND FULLY APPLICABLE TO SOME OF WHICH WE MAY REFER: BLUE BAY FISHERIES (P.) LTD. VS. CIT 166 ITR 1 (KER.); L.G. BALAKRISHNAN AND BROS. LTD. VS. CIT 151 ITR 270 (MAD.); CIT VS. INDIAN EXPANDED METALS (P.) LTD . 134 ITR 483 (BOM.). IN THE FACTS OF THE PRESENT CASE THE ASSES SEE ITSELF NEITHER DISPUTES NOR POSSIBLY COULD THIS ASPECT OF THE MATTER SO THAT WE FIND NO BASIS OR EVEN THE REASON FOR THE LD. CIT(A)S FINDING OF THE SAID RELIANCE BY THE AO AS BEING MIS CONCEIVED. AS REGARDS THE FURTHER QUESTION AND WHICH DEFINITELY ARISES AS THE NEXT ONE I.E. WHETHER THE SAID TRANSFER HAS RESULTED IN THE FORMATION OF THE ASSESSEES UNDERTAKING WE FIND TH AT THE AO HAS NOT RENDERED A SPECIFIC FINDING IN THIS RESPECT PERHAPS FOR THE REASON THA T HE TOOK THE SAME AS A GIVEN UNDER THE OBTAINING FACTS AND CIRCUMSTANCES OF THE CASE. IN F ACT THE SAME WAS NOT IN ISSUE AS THE ASSESSEE DID NOT RAISE ANY ARGUMENT QUA `FORMATION BEFORE HIM; ITS ONLY STAND IN THE ASSESSMENT PROCEEDINGS BEING THAT IT HAD ONLY TAKEN THE MACHINERY ON LEASE OR RENT WITHOUT TRANSFER OF OWNERSHIP SO THAT THE SAME WOULD NOT A MOUNT TO A `TRANSFER ( REFER PARA 11 OF THE ASSESSMENT ORDER ). BEFORE THE LD. CIT(A) THE ASSESSEE ADMITTED TO `LEASE AS CONSTITUTING A `TRANSFER IN TERMS OF S. 10B(2)(III) OF NO MOMENT THOUGH AS IT DID NOT RESULT IN THE FORMATION OF ITS UNDERTAKING PLACING RELIANCE ON THE DECISIO N IN THE CASE OF BAJAJ TEMPO LTD. V. CIT (SUPRA). DOES THAT MEAN THAT IT WAS NOT AWARE OF TH E SAID LEGAL POSITION EARLIER OR THAT THOUGH AWARE ITSELF CONSIDERED ITS UNDERTAKING TO HAVE BE EN FORMED AS A RESULT OF THE TRANSFER. IN FACT ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 10 EVEN IF NOT AWARE; THE LANGUAGE OF THE SECTION BEIN G CLEAR - THE BAR THEREBY OPERATES ONLY WHERE THE UNDERTAKING UNDER REFERENCE IS FORMED BY THE TRANSFER - NOTHING PREVENTED IT TO TAKE THIS STAND EVEN IF IN THE ALTERNATIVE BEFORE THE A O. BE THAT AS IT MAY THE POINT IS THAT THE ISSUE OF `FORMATION CAME TO ASSUME SIGNIFICANCE IN LIGHT OF ITS SAID ARGUMENT BEING NOT IN ISSUE PRIOR THERETO REQUIRING A SPECIFIC FINDING IN ITS RESPECT. THE ISSUE RAISED BEFORE HIM BY THE ASSESSEE REQUIRING A FACTUAL FINDING FOR RESOLUTION THE LD. CIT(A) UNDER THE CIRCUMSTANCES IF OF THE VIEW THAT THE SAME IS RELEVANT WHICH INDEED IT IS AS IS ALSO APPARENT FROM THE FACT OF HIS HAVING RENDERED A DEFINITE FINDING IN THE MATTER (W HICH CONSTITUTES HIS SECOND FINDING) AND ALLOWED RELIEF TO THE ASSESSEE ON THAT BASIS HE OU GHT TO HAVE IN OUR VIEW PRIOR THERE-TO SOUGHT A REMAND REPORT FROM THE AO IN THE MATTER R ATHER THAN PROCEEDING TO ISSUE HIS FINDING/S STRAIGHT AWAY. UNDER THIS FACT-SITUATION IT BECOMES ALSO INCUMBEN T ON US TO CONSIDER IF THE MATTER OUGHT TO BE PROCEEDED WITH BY US OR WOULD IT MERIT REMISSION BACK TO THE FILE OF THE AO FOR HIS RELEVANT FINDINGS. WE DECIDE IN FAVOUR OF THE FORME R. THIS IS AS THE AO HAS SPECIFICALLY INVOKED S. 10B(2)(III) AND THUS THE FINDING OF THE FORMATION AS A RESULT OF LEASE TO WHICH THE ASSESSEE OBJECTED BEFORE HIM BY STATING OF IT (LEAS E) AS NOT CONSTITUTING A TRANSFER (THOUGH SO IN IN LAW) IS IMPLICIT IN HIS ORDER PARTICULARLY IN THE ABSENCE OF THE ASSESSEE RAISING ANY OBJECTION ON THIS MATTER OF FACT BEFORE HIM. SECONDLY THE R EVENUE WHOSE INTEREST MAY STAND TO BE PREJUDICED THEREBY HAS NOT RAISED ANY SPECIFIC PLE A BEFORE US IN THIS REGARD I.E. OF THE LD. CIT(A) HAVING PROCEEDED IN THE MATTER WITHOUT ALLOW ING OPPORTUNITY TO THE AO TO RENDER HIS INDEPENDENT FINDINGS IN THE MATTER PARTICULARLY AS WE DO NOT FIND ANY FRESH MATERIAL AS HAVING BEEN ADDUCED BEFORE OR CONSIDERED BY THE LD. CIT( A) IN DEALING WITH THE ASSESSEES SAID ARGUMENT RAISED BEFORE HIM FOR THE FIRST TIME. NO DOUBT THE REVENUE HAS RAISED A GROUND (# 6) QUA VIOLATION OF RULE 46 (READ 46A) BUT THE SAME SPEA KS OF ADMISSION OF ADDITIONAL (FRESH) GROUNDS OF APPEAL BY THE LD. CIT(A) WHILE WE DO NO T FIND ANY SUCH RAISING BEFORE OR ADMISSION BY THE LD. CIT(A) AND NEITHER DID THE L D. DR SPECIFY THE SAME BEFORE US NOR THE MATERIAL CONSIDERED BY THE LD. CIT(A) THUS I.E. I N VIOLATION OF R. 46A. WE THEREFORE ONLY DEEM IT FIT TO PROCEED WITH THE MATTER. WE MAY HOWE VER MAKE IT CLEAR THAT IN CASE WE COME ACROSS ANY MATERIAL THAT MAY HAVE A BEARING IN THE MATTER IN THE SENSE THAT THAT IT COULD LEAD TO A REVERSAL OF HIS FINDING AND STANDS NOT CONSIDERE D BY THE AO WE WOULD PREFER ITS ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 11 CONSIDERATION BY THE ASSESSING AUTHORITY FIRST AND ACCORDINGLY REMIT THE SAME TO HIS FILE WITH APPROPRIATE DIRECTIONS SO THAT NO SIDE STANDS PREJ UDICED. 5.5 EXAMINING HIS SECOND FINDING WE ARE WHOLLY UNA BLE TO APPRECIATE AND CONSEQUENTLY UNABLE TO AGREE WITH THE INFERENCE/S DRAWN BY THE L D. CIT(A). TO COLLATE THE FACTS WHICH ARE NOT IN DISPUTE AND RATHER STAND FURNISHED BY THE ASSESSEE ITSELF IT AS WELL AS STPL ARE (ALMOST) WHOLLY-OWNED SUBSIDIARIES OF STABILIX CORP ORATION USA WHICH HOLDS 99.99% SHARE- HOLDING IN EACH OF THEM. THE ASSESSEE-COMPANY WAS I NCORPORATED UNDER THE COMPANIES ACT 1956. IT SET UP A 100% EXPORT-ORIENTED UNDERTAKING (EOU) AT NILA TECHNOPARK CAMPUS TRIVANDRUM BY TAKING ON SUB-LEASE 4000 SQ. FT. OF BUILT-UP AREA FROM STPL WHICH HELD LEASE- HOLD RIGHTS THEREIN (AT A TOTAL OF 6000 SQ. FT.) FR OM M/S. ELECTRONICS TECHNOLOGIES PARKS KERALA AND M/S. HEALTH CARE MEDIA (P.) LTD. AND IS ITSELF A 100% EOU PRODUCING COMPUTER SOFTWARE AND SUPPLYING IT TO THE PARENT COMPANY. THE COMMERC IAL PRODUCTION COMMENCED ON 1.4.2002 (REFER PARA II(2) OF THE NOTES TO THE ACCOUNTS AS O N 31/3/2003). AS SUCH THE ASSESSEES UNDERTAKING THE ELIGIBILITY OF WHICH U/S. 10B(2) IS IN ISSUE STOOD `FORMED ON OR BEFORE 1.4.2002 . THIS IS AS THE COMMERCIAL PRODUCTION COULD START ONLY AFTER THE FORMATION WHICH ENTAILS ADEQUATE ACCESS TO ALL THE FACTORS OF PRODU CTION SO AS TO CONSTITUTE A WHOLE OR A NUCLEUS AND THE HARMONIOUS WORKING OF WHICH PRODUCES THE OU TPUT FOR WHICH THE UNIT IS SET-UP OR FORMED. FURTHER COMMENCEMENT OF COMMERCIAL PRODUCT ION SIGNIFIES THAT THE DIFFERENT SUCH FACTORS HAVE BEEN CHECKED FOR COMPATIBILITY AND HAR MONIOUS WORKING SO AS TO BE ABLE TO DELIVER ON A REGULAR BASIS AT COMMERCIALLY VIABLE L EVELS. REFERENCE IN THIS CONTEXT IS ALSO DRAWN TO THE DECISION IN THE CASE OF L.G. BALAKRISHNAN & BROS. LTD. V. CIT (SUPRA). IN FACT EVEN TRIAL PRODUCTION WHICH PRECEDES THE COMMERCIA L PRODUCTION COULD ALSO ONLY BE AFTER `FORMATION INASMUCH IT WOULD REQUIRE ALL THE FACTO RS OF PRODUCTION TO BE IN PLACE AND IN A STATE OF PREPAREDNESS. THE ASSESSEE HAD 28 PERSONNEL ON I TS ROLLS DURING APRIL 2002 (WHICH INCIDENTALLY ALSO HAPPEN TO BE THE AVERAGE NUMBER O F ITS EMPLOYEES DURING THE ENSUING YEAR F.Y. 2002-03) WHOSE PROFILE COVERS A RANGE VIZ. P ROJECT LEADERS PROJECT MANAGERS SOFTWARE ENGINEERS ADMINISTRATIVE STAFF AND WAS HEADED BY A COMPETENT PROFESSIONAL IN ONE MR. LYJU ALEXANDER THOMAS WHO ALSO HEADED STPL BESIDES BEI NG FUNCTIONALLY RESPONSIBLE FOR THE QUALITY PORTFOLIO. IT PAID DURING THE SAID FINANC IAL YEAR WHICH IS ALSO ITS ACCOUNTING YEAR A DEPOSIT OF RS. 12 LAKHS TO STPL (THOUGH TERMED AS ` ADVANCE-RENT WHICH WE CONSIDER AS ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 12 INCORRECT IF NOT ALSO MISLEADING AS THE SAME CONT INUES TO OUTSTAND AS SUCH OVER THE YEARS AND NOT ADJUSTED AGAINST THE MONTHLY LEASE RENTALS) AGA INST THE LEASE AFORESAID WHICH WAS FOR A YEARLY RENT OF RS. 7.44 LAKHS ALLOWING USER OF ITS INTERIORS AND EQUIPMENT INCLUDING 15 COMPUTERS WORK STATIONS ACCESSORIES BESIDES FURN ITURE. ADDITIONS TO THE FIXED ASSETS WERE CARRIED OUT AT RS. 3.74 LAKHS INCLUDING RS. 3.34 L AKHS TOWARD COMPUTER AND RELATED SOFTWARE. FURTHERMORE THE TURNOVER FOR THE YEAR CONSISTING ENTIRELY OF EXPORT TURNOVER OF COMPUTER SOFTWARE TO THE PARENT COMPANY WAS AT RS. 71.45 LA CS . THE ASSESSEES UNDERTAKING THUS BY ALL COUNTS STOOD FORMED ON OR BEFORE 1/4/2002 THE DAT E OF COMMENCEMENT OF COMMERCIAL PRODUCTION . FURTHER IN ANY CASE I.E. EVEN IF SOME CRITICAL FACTOR OF PRODUCTION WAS NOT FIRMED UP BY THAT DATE EVEN THOUGH THERE IS NEITHER ANY C ONTENTION TO THAT EFFECT NOR ANY MATERIAL ON RECORD INDICATIVE OF SO THE FORMATION OF THE UNDER TAKING STOOD COMPLETED DURING THE F.Y. 2002- 03. IN THIS REGARD IT MAY ALSO BE PERTINENT TO STA TE THAT THE TURNOVER FOR THE YEAR ENTAILED A DIRECT PERSONNEL COST IN TERMS OF SALARIES AND ALL OWANCES AT RS. 23.05 LACS I.E. AT LESS THAN 1/3 RD OF THE OUTPUT VALUE. THE RATIO OBTAINS FOR THE FOLL OWING YEAR I.E. F.Y. 2003-04 THE RELEVANT PREVIOUS YEAR AS WELL; THE CORRESPONDING FIGURE BEING RS. 60.91 LACS AGAINST A TURNOVER OF RS. 187.21 LACS. IN OTHER WORDS THE SA LES FOR THE FIRST YEAR OF OPERATIONS WERE COST COMPETITIVE OR AT REGULAR/NORMATIVE PRODUCTIVITY L EVELS. THE ORDER OF THE LD. CIT(A) AS WOULD BE ALSO BE APPARENT FROM A BARE READING THEREOF IS BEREFT OF ANY FINDING FOR THIS YEAR I.E. F.Y. 2002-03 BEING CONFINED ONLY TO THE FOLLOWING YEAR I.E. F.Y. 2003-04 WHILE THE UNDERTAKING STOOD FORMED ONLY SOME TIME DURING THE IMMEDIATELY PRECEDING YEAR IF NOT ACTUALLY PRIOR THERETO . THIS FOLLY WHICH THE APPARENT NATURE OF THE MIST AKE EMANATE AS IT DOES OUT OF UNDISPUTED AND ADMITTED FACTS IMPELS OUR TERMING I T AS SO COULD PERHAPS HAVE BEEN AVOIDED HAD THE FIRST APPELLATE AUTHORITY PROCEEDED EVEN A S OBSERVED BY US EARLIER BY CALLING FOR A REMAND REPORT IN THE MATTER FROM THE ASSESSING AUTH ORITY. CONTINUING FURTHER A BARE READING OF THE TWO LINES OF HIS PARA 1 CONTAINING HIS SECOND FINDING AFOREMENTIONED (REPRODUCED AT PARA 5.3 OF T HIS ORDER) WHICH STANDS HIGHLIGHTED BY US WOULD SHOW IT TO BE SELF-CONTRADICTORY. THE SAME B EING RELEVANT ARE REPRODUCED AGAIN AS UNDER: `THE ASSESSEE TOOK ON LEASE 4000 SQ. FT. OF FURNISH ED OFFICE SPACE IN THE TECHNOPARK CAMPUS WITH WORKSTATIONS WIRING FLOORING AND COMPUTERS. IN THE CONTEXT OF THE ABOVE FACT SITUATION IT CANNOT BE HELD THAT THE UNIT OF THE ASSESSEE WAS FO RMED BY TRANSFER OF SECOND HAND MACHINERY. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 13 THUS WHILE HE NOTES THAT THE ASSESSEES UNIT CAME TO BE SET-UP BY TAKING ON LEASE THE VARIOUS TANGIBLE RESOURCES REQUIRED FOR THE PURPOSE HE CON CLUDES IMMEDIATELY THEREAFTER OF THE SAME HAVING NOT BEEN FORMED BY THE TRANSFER OF SECOND-HA ND MACHINERY AND WHICH IS CLEARLY DICHOTOMOUS. HOW WAS IF NOT THEREBY IT THEN FORMED ONE MAY AS K ? UNTIL OF COURSE HE CONSIDERS OR REGARDS `LEASE AS NOT AMOUNTING TO A TRANSFER WITHIN THE MEANING OF THE SECTION AS IMPLIED BY HIS FIRST FINDING AND WHICH WE HAVE ALREADY CONSIDERED AND DISCUSSED AT PARA 5.4. FOR OUR PURPOSES IT WOULD BE SUFFICIENT IF T HE USED PLANT & MACHINERY AS TRANSFERRED PLAYED A DOMINANT POSITION IN THE FORMATION OF THE ASSESSEES UNDERTAKING WHICH WE FIND TO HAVE BEEN SET-UP ONLY THEREWITH SO THAT THE ASSESS EES CASE FALLS TO BE COVERED WHOLLY U/S. 10B(2)(III) AND ACCORDINGLY ITS UNDERTAKING EXCLU DED THERE-UNDER. 5.6 IN FACT THERE IS SUFFICIENT INDICA ON RECORD T O INFER THAT THE ASSESSEES UNDERTAKING STOOD FORMED BY A SPLIT-UP OR RECONSTRUCTION OF A BUSINES S ALREADY IN EXISTENCE I.E. OF STPL ENGAGED IN THE SAME BUSINESS OF PRODUCING AND SUPPL YING THE SAME THING COMPUTER SOFTWARE - TO THE SAME PRINCIPAL BUYER (STABILIX CORPORATION USA)) FROM THE SAME PLACE WHICH LEASES OUT A SUBSTANTIAL PORTION OF ITS BUILT-UP SPACE PR OPERLY EQUIPPED WHICH IS A CRUCIAL RESOURCE FOR A KNOWLEDGE BUSINESS WHICH THE PRODUCTION OF C OMPUTER SOFTWARE REPRESENTS THERETO I.E. BESIDES THE NECESSARY EQUIPMENT AND ACCESSORIES I. E. THE OPERATING TOOLS NECESSARY FOR THE PRODUCTION OF THE COMPUTER SOFTWARE. THERE IS NO RE ASON TO INFER AND NOTHING TO SUGGEST THAT THE SAID RESOURCES WERE NOT BEING USED BY STPL I.E . WERE SURPLUS OR SUPERFLUOUS WITH IT. THAT THE SAME WAS SUFFICIENT FOR THE PURPOSE OF FORMATIO N OF THE ASSESSEES UNDERTAKING IS ESTABLISHED BY THE FACT THAT IT DID NOT REQUIRE AND THEREFORE DID NOT ACQUIRE ANY SUBSTANTIAL PLANT & MACHINERY SUBSEQUENT TO THE LEASE. EVEN THA T ACQUIRED IS MUCH AFTER THE COMMENCEMENT OF THE COMMERCIAL PRODUCTION I.E. DU RING THE LAST TWO MONTHS OF F.Y. 2002-03. THE SAME EVEN INCLUDING WHICH TRANSLATES IN THE RA TIO OF THE LEASED MACHINERY TO THE TOTAL MACHINERY AT IN EXCESS OF 80% BY VALUE COULD BE A ND IS TO BE TAKEN AS ONLY IN THE NORMAL COURSE OF BUSINESS; THE NEED FOR UPGRADATION AND CO NCOMITANT ACQUISITION OF PLANT AND MACHINERY BEING A NORMAL INCIDENT OF ANY GROWING BU SINESS AND AN INEVITABLE FEATURE OF A KNOWLEDGE BUSINESS. FURTHER ON FOR ALL WE KNOW EV EN THE EMPLOYEES WHO REPRESENT THE HUMAN CAPITAL AND THE OTHER CRITICAL FACTOR OF PRO DUCTION MAY ALSO INCLUDE SOME CRUCIAL PERSONNEL FROM THE SAID SISTER CONCERN EVEN AS BOT H ARE HEADED BY THE SAME FUNCTIONAL HEAD. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 14 THAT IS THE TANGIBLE RESOURCES AS WELL AS THE FUN CTIONAL HEAD IN THE FORM OF THE DIRECTOR/Q.A. MANAGER LYJU ALEXANDER THOMAS WITH WHICH THE UNIT STANDS FORMED IS THAT WHICH IS TRANSFERRED FROM OR SHARED WITH THE EXISTING BUSINE SS OF STPL. IF THE NUMBER OF EMPLOYEES WITH STPL HAS ALSO WITNESSED A DECLINE DURING THE S AID PERIOD THE CASE OF A SPLIT-UP OR RECONSTRUCTION WOULD RATHER STAND PROVED WITHOUT AN Y DOUBT. ALSO IT DOES APPEAR RATHER ODD THAT THE VALUE OF THE PLANT AND MACHINERY PER UNIT SPACE (SAY PER 100 OR 1000 SQ. FT.) WITH STPL TAKING THE FIGURES OF SPACE AND MACHINERY AVA ILABLE WITH IT SHOULD WITNESS SUCH A DRASTIC INCREASE I.E. POST LEASE SO THAT PERHAP S EVEN AS SUGGESTED BY THE AO THE MACHINERY/RESOURCES TRANSFERRED OR SHARED BY IT WIT H THE ASSESSEE WERE MORE EXTENSIVE THAN THAT STATED. HOWEVER WE DO NOT THINK IT WOULD BE IN THE ABSENCE OF FURTHER INVESTIGATION INTO FACTS PROPER TO PURSUE THIS MATTER OR DRAW ANY ADV ERSE INFERENCE ON THAT BASIS. THE SAME AS WELL AS THE INFORMATION WITH REGARD TO EMPLOYEES A S REFERRED TO EARLIER WOULD IF SO I.E. AS THE FACTS AND CIRCUMSTANCES SUGGEST ONLY GO TO FORTIFY THE EVEN OTHERWISE UNMISTAKABLE AND IRRESISTIBLE CONCLUSION THAT THE ASSESSEES UNDERTA KING STOOD FORMED ALMOST WHOLLY BY THE TRANSFER OF RESOURCES INCLUDING PLANT AND MACHINER Y FROM STPL . 5.7 WE ARE AWARE THAT THE AO HAS NOT MADE OU T ANY CASE U/S. 10B(2)(II) SPECIFICALLY STATING OF THE SAID CLAUSE AS BEING NOT APPLICABLE EVEN AS POINTED OUT BY THE LD. AR IN RESPONSE TO A SIMILAR CONTENTION ADVANCED BY THE LD. DR. HO WEVER IT IS NOT THE QUESTION OF A PARTICULAR PROVISION BUT OF AN INFERENCE FROM THE PROVEN AND UNDISPUTED FACTS AND CIRCUMSTANCES OF THE CASE AND WHICH COULD VARY FROM PERSON TO PERSON. B ESIDES AS WE SEE IT THE DIFFERENCE BETWEEN CLAUSES (II) AND (III) OF S. 10B(2) WHERE THE EXISTENCE OF AN EXISTING BUSINESS AND ITS NEXUS WITH THE NEW BUSINESS IS PROVEN AND UNDISPUTE D - AS OF STPL IN THE INSTANT CASE - IS ONLY ONE OF DEGREE I.E. WHETHER ONLY PLANT AND MACHINE RY OR OTHER RESOURCES ALSO STOOD TRANSFERRED AND OF THEIR ROLE IN THE FORMATION OF THE ASSESSEES NEW UNDERTAKING. ADEQUATE SPACE AT AN APPROPRIATE LOCATION (WHICH THE TECHNO PARK REPRESENTS) GEARED WITH INFRASTRUCTURAL SUPPORT IS THE ONLY OTHER MAJOR TA NGIBLE ASSET I.E. APART FROM PLANT AND MACHINERY THAT IS REQUIRED FOR THE FORMATION OF A SOFTWARE UNIT AS THE ASSESSEES AS WOULD BE APPARENT FROM THE SCHEDULE OF FIXED ASSETS TO THE B ALANCE-SHEET . THE OUTPUT OR THE PRODUCE COMPUTER SOFTWARE IS ALSO THE SAME TO BE SUPPLIE D TO THE SAME BUYER OR AT LEAST PRINCIPALLY SO . ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 15 THE WHOLE INTENT AND PURPORT OF BOTH THE C LAUSES IS WHETHER A NEW UNDERTAKING HAS COME INTO BEING OR NOT I.E. IS IT A CASE OF CHANGE OF LABEL AS THE HONBLE COURT PUT IT IN THE CASE OF BAJAJ TEMPO LTD. V. CIT (SUPRA) OR A CASE OF A `NEW UNDERTAKING COMING I NTO EXISTENCE SO THAT IT HELD THEREIN THAT A MARGINAL TRANSFER OF RE SOURCES SHOULD NOT DISTURB THE FINDING OF A NEW UNDERTAKING HAVING BEEN FORMED AS THE PROVISION HA D TO BE READ AND APPLIED REALISTICALLY AND CONSEQUENTLY A `NEW UNDERTAKING SHOULD BE TAKEN T O MEAN A `SUBSTANTIALLY NEW UNDERTAKING. THAT WE UNDERSTAND TO BE THE PITH AND SUBSTANCE OF ITS DECISION IN VIEW OF THE EMPHASIS OF THE SECTION ON THE `FORMATION RATHER THAN ON `TRANSFER PER SE . IN FACT AS WOULD BE APPARENT FROM THE SECTION ITSELF AS WELL AS THE READING OF THE D ECISIONS CITED THE TWO I.E. `TRANSFER AND `FORMATION FORM PART OF A COMPOSITE CONDITION SO THAT WHILE APPLYING THE LAW IN A PARTICULAR CASE THE TRANSFER HAS ALWAYS TO BE EXAMINED WITH R EFERENCE TO ITS EFFECT I.E. ON THE SETTING UP OR FORMATION OF THE TRANSFEREE-UNDERTAKING. THE OB SERVATIONS BY THE HONBLE COURT IN THE CASE OF CIT VS. SUPER TOOL CO . PVT. LTD . 202 ITR 50 (BOM.) RENDERED IN THE CONTEXT OF A PARI MATERIA PROVISION WOULD BE RELEVANT AND CONTEXTUAL AND TH EREFORE ARE REPRODUCED AS UNDER: SECTION 84 OF THE INCOME-TAX ACT 1961 AS IT STOO D AT THE RELEVANT TIME (ASSESSMENT YEAR 1965-66) PROVIDED FOR RELIEF TO BE GRANTED TO NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS TO THE EXTENT OF 6 PER CENT PER ANNUM ON THE CAPITAL EMPLOYED IN SUCH UNDERTAKINGS. SUB-SECTION (2) THEREOF LAID DOWN TH E CONDITIONS WHICH WERE TO BE FULFILLED TO AVAIL OF THIS BENEFIT. IT IS EVIDENT FROM A PLAIN READING OF SECTION 84(1) THAT THE SPECIAL RELIEF CONTEMPLATED BY THIS SUB-SECTION WAS AVAILABLE ONLY TO NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS ON FULFILMENT O F THE CONDITIONS MENTIONED IN SUB- SECTION (2). THE TWO CONDITIONS RELEVANT FOR THE P URPOSE WERE: (I) THAT SUCH UNDERTAKING WAS NOT FORMED BY THE SPLITTING UP OR T HE RECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE AND (II) IT WAS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF BUILDING MACHINERY OR PLANT PREVIOUSLY USED FOR AN Y PURPOSE. A CAREFUL PERUSAL OF THESE TWO CONDITIONS CLEARLY SHOWED THAT THE BENEFI T UNDER THE SCHEME WAS INTENDED TO BE GIVEN ONLY TO UNDERTAKINGS WHICH WERE IN THE REA L SENSE NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS. IF THE UNDERTAKING WAS ALR EADY IN EXISTENCE AND OUT OF SUCH EXISTING UNDERTAKING A NEW INDUSTRIAL UNDERTAKING HAD BEEN CREATED THE BENEFIT WAS NOT AVAILABLE. SIMILARLY THIS SECTION WOULD NOT A PPLY AND ITS BENEFIT WILL NOT BE AVAILABLE IF THERE WAS A TRANSFER TO THE NEW BUSINESS OF BUILDING MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. THE WORD TRANSFE R CANNOT BE GIVEN A NARROW MEANING. IT HAS TO BE INTERPRETED IN A BROADER SEN SE WITH REFERENCE TO THE CONTEXT IN WHICH IT IS USED. SO INTERPRETED IT WILL TAKE WITH IN ITS AMBIT LEASE OF BUILDING OR MACHINERY OR PLANT. THE WORD TRANSFER HAS BEEN US ED IN SECTION 84(2)(II) WHICH EXPRESSION HAD BEEN DEFINED IN THE ACT AND HAS A DE FINITE CONNOTATION. IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO TAKE OUT LEASE OF BU ILDING ETC. FROM THE EXPRESSION TRANSFER AND TO ALLOW THE BENEFIT EVEN TO INDUSTR IAL UNDERTAKINGS SET UP IN RENTED ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 16 PREMISES OR WITH MACHINERY OR PLANT TAKEN ON HIRE IT MIGHT HAVE SPECIFICALLY SAID SO AND INSTEAD OF USING THE EXPRESSION TRANSFER IT MIGHT HAVE USED THE EXPRESSION PURCHASE IN ITS PLACE. THIS VIEW GETS FULL SUPPO RT FROM THE INSERTION OF THE SECOND PROVISO TO SUB-SECTION (2) BY ACT 20 OF 1967 WITH EFFECT FROM APRIL 1 1967 WHICH BY A DEEMING PROVISION TAKES OUT OF THE SCOPE OF TRANS FER REFERRED TO IN CLAUSE (II) SHALL BE DEEMED NOT TO HAVE BEEN CONTRAVENED IF THE INDUS TRIAL UNDERTAKING IS SET UP IN RENTED PREMISES. AS A NATURAL COROLLARY IN THE A BSENCE OF THIS DEEMING PROVISION THE CONDITION IN CLAUSE (II) IS VIOLATED IF THE INDUSTR IAL UNDERTAKING WAS SET UP IN RENTED PREMISES. THE CONDITIONS LAID UNDER S. 80J(4) OR S. 84(2) OF THE ACT (AS THEY THEN STOOD) WERE IDENTICAL WORDED TO THE PRESENT SECTION. FURTHER THE PROVISI ON OF S. 10B(2)(III) CLEARLY QUALIFIES THE WORD `BUSINESS BY THE WORD `NEW CLARIFYING UNAMBIGUOU SLY THE INTENTION OF THE LEGISLATURE TO RESTRICT THE BENEFIT OF THE DEDUCTION TO ONLY NEWLY SET-UP UNITS. THE SAME READ WITH S. 80I(2)(II) AS DID THE HONBLE COURT AND EXPLANATION 1 & 2 TO THE PROVISION RESOLVES ANY DOUBT IF ANY IN THE MATTER; THE EXPLANATIONS ALSO ACTING AS OPERATIONAL GUIDELINES WHERE SOME PREVIOUSLY USED PLANT AND MACHINERY IS ALSO DEPLOYE D. THE WHOLE PREMISE OF THE FOREGOING DECISIONS IS THAT A NEW OR SUBSTANTIALLY NEW UNDER TAKING HAS TO COME INTO BEING FOR IT TO QUALIFY FOR THE STATUTORY BENEFIT. THE JURISDICTION AL HIGH COURT IN FACT IN THE CASE OF KERALA STATE CASHEW DEVELOPMENT CORPORATION VS. CIT (SUPRA) READ THE CONDITION OF THE UNDERTAKING (BEING SET UP OR FORMED) AS BEING NEW EVEN IN THE A BSENCE OF THE WORD `NEW QUALIFYING IT IN THE RELEVANT STATUTORY PROVISION BY READING THE SAM E MEANINGFULLY AND PURPOSIVELY. AS SUCH EVEN IF THE TRANSFERRED SECOND- HAND PLANT AND MACHINERY EXCEEDS THE STATUTORILY PRESCRIBED RATIO OF 20% FOR SUCH MACHIN ERY (WHICH WAS NOT AVAILABLEUNDER THE 1922 ACT) THE INFERENCE OF THE NON-SATISFACTION OF THE CONDITION OF S. 10B(2)(III) WOULD NOT FOLLOW AS A MATTER OF COURSE AND A DECISION SHALL HAVE TO BE TAKEN ON AN OVERALL CONSIDERATION OF THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES EVEN AS IT MAY BE CLARIFIED THAT THE ONUS TO PROVE THAT IT IS ELIGIBLE FOR EXEMPTION BEING SOUGHT IS ALWAYS ON THE ASSESSEE. OUR THIS UNDERSTANDING OF THE PROVISION ELUCIDATED BY THE HIGHER COURTS OF LAW EXPLAINS THE FOREGOING EXERCISE WHICH THUS IS ONLY AN ATTEMPT TO ANSWER THE TEST AS LAID DOWN BY THE APEX COURT SO AS TO BE ABLE TO APPLY THE LAW IN A MEANINGFUL AND PURPOSIVE RATHER THAN MECHANICAL MANNER. WHETHER THEREFORE AS A RESULT THE ASSESSEES CASE FALLS U/S. 10B(2)(II) OR (III) IS SECONDARY AND NOT OF MUCH SIGNIFICANCE GIVEN THE TESTS LAID DOWN PARTICULAR LY IN THE FACT SETTING OF A BUSINESS ALREADY IN EXISTENCE AND ITS CLOSE AND DIRECT CONNECTION WITH THE FORMATION OF THE ASSESSEES ENTERPRISE ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 17 AND IS MORE A QUESTION OF THE FACTS FITTING MORE NE ATLY INTO ONE PROVISION IN PREFERENCE TO THE OTHER. 5.8 ON THE BASIS OF THE FOREGOING ANALYSIS WE AR E OF THE CLEAR VIEW THAT THE ASSESSEES UNDERTAKING COULD NOT BE FORMED BUT FOR THE TRANSFE R OF PLANT AND MACHINERY AND WHICH THEREFORE APART FROM BEING MUCH IN EXCESS OF THE S TATUTORILY PRESCRIBED RATIO OF 20% HAS PLAYED A SIGNIFICANT ROLE IN THE SETTING UP OF ITS UNDERTAKING APART FROM OTHER ASSETS/RESOURCES EQUALLY CRUCIAL AND SIMILARLY TRANSFERRED OR EVEN SHARED SO THAT IT IS NOT A NEW UNDERTAKING OR EVEN A SUBSTANTIALLY SO. UNDER THE CIRCUMSTANCES W E THEREFORE HOLD THAT THE ASSESSEES UNDERTAKING DOES NOT FULFIL THE CONDITIONS STIPULAT ED U/S. 10B(2) AND AS SUCH IS NOT QUALIFIED FOR THE BENEFIT CONFERRED BY THE SAID SECTION ( ALSO REFER PARA 5.10 ). 5.9 WE NEXT DISCUSS THE CASE LAW RELIED UPON BY T HE ASSESSEE BEFORE US. THE DECISION IN THE CASE OF BAJAJ TEMPO LTD . V. CIT (SUPRA) STANDS ALREADY CONSIDERED AND RATHER OUR DECISION STANDS RENDERED IN A LARGE MEASURE BY APPLYING THE SAME. THE SECOND DECISION CITED BY THE ASSESSEE IS IN THE CASE OF GIRNAR INDUSTRIES VS. CIT (2010) 254 ELT 79 (KER.). THE SAME IS WITH RESPECT TO THE SCOPE OF THE TERM MANUFACTURE HOLDING BLENDING OF VARIETIES OF TEAS TO PRODUCE TEA WITH DIFFERENT FLAVOURS QUINTESSENTIAL LY A PROCESSING ACTIVITY TO BE A MANUFACTURE IN TERMS OF SECTION 10A OF THE ACT B Y GIVING A LIBERAL MEANING TO THE TERM IN VIEW OF ITS DEFINITION UNDER THE EXIM POLICY OF THE GOVERNMENT OF INDIA. WE ARE UNABLE TO SEE ANY CORRELATION OF THE SAID DECISION WITH THE I SSUE ARISING FOR ADJUDICATION IN THE PRESENT CASE; COMPUTER SOFTWARE BEING RATHER AN ACTIVITY SP ECIFIED AS A QUALIFYING CONDITION BY THE SECTION ITSELF SO THAT THE QUESTION AS TO WHETHER OR NOT THE SAME WOULD FALL UNDER THE AMBIT OF THE TERM MANUFACTURE OR PRODUCTION OF ARTICLE OR TH ING DOES NOT ARISE FOR CONSIDERATION I.E. IS IRRELEVANT. EVEN GOING BY ITS RATIO I.E. OF THE E XPRESSION USED IN A TAXING STATUTE TO BE READ IN HARMONY WITH THE OBJECT THEREOF TO EFFECTUATE THE L EGISLATIVE INTENT THE SAME IS OF NO MOMENT. THIS IS AS FIRSTLY PRODUCTION OF COMPUTER SOFTWAR E IS A SPECIFIED ACTIVITY QUALIFYING FOR DEDUCTION U/S. 10B SO THAT THERE IS NO OCCASION FO R ANY INTERPRETATION. SECONDLY THE QUESTION WHETHER THE ASSESSEES UNDERTAKING IS AN ELIGIBLE O NE OR NOT IN TERMS OF THE CONDITIONS SET OUT IN SECTION 10B(2)(III) [IF NOT ALSO S. 10B(2)(II)] IS A MATTER OF FINDING OF FACT AND HAS NOTHING TO DO WITH THE INTERPRETATION OR UNDERSTANDING OF THE LANGUAGE OF THE STATUTE OR EXPRESSION USED ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 18 THEREIN. IF AT ALL WE HAVE IN ARRIVING AT OUR DE CISION ONLY APPLIED THE LAW AS LAID DOWN BY THE HONBLE APEX COURT AND THE HONBLE JURISDICTIONAL H IGH COURT IN THE MATTER BOTH OF WHICH HAVE ADVOCATED THE INTERPRETATION OF THE TERM IN CONSIST ENCE WITH THE STATED OBJECT OF THE PROVISION I.E. OF A NEW QUALIFYING UNDERTAKING COMING INTO EXISTENCE. THE ISSUE IN FACT STANDS SETTLED BY THE VARIOUS DECISIONS AS AMONG OTHERS NARANG DAIRY PRODUCTS (SUPRA); BAJAJ TEMPO LTD. (SUPRA); KERALA STATE CASHEW DEVELOPMENT CORPORATION VS. CIT (SUPRA) IN RELATION TO LIKE BENEFICIARY PROVISIONS BEING IDENTICALLY WORDED. 5.10 THE THIRD CASE RELIED UPON BY THE ASSESSEE IS I.T.O. VS. TECH DRIVE (INDIA) PVT. LTD . (SUPRA). THE SAME IS IN THE CONTEXT OF THE EXTANT P ROVISION (SECTION 10B) AND DECIDES THE ISSUE AS TO WHETHER THE OWNERSHIP OF PLANT & MACHINERY BY THE ASSESSEE IS TO BE READ AS A QUALIFYING CONDITION FOR SATISFACTION OF S. 10B(2)(I) I.E. T HE MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING OR COMPUTER SOFTWARE. THE SAME HAS NO RELEVAN CE OR BEARING ON THE FACTS OF THE CASE WHICH FALLS UNDER THE OTHER TWO CLAUSES OF SECTION 10B(2) WITH CLAUSE (I) BEING SATISFIED. AS REGARDS THE CONTENTION/S RAISED WE CONSIDER THAT T HE HOST OF CASE LAW IN THE MATTER TO SOME OF WHICH REFERENCE STANDS MADE BY US IN THIS ORDER WO ULD AMPLY BEAR OUT THE LAW IN THE MATTER THE APPLICATION OF WHICH ALONE IN THE FACTS AND CI RCUMSTANCES OF THE CASE WE HAVE SOUGHT TO EXAMINE IN THE PRESENT CASE. FURTHER IT MAY SUFFI CE TO ADD THAT IT WOULD BE WHOLLY REPUGNANT TO THE PROVISION TO SUGGEST AS THE ARGUMENT ADVANC ED IMPLIEDLY DOES THAT THE CONDITION OF S. 10B(2)(III) WOULD NOT APPLY WHERE THE ACTIVITY INVO LVED IS THE PRODUCTION OF COMPUTER SOFTWARE. THIS DESPITE THE FACT THAT THE ASSESSEE A CQUIRES AS IT DID ITS SISTER CONCERN AND CONTINUES TO PLANT & MACHINERY AND ONLY FOR THE P RODUCTION OF THE SAME I.E. COMPUTER SOFTWARE. PLANT & MACHINERY IS BY DEFINITION EQU IPMENT OR TOOL WHICH EASES THE RIGOUR AND EXPENDITURE OF HUMAN LABOR IN PERFORMING A PARTICUL AR TASK. IN FACT THE COMBINE OF COMPUTER HARDWARE AND SOFTWARE BY HARNESSING PHYSICAL LAWS OF MATTER IS ABLE TO PERFORM TASKS WHICH ARE IMPOSSIBLE BY MAN. FURTHER HUMAN CAPITAL OR LA BOR IS INTEGRAL TO ANY ENTERPRISE AND HIGHER THE TECHNOLOGY INVOLVED AND/OR THE SCALE OF BUSINE SS THE MORE COMPETENT AND QUALIFIED THE PEOPLE REQUIRED TO MANAGE IT WHICH ARE IN ANY CASE INDISPENSABLE AND REQUIRED I.E. INDEPENDENT OF THE COMPETENCE LEVEL WHICH WOULD ON LY BE COMMENSURATE TO THE WORK OR SERVICES REQUIRED TO BE PERFORMED SO THAT THE EMPH ASIS ON HUMAN CAPITAL FOR THE PURPOSES OF THE APPLICATION OF THE PROVISION IS MISPLACED. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 19 THE COCHIN BENCH OF THE TRIBUNAL HAD AN OCCASION TO CONSIDER THE CONDITION OF SECTION 80IB(2)(II) WHICH IS THE SAME AS IN SECTION 10B(2)(III) IN THE CASE OF OLAM EXPORTS (INDIA) LTD. VS. CIT (I.T.A. 247/COCH/2007 DATED 30.3.2010). IT OBSERVED IN FAVOUR OF A LEASE AMOUNTING TO A TRANSFER FOLLOWING THE AFORE-NOTED DECISIONS. ALSO IT MAY BE CLARIFIED THAT IT IS TRITE LAW THAT AN EXEMPTION PROVISION IS TO BE INTE RPRETED STRICTLY AND ONLY ONCE THE QUALIFYING CONDITION(S) IS SATISFIED THAT THE PROVISION IS TO BE APPLIED IN A LIBERAL FASHION SO AS TO GIVE FULL EFFECT TO THE LEGISLATIVE INTENT AND FURTHER THE ONUS THAT IT FALLS WITHIN THE AMBIT OF THE EXEMPTION PROVISION IS ON THE ASSESSEE. 6. IN VIEW OF THE FOREGOING WE DECIDE THE IS SUE REPRESENTED BY THE REVENUES GROUND NOS. 2 TO 6 IN ITS FAVOUR AND THE ASSESSEES GROUN DS 2 & 3 AGAINST IT WITH GROUND # 1 IN BOTH THE APPEALS BEING GENERAL IN NATURE WARRANTING NO A DJUDICATION. 7. THE SECOND ISSUE RAISED BY THE REVENUE PER ITS GROUND NO.7 PERTAINS TO THE DELETION OF DISALLOWANCE AT RS. 4.25 LAKHS IN RESPECT OF CON SULTANCY CHARGES PAID TO LYJU ALEXANDER THOMAS RESIDENT DIRECTOR OF THE ASSESSEE-COMPANY. THE AO CALLED FOR DETAILS IN RESPECT OF HIS QUALIFICATIONS AND JUSTIFICATION IN TERMS OF REASON ABLENESS OF THE CHARGES PAID IN VIEW OF THE APPLICABILITY OF SECTION 40A(2)(A) OF THE ACT. THE ASSESSEE EXPLAINED HIM TO BE RENDERING CONSULTANCY IN CONNECTION WITH SOFTWARE DEVELOPMENT . FURTHER HE WAS A QUALIFIED ENGINEER IN THE DISCIPLINE OF ELECTRONICS AND TELECOMMUNICATION S AND IS A CERTIFIED PROJECT MANAGER (PMP) BESIDES HOLDING CERTIFICATIONS LIKE MICROSOF T CERTIFIED SYSTEMS ENGINEER (MCSE) AND CISCO CERTIFIED NETWORK ASSOCIATE (CCNA). THE AMOUN T PAID AND THE CLAIM IN IT RESPECT WAS STATED TO BE REASONABLE. IN APPEAL THE ASSESS EE REITERATED ITS STAND. THE LD. CIT(A) DELETED THE SAME HOLDING THUS: I AM NOT SATISFIED WITH THE REASONS GIVEN BY THE A O FOR REJECTING 50% OF THE CLAIM. U/S. 40A(2) EXPENDITURE CAN BE DISALLOWED ONLY WHEN THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVI NG REGARD TO FAIR MARKET VALUE OF THE GOODS SERVICES OR FACILITIES FOR WHICH THE PAYMEN T IS MADE FOR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM. THE ISSUE HAS TO BE DECIDED OBJECTIVELY FROM THE POINT OF VIEW OF THE BUSINESS MAN AND NOT AS A MERE RULE OF THUMB APPROACH. THE ASSE SSING OFFICER HAS NOT POINTED OUT ANY VALID REASON TO RESTRICT THE CLAIM TO 50%. HENCE THE DISA LLOWANCE U/S. 40A(2)(B) AMOUNTING TO RS. 4 25 000/- IS DELETED. THE ASSESSEE WILL BE ALLOW ED THE FULL CLAIM FOR THE PROFESSIONAL CHARGES PAID TO THE DIRECTOR SHRI LYJU ALEXANDER THOMAS. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 20 AGGRIEVED THE REVENUE IS IN APPEAL. 8. BEFORE US THE LD. DR SUBMITTED THAT THE LD. CIT(A) HAS NOT STATED ANY BASIS FOR THE DELETION OF THE DISALLOWANCE WHICH STOOD EFFECTED B Y THE AO IN THE ABSENCE OF ANY MATERIAL FURNISHED BY THE ASSESSEE. THE LD. AR ON THE OTHER HAND WOULD SUBMIT THAT THE AMOUNT PAID HAS TO BE VIEWED FROM THE STANDPOINT OF A BUSINESSM AN EVEN AS POINTED OUT BY THE LD. CIT(A). 9. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. 9.1 THE FIRST THING THAT STRIKES US IS THE ABSE NCE OR NEARLY SO OF ANY SUBSTANTIATION OF ITS CASE BY THE ASSESSEE. THE LD. CIT(A) HAS ALLOWED TH E ASSESSEE ITS CLAIM WITHOUT NOTICING THAT NO DETAILS OR INFORMATION STOOD SUBMITTED BY IT TO THE AO FOR HIM TO ENABLE ITS PURSUANCE AND FORMATION OF AN INFORMED OPINION IN THE MATTER. NO DOUBT THE ONUS FOR A DISALLOWANCE U/S. 40A(2)(A) IS ON THE REVENUE BUT THE SAME CAN ONLY BE ON THE BASIS OF THE PRIMARY DETAILS AND THE INFORMATION SUPPLIED IN SUPPORT BY THE ASSESSEE . THE MATTER HAS TWO ASPECTS. FIRST THE QUESTION OF COMPETENCE WITH REGARD TO THE STATED SE RVICES. THE ASSESSEE HAS STATED HIS PROFESSIONAL QUALIFICATIONS IN THIS REGARD. HOWEVE R MERELY DOING SO WITHOUT SOME MATERIAL TO SUPPORT MAY NOT BE ADEQUATE. THEN AGAIN IT IS A Q UESTION OF EXPERIENCE AS CLEARLY THE PAYEE IS NOT A FRESHLY QUALIFIED GRADUATE AND PROFESSIONA L COMPETENCE IN A LARGE MEASURE IS ON THE BASIS OF RELEVANT EXPERIENCE. THE SECOND ASPECT REQ UIRED TO BE CONSIDERED IS THE SERVICES RENDERED FOR THE IMPUGNED CHARGES STAND ALLOWED TO HIM ONLY IN RESPECT THEREOF. A PERSON MAY BE HIGHLY QUALIFIED BUT THAT BY ITSELF IS NEITH ER SUFFICIENT NOR A REASON FOR PAYING CHARGES TO HIM. THE EXACT NATURE OF THE SERVICES THEREFOR E NEEDS TO BE SPELT OUT. THE TERM `CONSULTANCY IS TOO WIDE AND VAGUE TO PROVIDE ANY DEFINITE UNDERSTANDING OF THE SERVICES RENDERED BY HIM PARTICULARLY AS THE ASSESSEE HAS A WHOLE RANGE OF PROFESSIONAL AND FURTHER WHO STAND PAID MUCH LESS IN COMPARISON. THE QUALITY OF THE SERVICES RENDERED MAY NOT BE AMENABLE TO ASSESSMENT BY THE AO BEING NOT A TECHN ICAL PERSON BUT THEIR SCOPE DEFINITELY IS. ALSO THE COMPARISON FOR ANY OBJECTIVE ASSESSMENT IS TO BE WITH REFERENCE TO THE FAIR MARKET VALUE SO THAT WHAT IS TO BE SEEN IS THE MARKET PRI CE OF SIMILAR SERVICES I.E. IF THE ASSESSEE WERE TO ENGAGE ANOTHER PROFESSIONAL OF SIMILAR STAN DING AND EXPERTISE ALL OF WHICH WOULD ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 21 REQUIRE PROFILING THOSE SERVICES. ALSO RELEVANT IN THE MATTER IS THE FACT THAT THE DIRECTOR ALSO HEADS AND HAS FUNCTIONAL RESPONSIBILITIES IN STPL PRESUMABLY AGAINST SOME REMUNERATION SO THAT HE IS NOT DEVOTED FULL-TIME TO THE ASSESSEE. THE EARNING OF PROFITS BY THE ASSESSEE OR THEIR SCALE WHICH HAS ALSO INFLUENCED THE DECISION BY TH E LD. CIT(A) IS NOT RELEVANT FOR THE PURPOSE WHICH ONLY REQUIRES A COMMERCIAL EVALUATION OF THE SERVICES THAT STAND PAID FOR. 9.2 EVEN SO THE BOARD HAS CLARIFIED THAT THE PROVISION OF S. 40A(2)(A) IS TO BE APPLIED ONLY WHERE THERE IS SCOPE OF AVAILING ANY TAX BENEFIT/SA VINGS SO THAT THE ASSESSEES CLAIM COULD POSSIBLY HAVE BEEN MOTIVATED BY TAX CONSIDERATIONS. IN THE PRESENT CASE HOWEVER IT IS JUST THE REVERSE WITH THE ASSESSEE CLAIMING FULL TAX EXEMPT ION WHILE THE REMUNERATION ALLOWED TO ITS RESIDENT DIRECTOR BEING IN RESPECT OF SERVICES REN DERED IN INDIA IS ONLY FULLY TAXABLE IN INDIA. EVEN THOUGH WE HAVE ON THE FACTUAL FINDING OF THE NON-ELIGIBILITY OF THE ASSESSEES UNIT FOUND IT TO BE NOT ENTITLED TO THE CLAIMED BENEFIT YET FIRSTLY THAT DOES NOT BY ITSELF RESULT IN ANY TAX SAVINGS WHICH IF SO WOULD ONLY BE INCIDENTAL. SE CONDLY IF ANYTHING IT ONLY GOES TO SHOW THAT THE ARRANGEMENT WAS ENTERED INTO ON PURELY COM MERCIAL CONSIDERATIONS AND IS NOT TAINTED BY ANY ULTERIOR MOTIVE OF TAX AVOIDANCE. 9.3 IN VIEW OF THE FOREGOING WE CONSIDER THE REVENUESS CASE AS LEGALLY NOT SUSTAINABLE THOUGH ON A DIFFERENT GROUND THAN THAT WHICH FOUND FAVOUR WITH THE LD. CIT(A) AND CONSEQUENTLY DISMISS ITS RELEVANT GROUNDS WHILE A CCEDING TO THE ASSESSEES GROUND # 4. 10. IN THE RESULT BOTH THE REVENUES APPEAL AND TH E ASSESSEES CO ARE PARTLY ALLOWED. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 05TH OCTOBER 2010 GJ/COPY TO: 1. STABILIX SOLUTIONS PVT. LTD. 212 NILA TECHNOPA RK CAMPUS KARIAVATTOM TRIVANDRUM - 695 581. 2. THE INCOME TAX OFFICER WARD-1(1) RANGE-1 TRI VANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX TRIVANDRUM. ITA.NO.848/COCH./2007 & C .O. NO. 76/COCH/2007 22 5. D.R. I.T.A.T. COCHIN BENCH COCHIN. 6. 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