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Commissioner Of Income-Tax v. Western Outdoor Interactive P. Ltd.
Factual and Procedural Background
The appeals arise from an order dated August 12, 2009, of the Income-tax Appellate Tribunal ("the Tribunal") concerning assessment years 2002-03, 2003-04, and 2004-05. The respondent-assessee operates two divisions engaged in software development for in-flight entertainment systems, exporting their products to M/s. MAS Ltd., USA. One division is located in Fort, Mumbai, operational since 1997-98, and the other at the Santacruz Export Processing Zone (SEEPZ), operational since 2000-01.
The assessee claimed exemption under section 10A of the Income-tax Act for the SEEPZ unit starting from assessment year 2000-01. The Income-tax Department granted this exemption for assessment years 2000-01 to 2002-03 but denied it for 2003-04 and 2004-05 on the ground that the SEEPZ unit was formed by splitting the Fort unit.
Following the denial, the assessment for 2002-03 was reopened under sections 147/148. The Assessing Officer rejected the exemption claim for the SEEPZ unit, citing evidence of common export transactions and shared expenses between the two units. The Commissioner of Income-tax (Appeals) set aside this rejection, directing the Assessing Officer to grant the exemption. The Revenue appealed to the Tribunal, which upheld the exemption for all three assessment years, finding the SEEPZ unit to be independent and not formed by splitting the Fort unit.
Legal Issues Presented
- Whether the Tribunal was justified in allowing exemption under section 10A of the Income-tax Act to the assessee's SEEPZ unit despite non-compliance with section 10A(2)(ii) regarding formation by splitting of an existing unit?
Arguments of the Parties
Appellant's Arguments
- The SEEPZ unit was formed by splitting the Fort unit, as both units develop the same software, export to the same party, and often receive common remittances.
- Mere administrative separations such as separate bank accounts and premises do not establish the SEEPZ unit as independent.
- The Tribunal erred by relying on prior years' acceptance of exemption, as each assessment year is independent and res judicata does not apply in tax matters.
Respondent's Arguments
- Relying on precedents including Commissioner Of Income-Tax v. Paul Brothers and Direct Information P. Ltd. v. ITO, once exemption is granted for initial years and not withdrawn, it cannot be denied in subsequent years absent a change in facts.
- The SEEPZ unit was found independent by both the Commissioner of Income-tax (Appeals) and the Tribunal, with separate books, bank accounts, and no transfer of plant or machinery from the Fort unit.
- The exemption under section 10A applies for ten consecutive years from commencement of export; hence, denial in later years without changed facts is improper.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Paul Brothers [1995] 216 ITR 548 (Bom) | Once exemption under a provision is granted and not withdrawn for initial years, it cannot be denied for subsequent years absent change in facts. | Accepted as binding authority to uphold exemption for subsequent assessment years where initial years’ exemption was granted and not withdrawn. |
| Direct Information P. Ltd. v. ITO [2012] 349 ITR 150 (Bom) | Similar principle as Paul Brothers regarding continuity of exemption benefits once granted. | Reinforced the principle that the Revenue cannot deny exemption in later years without withdrawing it for the first year. |
Court's Reasoning and Analysis
The court accepted the respondent’s submission based on the precedents of Paul Brothers and Direct Information P. Ltd., which establish that once a deduction or exemption is granted under the Income-tax Act for a particular year and not withdrawn, the Revenue cannot deny the same benefit for subsequent years unless there is a change in facts. In this case, the exemption under section 10A was granted to the SEEPZ unit for assessment years 2000-01 and 2001-02 and was not withdrawn. The Revenue did not demonstrate any change in facts to justify denial for later years.
Moreover, both the Commissioner of Income-tax (Appeals) and the Tribunal found on facts that the SEEPZ unit was independent and not formed by splitting the Fort unit. The Tribunal’s findings included that the units operated at different locations, maintained separate books and bank accounts, and there was no transfer of plant or machinery. The fact that both units developed the same software did not negate their independence.
Given these findings and the legal principle that each assessment year’s exemption stands unless expressly withdrawn, the court found no substantial question of law arose from the Revenue’s appeal.
Holding and Implications
The court DISMISSED the Revenue’s appeals against the Tribunal’s order dated August 12, 2009, thereby upholding the exemption granted under section 10A of the Income-tax Act to the respondent-assessee's SEEPZ unit for the assessment years 2002-03, 2003-04, and 2004-05.
The direct effect of this decision is that the SEEPZ unit retains its exemption benefit for the specified years. No new precedent was set, as the court relied on established principles that exemption once granted and not withdrawn cannot be denied in subsequent years without change in facts.
M.S Sanklecha, J.:— These appeals by the Revenue under section 260A of the Income-tax Act, 1961 (“the Act”), are against the common order dated August 12, 2009, of the Income-tax Appellate Tribunal (“the Tribunal”) in relation to the assessment years 2002-03, 2003-04 and 2004-05.
2. Being aggrieved by the order dated August 12, 2009, the appellant-Revenue has formulated the following identical question of law for the three assessment years for the consideration of this court.
Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing exemption to the assessee-company under section 10A of the Income-tax Act in respect of its unit at SEEPZ Mumbai even though it has not complied with the requirements of section 10A(2)(ii) of the Income-tax Act?
3. The facts are similar in all the three appeals.
4. However, for the sake of convenience, we are setting out the facts stated in Appeal No. 1150 of 2010 pertaining to the assessment year 2002-03 as under:
(a) The respondent-assessee is engaged in the business of development of software for in-flight entertainment for aircrafts. The software developed by the respondent-assessee is exported to one M/s. MAS Ltd. USA. The respondent-assessee has two divisions one in Fort, Mumbai which commenced its operation in 1997-98 and the other at Santacruz Export Processing Zone (SEEPZ) which commenced operation during 2000-01.
(b) In respect of its unit at SEEPZ, the respondent-assessee has claimed the benefit of section 10A of the’ Act from the assessment year 2000-01 onwards. The Income-tax Department allowed the claim for exemption of the SEEPZ unit under section 10A for the assessment years 2000-01, 2001-02 and 2002-03. However, for the assessment years 2003-04 and 2004-05, the benefit of section 10A of the Act was not extended to the SEEPZ unit on the ground that the same was formed by splitting of the Fort unit.
(c) Consequent to the above, the assessment for the assessment year 2002-03 was reopened under section 147/148 of the Act. The Assessing Officer by his order dated July 24, 2007, for the assessment year 2002-03 rejected the appellant's claim for exemption for the SEEPZ unit under section 10A of the Act on the ground that it was formed by splitting the Fort unit as is evident from the fact that the same kind of software is being exported by both units and export realization was received by single payment in many cases and many expenses like foreign travel expenses were incurred by the Fort unit and transferred to the SEEPZ unit.
(d) In appeal, the Commissioner of Income-tax (Appeals) by an order dated March 24, 2008, set aside the order dated July 24, 2007, for the assessment year 2002-03 disallowing the claim of exemption under section 10A of the Act to the SEEPZ unit. The order dated March 24, 2008, while holding that benefit of section 10A is available to the SEEPZ unit records that the order for the assessment years 2003-04 and 2004-05 by the Assessing Officer denying the benefit of section 10A of the Act had been set aside by his predecessor. Therefore, the Assessing Officer was directed to grant relief under section 10A of the Act to the respondent-assessee in respect of its SEEPZ unit.
(e) Being aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal, by its common order dated August 12, 2009, dismissed the Revenue's appeal for the assessment years 2002-03, 2003-04 and 2004-05 by holding that the respondent's SEEPZ unit is entitled on the merits to the benefit of section 10A of the Act. The Tribunal records a finding that for the assessment years 2000-01 and 2001-02 the claim of the respondent under section 10A of the SEEPZ unit was allowed in scrutiny assessment under section 143(3) of the Act. Further, on the merits, it was held that two units were functioning at different location and were functioning independently. Further, nothing has been brought on record to suggest that any plant, machinery or equipment of the existing unit was transferred to the new unit. Further, there were separate books of account and bank accounts for both the units. The Tribunal also held that merely because the two units manufactured the same product it cannot lead to a conclusion that they are not two separate units. Thus, the grant of benefit of section 10A of the Act was upheld.
5. Mr. Vimal Gupta, counsel appearing for the Revenue in support of the appeal, submits that the SEEPZ unit is formed by splitting up the Fort unit as is evident from the fact that both units develop the same software product, export it to the same party and many a times common remittance is also received from the foreign party. It is his case that merely by opening a bank account, taking separate premises and purchasing of few computers would not result in an independent unit being set up. Mr. Gupta further submits that the Tribunal erred in proceeding on the basis that as the respondent-assessee had been granted benefit of section 10A of the Act for assessment years 2000-01 and 2001-02, it is not open to take a contrary view for subsequent years. Mr. Gupta submits that each year is an independent year and there is no concept of res judicata in tax matters. Therefore, the Revenue is entitled to take a different view in subsequent year.
6. On the other hand, Mr. Percy Pardiwalla, senior counsel appearing on behalf of the respondent-assessee, submitted that in view of the decision of this court in the matter of Commissioner Of Income-Tax v. Paul Brothers. reported in [1995] 216 ITR 548(Bom) and Direct Information P. Ltd. v. ITO dated September 29, 2011, in Writ Petition No. 1479 of 2011, since reported in [2012] 349 ITR 150(Bom) the issue is no longer open to debate. In the above case, it is held that once a benefit of deduction was extended in respect of a provision for a particular number of years then unless the benefit is withdrawn for the first year it cannot be withdrawn for subsequent years, particularly, when there is no change in the facts. Therefore, he states that once a benefit of section 10A was extended to the respondent-assessee for the assessment years 2000-01 and 2001-02 in respect of its claim for exemption under section 10A of the Act and the same not having been withdrawn for those years it cannot be denied in the subsequent assessment years. This is for the reason that the benefit under section 10A of the Act is available, inter alia, if the unit has not been formed by splitting up or reconstruction of business already in existence. This aspect of the matter was examined while completing assessment under section 143(3) for the assessment years 2000-01 and 2001-02 and the benefit was extended after reaching a conclusion that the same was not formed by splitting up or reconstruction of the business already in existence. Further, the benefit which is given to the respondent-assessee under section 10A is for the period of 10 consecutive assessment years beginning with the assessment year in which the undertaking begins to export computer software. Besides the above, he submitted that both the Commissioner of Income-tax (Appeals) and the Tribunal have concluded on examination of evidence that the SEEPZ unit was an independent unit not formed by splitting up of the Fort unit. Therefore, this court should not interfere with this finding of fact.
7. We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this court in the matter of Paul Brothers (supra) and Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether the SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income-tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income-tax Officer cannot withdraw the relief for subsequent years. More particularly so, when the Revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case, for the assessment years 2000-01 and 2001-02 the relief granted under section 10A of the Act to the SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the Department to deny the benefit of section 10A for subsequent assessment years, i.e, the assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income-tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit.
8. In view of the above, the question as formulated in the present facts, do not give rise to any substantial question of law. Therefore, appeal is dismissed. No order as to costs.
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