Deduction Under Section 80IB

Dear Friend Santhanarayan,

Since the exemption u/s 80IB is available only if the undertaking is new undertaking (i.e. an undertaking which is not formed by reconstruction, etc. of business) normally in such cases where old undertaking is transferred will not qualify for exemption unless the law makes some exception. In your case the deduction will not be available to the newly formed private limited company which will suceed the proprietory concern because unlike amalgamation / demerger of the undertaking Section 80IB does not carve out an exception in case of succession of the business which is the case with you.

Regards,

Chintan

Dear Sathyanarayan,

Plz ignore

Perfect answer by Friend Chintan.........

Just want to add that Transfer (From properitorship to company) would be exempt u/s 47........

If it is a high profit making unit then u should defer this conversion for remaining period of 80 IB

Dear Chintanshah,

I read the complete section. I didn't come across a provision where it is given that such conversion will disqualify the claim.

If you come across the provsion we can identify that

Conversion of proprietory concern into company is not

1. Splitting up of undertaking or

2. Reconstruction of undertaking. I have read a case law which state that mere change of ownership does not constitute Reconstruction.

The deduction is provided for doing manufacturing activity in backward arears.]]

They are converting it into company for achieving some competative status and bank finance. But the basic reason for deduction does not change. So i think deduction will be still available.

Dear Sathyanarayan,

Plz ignore

Although U asked friend Chintan to answer but let me share my views -

1) Sec 80IB itself provide that unit/undertaking should not be formed by way of reconstructionj of business already in existence

2) U r rite that the basic purpose/objective has not changed but bhai had that been the case Sec 80IB would not have provided for amalgamation/merger

3) Further exemption provided by Sec 47 on conversion of Properitorship into Company would not be required, For Income tax what is relevant is exemption was granted to an assessee (properietor) & now the assesee has changed therefore  deduction u/s 80IB cannot be claimed by the Co.

Sir,

I you see the section you will never find word assessee.

The exemption is given for Industrial undertaking.

I view it like that only.

I have seen a case where they said that Mere change of ownership does not constiture reconstrution.

Please do reply

Dear Sathyanarayn,

Bhai u were rite, DEDUCTION WILL BE AVAILABLE.........

JUST LOOK AT THIS JUDGEMENT (it was given under old Income Tax Act)

LAST 4 LINES SUMS UP THE ENTIRE STORY............

https://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2008ITAct/%5B1959%5D035ITR0662(Bom).htm

Thanks for the link.

thank you very much.

We were in need of it.

Dear friends amirbhai and sathyanarayan bhai,

You are quite correct regarding the allowability of deduction u/s 80IB. This is because:

1. Reconstruction of business is different from business resturcturing. When the ownership structure of the business is changed it is business restructuring. Reconstruction of business means when one carries on the same business say at some other place or mordernises by purchasing some new machinery, but the investment in machinery is not substantial and there is no new business. It is only the manner in which the business is carried on that has changed. The business has remained the same. Hence there is no reconstruction of business in the aforesaid case. Its only business restructuring.

2. The second thing is that the conditions specified u/s 80IB(2) is to be satisfied by the industrial undertaking in the initial assessment year (i.e. the assessment year relevant to the previous year in which the industrial undertaking started its activities.) If once this condition is satisfied, the industrial undertaking becomes an eligible industrial undertaking. Now Section 80IB(1) reads that subject to the provisions of Section 80IB(3) to (11), (11A), etc. if the income of the assessee includes the income from an eligible industrial undertaking than he shall get a deduction at the rates specifies in the respective sub sections in respect of the profits of the undertaking. Hence once the industrial undertaking becomes an eligible industrial undertaking, no matter whoever assessee owns it will be eligible for deduction in respect of the profits of that industrial undertaking at the specified rates.

3. Section 80IB(12) only explains that in case of amalgamation or demerger to whom deduction shall be allowed and who will not be eligible for deduction in the A.Y. relevant to the P.Y. in which amalgamation takes place and subsequent years. It does not create a rider to the conditions specified in Section 80IB (2). Had such been the case the amalgamated company would be eligible for fresh period of specified years. This is because had such rider been created the undertaking be considered as new industrial undertaking being an exception to Section 80IB(2). Hence the year of amalgamation would be the initial assessment year for the purposes of section 80IB and fresh period of deduction would have started.

Lastly I will like to advice one thing. Please don't take too much reliance on judgements while advising clients. Believe me its dangerous. There may be contrary judgement that you might not be aware of. There is a big risk of going the wrong way... Try to rely as much on facts and your independent interpretation of the law....

Well I' ll also thank friend sathyanarayan for bringing such a good case to the forum.. friend you really contributed... Thanks a lot....

Regards,

Chintan Shah

Friends,

P.S. to above: The question now remains is who, the proprietorship or the newly formed company will be eligible to take deduction in the year of succession?

I personally think it will be on actual basis. two sets of P&L will have to be prepared for the industrial undertaking and profits for the two periods will have to be computed seperatly. This is ofcourse if the succession takes place during the F.Y.

Like amalgamation or demerger the law doesnot specify how to claim deduction in the year of restructuring.

Pls feel free to express your opinion..

Regards,

Chintan

I too have the same doubt.

We are in discussion in our office regading the issue.

I personally feel the both will be eligible to the extent of their income.

Please do share what is the final outcome of the discussion at your office... when you get to know of it....

Sure.