1 REPORTABLE IN 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) JUDGMENTA. M. KHANWILKAR, J. 1. This appeal takes exception to judgment and order dated 5.5.2008 passed by High Court of Judicature for Rajasthan at Jodhpur (for short, High Court ) in Income Tax Appeal No. 71 of 2008. 2. matter relates to Assessment Year 2002 2003, relevant Previous/Financial year for which is 2001 2002 i.e. 1.4.2001 to 31.3.2002. Signature Not Verified Digitally signed by DEEPAK SINGH Date: 2020.03.05 3. 16:56:51 IST Reason: Briefly stated, erstwhile partnership firm M/s. Chetak Enterprises entered into agreement with Government of 2 Rajasthan for construction of road and collection of road/toll tax. construction of road was completed by said firm on 27.3.2000 and same was inaugurated on 1.4.2000. firm was converted into private limited company on 28.3.2000 named as M/s. Chetak Enterprises (P) Ltd. (for short, assessee Company ) under Part IX of Companies Act, 1956 (for short, Companies Act ). On conversion of firm into company, intimation was given to Chief Engineer (Roads), P.W.D., Rajasthan, Jaipur. said authority noted change and cancelled registration of firm and granted fresh registration code to assessee Company. As aforesaid, road was inaugurated on 1.4.2000 and assessee Company started collecting toll tax. For relevant assessment year, assessee Company claimed deduction under Section 80 IA of Income Tax Act, 1961 (for short, Income Tax Act ). assessing officer declined that claim of assessee Company, which decision was reversed by Commissioner of Income Tax (Appeals), Udaipur. Income Tax Appellate Tribunal (for short, ITAT ) confirmed decision of first appellate authority, following its decision1 in case of assessee Company for Assessment Year 2001 2002. As result, Department preferred appeal 1 Chetak Enterprises P. Ltd. vs. ACIT, (2005) 95 ITD 1 (Jodh.) 3 before High Court. High Court formulated following question of law: Whether in facts and in circumstances of case, assessee Company was right in finding that assessee fulfilled condition of sub Section (4)(i)(b) of Section 80 IA? Section 80 IA, as applicable to Assessment Year 2002 03 reads thus: 80 IA (1) Where gross total income of assessee includes any profits and gains derived from any business of industrial undertaking or enterprise referred to in sub section (4) (such business being hereinafter referred to as eligible business), there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction from such profits and gains of amount equal to hundred per cent of profits and gains derived from such business for first five assessment years commencing at any time during periods as specified in sub section (2) and thereafter, twenty five per cent of profits and gains for further five assessment years: Provided that where assessee is company, provisions of this sub section shall have effect as if for words twenty five per cent , words thirty per cent had been substituted. (2) deduction specified in sub section (1) may, at option of assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from year in which undertaking or enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops industrial park or generates power or commences transmission or distribution of power: Provided that where assessee begins operating and maintaining any infrastructure facility referred to in clause (b) of Explanation to clause (i) of sub section (4), 4 provisions of this sub section shall have effect as if for words fifteen years , words twenty years had been substituted. (2A) Notwithstanding anything contained in sub section (1) or sub section (2), deduction in computing total income of undertaking providing telecommunication services, specified in clause (ii) of sub section (4), shall be hundred per cent of profits and gains of eligible business for first five assessment years commencing at any time during periods as specified in sub section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years. (3) This section applies to industrial undertaking referred to in clause (iv) of sub section (4) which fulfils all following conditions, namely: (i) it is not formed by splitting up, or reconstruction, of business already in existence: Provided that this condition shall not apply in respect of industrial undertaking which is formed as result of re establishment, re construction or revival by assessee of business of any such industrial undertaking as is referred to in section 33B, in circumstances and within period specified in that section; (ii) it is not formed by transfer to new business of machinery or plant previously used for any purpose. Explanation 1. For purposes of clause (ii), any machinery or plant which was used outside India by any person other than assessee shall not be regarded as machinery or plant previously used for any purpose, if following conditions are fulfilled, namely: (a) Such machinery or plant was not, at any time previous to date of installation by assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and 5 (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under provisions of this Act in computing total income of any person for any period prior to date of installation of machinery or plant by assessee. Explanation 2. Where in case of industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to new business and total value of machinery or plant or part so transferred does not exceed twenty per cent of total value of machinery or plant used in business, then, for purposes of clause (ii) of this sub section, condition specified therein shall be deemed to have been complied with. (4) This section applies to (i) Any enterprise carrying on business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility which fulfils all following conditions, namely: (a) it is owned by company registered in India or by consortium of such companies; (b) it has entered into agreement with Central Government or State Government or local authority or any other statutory body for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating new infrastructure facility subject to condition that such infrastructure facility shall be transferred to Central Government, State Government, local authority or such other statutory body, as case may be, within period stipulated in agreement; (c) it has started or starts operating and maintaining infrastructure facility on or after 1st day of April, 1995: 6 Provided that where infrastructure facility is transferred on or after 1 st day of April, 1999 by enterprise which developed such infrastructure facility (hereafter referred to in this section as transferor enterprise) to another enterprise (hereafter in this section referred to as transferee enterprise) for purpose of operating and maintaining infrastructure facility on its behalf in accordance with agreement with Central Government, State Government, local authority or statutory body, provisions of this section shall apply to transferee enterprise as if it were enterprise to which this clause applies and deduction from profits and gains would be available to such transferee enterprise for unexpired period during which transferor enterprise would have been entitled to deduction, if transfer had not taken place. Explanation. For purposes of this clause, infrastructure facility means, (a) road, bridge, airport, port, inland waterways and inland ports, rail system or any other public facility of similar nature as may be notified by Board in this behalf in Official Gazette; (b) highway project including housing or other activities being integral part of highway project; and (c) 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 1st day of April, 1995, but on or before 31st day of March, 2003; 7 (iii) any undertaking which develops, develops and operates or maintains and operates industrial park notified by Central Government in accordance with scheme framed and notified by Government for period beginning on 1st day of April, 1997 and ending on 31st day of March, 2006: Provided that in case where undertaking develops industrial park on or after 1st day of April, 1999 and transfers operation and maintenance of such industrial park to another undertaking (hereafter in this section referred to as transferee undertaking) deduction under sub section (1), shall be allowed to such transferee undertaking for remaining period in ten consecutive assessment years in manner as if operation and maintenance were not so transferred to transferee undertaking; (iv) industrial undertaking which, (a) is set up in any part of India for generation or generation and distribution of power if it begins to generate power at any time during period beginning on 1st day of April, 1993 and ending on 31 st day of March, 2003; (b) starts transmission or distribution by laying network of new transmission or distribution lines at any time during period beginning on 1st day of April, 1999 and ending on 31 st day of March, 2003: Provided that deduction under this section to industrial undertaking under sub clause (b) shall be allowed only in relation to 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, profits and gains of eligible business to which provisions of sub section (1) apply shall, for purposes of determining quantum of 8 deduction under that sub section for assessment year immediately succeeding initial assessment year or any subsequent assessment year, be computed as if such eligible business were only source of income of assessee during previous year relevant to initial assessment year and to every subsequent assessment year up to and including assessment year for which determination is to be made. (6) Notwithstanding anything contained in sub section (4), where housing or other activities are integral part of highway project and profits of which are computed on such basis and manner as may be prescribed, such profit shall not be liable to tax where profit has been transferred to special reserve account and same is actually utilised for highway project excluding housing and other activities before expiry of three years following year in which such amount was transferred to reserve account; and amount remaining unutilised shall be chargeable to tax as income of year in which such transfer to reserve account took place. (7) Where assessee is person other than company or co operative society, deduction under sub section (1) from profits and gains derived from industrial undertaking shall not be admissible unless accounts of industrial undertaking for previous year relevant to assessment year for which deduction is claimed have been audited by accountant, as defined in Explanation below sub section (2) of section 288, and assessee furnishes, along with his return of income, report of such audit in prescribed form duly signed and verified by such accountant. (8) Where any goods held for purposes of eligible business are transferred to any other business carried on by assessee, or where any goods held for purposes of any other business carried on by assessee are transferred to eligible business and, in either case, consideration, if any, for such transfer as recorded in accounts of eligible business does not correspond to market value of such goods as on date of transfer, then, for purposes of deduction under this section, profits and gains of such eligible business shall be computed as if transfer, in either case, had been made at market value of such goods as on that date: 9 Provided that where, in opinion of Assessing Officer, computation of profits and gains of eligible business in manner hereinbefore specified presents exceptional difficulties, Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation. For purposes of this sub section, market value , in relation to any goods, means price that such goods would ordinarily fetch on sale in open market. (9) Where any amount of profits and gains of industrial undertaking or of enterprise in case of assessee is claimed and allowed under this section for any assessment year, deduction to extent of such profits and gains shall not be allowed under any other provisions of this Chapter under heading C. Deductions in respect of certain incomes , and shall in no case exceed profits and gains of such eligible business of industrial undertaking or enterprise, as case may be. (10) Where it appears to Assessing Officer that, owing to close connection between assessee carrying on eligible business to which this section applies any other person, or for any other reason, course of business between them is so arranged that business transacted between them produces to assessee more than ordinary profits which might be expected to arise in such eligible business, Assessing Officer shall, in computing profits and gains of such eligible business for purposes of deduction under this section, take amount of profits as may be reasonably deemed to have been derived therefrom. (11) Central Government may, after making such inquiry as it may think fit, direct, by notification in Official Gazette, that 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 notification. (12) Where any undertaking of Indian company which is entitled to deduction under this section is transferred, before expiry of period specified in this section, to another Indian company in scheme of amalgamation or demerger (a) no deduction shall be admissible under this section to amalgamating or demerged company for previous year in which 10 amalgamation or demerger takes place; and (b) provisions of this section shall, as far as may be, apply to amalgamated or resulting company as they would have applied to amalgamating or demerged company if amalgamation or demerger had not taken place. High Court while upholding view taken by first appellate authority and ITAT, dismissed appeal and observed thus: ..In present case, so far as facts are concerned, it is not in dispute, that work of construction of roads was completed on 27.3.2000, and on and with effect from 28.3.2000, partnership firm was converted into Company, by being registered under Part IX of Companies Act, and became private Limited Company. As noticed above, relevant previous year is 1.4.2000 to 31.3.2001. Thus, right from commencement of relevant financial year, it cannot be disputed, that it was Company, and was undertaking specified business. Then, so far as question, as has been gone into by Assessing Officer, and Excise Commissioner that assessee Company has not entered into any agreement with Government, is concerned, in that regard, learned Tribunal has found, that main objects of Memorandum of Association of assessee Company indicates, that it was mentioned as under: On conversion of partnership firm into company limited by shares under these presents to acquire by operation of Law under Part IX of Companies Act, 1956 as going concern and continue partnership business now being carried on under 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 learned Tribunal, at page 13 of judgment, that erstwhile partnership firm, in its first communication to Chief Engineer on 23.10.1998, while replying to notice inviting bids, made it categorically clear, that firm will be converted into limited company under Chapter IX of 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 existing partners as its Directors, and 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 Government and Firm, wherein said letter of Chief Engineer dt. 27.8.1999, was considered as part of agreement. With this, agreement also mentions firm, to mean and include its successors and assigns . Thus it has been found, that since incorporation of Firm into Company, has effect of statutorily vesting of liabilities and assets in Firm, and agreement comprehends successors and assigns, it is clear, that assessee fulfils all conditions. Then proviso, appended in this sub section, has also been considered, which clearly provides for entitlement of deduction to transferee, with effect from date of transfer, therefore also, it was found that deduction is available. In our view, when right from day one, i.e. while replying to notice inviting tenders itself, it was made clear by Firm, that Firm will be converting into limited Company under Part IX of Companies Act, and Chief Engineer was requested to allow change in Constitution, and accordingly change of name in agreement, after converting Firm into Company, with existing partners as its Directors, and this request was accepted, and that acceptance letter formed part of agreement, in our view, Firm stands in shoes of promoter, and Company takes over all assets and liabilities statutorily. In other words, by operation of law, there is statutory transformation of Firm into Company, obviously rights and liabilities of Company, and assets, go to Company. It is different story that even from agreement entered into by promoter (predecessor in interest of Company), as successor of Firm and Company is deemed to be party, and, therefore also, is very much entitled to benefit of deduction on this ground. Over & above all this, proviso is complete answer to contention of Revenue, and in favour of assessee, which rather clearly provides, that even in case of transfer, transferee will become entitled to deduction of course with effect from date of transfer. In present case, transfer was statutory, and did come into effect since 28.3.2000, i.e. much before commencement of relevant financial year, and as such, 12 considering from any standpoint, assessee could not be denied benefit of deduction available to it. 4. Being aggrieved, Department filed two separate special leave petitions before this Court. present civil appeal emanates from SLP(C) No. 6772/2009 and pertains to Assessment Year 2002 2003. As regards Civil Appeal No. 1748/2010 (arising out of SLP(C) No. 3430/2009) pertaining to Assessment Year 2001 2002, 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 appellant and Mr. S. Krishnan, learned counsel for respondent. 6. It is not in dispute that agreement was executed between erstwhile partnership firm and State Government for construction of road and collection of toll tax. Before commencement of assessment year in question i.e. 2002 2003, construction of road was completed (on 27.3.2000) and it was inaugurated on 1.4.2000. Before date of inauguration, partnership firm was converted into company on 28.3.2000 under Part IX of Companies Act. Memorandum of Association of assessee Company reveals main object as follows: 13 On conversion of partnership firm into company limited by shares under these presents to acquire by operation of law under Part IX of Companies Act, 1956 as going concern and continue partnership business now being carried on under name and style of M/s. Chetak Enterprises including all its assets, movables and immovables, rights, debts and liabilities in connection therewith. As matter of fact, before agreement was executed with erstwhile partnership firm, it was clearly understood that partnership firm would in due course be converted into registered limited company. That is evident from communication addressed to Chief Engineer on 23.10.1998, at time of replying to notice inviting bids. explicit request was made to allow partnership firm to change its constitution and consequently change of name in agreement after converting firm into company with existing partners as its Directors. Chief Engineer being appropriate authority of State, vide letter dated 27.8.1999, took note of request made by erstwhile partnership firm and informed said firm that its offer was accepted subject to terms and conditions specified in that regard. It is only after this interaction, agreement was entered into between Government 14 of Rajasthan and erstwhile partnership firm, in which communication sent by Chief Engineer, dated 27.8.1999, was made part of agreement. Notably, after conversion of partnership firm into company under Part IX of Companies Act, State authorities noted change and provided fresh registration code to assessee Company. 7. question is: what is effect of conversion of partnership firm into company under Part IX of Companies Act? That can be discerned from Section 575 of Companies Act, which reads thus: 575. Vesting of property on registration. All property, movable and immovable (including actionable claims), belonging to or vested in company at date of its registration in pursuance of this Part, shall, on such registration, pass to and vest in company as incorporated under this Act for all estate and interest of company therein. It is manifest that all properties, movable and immovable (including actionable claims) belonging to or vested in company at date of its registration would vest in company as incorporated under Act. In other words, property acquired by promoter can be claimed by company after its incorporation without any need for conveyance on account of statutory vesting. On such statutory vesting, all properties of firm, in law, vest in company and 15 firm is succeeded by company. firm ceases to exist and assumes status of company after its registration as company. priori, it must follow that business is carried on by enterprise owned by company registered in India and agreement entered into between erstwhile partnership firm and State Government, by legal implication, assumes character of agreement between company registered in India and State Government for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating new infrastructure facility. 8. For purpose of considering compliance of clause (a) of Section 80 IA(4)(i), assessee must be 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 company registered in India. That stipulation is fulfilled in present case, as registered firm was converted into company under Part IX of Companies Act on 28.3.2000, which is before commencement of Assessment Year 2002 2003. For assessment year under consideration, activity undertaken by assessee is only maintaining and operating or developing, maintaining and operating infrastructure facility, inasmuch as, construction of road was completed on 16 27.3.2000 and same was inaugurated on 1.4.2000, whereafter toll tax was being collected by assessee Company. 9. As regards clause (b) of Section 80 IA(4)(i), requirement predicated is that assessee must have entered into agreement with Central Government or State Government or local authority or any other statutory body for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating new infrastructure facility. As aforesaid, in present case, agreement was initially executed between erstwhile partnership firm and State Government, but with clear understanding that as and when partnership firm is converted into company, name of company in agreement so executed be recorded recognising change. Notably, agreement itself mentions that M/s. Chetak Enterprises as party to agreement was meant to include its successors and assignee. Further, State Government had granted sanction to company and original agreement entered into with firm automatically stood converted in favour of assessee Company, which came into existence on 28.3.2000 being successor of erstwhile partnership firm. Thus understood, even stipulation in clause (b) of Section 80 IA(4)(i) is fulfilled by assessee Company. Since 17 these are only two issues which weighed with assessing officer to deny deduction to assessee Company as claimed under Section 80 IA of Income Tax Act, first appellate authority was justified in reversing view taken by assessing officer. For same reason, ITAT, as well as, High Court have justly affirmed view taken by first appellate authority, holding that respondent/assessee Company qualified for deduction under Section 80 IA being enterprise carrying on stated business pertaining to infrastructure facility and owned by Company registered in India on basis of agreement executed with State Government to which respondent/assessee Company has succeeded in law after conversion of partnership firm into company. 10. Learned counsel for appellant has relied on decision of this Court in Giridhar G. Yadalam vs. Commissioner of Wealth Tax & Anr.2. In said decision, Court had delineated contours regarding permissibility of purposive interpretation of taxing/fiscal statutes, particularly in context of exemption. This decision is of no avail to doubt correctness of view taken 2 (2015) 17 SCC 664 18 by High Court vide impugned judgment, in facts of present case. 11. In view of above, appeal stands dismissed with no order as to costs. ................................., J (A.M. Khanwilkar) ................................., J (Dinesh Maheshwari) New Delhi; March 05, 2020. Commissioner of Income-tax, Udaipur v. Chetak Enterprises Pvt. Ltd