11.
Mahabir Industries vs. Pr. CIT (2018) 406 ITR 315 (SC)
Industrial undertaking – Deduction u/s.
80IA, 80IB and 80IC – The Assessees had started claiming and were allowed
deductions from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from
the Assessment Year 2000-01 to Assessment Year 2005-06 under section 80-IB of
the Act and thus were entitled to the deduction under the new provision i.e.
section 80-IC on fulfilling conditions contained in sub-section (2) of section
80-IC for the first time for the Assessment Year 2006-07
The Assessee
manufactured polythene for which it had its factory in Shimla, Himachal
Pradesh. The activity undertaken by the Assessee, an industrial undertaking,
qualified for exemption from income tax u/s. 80-IA of
the Act.
This deduction
under section 80-IA was claimed and allowed for two Assessment Years i.e.
1998-99 and 1999-2000.
Section 80-IA of the
Act was originally introduced in the year 1991 by the Finance (No. 2) Act, 1991
w.e.f. April 1, 1991. There were amendments in the section from time to time.
This section was amended by the Finance Act, 1999 w.e.f. April 1, 2000. Along
with this provision, section 80-IB was also introduced for the first time by
the same Finance Act, 1999.
From the Assessment
Year 2000-01 to Assessment Year 2005-06, the Assessee claimed deduction u/s.
80-IB.
Another provision
in the form of section 80-IC was inserted by Finance Act, 2003 w.e.f. April 1,
2004. The provisions of section 80-IC provided deduction to manufacturing units
situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and
North-Eastern States. The deduction was provided to new units established in
the aforesaid States, and also to existing units in those States if substantial
expansion was carried out.
The Assessee completed substantial expansion (by investing in new plant
and machinery of value more than 50% of the value of plant and machinery
already installed as on 1 April, 2005) to the manufacturing unit situated at
Baddi, Himachal Pradesh in the Assessment Year 2006-07. In view of the
substantial expansion, the Assessee claimed deduction u/s. 80-IC @100% for
Assessment Years 2006-07 and 2007-08, which was also allowed by the Assessing
Officer (AO) after passing the order u/s. 143(3) of the Act.
However,
thereafter, deductions for the Assessment Year 2008-09 and Assessment Year
2009-2010 were rejected by the AO on the ground that this was 11th
and 12th year of deduction and as per section 80-IC(6), total
deductions u/s. 80-IC and section 80-IB cannot exceed the total period of ten
years. Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal
upheld the order of the AO. The High Court dismissed the appeals on the ground
that it cannot claim deduction u/s. 80-IC, 80-IB or 10C for a period exceeding
ten years.
The Assessee framed
the questions of law in the appeal before the Supreme Court:
(a) Whether the Hon’ble High Court was justified
in holding that the Petitioner was not entitled to deduction u/s. 80-IC of the
Act by virtue of provision s/s. (6), when the same was not even applicable to
the Petitioner?
(b) Whether the Hon’ble High Court was justified in
holding that the provisions of section 80-IC(6) of the Act apply to all the
undertaking claiming deduction u/s. 80-IB(4) of the Act when 80-IC(6) refers to
only those undertakings which are covered by second proviso to section
80-IB(4)?
(c) Whether the Hon’ble High Court was justified
in holding that the Petitioner is not eligible for deduction u/s. 80-IC for a
period of 10 assessment years when substantial expansion was carried out by the
Petitioner and a substantially new unit was claiming deduction u/s. 80-IC of
the Act?
(d) Whether the Hon’ble High Court was justified in
holding that the Petitioner was not entitled to deduction u/s. 80-IC of the Act
for assessment year 2008-09 and 2009-10 when the total period of deduction of
ten years was expiring after assessment year 2009-10?
The Supreme Court
noted that the High Court judgment had taken a categorical view that the moment
‘substantial expansion’ is completed as per section 80-IC(8)(ix), the statutory
definition of ‘initial assessment year’ {Section 80-IC(8)(v)} comes into play.
As a consequence, section 80-IC(3)(ii) would entitle the unit to hundred per
cent deduction for five years commencing with completion of ‘substantial
expansion’ followed by twenty-five per cent deduction for next five years i.e.
subject to maximum of ten years. According to the Supreme Court, the High
Court, thus, accepted that when the substantial expansion is done in a
particular Assessment Year and that is made during the period mentioned in
sub-section (2) of section 80-IC, not only benefit admissible u/s. 80-IC shall
get triggered, the year in which such substantial expansion is completed is to
be treated as ‘initial assessment year’. Having said so, it has put a cap of
ten years by invoking the provision of section 80-IC(6). According to the
Supreme Court, as per the provisions of sub-section (6) of section 80-IC, no
deduction is allowed to any undertaking or enterprise under that section, where
the total period of deduction inclusive of the period of deduction under that
section, or under the second proviso to sub-section (4) of section 80-IB or
u/s. 10C, as the case may be, exceeds ten assessment years. The total period of
ten years, thus, is to be counted in the following three circumstances:
(a) When the
deduction has been given u/s. 80-IC for a period of ten years, no further
deduction is admissible.
(b) When the
deduction is given under second proviso to sub-section (4) of section 80-IB.
The said second
proviso reads as under:
Provided further
that in the case of such industries in the North-Eastern Region, as may be
notified by the Central Government, the amount of deduction shall be hundred
per cent of profits and gains for a period of ten assessment years, and the
total period of deduction shall in such a case not exceed ten assessment years.
This provision
pertains to those industries which are in the North-Eastern Region.
(c) When the deduction is claimed u/s. 10C.
It is again a
special provision in respect of certain industrial undertakings in
North-Eastern Region.
The Supreme Court
held that the Assessee in the instant case had not got deduction u/s. 80-IC for
a period of ten years as he started claiming deduction under this provision
w.e.f. Assessment Year 2006-07. Situation Nos. (b) and (c) mentioned above would
not apply to the Assessee as it’s undertaking/enterprise was not established in
North-Eastern Region. It was, thus, clear that the High Court had failed to
appreciate that the provisions of section 80-IC(6) of the Act state that the
total period of deduction u/s. 80-IC and section 80-IB cannot exceed ten
assessment years only if the manufacturing unit was claiming deduction under
second proviso to section 80-IB(4) of the Act i.e. units located in the
North-Eastern State.
According to the
Supreme Court, the matter could be looked into from another angle. U/s. 80-IA,
deduction is provided to such industrial undertakings or enterprises which are
engaged in infrastructure development etc., provided they fulfill the
conditions mentioned in s/s. (4) thereof. Section 80-IB makes provisions for
deduction in respect of those industrial undertakings, other than
infrastructure development undertakings, which are enumerated in the said
provision. On the other hand, the intention behind section 80-IC is to grant deduction
to the units making new investments in the State by establishing new
manufacturing unit or even to the existing manufacturing unit which carried out
substantial expansions. The purport behind the three types of deductions
specified in section 80-IA, section 80-IB and section 80-IC was, thus,
different. Section 80-IC stipulates the period for which hundred per cent
deduction is to be given and then deduction at reduced rates is to be given. If
the Assessee had earlier availed deduction u/s. 80-IA and section 80-IB, that
would be of no concern in as much as on carrying out substantial expansion, which
was carried out and completed in the Assessment Year 2006-07, the Assessee became entitled to deduction u/s. 80-IC from the initial
year. The term ‘initial year’ is referable to the year in which substantial
expansion has been completed, which legal position was stated by the High Court
itself and even accepted by the Department as it had not challenged that part
of the judgment.
The inclusion of
period for the deduction is availed u/s. 80-IA and section 80-IB, for the
purpose of counting ten years, is provided in sub-section (6) of section 80-IC
and it is limited to those industrial undertakings or enterprises which are
set-up in the North-Eastern Region. By making specific provision of this kind,
the Legislature had shown its intent, namely, where the industry is not located
in North-Eastern State, the period for which deduction is availed earlier by an
Assessee u/s. 80-IA and section 80-IB would not be reckoned for the purpose of
availing benefit of deduction u/s. 80-IC of the Act.
The Supreme Court
observed that insofar as the factum of substantial expansion of the
Assessee’s unit in the Assessment Year 2006-07 was concerned, the same was not
subject matter of any controversy in the instant case. It hads been accepted by
the Department that Assessee had carried out substantial expansion. Precisely,
for this reason, the AO had allowed deduction for Assessment Years 2006-07 and
2007-08. Therefore, issue was not as to whether there is a substantial
expansion or not. The issue was only as to how a period of ten years was to be
calculated, namely, whether those Assessment Years in respect of which
deduction u/s. 80-IA and section 80-IB was allowed were to be counted for the
purpose of giving deduction u/s. 80-IC.
The Supreme Court
was of the opinion that it was wrong on the part of the AO not to allow
deduction to the Assessee u/s. 80-IC for the Assessment Years 2008-09 and
2009-2010. As a result, the judgment of the High Court on this aspect was set
aside and the appeals were accordingly allowed.
12. CIT vs. Classic Binding Industries (2018) 407 ITR 429 (SC)
Industrial undertaking – Deduction u/s.
80IC – After availing deduction for a period of 5 years @ 100% of such profits
and gains from the ‘units’, the Assessees would be entitled to deduction for
remaining 5 Assessment Years @ 25% (or 30% where the Assessee is a company), as
the case may be, and not @ 100%.
The Assessee firm
derived income from manufacturing of printed embossed book binding cover
material of cotton in sheet form and security fiber of dual coloured
combination. The Assessee firm comprised of nine partners during the relevant
assessment year. The Assessee started its business activity/operation on 11th
July, 2005 and initial Assessment Year for claim of deduction u/s. 80-IC of the
Act was Assessment Year 2006-07. The Assessee had already claimed deduction
u/s. 80-IC to the extent of the 100% eligible profit for five Assessment Years
2006-07 to Assessment Year 2010-11. However, it was noticed that the Assessee
firm had again claimed 100% deduction against eligible profits in the relevant
Assessment Year 2012-13 which is seventh year of production for the firm by
claiming substantial expansion in Financial Year 2010-11.
The Assessee was
asked to furnish the reasons and justification for the said claim of 100% as
against the eligible norm of 25%. The Assessee submitted its reasons for claim
stating that the Assessee fulfills all the conditions for the claim of 100%
deduction.
The Assessing
Officer found that in view of the provisions of section 80-IC of the Act
Assessee firm had already claimed deduction u/s. 80-IC of the Act at the rate
of 100% for five years from Assessment Year 2006-07 to Assessment Year 2010-11,
i.e., from the date of setting up of the industrial undertaking and in view of
the same, it would be eligible for claim of deduction @ 25% of its eligible
business profits for the remaining five years, i.e., from Assessment Year
2011-2012 to Assessment Year 2015-2016. The Assessing Officer denied the claim
of the enhanced deduction in view of the substantial expansion was claimed by
the Assessee and, accordingly, restricted the deduction to 25% of eligible
profits for the assessment year 2012-13.
On appeal, the
CIT(A) following the decision of the jurisdictional Tribunal in the case of Hycron
Electronics vs. ITO and other related cases, upheld the order of the
Assessing Officer and dismissed the appeal of the Assessee for 100% deduction.
Feeling aggrieved,
the Assessee filed further appeal before the ITAT. While observing that both
the parties agreed that the issue involved in appeals, was squarely covered
against the Assessee in view of the decision of the coordinate bench of ITAT in
the case of Hycron Electronics, dismissed the appeal by a composite order for
Assessment Years 2011-12 and Assessment Year 2012-13 by holding that Assessee
was eligible for deduction u/s. 80 of the Act @ 25% of the profit derived from
industrial undertaking for these years and not @ 100% of deduction claimed by
the Assessee.
Dissatisfied with
the aforesaid order, Assessee filed appeal u/s. 260A before the High Court of
Himachal Pradesh, Shimla raising therein substantial questions of law. The
result of other Assessees was also on almost same pattern, who filed their
respective appeals as well. The High Court decided the issue in a composite
judgment, in favour of all these Assessees. The High Court held that there was
no restriction that undertaking or enterprise established after 7th
January, 2003 could not carry out ‘Substantial Expansion’ and could not be
carried out more than once as long as period of eligibility for claiming
deduction u/s. 80-IC of the Act.
The Supreme Court
noted the provisions of section 80IC of the Act and observed that whereas the
exemption is provided @ 100% of such profits and gains for five assessment
years commencing with the initial assessment years and, thereafter, 25% (or 30%
where the Assessee is a company) of the profits and gains for next five years.
The deduction is limited to a period of 10 years.
In this backdrop,
according to the Supreme Court, the question before it was as to whether these
Assessees, who had availed deductions @ 100% for first five years on the ground
that they had set up a manufacturing unit as prescribed under s/s. (2) of the
Act, could start claiming deductions @ 100% again for next five years as they
had undertaken “substantial expansion” during the period mentioned in
s/s. (2)?
The Supreme Court
noted that in the instant case, it was concerned with the Assessees who had
established their undertakings in the State of Himachal Pradesh. S/s. (3),
mentions the period of 10 years commencing with the initial Assessment Year.
S/s. (6) puts a cap of 10 years, which is the maximum period for which the
deduction can be allowed to any undertaking or enterprise under this section,
starting from the initial Assessment Year. Another significant feature under
s/s. (3) is that the deduction allowable is 100% of such profits and gains from
an undertaking or an enterprise for five Assessment Years commencing with the
initial Assessment Year and thereafter the deduction is allowable at 25% (or
30% where the Assessee is a company) of the profits and gains. Cumulative
reading of these provisions brings out the following aspects:
(a) Those undertakings or enterprises fulfilling
the conditions mentioned in sub-section (2) of section 80-IC become entitled to
deduction under this provision.
(b) This deduction is allowable from the initial
Assessment Year. “Initial Assessment Year” is defined in section
80-IB(14)(c) of the Act.
(c) The deduction is @ 100% of such profits and
gains for first 5 Assessment Years and thereafter a deduction is permissible @
25% (or 30% where the Assessee is a company).
(d) Total period of deduction is 10 years, which
means 100% deduction for first 5 years from the initial Assessment Year and 25%
(or 30% where the Assessee is a company) for the next 5 years.
According to the
Supreme Court, keeping in mind the aforesaid scheme and spirit behind this
provision, such a situation could not be countenanced where an Assessee is able
to secure deduction @ 100% for the entire period of 10 years. If that was
allowed it would amount to doing violence to the provisions of sub-section (3)
read with sub-section (6) of section 80-IC. A pragmatic and reasonable interpretation
of section 80-IC would be to hold that once the initial Assessment Year
commences and an Assessee, by virtue of fulfilling the conditions laid down in
sub-section (2) of Section 80-IC, starts enjoying deduction, there cannot be
another “Initial Assessment Year” for the purposes of section 80-IC
within the aforesaid period of 10 years, on the basis that it had carried
substantial expansion in its unit.
The Supreme Court
expressly stated that it was conscious of its recent judgment in Mahabir
Industries vs. Principal Commissioner of Income Tax (406 ITR 315). However,
a fine distinction needed to be noted between the two sets of cases. In Mahabir
Industries, the Assessees had availed the initial deduction under a different
provision, namely, section 80-IA of the Act, i.e. by fulfilling the conditions
mentioned in sub-section (4) of section 80-IA. Those conditions were altogether
different. Deduction in respect of profits and gains under the said provision
was admissible when these profits and gains are from industrial undertakings or
enterprises engaged in infrastructure development etc. Even this availment
started at a time when section 80-IC was not even on the statute book. Section
80-IC was inserted by the Finance Act, 2003 with effect from April 01, 2004.
The Assessees in those cases had started claiming and were allowed deductions
from the Assessment Years 1998-99 and 1999-2000 u/s. 80-IA and from the
Assessment Year 2000-01 to Assessment Year 2005-06 u/s. 80-IB of the Act. The
deduction was, thus, claimed by the Assessees in those appeals under the new
provision i.e. section 80-IC on fulfilling conditions contained in sub-section
(2) of section 80-IC for the first time for the Assessment Year 2006-07. Thus,
insofar as those cases were concerned, the initial Assessment Year u/s. 80-IC
started only from the Assessment Year 2006-07. In contrast, position here was
altogether different. These Assessees had availed deduction u/s. 80-IC alone.
Initially, they claimed the deduction on the ground that they had set up their
units in the State of Himachal Pradesh and after availing the deduction @ 100%
they wanted continuation of this rate of 100% for the next 5 years also under
the same provision on the ground that they had made substantial expansion. The
Supreme Court held that, as pointed out above, once the Assessees had started
claiming deduction u/s. 80-IC and the initial Assessment Year has commenced
within the aforesaid period of 10 years, there could not be another initial
Assessment Year thereby allowing 100% deduction for the next 5 years also when
s/s. (3), in no uncertain terms, provides for deduction @ 25% only for the next
5 years. Also, the Assessees accepted the legal position that they could not
claim deduction of more than 10 years in all u/s. 80-IC.
The Supreme Court therefore held that after
availing deduction for a period of 5 years @ 100% of such profits and gains
from the ‘units’, the Assessees would be entitled to deduction for remaining 5
Assessment Years @ 25% (or 30% where the Assessee is a company), as the case
may be, and not @ 100%. The question of law was, thus, answered in favour of
the Revenue thereby allowing all these appeals.
