INCOME TAX ACT, 1961

Deduction under section 10A- Undertaking in free trade zone-New STP unit vis-a-vis extension of old unit-Conversion of partnership firm to private limited company

Assessee-company had filed its return of income for the relevant assessment year and claimed exemption under section 10A. While processing the return under section 143(1)(a), the same was allowed . Later it was found that the assessee was converted from partnership firm to private limited company as per the provisions of section 575 of the Companies Act, 1956. According to this provision, all assets and liabilities vest in the company and Software Technology Parks of India (STPI) recognized this company. AO held that the assessee was not entitled to exemption under section10A for the income earned during the specified period as the company was not recognized under STPI for this period and the recognition came only w.e.f. 15-4-1999, and the earlier recognition issued to the firm w.e.f. 6-10-1998 was not applicable to the private limited company as the registration was granted to the firm only. He was also held that since STPI recognition was granted w.e.f. 15-4-1999, the assessee was entitled to exemption under section 10A only from the next assessment year. Hence, the assessment was reopened and the exempted income was brought to tax by denying exemption under section 10A. Even the deduction under section 80HHE was denied on the ground that the erstwhile partnership firm had filed a return for the relevant assessment year up to the date of conversion and claimed deduction under section 80HHE. Held:The main reason for which the exemption was denied by the lower authorities was that the assessee was not approved by STPI for the relevant assessment year and it was approved only on 15-2-1999, which fell under the next assessment year. The assessee was not a new unit and it was carrying on the business which entitled deduction under section 10A vide STPI recognition dated 6-10-1998 which was in the name of the firm which was converted into a private limited company, due to operation of law as per Part IX of Companies Act, 1956 and all the properties and liabilities of the firm were vested with the limited company. There was a mere change of name and the composition in the ownership of the undertaking and business of the undertaking had not changed as the same partners had become directors of the company. The business activities of the newly constituted company remained the same. Splitting of the old business or reconstruction did not form the business of the assessee. The undertaking of the assessee remained the same.

The letter issued by STPI clearly stated that all the approval issued by their, office like permission, IE Code, Green Card, etc., stood valid under new name. Thus, it means that the authorities of STPI substituted the name of the firm with the assessee. There shall be statutory vesting of all the properties of the previous firm in the newly incorporated company without any need for separate conveyance. In view of this, if the firm was entitled to section 10A exemption, the assessee was also entitled to this exemption, because the assessee had stepped into the shoes of firm. The firm was entitled to section 10A exemption for the period of ten years commences from the financial year relevant to the assessment year in which the undertaking begins to manufacture or produce articles or things. In the present case, since the registration was granted by STPI on 6-10-1998, the assessee was entitled to exemption under section 10A from the relevant assessment year for a period of ten consecutive assessment years. The issue of splitting up or reconstruction did not arise as the lower authorities, themselves had admitted that it was not a new business formed by splitting up or reconstitution of existing business and the assessee was entitled to deduction for the next assessment year. When the lower authorities had admitted that this undertaking was not formed by splitting up or reconstruction, there was no reason for denial of the exemption for the relevant assessment year. Hence, the assessee was entitled to exemption under section 10A though the STPI letter was issue on 15-4-1999.

Income Tax Act, 1961 Section 10A