GLIMPSES OF SUPREME COURT RULINGS

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 11^th and 12^th 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 11^th 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 7^th 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.