Bombay High Court

Pr. Commissioner Of Income Tax - 2 vs Mahindra Engineering Services Ltd on 13 November, 2025

Author: B. P. Colabawalla

Bench: B. P. Colabawalla

   2025:BHC-OS:21231-DB


                                                                                              9.itxa.18.2019.doc



                                 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                                       ORDINARY ORIGINAL CIVIL JURISDICTION


                                             INCOME TAX APPEAL NO.18 OF 2019

                       Principal Commissioner of Income Tax-2                                   .. Appellant

                                  Versus

                       Mahindra Engineering Services Limited                                    .. Respondent

          Digitally
          signed by
          UTKARSH
                            Ms. Samiksha Kanani a/w Gayatri Naik, Advocates for the
UTKARSH   KAKASAHEB
KAKASAHEB BHALERAO
BHALERAO Date:
                            Petitioner.
          2025.11.18
          12:06:07
          +0530

                            Mr. J. D. Mistri, Senior Advocate a/w Harsh Kapadia i/b
                            Atul K. Jasani, Advocates for Respondents.

                                                   CORAM           : B. P. COLABAWALLA &
                                                                       AMIT S. JAMSANDEKAR, JJ.

                                                   DATE            : NOVEMBER 13, 2025

                       P. C.

1. The above Appeal has been filed by the Appellant/Revenue

challenging the order dated 20th March 2018 passed by the Income Tax

Appellate Tribunal [ITAT]. According to the Revenue, the impugned

order gives rise to the following substantial question of law.

i. Whether on facts and circumstances of the case and in law, Hon'ble ITAT is correct in allowing the deduction u/s 10A of the Act, ignoring the fact that the assessee's undertaking-STP Unit was formed by splitting

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up/reconstruction of business already in existence and therefore the new undertaking did not fulfill the second condition laid down in Section 10A(2) of the Income Tax Act, 1961.

2. The Respondent Assessee company filed its Return of

Income on 14th November 2007 declaring an income of Rs. "Nil". The

Nil income consists of a loss of Rs.95,46,150/- as per the assessee's

computation of income. The return was processed under Section 143(1)

on 20th March 2009. The case was thereafter selected for scrutiny and a

notice was issued under Section 143(2) which was served on the

assessee. In the scrutiny proceedings, the Assessing Officer passed an

order on 30th December 2009 under Section 143(3) of the Income Tax

Act, 1961 [for short "the IT Act"]. By this order, the Assessing Officer,

inter alia denied the assessee the deduction under Section 10A of the IT

Act.

3. Being aggrieved by the decision of the Assessing Officer, the

assessee preferred an Appeal before the CIT (Appeals). The CIT

(Appeals), by his order dated 7 th January 2011, inter alia held that the

assessee is entitled to the deductions under Section 10A. This finding

was primarily given on the basis that the assessee had not undertaken

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any reconstruction or splitting up of its business by setting up a new

unit in the Software Technology Park at Pune and hence was entitled to

the deduction.

4. Being aggrieved by this order of the CIT (Appeals), the

Revenue preferred an Appeal before the ITAT. The ITAT also, on this

issue, confirmed the findings of the CIT (Appeals) and dismissed the

Appeal of the Revenue. This is how the above Appeal is filed before us

under Section 260A of the IT Act.

5. After hearing the learned advocate appearing on behalf of

the Appellant/Revenue as well as Mr. Mistri, the learned senior counsel

appearing on behalf of the assessee, we are clearly of the view that the

question of law as projected in the above Appeal, does not give rise to

any substantial question of law. We say this because the CIT (Appeals)

as well as the ITAT, on facts have come to the conclusion that the setting

up of the STP Unit at Pune by the Respondent assessee did not amount

to reconstruction or splitting up of their existing business. There is a

detailed discussion on this aspect by the CIT (Appeals) from paragraph

4.3 onwards in the order dated 7 th January 2011. The learned

Commissioner opined that the conclusion drawn by the Assessing

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Officer was primarily on the purchase order dated 15 th October 2004

and the sameness of the services in the pre-existing non STPI unit and

the comparable rates of pre-STPI and post-STPI jobs. The CIT (Appeals)

looking into the scope of the work of the STPI unit, the investment and

new infrastructure in the unit, deployment of personnel and the scope

and magnitude of the work as mentioned in the final contract with

International Truck and Engine Corporation (ITEC), found that the

Assessing Officer's decision is based on an inadequate premise. To this

end, the CIT (Appeals) came to the conclusion that the purchase order

dated 15th October 2004 was in connection with only a Pilot Project

mounted to test the ability of the assessee to do business on a magnitude

and level compatible to the expectations of ITEC. The CIT (Appeals)

noted that the work given for the Pilot Project was initially for a sum of

Rs.9.3 Crores only. As against this, after signing the contract with ITEC

the STP Unit earned revenues of Rs.42.74 Crores. The CIT (Appeals)

opined that it was obvious that the meager revenue earned by virtue of

the purchase order only underlined the point that the character of the

STP unit cannot be tested on this basis, as the scale and magnitude of

the work actually expected was much higher. This expectation was

correctly reflected in the Comprehensive Engineering Services

Agreement dated 9th December 2005 entered into by ITEC with the

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Respondent assessee. The CIT (Appeals) also noted that as per

paragraph 2.3 of the said agreement, with the commencement thereof,

the purchase order dated 15 th October 2004 stood terminated and

superseded by the said agreement. The CIT (Appeals) came to the

conclusion that this did not represent continuation of the same

business, but start of new business which was different because of its

range, scale and skill sets required. He also came to the conclusion that

this would further indicate that the work in relation to the purchase

order was only an interim arrangement which is not a true reflection of

the real scope of work of the agreement with ITEC.

6. Apart from this, the CIT (Appeals) took note of various

other facts to come to the conclusion that the findings given by the

Assessing Officer were incorrect. The CIT (Appeals) noted that the

Respondent assessee had applied for STP registration and signed the

agreement with ITEC only after receiving the STP registration. Further

50,800 sq. ft. of new premises were acquired on rent and fixed assets

worth Rs.7 Crores were put in place. The infrastructure put in place

included setting up of work stations, installation of sophisticated

systems and machinery, designing of new software, Team Centre

Multisites etc. The CIT (Appeals) also noted that a large number of new

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personnel were identified and deployed in the STP unit. In fact by

December 2006 the number of employees increased to 192. The infusion

of investment, infrastructure and personnel on this scale would clearly

indicate that by virtue of the agreement of the Respondent assessee with

ITEC, it was making an entry into a new domain of business, otherwise

for an existing business, such large scale infusion would be neither

necessary nor strategically desirable, was the finding of the CIT

(Appeals).

7. The CIT (Appeals) also took note of certain high end jobs

that were undertaken by the assessee after the signing of the agreement

with ITEC. Prior to setting up the STP, the Appellant carried out small

jobs based on purchase orders raised. Further, taking into consideration

that the said exemption was allowed for the earlier Assessment Year,

and there being no significant and material change of facts in the year

under consideration, the CIT (Appeals) came to the conclusion that the

present case did not fall within the words "splitting up, or the

reconstruction of a business already in existence" appearing in Section

10A(2)(ii) of the IT Act. To come to the conclusion that he did, the CIT

(Appeals) also referred to the judgment of the Hon'ble Supreme Court in

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the case of Textile Machinery Corporation Limited V/S

Commissioner of Income Tax [(1977) 107 ITR 195 (SC)].

8. This finding of the CIT (Appeals) was confirmed by the

ITAT in the impugned order in paragraph 12. The ITAT came to the

conclusion that the observations of the CIT (Appeals) was based on the

evidence on record and in accordance with the settled principle of law.

The ITAT therefore did not find any reason to interfere with the order

passed by the CIT (Appeals) on this aspect.

9. When one looks at the observations of the CIT (Appeals) as

well as that of the ITAT, we are clearly of the view that the findings that

have been rendered therein are wholly fact based. In fact, in our view,

the CIT (Appeals) after analyzing the facts has correctly applied the ratio

of the Hon'ble Supreme Court in the case of Textile Machinery

Corporation Ltd (supra).

10. Further, the judgment in Textile Machinery Corporation

Ltd (supra) was considered by this Court in the case of Commissioner

of Income Tax-V, Pune V/S Finolex Cables Limited [(2012) 24

taxmann.com 279 (Bom.)]. Though this Court was considering the

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provisions of Section 80-I(2)(i) in the said judgment, the said Section

provided that the deduction under 80-I(2)(i) would be available only to

an industrial undertaking which is inter alia not formed by splitting up,

or the reconstruction of a business already in existence.

11. This Court, after examining and analyzing the judgment of

the Hon'ble Supreme Court in Textile Machinery Corporation Ltd

(supra) as well as the judgment of the Hon'ble Supreme Court in the

case of Commissioner of Income Tax V/S Indian Aluminum

Company Limited [(1977) 108 ITR 367], held as under:-

"12. The issue which arises before the Court in the appeal is not res-integra. In Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC) the Supreme Court considered the ambit of the exemption that was available under the provisions of Section 15C(2)(i) of the Income Tax Act, 1922. The Supreme Court held that Section 15C had both a negative and a positive connotation. Negatively, a new industrial undertaking should not be formed either by splitting up or reconstruction of a business already in existence or transferring to a new business, the building, plant and machinery which was used in the business carried out earlier. Positively, a new industrial undertaking must produce a result. The five tests which have been laid down by the Supreme Court are as follows:--

"(1) investment of substantial fresh capital in the industrial undertaking set up;

(2) employment of requisite labour therein; (3) manufacture or production of articles in the said undertaking;

(4) earning of profits clearly attributable to the said new

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undertaking; and (5) above all, a separate and distinct identity of the industrial unit set up."

13. The following principles of law clearly emerge from the decision of the Supreme Court:--

(i) There must be a new undertaking where substantial investment of fresh capital is made in order to enable earning of profit attributable to that new capital;

(ii) The manufacturing or production of articles yielding additional profit attributable to a new outlay of capital in a separate and distinct unit is the heart of the matter;

(iii) The true test is not whether a new industrial undertaking connotes expansion of the existing business, but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business;

(iv) If an undertaking can exist even after cessation of the principal business of the Assessee, it cannot but be a new and separate business or undertaking;

(v) There must be a new undertaking which constitutes an integrated unit by itself;

(vi) A new unit must be set up with new plant and machinery;

and

(vii) The fact that a Unit produces the same commodity does not disentitle the Assessee to the benefit of the deduction.

14. On the same day, as the decision in Textile Machinery Corpn. Ltd. (supra), the same Bench of the Supreme Court decided an appeal in CIT v. Indian Aluminum Co. Ltd. [1977] 108 ITR 367. The decision in Indian Aluminum Co. Ltd. (supra) is significant because in that case the Assessee, which had four manufacturing centres for manufacture of aluminum ingots, had during the course of the accounting year relevant to the Assessment Year made a fresh outlay of capital at one more centre besides which additional investments were made in the form of extension to the existing factory premises where a new plant and machinery was installed. The Tribunal held that as a result, the production of aluminum ingots doubled and that in

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view of the nature of the substantial investments it could not be said that the unit was not a new unit. These units were set up side by side with the old ones and added to the Assessee's total output. The Supreme Court followed its decision in Textile Machinery Corpn. Ltd. (supra) and dismissed the appeal of the Revenue. Indian Aluminum Co. Ltd. (supra), therefore, was a case where the claim of the Assessee was upheld on the basis of the substantial investments made by the Assessee, resulting in a significant increase in the capacity of production though the new unit was involved in the production of the same goods. The test was that a new unit was a separate industrial undertaking by itself."

emphasis supplied

12. What is important to note in this decision is that this Court

noted that in Indian Aluminum Company Limited (supra) was a case

where the claim of the assessee was upheld on the basis that substantial

investments were made by the assessee, resulting in a significant

increase in the capacity of production, though the new unit was involved

in the production of the same goods.

13. Once this is the case, we find that the question of law as

projected by the Revenue does not give rise to any substantial question

of law requiring an answer by this Court. As mentioned earlier, we say

this because not only because the findings given are purely factual in

nature, but we find that the law has been correctly applied by the CIT