COMMISSIONER OF INCOME TAX Vs. PRISMA ELECTRONICS

JUDGEMENT

(1.) This group of appeals raises the same question of law and are being decided together. For facility, the facts of ITA No.283 of 2010 is being taken into consideration.

(2.) The assessee's factory is situated in SIDCO Industrial Estate in Jammu & Kashmir and derives income from manufacture and sale of consumer electronic durable goods. For the assessment year 2005-06, the assessee filed a return showing a loss of Rs.64,127/-. The case was taken up for scrutiny and notice under Section 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was issued. During the year in question, the assessee claimed deduction under Section 80-IB of the Act amounting to Rs.18,51,055/-. The Assessing Officer issued a notice under Section 142(1) of the Act requiring the assessee to justify his claim of deduction under Section 80-IB of the Act. In response to the notice, the assessee submitted that his factory is situated in Jammu & Kashmir. On going through the claim of the assessee, the Assessing Officer found that the assessee was running the business from the same premises as a proprietorship concern and that on 1st April, 2004 a partnership firm was constituted in which two other persons were inducted as partners. According to the Assessing Officer, a new legal entity was formed on 1st April, 2004. The Assessing Officer accordingly held that the industrial undertaking under proprietorship was converted into a partnership firm on 1st April, 2004 and that the transfer of machinery or plant previously used by the proprietorship concern was being used by the partnership firm and, accordingly, the assessee was not entitled for exemption under Section 80-IB of the Act. The Assessing Officer, accordingly, disallowed the deduction claimed by the assessee.

(3.) The assessee, being aggrieved, filed an appeal before the Commissioner of Income Tax, who allowed the appeal holding that the assessee was entitled for deduction under Section 80-IB of the Act. The appellate authority found that the business of the undertaking was not formed by splitting up or by reconstruction and that the undertaking was already in existence and, consequently, the assessee was not hit by the provision of Section 80IB(2)(i) of the Act. The revenue, being aggrieved, filed an appeal before the Income Tax Tribunal, which was dismissed. The Tribunal found that only the constitution of the assessee's firm was changed from proprietorship concern into a partnership firm and that there was no transfer of plant and machinery to the new firm, inasmuch as it was only a transfer of the industrial undertaking as a whole along with the assets and liabilities. The Tribunal held that there was no splitting up or reconstruction of the business, which was already in existence and that it was only a case of change of the constitution of the same industrial concern, which continued to manufacture the same item, even after the admission of a partner. The Tribunal found that the conditions that disqualifies the deductions under Section 80-IB of the Act was not existing.