By K. B. Bhujle
Advocate
Stovekraft India vs. CIT; [2017] 88
taxmann.com 225 (HP)
The assessee started its business activity
with effect from 06/01/2005 and treating the F. Y. 2005-2006 (A. Y. 2006-2007),
as initial assessment year, claimed deduction on profits at the rate of 100 per
cent u/s. 80-IC of the Act. Sometime in
the F. Y. 2009-10, the assessee carried out ‘substantial expansion’ of the
‘Unit’ and by treating the said Financial Year to be the ‘initial assessment
year’, further claimed deduction at the rate of 100 per cent, instead of 25 per
cent, u/s. 80-IC. The Assessing Officer denied the claim of deduction at the
rate of 100 per cent with effect from Financial Year 2009-10 after undertaking
‘substantial expansion’, so carried out holding that the assessee was not
entitled to deduction not at the rate of 100 per cent but on reduced basis at
the rate of 25 per cent, as provided u/s. 80-IC. He concluded that only such of
those units, existing prior to incorporation of section 80-IC in the statute,
i.e. 07/01/2003, could undertake substantial expansion and units established
subsequent to the said date being termed as ‘new industrial units’ were
ineligible for exemption u/s. 80-IC, even though they might had carried out any
expansion, substantial or otherwise. He held that, for the purpose of section
80-IC, the assessee can have only one assessment year as initial assessment
year. The Tribunal upheld the decision of the Assessing Officer.
On appeal by the assessee, the Himachal Pradesh
High Court reversed the decision of the Tribunal and held
as under:
“i) What is of importance is
the stipulation under sub-clause (ii) of clause (b) of sub-section 2 of section
80-IC, insofar as State of Himachal Pradesh is concerned. If between 07/01/2003
and 01/04/2012, a ‘Unit’ has ‘begun’ or ‘begins’ to manufacture or produce any
article or thing, specified in the Fourteenth Schedule or commences any
operation ‘and undertakes substantial expansion’ during the said period, then
by virtue of sub-section (3), it shall be entitled to deduction at the rate of
100 per cent of profits and gains for five assessment years, commencing from
‘initial assessment year’ and thereafter at the rate of 25 per cent of the
profits and gains. The only restriction being that such substantial expansion
is not formed by splitting up, or reconstruction, of the business already in
existence. At this stage, it is noted that under sub-section (6) of section
80-IC, there is a cap(10 years) with regard to the total period for which a
‘Unit’ is entitled to such deduction.
ii) Can there be more than one
‘initial assessment year’, as the authorities below have held it not to be so?
Clause (v) of sub-section (8) of section 80-IC, defines what is an ‘initial
assessment year’. It is only for the purpose of this section. Now, ‘initial
assessment year’ has been held to mean the assessment year relevant to the
previous year in which the ‘Unit’ begins to manufacture or produce article or
thing or commences operation or completes substantial expansion. Significantly,
the Act does not stipulate that only units established prior to 07/01/2003
shall be entitled to the benefits u/s. 80-IC. The definition of ‘initial
assessment year’ is disjunctive and not conjunctive. The initial assessment year
has to be subsequent to the year in which the ‘Unit’ completes substantial
expansion or commences manufacturing etc., as the case may be.
iii) A bare look at Explanation
(b) of section 80-IB (11C) and section 80-IB(14)(c) would reflect that, earlier
[till section 80-IC was inserted with effect from 01/04/2004], ‘substantial
expansion’ was not included in the definition of ‘initial assessment year’.
Earlier definition had used words ‘starts functioning’, ‘company is approved’,
‘commences production’, ‘begins business’, ‘starts operating’, ‘begins to
provide services’. But section 80-IC (8)(v) changed wordings [of ‘initial
assessment year’] to ‘begins to manufacture’, ‘commences operation’, or
‘completes substantial expansion’. Thus, legislature consciously extended the
benefit of ‘initial assessment year’ to a unit that completed substantial
expansion.
iv) This is absolutely in
conjunction and harmony with clause (b) of sub-section (2) of section 80-IC,
which postulates two things – (a) an
undertaking or an enterprise has ‘begun’, it is in the past tense or (b)
‘begins’, which is in presenti. Significantly, what is important is the
word ‘and’ prefixed to the words ‘undertakes substantial expansion’ during the
period 07/01/2003 to 01/04/2012.
v) Words ‘commencing with the
initial Assessment Year’ are relevant. It is the trigger point for entitling
the unit, subject to the fulfillment of its eligibility for deduction at the
rate of 100 per cent, for had it not been so, there was no purpose or object of
having inserted the said words in the section. If the intent was only to give
100 per cent deduction for the first five years and thereafter at the rate of
25 per cent for next five years, the Legislatures would not have inserted the
said words. They would have plainly said, ‘for the first initial five years a
unit would be entitled to deduction at the rate of 100 per cent and for the
remaining five years at the rate of 25 per cent’.
vi) Thus, the question, which
further arises for consideration, is as to whether, it is open for a ‘Unit’ to
claim deduction for a period of ten years at the rate of 100 per cent or not.
It is legally permissible. The statute provides for the same.
vii) Also, ‘substantial
expansion’ can be on more than one occasion. Meaning of expression ‘substantial
expansion’ is defined in clause (8(ix)) of section 80-IC and with each such
endeavour, if the assessee fulfils the criteria then there cannot be any
prohibition with regard thereto. For what is important is not the number of
expansions, but the period within which such expansions can be carried out
within the window period [07/01/2003 to 01/04/2012], and it is here the words
‘begun’ or ‘begins’ and ‘undertakes substantial expansion’ during the said
period, as stipulated under clause (b) sub-section 2 of section 80-IC, to be of
significance. The only rider imposed is by virtue of sub-section (6) of section
80-IA, which caps the deduction with respect to assessment years to which a
unit is entitled to.
viii)The Act does not create distinction between the old units,
i.e., the units which stand established prior to 07/01/2003 (the cutoff date),
and the new units established thereafter. Artificial distinction sought to be
inserted by the revenue, only results into discrimination. The object, intent
and purpose of enactment of the section in question is only to provide
incentive for economic development, industrialisation and enhanced employment
opportunities. The continued benefit of deduction at higher rates is available
only to such of those units, which fulfil such object by carrying out
‘substantial expansion’.
ix) Both the Assessing Officer
as well as the Appellate Authority(s)/Tribunal erred in not appreciating as to
what was the intent and purpose of insertion of section 80-IC. Thus, in view of
the above discussion, these appeals are allowed and orders passed by the
Assessing Officer as well as the Appellate Authority and the Tribunal, in the
case of each one of the assessees, are quashed and set aside, holding as under:
a) Such of those undertakings
or enterprises which were established, became operational and functional prior
to 07/01/2003 and have undertaken substantial expansion between 07/01/2003 upto
01/04/2012, should be entitled to benefit of section 80-IC, for the period for
which they were not entitled to the benefit of deduction u/s. 80-IB.
b) Such of those units which
have commenced production after 07/01/2003 and carried out substantial
expansion prior to 01/04/2012, would also be entitled to benefit of deduction
at different rates of percentage stipulated u/s. 80-IC.
c) Substantial expansion
cannot be confined to one expansion. As long as requirement of section
80-IC(8)(ix) is met, there can be number of multiple substantial expansions.
d) Correspondingly, there can
be more than one initial assessment years.
e) Within the window period of
07/01/2013 upto 01/04/2012, an undertaking or an enterprise can be entitled to
deduction at the rate of 100 per cent for a period of more than five years.
f) All this, of course, is
subject to a cap of ten years. [Section 80-IC(6)].”
