1. These two appeals are filed by the Revenue being aggrieved by the order dt. 23.12,2005 in ITA No.315/Bang./2005 and 316/Bang./2005 respectively by Income Tax Appellate Tribunal, Bangalore (hereinafter called as 'ITAT' for short). The respondent assessee filed return for the assessment year 1999-2000 admitting the total income of Rs. Nil. However, the return indicated that Company was incorporated on 04.11.1992. It indicated profit from business/profession of Rs. 1,17,83,132/- and the exemption has been claimed on this amount also. Return was processed on 7.12.2000 resulting in nil demand. In the return of income for the AY 2002 03 assessee has filed form 56F indicating that it was third year of claim of exemption under Sec. 10A of the Income Tax Act (hereinafter called as 'Act' for short). Since the records revealed that no two undertakings existed, question of admissibility of exemption under Sec. 10A and the extent of admissibility was examined after issuing notice to the assessee by the Assessing Officer. It was contended by the assessee that though the establishment of the manufacturing unit was started in Software Technology Park (hereinafter called as 'STP' for short) after investing the amount which was independent of earlier business which was being carried on by the assessee at Devaiah Court. The unit established in the STP has been established independently and production was started and profit was earned from 1.5.1998. Wherefore, the assessee was entitled to exemption under Sec. 10A. The Assessing Officer after considering the objection shown by the assessee, held that provisions of Sections 10A(2)(i)(b): 10A(2)(ii) and 10A(2)(iii) were not complied with and wherefore, the assessee was not entitled to exemption under Sec. 10A of the Act as it is reconstruction of the earlier establishment and more than 20% of the plant and machinery already available in the old establishment has been utilised for manufacturing in the STP unit and further the earlier organisation has been closed and assessee was manufacturing since the year 1993 but not in STP and accordingly, disallowed the exemption claimed by the assessee by his order dt. 20th January 2004. The Assessing Officer had also held that the bad and doubtful debts should be added for calculating book profit under Sec. 115JB of the Act and being aggrieved by the same ITA Nos.62 to 64/W-11(2)/CIT(A)I/03-04 were filed by the assessee before the Commissioner of Income Tax (Appeals) - I Bangalore and appellate authority by order dt. 16.12.2004 held that the conditions laid down in sections 10A(2)(i)(b) and 10(2)(iii) has been complied with. However, condition in 10A(2)(ii) is not complied with and accordingly held that the establishment was the reconstruction of the unit which was already in existence and accordingly confirmed the finding given by the Assessing Officer that the assessee cannot claim exemption under Sec. 10A and upheld the order passed by the Assessing Officer that the bad and doubtful debts should be included for the purpose of calculating book profit under Sec. 115JB of the Act.
2. Being aggrieved by the said order passed by the Appellate Authority ITA Nos.315, 31.6 and 317/Bang./2005 were filed before the ITAT and the ITAT by order dt. 23.12.2005 held that Clause (i) and (iii) of Sec. 10A(2) had already been satisfied and it was not a case of reconstruction and it was establishment of an independent unit in the STP and wherefore, the assessee was entitled to exemption under Sec. 10A and accordingly, allowed the appeals.
3. Being aggrieved by the said order passed by the ITAT in ITA Nos.315 and 316/Bang./2005 these two appeals are filed by the Revenue.
4. I.T.A. No. 952/2006 has been admitted by order dt. 26.9.2007 and I.T.A. No. 953/2006 has been admitted on 22.10.2007 to consider the substantial questions of law framed in the appeal memo of ITA No. 952/2006 which reads as follows :
1.Whether the Tribunal was correct in holding that the assessee would be entitled to claim allowance under Sec. 10A of the Act in respect of Software Development Centre at Devaiah Court, Jayanagar, Bangalore, by ignoring the holdings of the Assessing Officer that the same was set up by reconstruction of the assessee's business and consequently the claim was not allowable in view of Sections 10A(2)(I)(b); 10(2)A(I); 10(2)(iii) and 33B of the Act?
2. Whether the Tribunal was correct in holding that the provision for doubtful debts, doubtful investments and doubtful advances should not be added back for the purpose of computing book profit u/s. 115JB of the Act?
5. However, when ITA Nos. 952/06 and 953/06 were posted before the Court it was found that ITA No. 552/2006 was not connected to these cases and it was delinked from ITA Nos. 952 and 953 of 2006 by order dt. 13.07.2011 and it was held that these two appeals involve adjudication of the following two substantial questions of law :
"(1) Whether the Tribunal was correct in holding that the assessee would be entitled to claim allowance under Section 10A of the Act in respect of Software Development Center at Devaiah Court, Jayanagar, Bangalore by ignoring the finding of the Assessing Officer that the same was set up by reconstruction of the assessee's business and consequently, the claim was not allowable in view of Sections 10A(2)(I)(b); 10(2)A(I); 10(2)(iii) and 33B of the Act?
(2) Whether the Tribunal was correct in holding that the provision for doubtful debts, doubtful investments and doubtful advances should not be added back for the purpose of computing back profit under Section 115JB of the Act?"
6. We have heard the learned counsel appearing for the appellant - Revenue and the learned counsel appearing for the respondent.
7. Learned counsel appearing for the appellants submitted that the ITAT was not at all justified in holding that the establishment in STP is an independent unit and not reconstruction of the earlier unit which existed in Devaiah Court. Wherefore, all the conditions of Sec. 10A seeking for exemption had been satisfied. Learned counsel further submitted that the material on record would clearly show that the machinery had been purchased in the name of the old establishment. The plant and machinery were transferred to the STP unit front Devaiah Court. The concurrent finding of the Assessing Officer, Appellate Authorities was justified and the reasoning given by the ITAT to hold that all the conditions of Sec. 10A(2) had been satisfied, is clearly erroneous and the same may be set aside and first substantial question of law may be answered in favour of the appellant. He has also submitted that the bad and doubtful debt had been rightly added to the book profit under Sec. 115JB of the Act. Therefore, the second substantial question of law may be answered in favour of the appellant.
8. Learned counsel appearing for the respondent submitted that the second substantial question of law had already been answered by the Hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 / 174 Taxman 118 (SC), wherein the Hon'ble Supreme Court has clearly held that the bad and doubtful debts are not liability and cannot be added back for the purpose of calculating book profit under Sec. 115JA(2)(c) of the Act. Wherefore, the second substantial question of law has to be answered against the Revenue and in favour of the assessee and so far as the first substantial question of law is concerned, the ITAT which is the final authority on the question of fact having regard to the material on record that was produced before the Assessing Officer and the Appellate Authority, has rightly come to the conclusion and cogent reasons are given and following the earlier decisions of the ITAT and the High Court, ITAT has rightly held that there was no reconstruction of the earlier establishment and merely because there was earlier establishment, would not preclude an independent unit in STP, if the assessee is able to show that the said STP unit was established by investment of plant and machinery. Wherefore, the first substantial question of law may be answered in favour of the assessee and against the Revenue.
9. We have given careful consideration to the contention of the learned counsel appearing for the parties and scrutinised the material on record.
10. The material on record would clearly show that the Assessing Officer held that the provisions of Sec. 10A(2) (i), (ii) and (iii) have not been satisfied. Wherefore, the assessee is not entitled to exemption. The appellate authority held that clause (i) and (iii) of Sec. 10A (2) had been satisfied. However, clause (ii) was not satisfied as the establishment of STP was reconstruction of a business already in existence in Devaiah Court. The Revenue has not chosen to file an appeal against the said finding that the assessee had satisfied clause (i) and (iii) of Sec. 10A(2) of the Act. Even otherwise, the ITAT which is the final authority on the question of fact, has rightly held that having regard to the material on record, it was clear that the plant and machinery that was available in the Devaiah Court unit was less than 20% of the existing machinery in STP unit and having regard to the number of staff and other facts of the case, the said two conditions as specified in Sec. 10A(2) (i) find (iii) of the Act are satisfied. So far as condition as per Sec. 10A(2)(ii) is concerned, the ITAT has held that it was not a case of reconstruction of already existing business. The ITAT on the basis of the material that was produced by the assessee, has referred to the facts which would clearly show that all the assets purchased after 31.3.1996 are stated to be located at STP unit, electronic city, while the assets purchased upto 31.3.1996 arc stated to be located in Devaiah Court. It is clarified that the assets located in Devaiah Court unit are still there.
11. The material produced would clearly show that there was no reconstruction of already existing business and the Assessing Officer and the appellate authority could not have rejected the said claim for exemption only on the ground that no separate account is maintained regarding STP unit at electronic city and Devaiah Court unit. The said finding on the question of fact is clearly supported by the material on record as the material produced by the assessee would clearly show that the STP unit was established with plant and machinery and assets purchased after 31.3.1996 only and the staff was also recruited. The plant and machinery used was less than 20% at STP unit and the earlier establishment which also continued to work with the machinery that was purchased prior to 31.3.1996. Having regard to the interpretation of the word "construction" and Sec. 10A(2)(ii) of the Act and decision of the Hon'ble Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 , wherein it is held as follows :
"As in the instant case, once then new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not be treated as being formed by reconstruction of the old business."
12. The ITAT has also relied upon the decision of this Court in the case of Addl. CIT v. Hutti Gold Mines Co. Ltd. [1981] 128 ITR 476 /16 Taxman 155 (Kar.) wherein it is held that the concept of reconstruction of business will not be attracted when a company which is already running one industrial unit sets up another industrial unit. In fact in the said case, the old mill was completely dismantled and a new mill was installed in the adjacent premises and this Court held that there is no reconstruction. However, the finding of the ITAT that merely because no separate account is maintained in respect of the STP unit and the manufacturing unit at Devaiah Court, the same would not be a ground to disallow the exemption when the assessee is otherwise entitled to exemption having fulfilled the condition of no reconstruction of business of an already existing unit. Wherefore, the said finding arrived at by the ITAT which is a pure question of fact and based upon the material on record, cannot at all be said to be arbitrary or capricious as to call for interference in this appeal. Accordingly, we answer the first substantial questions of law against the Revenue and in favour of the assessee.
13. So far as the second substantial question of law is concerned, the said question is already covered by the decision of the Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) wherein the Hon'ble Supreme Court has clearly held that bad and doubtful debts can never be said to be liability and cannot be added up for computing the book profit under Sec. 115JA(2)(c) of the Act. It has been clearly observed by the Hon'ble Supreme Court as follows :
'The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view, item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs. 92,15,187 under clause (c) of the Explanation to section 115JA of the 1961 Act."
14. In view of the above said principle laid down by the Hon'ble Supreme Court, we answer the second substantial question of law also in favour of the assessee and against the revenue and pass the following:
ORDER
Appeals are dismissed.