CIT vs. Chetak Enterprises Pvt. Ltd (Supreme Court)

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1764 OF 2010
Commissioner of Income Tax, Udaipur … Appellant(s)
Versus
M/s. Chetak Enterprises Pvt. Ltd. …Respondent(s)
J U D G M E N T
A. M. KHANWILKAR, J.
1. This appeal takes exception to the judgment and order dated
5.5.2008 passed by the High Court of Judicature for Rajasthan at
Jodhpur (for short, “the High Court”) in Income Tax Appeal No. 71 of
2008.
2. The matter relates to Assessment Year 20022003,
the relevant
Previous/Financial year for which is 20012002
i.e. 1.4.2001 to
31.3.2002.
3. Briefly stated, the erstwhile partnership firm M/
s. Chetak
Enterprises entered into an agreement with the Government of
2
Rajasthan for construction of road and collection of road/toll tax.
The construction of road was completed by the said firm on 27.3.2000
and the same was inaugurated on 1.4.2000. The firm was converted
into a private limited company on 28.3.2000 named as M/s. Chetak
Enterprises (P) Ltd. (for short, “the assesseeCompany”)
under Part IX
of the Companies Act, 1956 (for short, “the Companies Act”). On
conversion of the firm into company, an intimation was given to the
Chief Engineer (Roads), P.W.D., Rajasthan, Jaipur. The said
authority noted the change and cancelled the registration of the firm
and granted a fresh registration code to the assesseeCompany.
As
aforesaid, the road was inaugurated on 1.4.2000 and the assesseeCompany
started collecting toll tax. For the relevant assessment
year, the assesseeCompany
claimed deduction under Section 80IA
of the Income Tax Act, 1961 (for short, “the Income Tax Act”). The
assessing officer declined that claim of the assesseeCompany,
which
decision was reversed by the Commissioner of IncomeTax
(Appeals),
Udaipur. The Income Tax Appellate Tribunal (for short, “the ITAT”)
confirmed the decision of the first appellate authority, following its
decision1 in the case of the assesseeCompany
for the Assessment
Year 20012002.
As a result, the Department preferred an appeal
1 Chetak Enterprises P. Ltd. vs. ACIT, (2005) 95 ITD 1 (Jodh.)
3
before the High Court. The High Court formulated the following
question of law: “
Whether in the facts and in the circumstances of
the case, the assesseeCompany
was right in finding
that the assessee fulfilled the condition of subSection
(4)(i)(b) of Section 80IA?”
Section 80IA,
as applicable to Assessment Year 200203
reads thus:
“
80IA
(1) Where the gross total income of an assessee
includes any profits and gains derived from any business of
an industrial undertaking or an enterprise referred to in
subsection
(4) (such business being hereinafter referred to
as the eligible business), there shall, in accordance with and
subject to the provisions of this section, be allowed, in
computing the total income of the assessee, a deduction
from such profits and gains of an amount equal to hundred
per cent of profits and gains derived from such business for
the first five assessment years commencing at any time
during the periods as specified in subsection
(2) and
thereafter, twentyfive
per cent of the profits and gains for
further five assessment years:
Provided that where the assessee is a company, the
provisions of this subsection
shall have effect as if for the
words “twentyfive
per cent”, the words “thirty per cent” had
been substituted.
(2) The deduction specified in subsection
(1) may, at the
option of the assessee, be claimed by him for any ten
consecutive assessment years out of fifteen years beginning
from the year in which the undertaking or the enterprise
develops and begins to operate any infrastructure facility or
starts providing telecommunication service or develops an
industrial park or generates power or commences
transmission or distribution of power:
Provided that where the assessee begins operating and
maintaining any infrastructure facility referred to in clause
(b) of Explanation to clause (i) of subsection
(4), the
4
provisions of this subsection
shall have effect as if for the
words “fifteen years”, the words “twenty years” had been
substituted.
(2A) Notwithstanding anything contained in subsection
(1)
or subsection
(2), the deduction in computing the total
income of an undertaking providing telecommunication
services, specified in clause (ii) of subsection
(4), shall be
hundred per cent of the profits and gains of the eligible
business for the first five assessment years commencing at
any time during the periods as specified in subsection
(2)
and thereafter, thirty per cent of such profits and gains for
further five assessment years.
(3) This section applies to an industrial undertaking
referred to in clause (iv) of subsection
(4) which fulfils all the
following conditions, namely: (
i) it is not formed by splitting up, or the
reconstruction, of a business already in
existence:
Provided that this condition shall not apply
in respect of an industrial undertaking which
is formed as a result of the reestablishment,
reconstruction
or revival by the assessee of
the business of any such industrial
undertaking as is referred to in section 33B,
in the circumstances and within the period
specified in that section;
(ii) it is not formed by the transfer to a new
business of machinery or plant previously
used for any purpose.
Explanation 1.For
the purposes of clause (ii),
any machinery or plant which was used
outside India by any person other than the
assessee shall not be regarded as machinery
or plant previously used for any purpose, if
the following conditions are fulfilled, namely:
(
a) Such machinery or plant was not, at
any time previous to the date of the
installation by the assessee, used in
India;
(b) such machinery or plant is imported
into India from any country outside
India; and
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(c) no deduction on account of
depreciation in respect of such
machinery or plant has been allowed or
is allowable under the provisions of this
Act in computing the total income of
any person for any period prior to the
date of the installation of machinery or
plant by the assessee.
Explanation 2.Where
in the case of an
industrial undertaking, any machinery or
plant or any part thereof previously used for
any purpose is transferred to a new business
and the total value of the machinery or plant
or part so transferred does not exceed twenty
per cent of the total value of the machinery or
plant used in the business, then, for the
purposes of clause (ii) of this subsection,
the
condition specified therein shall be deemed to
have been complied with.
(4) This section applies to(
i) Any enterprise carrying on the business of (i)
developing, (ii) maintaining and operating or
(iii) developing, maintaining and operating
any infrastructure facility which fulfils all the
following conditions, namely: (
a) it is owned by a company registered in
India or by a consortium of such
companies;
(b) it has entered into an agreement with
the Central Government or a State
Government or a local authority or any
other statutory body for (i) developing,
(ii) maintaining and operating or (iii)
developing, maintaining and operating
a new infrastructure facility subject to
the condition that such infrastructure
facility shall be transferred to the
Central Government, State
Government, local authority or such
other statutory body, as the case may
be, within the period stipulated in the
agreement;
(c) it has started or starts operating and
maintaining the infrastructure facility
on or after the 1st day of April, 1995:
6
Provided that where an infrastructure
facility is transferred on or after the 1st
day of April, 1999 by an enterprise
which developed such infrastructure
facility (hereafter referred to in this
section as the transferor enterprise) to
another enterprise (hereafter in this
section referred to as the transferee
enterprise) for the purpose of operating
and maintaining the infrastructure
facility on its behalf in accordance with
the agreement with the Central
Government, State Government, local
authority or statutory body, the
provisions of this section shall apply to
the transferee enterprise as if it were
the enterprise to which this clause
applies and the deduction from profits
and gains would be available to such
transferee enterprise for the unexpired
period during which the transferor
enterprise would have been entitled to
the deduction, if the transfer had not
taken place.
Explanation.For
the purposes of this clause,
“infrastructure facility” means,(
a) a road, bridge, airport, port, inland
waterways and inland ports, rail
system or any other public facility of a
similar nature as may be notified by
the Board in this behalf in the Official
Gazette;
(b) a highway project including housing or
other activities being an integral part of
the highway project; and
(c) a water supply project, water treatment
system, irrigation project sanitation
and sewerage system or solid waste
management system;
(ii) any undertaking which has started or starts
providing telecommunication services
whether basic or cellular, including radio
paging, domestic satellite service, network of
turnking, broadband network and internet
services on or after the 1st day of April, 1995,
but on or before the 31st day of March, 2003;
7
(iii) any undertaking which develops, develops
and operates or maintains and operates an
industrial park notified by the Central
Government in accordance with the scheme
framed and notified by the Government for
the period beginning on the 1st day of April,
1997 and ending on the 31st day of March,
2006:
Provided that in a case where an
undertaking develops an industrial park on
or after the 1st day of April, 1999 and
transfers the operation and maintenance of
such industrial park to another undertaking
(hereafter in this section referred to as the
transferee undertaking) the deduction under
subsection
(1), shall be allowed to such
transferee undertaking for the remaining
period in the ten consecutive assessment
years in a manner as if the operation and
maintenance were not so transferred to the
transferee undertaking;
(iv) an industrial undertaking which,(
a) is set up in any part of India for the
generation or generation and
distribution of power if it begins to
generate power at any time during the
period beginning on the 1st day of April,
1993 and ending on the 31st day of
March, 2003;
(b) starts transmission or distribution by
laying a network of new transmission
or distribution lines at any time during
the period beginning on the 1st day of
April, 1999 and ending on the 31st day
of March, 2003:
Provided that the deduction under this section to
an industrial undertaking under subclause
(b)
shall be allowed only in relation to the profits
derived from laying of such network of new lines for
transmission or distribution.
(5) Notwithstanding anything contained in any other
provision of this Act, the profits and gains of an eligible
business to which the provisions of subsection
(1) apply
shall, for the purposes of determining the quantum of
8
deduction under that subsection
for the assessment year
immediately succeeding the initial assessment year or any
subsequent assessment year, be computed as if such eligible
business were the only source of income of the assessee
during the previous year relevant to the initial assessment
year and to every subsequent assessment year up to and
including the assessment year for which the determination is
to be made.
(6) Notwithstanding anything contained in subsection
(4),
where housing or other activities are an integral part of the
highway project and the profits of which are computed on
such basis and manner as may be prescribed, such profit
shall not be liable to tax where the profit has been
transferred to a special reserve account and the same is
actually utilised for the highway project excluding housing
and other activities before the expiry of three years following
the year in which such amount was transferred to the
reserve account; and the amount remaining unutilised shall
be chargeable to tax as income of the year in which such
transfer to reserve account took place.
(7) Where the assessee is a person other than a company
or a cooperative
society, the deduction under the subsection
(1) from profits and gains derived from an industrial
undertaking shall not be admissible unless the accounts of
the industrial undertaking for the previous year relevant to
the assessment year for which the deduction is claimed have
been audited by an accountant, as defined in the
Explanation below subsection
(2) of section 288, and the
assessee furnishes, along with his return of income, the
report of such audit in the prescribed form duly signed and
verified by such accountant.
(8) Where any goods held for the purposes of the eligible
business are transferred to any other business carried on by
the assessee, or where any goods held for the purposes of
any other business carried on by the assessee are
transferred to the eligible business and, in either case, the
consideration, if any, for such transfer as recorded in the
accounts of the eligible business does not correspond to the
market value of such goods as on the date of the transfer,
then, for the purposes of the deduction under this section,
the profits and gains of such eligible business shall be
computed as if the transfer, in either case, had been made at
the market value of such goods as on that date:
9
Provided that where, in the opinion of the Assessing Officer,
the computation of the profits and gains of the eligible
business in the manner hereinbefore specified presents
exceptional difficulties, the Assessing Officer may compute
such profits and gains on such reasonable basis as he may
deem fit.
Explanation. For
the purposes of this subsection,
“market
value”, in relation to any goods, means the price that such
goods would ordinarily fetch on sale in the open market.
(9) Where any amount of profits and gains of an industrial
undertaking or of an enterprise in the case of an assessee is
claimed and allowed under this section for any assessment
year, deduction to the extent of such profits and gains shall
not be allowed under any other provisions of this Chapter
under the heading “C.Deductions
in respect of certain
incomes”, and shall in no case exceed the profits and gains
of such eligible business of industrial undertaking or
enterprise, as the case may be.
(10) Where it appears to the Assessing Officer that, owing
to the close connection between the assessee carrying on the
eligible business to which this section applies an any other
person, or for any other reason, the course of business
between them is so arranged that the business transacted
between them produces to the assessee more than the
ordinary profits which might be expected to arise in such
eligible business, the Assessing Officer shall, in computing
the profits and gains of such eligible business for the
purposes of the deduction under this section, take the
amount of profits as may be reasonably deemed to have been
derived therefrom.
(11) The Central Government may, after making such
inquiry as it may think fit, direct, by notification in the
Official Gazette, that the exemption conferred by this section
shall not apply to any class of industrial undertaking or
enterprise with effect from such date as it may specify in the
notification.
(12) Where any undertaking of an Indian company which is
entitled to the deduction under this section is transferred,
before the expiry of the period specified in this section, to
another Indian company in a scheme of amalgamation or
demerger(
a) no deduction shall be admissible under this
section to the amalgamating or the demerged
company for the previous year in which the
10
amalgamation or the demerger takes place;
and
(b) the provisions of this section shall, as far as
may be, apply to the amalgamated or the
resulting company as they would have
applied to the amalgamating or the demerged
company if the amalgamation or demerger
had not taken place.”
The High Court while upholding the view taken by the first appellate
authority and the ITAT, dismissed the appeal and observed thus: ‘‘…..
In the present case, so far as the facts are concerned, it
is not in dispute, that the work of construction of roads was
completed on 27.3.2000, and on and with effect from
28.3.2000, the partnership firm was converted into a
Company, by being registered under Part IX of the
Companies Act, and became a private Limited Company. As
noticed above, the relevant previous year is 1.4.2000 to
31.3.2001. Thus, right from the commencement of the
relevant financial year, it cannot be disputed, that it was a
Company, and was undertaking the specified business.
Then, so far as the question, as has been gone into by the
Assessing Officer, and the Excise Commissioner that the
assessee Company has not entered into any agreement with
the Government, is concerned, in that regard, the learned
Tribunal has found, that the main objects of the
Memorandum of Association of the assessee Company
indicates, that it was mentioned as under:
‘‘On conversion of the partnership firm into a
company limited by shares under these
presents to acquire by operation of Law under
Part IX of the Companies Act, 1956 as going
concern and continue the partnership business
now being carried on under the name & style of
M/s Chetak Enterprises including all its assets,
movables and immovables, rights, debts and
liabilities in connection therewith.’’
Then, it has also been found by the learned Tribunal,
at page 13 of the judgment, that the erstwhile partnership
firm, in its first communication to the Chief Engineer on
23.10.1998, while replying to the notice inviting bids, made
it categorically clear, that ‘‘the firm will be converted into a
limited company under Chapter IX of the Companies Act. As
such, you are requested to allow us change in constitution
and accordingly change of name in agreement, after
11
converting firm into company with the existing partners as
its Directors, and the Chief Engineer vide letter dt.
27.8.1999, took note of this letter, and informed, that their
offer was accepted, subject to terms and conditions specified
therein. It is thereafter, that agreement was entered into
between the Government and the Firm, wherein the said
letter of the Chief Engineer dt. 27.8.1999, was considered as
part of the agreement. With this, the agreement also
mentions the firm, ‘‘to mean and include its successors and
assigns’’. Thus it has been found, that since incorporation of
the Firm into a Company, has the effect of statutorily vesting
of liabilities and assets in the Firm, and the agreement
comprehends successors and assigns, it is clear, that the
assessee fulfils all the conditions. Then the proviso,
appended in this subsection,
has also been considered,
which clearly provides for entitlement of the deduction to the
transferee, with effect from the date of transfer, therefore
also, it was found that the deduction is available.
In our view, when right from the day one, i.e. while
replying to the notice inviting tenders itself, it was made
clear by the Firm, that the Firm will be converting into a
limited Company under Part IX of the Companies Act, and
the Chief Engineer was requested to allow the change in the
Constitution, and accordingly change of name in the
agreement, after converting the Firm into the Company, with
the existing partners as its Directors, and this request was
accepted, and that acceptance letter formed part of the
agreement, in our view, the Firm stands in the shoes of
promoter, and the Company takes over all assets and
liabilities statutorily.
In other words, by operation of law, there is statutory
transformation of the Firm into the Company, obviously the
rights and liabilities of the Company, and the assets, go to
the Company. It is a different story that even from the
agreement entered into by the promoter (predecessor in the
interest of the Company), as successor of the Firm and the
Company is deemed to be a party, and, therefore also, is very
much entitled to the benefit of deduction on this ground.
Over & above all this, the proviso is a complete answer to the
contention of the Revenue, and in favour of the assessee,
which rather clearly provides, that even in case of transfer,
the transferee will become entitled to deduction of course
with effect from the date of transfer.
In the present case, the transfer was statutory, and did
come into effect since 28.3.2000, i.e. much before the
commencement of the relevant financial year, and as such,
12
considering from any standpoint, the assessee could not be
denied benefit of deduction available to it.”
4. Being aggrieved, the Department filed two separate special leave
petitions before this Court. The present civil appeal emanates from
SLP(C) No. 6772/2009 and pertains to Assessment Year 20022003.
As regards Civil Appeal No. 1748/2010 (arising out of SLP(C) No.
3430/2009) pertaining to Assessment Year 20012002,
the same has
been disposed of in terms of order dated 17.10.2019 due to low tax
effect leaving question of law open.
5. We have heard Mr. Rupesh Kumar, learned counsel for the
appellant and Mr. S. Krishnan, learned counsel for the respondent.
6. It is not in dispute that an agreement was executed between the
erstwhile partnership firm and the State Government for construction
of road and collection of toll tax. Before the commencement of the
assessment year in question i.e. 20022003,
the construction of road
was completed (on 27.3.2000) and it was inaugurated on 1.4.2000.
Before the date of inauguration, the partnership firm was converted
into a company on 28.3.2000 under Part IX of the Companies Act.
The Memorandum of Association of the assesseeCompany
reveals the
main object as follows: 13
“On conversion of the partnership firm into a
company limited by shares under these presents to
acquire by operation of law under Part IX of the
Companies Act, 1956 as going concern and
continue the partnership business now being
carried on under the name and style of M/s. Chetak
Enterprises including all its assets, movables and
immovables, rights, debts and liabilities in
connection therewith.”
As a matter of fact, before the agreement was executed with the
erstwhile partnership firm, it was clearly understood that the
partnership firm would in due course be converted into a registered
limited company. That is evident from the communication addressed
to the Chief Engineer on 23.10.1998, at the time of replying to the
notice inviting bids. An explicit request was made to allow the
partnership firm to change its constitution and consequently change
of name in the agreement after converting the firm into a company
with the existing partners as its Directors. The Chief Engineer being
the appropriate authority of the State, vide letter dated 27.8.1999,
took note of the request made by the erstwhile partnership firm and
informed the said firm that its offer was accepted subject to terms
and conditions specified in that regard. It is only after this
interaction, an agreement was entered into between the Government
14
of Rajasthan and the erstwhile partnership firm, in which the
communication sent by the Chief Engineer, dated 27.8.1999, was
made part of the agreement. Notably, after the conversion of the
partnership firm into a company under Part IX of the Companies Act,
the State authorities noted the change and provided fresh registration
code to the assesseeCompany.
7. The question is: what is the effect of conversion of partnership
firm into a company under Part IX of the Companies Act? That can
be discerned from Section 575 of the Companies Act, which reads
thus: “
575. Vesting of property on registration.All
property,
movable and immovable (including actionable claims),
belonging to or vested in a company at the date of its
registration in pursuance of this Part, shall, on such
registration, pass to and vest in the company as
incorporated under this Act for all the estate and interest of
the company therein.”
It is manifest that all properties, movable and immovable (including
actionable claims) belonging to or vested in a company at the date of
its registration would vest in the company as incorporated under the
Act. In other words, the property acquired by a promoter can be
claimed by the company after its incorporation without any need for
conveyance on account of statutory vesting. On such statutory
vesting, all the properties of the firm, in law, vest in the company and
15
the firm is succeeded by the company. The firm ceases to exist and
assumes the status of a company after its registration as a company.
A priori, it must follow that the business is carried on by the
enterprise owned by a company registered in India and the agreement
entered into between the erstwhile partnership firm and the State
Government, by legal implication, assumes the character of an
agreement between the company registered in India and the State
Government for (i) developing, (ii) maintaining and operating or (iii)
developing, maintaining and operating a new infrastructure facility.
8. For the purpose of considering compliance of clause (a) of
Section 80IA(
4)(i), the assessee must be an enterprise carrying on
business of (i) developing, (ii) maintaining and operating or (iii)
developing, maintaining and operating any infrastructure facility,
which enterprise is owned by a company registered in India. That
stipulation is fulfilled in the present case, as the registered firm was
converted into a company under Part IX of the Companies Act on
28.3.2000, which is before the commencement of Assessment Year
20022003.
For the assessment year under consideration, the
activity undertaken by the assessee is only maintaining and operating
or developing, maintaining and operating the infrastructure facility,
inasmuch as, the construction of the road was completed on
16
27.3.2000 and the same was inaugurated on 1.4.2000, whereafter toll
tax was being collected by the assesseeCompany.
9. As regards clause (b) of Section 80IA(
4)(i), the requirement
predicated is that the assessee must have entered into an agreement
with the Central Government or a State Government or a local
authority or any other statutory body for (i) developing, (ii)
maintaining and operating or (iii) developing, maintaining and
operating a new infrastructure facility. As aforesaid, in the present
case, the agreement was initially executed between the erstwhile
partnership firm and the State Government, but with clear
understanding that as and when the partnership firm is converted
into a company, the name of the company in the agreement so
executed be recorded recognising the change. Notably, the agreement
itself mentions that M/s. Chetak Enterprises as party to the
agreement was meant to include its successors and assignee.
Further, the State Government had granted sanction to the company
and the original agreement entered into with the firm automatically
stood converted in favour of the assesseeCompany,
which came into
existence on 28.3.2000 being the successor of the erstwhile
partnership firm. Thus understood, even the stipulation in clause (b)
of Section 80IA(
4)(i) is fulfilled by the assesseeCompany.
Since
17
these are the only two issues which weighed with the assessing officer
to deny deduction to the assesseeCompany
as claimed under Section
80IA
of the Income Tax Act, the first appellate authority was justified
in reversing the view taken by the assessing officer. For the same
reason, the ITAT, as well as, the High Court have justly affirmed the
view taken by the first appellate authority, holding that the
respondent/assesseeCompany
qualified for the deduction under
Section 80IA
being an enterprise carrying on the stated business
pertaining to infrastructure facility and owned by a Company
registered in India on the basis of the agreement executed with the
State Government to which the respondent/assesseeCompany
has
succeeded in law after conversion of the partnership firm into a
company.
10. Learned counsel for the appellant has relied on the decision of
this Court in Giridhar G. Yadalam vs. Commissioner of Wealth
Tax & Anr.2. In the said decision, the Court had delineated the
contours regarding permissibility of purposive interpretation of
taxing/fiscal statutes, particularly in the context of an exemption.
This decision is of no avail to doubt the correctness of the view taken
2 (2015) 17 SCC 664
18
by the High Court vide the impugned judgment, in the facts of the
present case.
11. In view of the above, the appeal stands dismissed with no order
as to costs.
……………………………, J
(A.M. Khanwilkar)
……………………………, J
(Dinesh Maheshwari)
New Delhi;
March 05, 2020.