COMMISSIONER OF INCOME TAX, UDAIPUR versus M/S. CHETAK ENTERPRISES PVT. LTD. on 5 March 2020

Conclusion

1. This appeal takes exception to the judgment and order dated5.5.2008 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 2002-2003, the relevantPrevious/Financial year for which is 2001-2002 i.e. 1.4.2001 to 31.3.2002.

3. Briefly stated, the erstwhile partnership firm - M/s. ChetakEnterprises entered into an agreement with the Government of Rajasthanfor construction of road and collection of road/toll tax. The constructionof road was completed by the said firm on 27.3.2000 and the same wasinaugurated on 1.4.2000. The firm was converted into a private limitedcompany on 28.3.2000 named as M/s. Chetak Enterprises (P) Ltd. (forshort, “the assessee-Company”) under Part IX of the Companies Act,1956 (for short, “the Companies Act”). On conversion of the firm intocompany, an intimation was given to the Chief Engineer (Roads), P.W.D.,Rajasthan, Jaipur. The said authority noted the change and cancelled theregistration of the firm and granted a fresh registration code to theassessee-Company. As aforesaid, the road was inaugurated on 1.4.2000and the assessee-Company started collecting toll tax. For the relevantassessment year, the assessee-Company claimed deduction under Section80-IA of the Income Tax Act, 1961 (for short, “the Income Tax Act”).The assessing officer declined that claim of the assessee-Company, whichdecision was reversed by the Commissioner of Income-Tax (Appeals),Udaipur. The Income Tax Appellate Tribunal (for short, “the ITAT”)confirmed the decision of the first appellate authority, following itsdecision[1] in the case of the assessee-Company for the Assessment Year2001-2002. As a result, the Department preferred an appeal before theHigh Court. The High Court formulated the following question of law: - “Whether in the facts and in the circumstances of the case, theassessee-Company was right in finding that the assessee fulfilledthe condition of sub-Section (4)(i)(b) of Section 80-IA?”

Section 80-IA, as applicable to Assessment Year 2002-03 readsthus: - 1 Chetak Enterprises P. Ltd. vs. ACIT, (2005) 95 ITD 1 (Jodh.)

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“80-IA (1) Where the gross total income of an assessee includesany profits and gains derived from any business of an industrialundertaking or an enterprise referred to in sub-section (4) (suchbusiness being hereinafter referred to as the eligible business),there shall, in accordance with and subject to the provisions ofthis section, be allowed, in computing the total income of theassessee, a deduction from such profits and gains of an amountequal to hundred per cent of profits and gains derived from suchbusiness for the first five assessment years commencing at anytime during the periods as specified in sub-section (2) andthereafter, twenty-five per cent of the profits and gains for furtherfive assessment years:

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Provided that where the assessee is a company, the provisionsof this sub-section shall have effect as if for the words “twenty-five per cent”, the words “thirty per cent” had been substituted.

(2) The deduction specified in sub-section (1) may, at the optionof the assessee, be claimed by him for any ten consecutiveassessment years out of fifteen years beginning from the year inwhich the undertaking or the enterprise develops and begins tooperate any infrastructure facility or starts providingtelecommunication service or develops an industrial park orgenerates power or commences transmission or distribution ofpower:

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Provided that where the assessee begins operating andmaintaining any infrastructure facility referred to in clause (b) ofExplanation to clause (i) of sub-section (4), the provisions of thisFsub-section shall have effect as if for the words “fifteen years”,the words “twenty years” had been substituted.

(2A) Notwithstanding anything contained in sub-section (1) orsub-section (2), the deduction in computing the total income of anundertaking providing telecommunication services, specified inclause (ii) of sub-section (4), shall be hundred per cent of theprofits and gains of the eligible business for the first fiveassessment years commencing at any time during the periods asspecified in sub-section (2) and thereafter, thirty per cent of suchprofits and gains for further five assessment years.

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(3) This section applies to an industrial undertaking referred to inclause (iv) of sub-section (4) which fulfils all the followingconditions, namely: -

(i) it is not formed by splitting up, or the reconstruction, of abusiness already in existence:

Provided that this condition shall not apply in respect of anindustrial undertaking which is formed as a result of there-establishment, re-construction or revival by the assesseeof the business of any such industrial undertaking as is referredto in section 33B, in the circumstances and within the periodspecified in that section;

(ii) it is not formed by the transfer to a new business of machineryor plant previously used for any purpose.

Explanation 1.-For the purposes of clause (ii), any machineryor plant which was used outside India by any person otherthan the assessee shall not be regarded as machinery or plantpreviously used for any purpose, if the following conditionsare fulfilled, namely: - (a) Such machinery or plant was not, at any time previous tothe date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from anycountry outside India; and

(c) no deduction on account of depreciation in respect ofsuch machinery or plant has been allowed or is allowableunder the provisions of this Act in computing the totalincome of any person for any period prior to the date ofthe 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 usedfor any purpose is transferred to a new business and the totalvalue of the machinery or plant or part so transferred doesnot exceed twenty per cent of the total value of the machineryor plant used in the business, then, for the purposes of clause(ii) of this sub-section, the condition specified therein shall bedeemed to have been complied with.

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A(4) This section applies to-

(i) Any enterprise carrying on the business of (i) developing,(ii) maintaining and operating or (iii) developing, maintainingand operating any infrastructure facility which fulfils allthe following conditions, namely: - B

(a) it is owned by a company registered in India or by aconsortium of such companies; (b) it has entered into an agreement with the CentralGovernment or a State Government or a local authorityor any other statutory body for (i) developing, (ii)maintaining and operating or (iii) developing, maintainingand operating a new infrastructure facility subject tothe condition that such infrastructure facility shall betransferred to the Central Government, StateGovernment, local authority or such other statutorybody, as the case may be, within the period stipulatedin the agreement; C

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(c) it has started or starts operating and maintaining theinfrastructure facility on or after the 1[st] day of April,1995:

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Provided that where an infrastructure facility istransferred on or after the 1[st] day of April, 1999 by anenterprise which developed such infrastructure facility(hereafter referred to in this section as the transferorenterprise) to another enterprise (hereafter in thissection referred to as the transferee enterprise) forthe purpose of operating and maintaining theinfrastructure facility on its behalf in accordance withthe agreement with the Central Government, StateGovernment, local authority or statutory body, theprovisions of this section shall apply to the transfereeenterprise as if it were the enterprise to which thisclause applies and the deduction from profits and gainswould be available to such transferee enterprise forthe unexpired period during which the transferorenterprise would have been entitled to the deduction,if the transfer had not taken place.

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Explanation.- For the purposes of this clause, “infrastructurefacility” means,- (a) a road, bridge, airport, port, inland waterways and inland ports,rail system or any other public facility of a similar nature as maybe notified by the Board in this behalf in the Official Gazette; (b) a highway project including housing or other activities beingan integral part of the highway project; and

(c) a water supply project, water treatment system, irrigation projectsanitation and sewerage system or solid waste managementsystem;

(ii) any undertaking which has started or starts providingtelecommunication services whether basic or cellular, includingradio paging, domestic satellite service, network of turnking,broadband network and internet services on or after the 1[st] day ofApril, 1995, but on or before the 31[st ]day of March, 2003;

(iii) any undertaking which develops, develops and operates ormaintains and operates an industrial park notified by the CentralGovernment in accordance with the scheme framed and notifiedby the Government for the period beginning on the 1[st] day of April,1997 and ending on the 31[st] day of March, 2006:

Provided that in a case where an undertaking develops anindustrial park on or after the 1[st] day of April, 1999 and transfersthe operation and maintenance of such industrial park to anotherundertaking (hereafter in this section referred to as the transfereeundertaking) the deduction under sub-section (1), shall be allowedto such transferee undertaking for the remaining period in the tenconsecutive assessment years in a manner as if the operation andmaintenance 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 generationand distribution of power if it begins to generate power at anytime during the period beginning on the 1[st] day of April, 1993 andending on the 31[st] day of March, 2003; (b) starts transmission or distribution by laying a network of newtransmission or distribution lines at any time during the period A

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beginning on the 1[st] day of April, 1999 and ending on the 31[st] dayof March, 2003:

Provided that the deduction under this section to an industrialundertaking under sub-clause (b) shall be allowed only in relationto the profits derived from laying of such network of new lines fortransmission or distribution.

(5) Notwithstanding anything contained in any other provision ofthis Act, the profits and gains of an eligible business to which theprovisions of sub-section (1) apply shall, for the purposes ofdetermining the quantum of deduction under that sub-section forthe assessment year immediately succeeding the initial assessmentyear or any subsequent assessment year, be computed as if sucheligible business were the only source of income of the assesseeduring the previous year relevant to the initial assessment yearand to every subsequent assessment year up to and including theassessment year for which the determination is to be made.

(6) Notwithstanding anything contained in sub-section (4), wherehousing or other activities are an integral part of the highwayproject and the profits of which are computed on such basis andmanner as may be prescribed, such profit shall not be liable to taxwhere the profit has been transferred to a special reserve accountand the same is actually utilised for the highway project excludinghousing and other activities before the expiry of three yearsfollowing the year in which such amount was transferred to thereserve account; and the amount remaining unutilised shall bechargeable to tax as income of the year in which such transfer toreserve account took place.

(7) Where the assessee is a person other than a company or aco-operative society, the deduction under the sub-section (1) fromprofits and gains derived from an industrial undertaking shall notbe admissible unless the accounts of the industrial undertaking forthe previous year relevant to the assessment year for which thededuction is claimed have been audited by an accountant, asdefined in the Explanation below sub-section (2) of section 288,and the assessee furnishes, along with his return of income, thereport of such audit in the prescribed form duly signed and verifiedby such accountant.

(8) Where any goods held for the purposes of the eligible businessare transferred to any other business carried on by the assessee,or where any goods held for the purposes of any other businesscarried on by the assessee are transferred to the eligible businessand, in either case, the consideration, if any, for such transfer asrecorded in the accounts of the eligible business does notcorrespond to the market value of such goods as on the date ofthe transfer, then, for the purposes of the deduction under thissection, the profits and gains of such eligible business shall becomputed as if the transfer, in either case, had been made at themarket value of such goods as on that date:

Provided that where, in the opinion of the Assessing Officer, thecomputation of the profits and gains of the eligible business in themanner hereinbefore specified presents exceptional difficulties,the Assessing Officer may compute such profits and gains onsuch reasonable basis as he may deem fit.

Explanation. -For the purposes of this sub-section, “market value”,in relation to any goods, means the price that such goods wouldordinarily fetch on sale in the open market.

(9) Where any amount of profits and gains of an industrialundertaking or of an enterprise in the case of an assessee is claimedand allowed under this section for any assessment year, deductionto the extent of such profits and gains shall not be allowedunder any other provisions of this Chapter under the heading“C.-Deductions in respect of certain incomes”, and shall in nocase exceed the profits and gains of such eligible business ofindustrial undertaking or enterprise, as the case may be.

(10) Where it appears to the Assessing Officer that, owing to theclose connection between the assessee carrying on the eligiblebusiness to which this section applies an any other person, or forany other reason, the course of business between them is soarranged that the business transacted between them produces tothe assessee more than the ordinary profits which might beexpected to arise in such eligible business, the Assessing Officershall, in computing the profits and gains of such eligible businessfor the purposes of the deduction under this section, take the amountof profits as may be reasonably deemed to have been derivedtherefrom.

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SUPREME COURT REPORTS

(11) The Central Government may, after making such inquiry as itmay think fit, direct, by notification in the Official Gazette, thatthe exemption conferred by this section shall not apply to anyclass of industrial undertaking or enterprise with effect from suchdate as it may specify in the notification.

(12) Where any undertaking of an Indian company which is entitledto the deduction under this section is transferred, before the expiryof the period specified in this section, to another Indian companyin a scheme of amalgamation or demerger- (a) no deduction shall be admissible under this section to theamalgamating or the demerged company for the previousyear in which the amalgamation or the demerger takesplace; and (b) the provisions of this section shall, as far as may be, applyto the amalgamated or the resulting company as they wouldhave applied to the amalgamating or the demerged companyif the amalgamation or demerger had not taken place.”

The High Court while upholding the view taken by the first appellateauthority and the ITAT, dismissed the appeal and observed thus: - ‘‘…..In the present case, so far as the facts are concerned, itis not in dispute, that the work of construction of roads wascompleted on 27.3.2000, and on and with effect from 28.3.2000,the partnership firm was converted into a Company, by beingregistered under Part IX of the Companies Act, and became aprivate Limited Company. As noticed above, the relevantprevious year is 1.4.2000 to 31.3.2001. Thus, right from thecommencement of the relevant financial year, it cannot bedisputed, that it was a Company, and was undertaking thespecified business. Then, so far as the question, as has beengone into by the Assessing Officer, and the ExciseCommissioner that the assessee Company has not entered intoany agreement with the Government, is concerned, in thatregard, the learned Tribunal has found, that the main objects ofthe Memorandum of Association of the assessee Companyindicates, that it was mentioned as under:

‘‘On conversion of the partnership firm into a companylimited 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 businessnow being carried on under the name & style of M/s ChetakEnterprises including all its assets, movables andimmovables, rights, debts and liabilities in connectiontherewith.’’

Then, it has also been found by the learned Tribunal, atpage 13 of the judgment, that the erstwhile partnership firm, in itsfirst communication to the Chief Engineer on 23.10.1998, whilereplying to the notice inviting bids, made it categorically clear, that‘‘the firm will be converted into a limited company under ChapterIX of the Companies Act. As such, you are requested to allow uschange in constitution and accordingly change of name inagreement, after converting firm into company with the existingpartners as its Directors, and the Chief Engineer vide letterdt. 27.8.1999, took note of this letter, and informed, that their offerwas accepted, subject to terms and conditions specified therein.It is thereafter, that agreement was entered into between theGovernment and the Firm, wherein the said letter of the ChiefEngineer dt. 27.8.1999, was considered as part of the agreement.With this, the agreement also mentions the firm, ‘‘to mean andinclude its successors and assigns’’. Thus it has been found, thatsince incorporation of the Firm into a Company, has the effect ofstatutorily vesting of liabilities and assets in the Firm, and theagreement comprehends successors and assigns, it is clear, thatthe assessee fulfils all the conditions. Then the proviso, appendedin this sub-section, has also been considered, which clearlyprovides for entitlement of the deduction to the transferee, witheffect from the date of transfer, therefore also, it was found thatthe deduction is available.

In our view, when right from the day one, i.e. while replyingto the notice inviting tenders itself, it was made clear by the Firm,that the Firm will be converting into a limited Company underPart IX of the Companies Act, and the Chief Engineer wasrequested to allow the change in the Constitution, and accordinglychange of name in the agreement, after converting the Firm intothe Company, with the existing partners as its Directors, and thisrequest was accepted, and that acceptance letter formed part of D

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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 statutorytransformation of the Firm into the Company, obviously the rightsand liabilities of the Company, and the assets, go to the Company.BIt is a different story that even from the agreement entered intoby the promoter (predecessor in the interest of the Company), assuccessor of the Firm and the Company is deemed to be a party,and, therefore also, is very much entitled to the benefit of deductionon this ground. Over & above all this, the proviso is a completeanswer to the contention of the Revenue, and in favour of theCassessee, which rather clearly provides, that even in case oftransfer, the transferee will become entitled to deduction of coursewith effect from the date of transfer.

In the present case, the transfer was statutory, and did comeinto effect since 28.3.2000, i.e. much before the commencementDof the relevant financial year, and as such, considering from anystandpoint, the assessee could not be denied benefit of deductionavailable to it.”

4. Being aggrieved, the Department filed two separate specialleave petitions before this Court. The present civil appeal emanates fromESLP(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, the same has beendisposed of in terms of order dated 17.10.2019 due to low tax effectleaving question of law open.

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5. We have heard Mr. Rupesh Kumar, learned counsel for theappellant and Mr. S. Krishnan, learned counsel for the respondent.

6. It is not in dispute that an agreement was executed betweenthe erstwhile partnership firm and the State Government for constructionof road and collection of toll tax. Before the commencement of theGassessment year in question i.e. 2002-2003, the construction of roadwas completed (on 27.3.2000) and it was inaugurated on 1.4.2000. Beforethe date of inauguration, the partnership firm was converted into acompany on 28.3.2000 under Part IX of the Companies Act. TheMemorandum of Association of the assessee-Company reveals the mainobject as follows: -H

“On conversion of the partnership firm into a company limited byshares under these presents to acquire by operation of law underPart IX of the Companies Act, 1956 as going concern and continuethe partnership business now being carried on under the nameand style of M/s. Chetak Enterprises including all its assets,movables and immovables, rights, debts and liabilities in connectiontherewith.”

As a matter of fact, before the agreement was executed with theerstwhile partnership firm, it was clearly understood that the partnershipfirm would in due course be converted into a registered limited company.That is evident from the communication addressed to the Chief Engineeron 23.10.1998, at the time of replying to the notice inviting bids. Anexplicit request was made to allow the partnership firm to change itsconstitution and consequently change of name in the agreement afterconverting the firm into a company with the existing partners as itsDirectors. The Chief Engineer being the appropriate authority of theState, vide letter dated 27.8.1999, took note of the request made by theerstwhile partnership firm and informed the said firm that its offer wasaccepted subject to terms and conditions specified in that regard. It isonly after this interaction, an agreement was entered into between theGovernment of Rajasthan and the erstwhile partnership firm, in whichthe communication sent by the Chief Engineer, dated 27.8.1999, wasmade part of the agreement. Notably, after the conversion of thepartnership firm into a company under Part IX of the Companies Act,the State authorities noted the change and provided fresh registrationcode to the assessee-Company.

7. The question is: what is the effect of conversion of partnershipfirm into a company under Part IX of the Companies Act? That can bediscerned from Section 575 of the Companies Act, which reads thus: - “575. Vesting of property on registration.- All property,movable and immovable (including actionable claims), belongingto or vested in a company at the date of its registration inpursuance of this Part, shall, on such registration, pass to and vestin the company as incorporated under this Act for all the estateand interest of the company therein.”

It is manifest that all properties, movable and immovable (includingactionable claims) belonging to or vested in a company at the date of itsregistration would vest in the company as incorporated under the Act.

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AIn other words, the property acquired by a promoter can be claimed bythe company after its incorporation without any need for conveyance onaccount of statutory vesting. On such statutory vesting, all the propertiesof the firm, in law, vest in the company and the firm is succeeded by thecompany. The firm ceases to exist and assumes the status of a companyafter its registration as a company. A priori, it must follow that the businessBis carried on by the enterprise owned by a company registered in Indiaand the agreement entered into between the erstwhile partnership firmand the State Government, by legal implication, assumes the characterof an agreement between the company registered in India and the StateGovernment for (i) developing, (ii) maintaining and operating or (iii)Cdeveloping, maintaining and operating a new infrastructure facility.

8. For the purpose of considering compliance of clause (a) ofSection 80-IA(4)(i), the assessee must be an enterprise carrying onbusiness of (i) developing, (ii) maintaining and operating or (iii) developing,maintaining and operating any infrastructure facility, which enterprise isDowned by a company registered in India. That stipulation is fulfilled inthe present case, as the registered firm was converted into a companyunder Part IX of the Companies Act on 28.3.2000, which is before thecommencement of Assessment Year 2002-2003. For the assessmentyear under consideration, the activity undertaken by the assessee is onlymaintaining and operating or developing, maintaining and operating theEinfrastructure facility, inasmuch as, the construction of the road wascompleted on 27.3.2000 and the same was inaugurated on 1.4.2000,whereafter toll tax was being collected by the assessee-Company.

9. As regards clause (b) of Section 80-IA(4)(i), the requirementpredicated is that the assessee must have entered into an agreementFwith the Central Government or a State Government or a local authorityor any other statutory body for (i) developing, (ii) maintaining andoperating or (iii) developing, maintaining and operating a newinfrastructure facility. As aforesaid, in the present case, the agreementwas initially executed between the erstwhile partnership firm and theGState Government, but with clear understanding that as and when thepartnership firm is converted into a company, the name of the companyin the agreement so executed be recorded recognising the change.Notably, the agreement itself mentions that M/s. Chetak Enterprises asparty to the agreement was meant to include its successors and assignee.Further, the State Government had granted sanction to the company andH

the original agreement entered into with the firm automatically stoodconverted in favour of the assessee-Company, which came into existenceon 28.3.2000 being the successor of the erstwhile partnership firm. Thusunderstood, even the stipulation in clause (b) of Section 80-IA(4)(i) isfulfilled by the assessee-Company. Since these are the only two issueswhich weighed with the assessing officer to deny deduction to theassessee-Company as claimed under Section 80-IA of the Income TaxAct, the first appellate authority was justified in reversing the view takenby the assessing officer. For the same reason, the ITAT, as well as, theHigh Court have justly affirmed the view taken by the first appellateauthority, holding that the respondent/assessee-Company qualified forthe deduction under Section 80-IA being an enterprise carrying on thestated business pertaining to infrastructure facility and owned by aCompany registered in India on the basis of the agreement executedwith the State Government to which the respondent/assessee-Companyhas succeeded in law after conversion of the partnership firm into acompany.

10. Learned counsel for the appellant has relied on the decision ofthis Court in Giridhar G. Yadalam vs. Commissioner of Wealth Tax& Anr.[2]. In the said decision, the Court had delineated the contoursregarding permissibility of purposive interpretation of taxing/fiscalstatutes, particularly in the context of an exemption. This decision is ofno avail to doubt the correctness of the view taken by the High Courtvide the impugned judgment, in the facts of the present case.

11. In view of the above, the appeal stands dismissed with noorder as to costs.

Divya Pandey

Appeal dismissed.

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