PR. COMMISSIONER OF INCOME TAX SHIMLA versus M/S AARHAM SOFTRONICS on 20 February 2019

[2019] 4 S.C.R. 409

PR. COMMISSIONER OF INCOME TAX, SHIMLA

v.

M/S. AARHAM SOFTRONICS

(Civil Appeal No. 1784 of 2019)

FEBRUARY 20, 2019

[A. K. SIKRI, S. ABDUL NAZEER AND M. R. SHAH, JJ.]

Income Tax Act, 1961 – ss.80-IA, 80-IB, 80-IC – ‘InitialAssessment Year’ u/s.80-IC – U/s.80-IC an undertaking or enterprise,in certain special category states, which has inter alia, begun orbegins to manufacture or produce any article or thing by setting upa new factory in the area specified therein, is allowed, deductionfrom profits and gains u/sub-s.(3) of s.80-IC– Sub-s.(3) of s.80-ICinter alia states that a category of undertakings or enterprises(present cases belong to this category) are allowed exemption @100% of profits and gains for five assessment years commencingwith the initial assessment year and @ 25% of profits and gains forthe next five years, thus deduction being for a total of 10 years –Deduction was also provided to existing units if substantial expansionthereof was carried out – Assessees set up new industrial units andavailed 100% deduction for 5 years and after carrying out“substantial expansion” claimed deduction @ 100% instead of 25%for another 5 years – If entitled to – High Court answered inaffirmative – Held: Sub-sec.(6) of s.80-IC puts a cap of 10 years,which is the maximum period for which the deduction can be allowedto any undertaking or enterprise under this section, starting fromthe initial Assessment Year – Clause (v) of sub-sec.(8) of s.80-ICprovides definition of ‘initial assessment year’, for the purpose ofthis very section, i.e.s.80-IC – As per this definition, there can be‘initial assessment year’, relevant to previous year, in any of thefollowing contingencies:(i) the previous year in which theundertaking or the enterprise begins to manufacture or producearticle or things; or (ii) completes substantial expansion – Thus,benefit of s.80-IC is admissible not only when an undertaking orenterprise sets up new unit and starts manufacturing or producingarticle or things but, is also accrued to those existing units, if theycarry out “substantial expansion” of their units by investing required

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Acapital, in the assessment year relevant to the previous year – Thus,definition of ‘initial assessment year’ contained in clause (v) of sub-sec.(8) of s.80-IC can lead to a situation where there can be morethan one “initial assessment year” within the period of 10 years –Judgment in Classic Binding Industries holding that there cannotbe two assessment years within a span of 10 years u/sub-sec.(6) ofBs.80-IC does not lay down correct law – No reason as to why 100%deduction of the profits and gains be not allowed to even thoseunits who availed this deduction on setting up a new unit and havenow invested huge amount with substantial expansion of those units.

Income Tax Act, 1961 – ss.80-IB(14) and 80-IC –CHeld: s. 80-IB(14) starts with the words ‘for the purpose of thissection’ – Thus, ‘initial assessment year’ defined therein is relatableonly to the deductions that are provided under the provisions ofs.80-IB – s.80-IB is materially different from s.80-IC.

Income Tax Act, 1961 – s.80-IC – Purpose of – Explained.DDisposing of the appeals, the Court

Conclusion

HELD: 1.1 Sub-section (2) of Section 80-IC, Income TaxAct, 1961 applies to an undertaking or enterprise which has, interalia, begun or begins to manufacture or produce any article orEthing by setting up a new factory in the area specified thereinwhich includes State of Himachal Pradesh as well. Sub-section(3) of Section 80-IC inter alia states that a category ofundertakings or enterprises (present cases belong to thatcategory) where the exemption is at the rate of 100% of profitsand gains for five assessment years commencing with the initialFassessment year and, thereafter, 25% of profits and gains. Totalexemption, thus, is for a period of 10 years, namely, @100% for1st five years and @ 25% for remaining five years. The provisionsof Section 80-IC provided deduction to manufacturing unitssituated in the State of Sikkim, Himachal Pradesh and UttaranchalGand North-Eastern States. The deduction was provided to newunits established in the aforesaid States, and also to existing unitsin those States if substantial expansion was carried out.[Paras 8, 9][417-F-H; 418-A, B; 421-D, E]

1.2 Sub-section (3) mentions the period of 10 yearscommencing with the initial Assessment Year. Subsection (6) putsH

a cap of 10 years, which is the maximum period for which thededuction can be allowed to any undertaking or enterprise underthis section, starting from the initial Assessment Year. Anothersignificant feature under sub-section (3) is that the deductionallowable is 100% of such profits and gains from an undertakingor an enterprise for five Assessment Years commencing with theinitial Assessment Year and thereafter the deduction is allowableat 25% (or 30% where the assessee is a company) of the profitsand gains. [Para 10][422-A, B]

1.3 In Commissioner of Income Tax vs. M/s. ClassicBinding Industries case Supreme Court took the view that once‘initial assessment year’ starts on fulfilling the conditions laiddown in sub-section (2) of Section 80-IC, there cannot be another‘initial assessment year’ for the purposes of Section 80-IC withinthe aforesaid period of 10 years. While doing so, the Courtreferred to Section 80-IB(14)(c) of the Act, on the basis of whichan opinion was formed that there cannot be another ‘initialassessment year’ for the purpose of Section 80-IC within theaforesaid period of 10 years. This is the apparent error whichwas committed. Section 80-IB(14) starts with the words ‘for thepurpose of this section’. Thus, ‘initial assessment year’ definedtherein is relatable only to the deductions that are provided underthe provisions of Section 80-IB, namely, in respect of profits andgains from certain industrial undertakings other thaninfrastructure development undertakings. Section 80-IB ismaterially different from Section 80-IC of the Act. Inasmuch asSection 80-IC is a special provision in respect of certainundertakings, all enterprises mentioned in Section 80-IC arelimited in contrast with Section 80-IB, the deduction under thisSection is available only when such undertakings or enterprisesare established in particular States, Sikkim, Himachal Pradesh,Uttaranchal or any of the North-Eastern States. Further, Sub-section (3) of Section 80-IC mentions about the deduction that ispermissible, namely, 100% deduction of the profits and gains forfirst five years and 25% (or 30% where the assessee is a company)for the next five years. This sub-section, in any case, does notdeal with the ‘initial assessment year’. Clause (v) of sub-section(8) of Section 80-IC is the concerned provision which provides A

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Adefinition of ‘initial assessment year’, for the purpose of this verySection, i.e., Section 80-IC, which was not noticed whilepronouncing the judgment in Commissioner of Income Tax vs.M/s. Classic Binding Industries case. There is substance in thissubmission of the assessees. The Court has no hesitation toaccept this mistake which occurred in the aforesaid judgment.BThe Court specifically dealt with ‘initial assessment year’ andcame to conclusion that there cannot be two initial assessmentyears within a span of 10 years which is the maximum period forallowing deduction as per sub-section (6) of Section 80-IC. Asthe issue directly concerned with initial assessment year, itsCdefinition contained in that very Section was missed out. To thatextent, there is an error in the judgment dated 20[th] August, 2018in Classic Binding Industries case. [Paras 12, 13][423-B-H;424-A, B]

1.4 As per definition in Section 80-IC, there can be ‘initialDassessment year’, relevant to previous year, in any of the followingcontingencies: (i) The previous year in which the undertaking orthe enterprise begins to manufacture or produce article or things;or (ii) Commences operation; or (iii) Completes substantialexpansion. First two events are relatable to new units whereasthird incident would occur in respect of existing units. The benefitEof Seciton 80-IC is, thus, admissible not only when an undertakingor enterprise sets up new unit and starts manufacturing orproducing article or things. The advantage of this provisions isalso accrued to those existing units, if they carry out “substantialexpansion” of their units by investing required capital, in theFassessment year relevant to the previous year. “Substantialexpansion” is defined in clause (ix) of sub-section (8) of Section80-IC. As per the aforesaid definition, an existing unit would betreated as having carried out substantial expansion when thereis increase in the investment in the plant and machinery by atleast 50% of the book value of the plant and machinery (beforeGtaking depreciation in any year). In all these cases at hand, theassessees had initially set up new industry in the State of HimachalPradesh of the nature specified under Section 80-IC of the Act.As a result, they became entitled to avail the concession providedin the said provision. It is also an admitted fact that after fiveH

years and before the expiry of 10 years, the assessees had carriedsubstantial expansion of their units in terms of the aforesaiddefinition. There can be another ‘initial assessment year’ on thefulfillment of the condition mentioned in the said definition, namely,completion of substantial expansion of the existing unit.[Paras 16, 17][424-F-H; 425-A, C-E]

1.5 The definition of ‘initial assessment year’ contained inclause (v) of sub-section (8) of Section 80-IC can lead to a situationwhere there can be more than one “initial assessment year” withinthe said period of 10 years. As per sub-section (6), cap is on the10 assessment years. It is not on quantum. The purpose forwhich Section 80-IC was enacted was to establish the businessof the nature specified in the said provision in the specified States.This provision was, thus, aimed at encouraging the undertakingsor enterprises to establish and set up such units in the aforesaidStates to make them industrially advanced States as well.Undoubtedly, these are difficult States as most of these States fallin hilly areas. Therefore, cost of production and transportationmay also go up. [Para 19][426-D-F]

1.6 When these objectives for which Section 80-IC wasenacted, are kept in mind an irresistible conclusion would be togrant 100% deduction of the profits and gains even from the yearwhen there is substantial expansion in the existing unit. Afterall, this substantial expansion involves great deal of investmentwhich has to be, at least 50% in the plant and machinery, of thebook value thereof before taking depreciation in any year. Withan expansion of such a nature not only there would be increase inproduction but generation of more employment as well, whichwould benefit the local populace. It is for this reason, carryingout substantial expansion by itself is treated as ‘initial assessmentyear’. It would mean that even when an old unit completessubstantial expansion, such a unit also becomes entitled to availthe benefit of Section 80-IC. If that is the purpose of thelegislature, there is no reason as to why 100% deduction of theprofits and gains be not allowed to even those units who hadavailed this deduction on setting up of a new unit and have nowinvested huge amount with substantial expansion of those units.It would be pertinent to point out that in Para 20 of the judgment A

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[2019] 4 S.C.R.

Ain Classic Binding Industries, this Court observed that ifdeduction @ 100% for the entire period of 10 years, it would bedoing violence to the language of sub-section (6) of Section 80-IC. However, this observation came without noticing thedefinition of ‘initial assessment year’ contained in the same veryprovision. [Paras 20, 22][426-F-H; 427-A, B; 431-B, C]B1.7 The aforesaid discussion leads to the followingconclusions:

(a) Judgment dated 20[th] August, 2018 in Classic BindingIndustries case omitted to take note of the definition ‘initialCassessment year’ contained in Section 80-IC itself and insteadbased its conclusion on the definition contained in Section 80-IB, which does not apply in these cases. The definitions of ‘initialassessment year’ in the two sections, viz. Sections 80-IB and 80-IC are materially different. The definition of ‘initial assessmentyear’ under Section 80-IC has made all the difference. Therefore,Dwe are of the opinion that the aforesaid judgment does not laydown the correct law.

(b) An undertaking or an enterprise which had set up anew unit between 7[th] January, 2003 and 1[st] April, 2012 in State ofHimachal Pradesh of the nature mentioned in clause (ii) of sub-Esection (2) of Section 80-IC, would be entitled to deduction atthe rate of 100% of the profits and gains for five assessmentyears commencing with the ‘initial assessment year’. For thenext five years, the admissible deduction would be 25% (or 30%where the assessee is a company) of the profits and gains.F

(c) However, in case substantial expansion is carried outas defined in clause (ix) of sub-section (8) of Section 80-IC bysuch an undertaking or enterprise, within the aforesaid period of10 years, the said previous year in which the substantial expansionis undertaken would become ‘initial assessment year’, and fromGthat assessment year the assessee shall be entitled to 100%deductions of the profits and gains.

(d) Such deduction, however, would be for a total period of10 years, as provided in sub-section (6). For example, if theexpansion is carried out immediately, on the completion of first H

five years, the assessee would be entitled to 100% deductionagain for the next five years. On the other hand, if substantialexpansion is undertaken, say, in 8[th] year by an assessee such anassessee would be entitled to 100% deduction for the first fiveyears, deduction @ 25% of the profits and gains for the next twoyears and @ 100% again from 8[th] year as this year becomes ‘initialassessment year’ once again. However, this 100% deductionwould be for remaining three years, i.e., 8[th], 9[th] and 10[th]assessment years. [Para 24][431-F-H; 432-A-F]

Commissioner of Income Tax v. M/s. Classic BindingIndustries (2018) 9 SCC 753 – held not correct law.

Commissioner of Customs (Import), Mumbai v. DilipKumar and Company and Others (2018) 9 SCC 1 :[2018] 7 SCR 1191 – followed.

Mahabir Industries v. Principal Commissioner ofIncome Tax Civil Appeal Nos. 4765-4766 of 2018decided on May 18, 2018 – referred to.

Case Law Reference

(2018) 9 SCC 753held not correct lawPara 13[2018] 7 SCR 1191followedPara 20

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1784of 2019

From the Judgment and Order dated 26.02.2018 of the HighCourt of Himachal Pradesh, Shimla in I.T.A. No. 25 of 2015

With

Civil Appeal Nos. 1785, 1786, 1787, 1788, 1789, 1790, 1797, 1796,1795, 1798, of 2019, Misc. Application No. 2840 of 2018 in Civil AppealNo. 7217 of 2018, Misc. Application No. 2880 of 2018 in Civil AppealNo. 7218 of 2018, Misc. Application No. 2841 of 2018 in Civil AppealNo. 7221 of 2018, Misc. Application No. 2976 of 2018 in Civil AppealNo. 7223 of 2018, Misc. Application No. 2850 of 2018 in Civil AppealNo. 7215 of 2018, Misc. Application No. 2852 of 2018 in Civil AppealNo. 7236 of 2018, Misc. Application No. 2879 of 2018 in Civil AppealNo. 7222 of 2018.

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AA. N. S. Nadkarni, ASG, K. Radhakrishnan, Mukul Rohatgi, KapilSibal, Arvind P. Datar, Sr. Advs., H. Raghavendra Rao, Arijit Prasad,A. K. Srivastav, Mrs. Anil Katiyar, Jay Savla, Sameer Rohatgi,Ms. Renuka Sahu, Jasdeep Singh Dhillon, Prabhat Kumar Chaurasia,Dushyant Tiwari, Rohit Kaura, Anish R. Shah, Puneet Jain, Ms. ChristiJain, Abhinav Gupta, Harsh Jain, Ms. Ankita Gupta, Abhinav Deshwal,BR. Jawahar Lal, Siddharth Bawa, Shyamal Anand, Mayankshir Sagar,Balaji Srinivasan, Advs. for the appearing parties.

The Judgment of the Court was delivered by

A. K. SIKRI, J.C

SLP(C) Nos. 23172 of 2018, 23176 of 2018, 23179 of 2018,24678 of 2018, 23414 of 2018, 24679 of 2018, 2296 of 2019,1983 of 2019, 3278 of 2019 and 4483 of 2019 :

1. Leave granted.

D2. Origin of these appeals can be traced to the judgment dated28[th] November, 2017 rendered by High Court of Himachal Pradesh in abatch of appeals. Vide the said judgment, the High Court decided manyissues. However, in these proceedings we are concerned with only onequestion of law which is formulated in the following terms:

“Whether an assessee who sets up a new industry of a kindEmentioned in sub-section (2) of Section 80-IC of the Act and startsavailing exemption of 100 per cent tax under sub-section (3) ofSection 80-IC (which is admissible for five years) can start claimingthe exemption at the same rate of 100% beyond the period of fiveyears on the ground that the assessee has now carried outFsubstantial expansion in its manufacturing unit?”

3. The High Court has answered the aforesaid question in theaffirmative thereby holding that when the assessees started availingexemption of 100% tax on the setting up of a new industry of the kindmentioned in sub-section (2) of Section 80IC, which is admissible for 5Gyears, and either on the expiry of 5 years or thereafter (but within 10years) from the date when these assessees started availing exemption,they carried out substantial expansion of its industry, from that year theassessees become entitled to claim exemption @ 100% again.

4. The Income Tax Department (hereinafter referred to as theH‘Revenue’) had challenged the judgment of the High Court on the aforesaid issue by filing number of special leave petitions which wereconverted into appeals after leave was granted in those special leavepetitions. Thereafter, these appeals were heard and decided by a DivisionBench of this Court, which comprised one of us (A.K. Sikri, J.). By itsjudgment dated August 20, 2018. The judgment of the High Court wasreversed on the aforesaid issue.

5. It so happened that in some of the appeals, assessees whowere respondents, were not served with the notice and they remainedunrepresented. Since the appeals in respect of these assessees weredecided in their absence, they filed miscellaneous applications for recallof the order, with prayer to decide the appeals afresh after giving hearingto them. Since, these assessees remained unrepresented, as even thenotice was not served upon them, by a separate order passed in theircases, those applications have been allowed and their appeals being C.A.No. 7218, 7222, 7236, 7215, 7221, 7217 and 7223 of 2018 have beenrestored. Even the Revenue has filed few SLPs against the commonjudgment of the High Court as these SLPs were not filed earlier whenbatch of appeals was decided on 20[th] August, 2018 by this Court. Appealsarising out of these SLPs have also been heard along with other appealsin which the earlier judgment rendered has been recalled. All theseappeals have been heard afresh and are being disposed of by the presentjudgment.

6. We have already taken note of the question of law that arisesfor determination. Factual background in which this question of lawarises for consideration has been taken note of in the judgment dated20[th] August, 2018 which may again be reiterated, in order to understandthe niceties of this issue:

To understand the aforesaid question of law in clear terms, it maybe mentioned at this stage itself that sub-section (2) of Section 80-ICapplies to an undertaking or enterprise which has, inter alia, begun orbegins to manufacture or produce any article or thing by setting up anew factory in the area specified therein which includes State of HimachalPradesh as well. Sub-section (3) of Section 80-IC is in two parts: incertain cases, exemption from income is provided at the rate of 100% ofsuch profits and gains earned from the aforesaid undertaking or enterprisefor 10 assessment years commencing with the initial assessment year.The present appeals do not fall in that category. Other clause relates toanother category of undertakings or enterprises (these cases belong to A

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Athat category) where the exemption is at the rate Civil Appeal No. 7208OF 2018 & Ors. Page 4 of 17 of 100% of profits and gains for fiveassessment years commencing with the initial assessment year and,thereafter, 25% of profits and gains. Total exemption, thus, is for a periodof 10 years, namely, @100% for 1st five years and @ 25% for remainingfive years. In these cases, all the assessees started claiming exemptionB@ 100% on profits and gains and availed it for a period of five years.During this period these assessees carried out “substantial expansion”and they claimed that, on that basis, they should be allowed exemptionfrom profits and gains for another five years @ 100% instead of 25%from 6th to 10th year as well. Interestingly, they admit that the totalCperiod during which they are entitled to exemption would not exceed 10years, as per the mandate of sub-section (6). In this backdrop, the questionis as to whether the assessees can again start claiming 100% exemptionfor the next five years from profits and gains after availing the same forfirst five years on the ground that they have now carried out substantial expansion. The High Court has answered the question in affirmativeDand for this reason, it is the department which has come up to this Courtchallenging the said decision by filing these appeals.

Section 80-IA was inserted by the Finance (No. 2) Act, 1991,with effect from 1st April, 1991. By virtue of said Section, the gross totalincome (profits and gains) of an assessee derived from any business ofEan industrial undertaking, so specified therein, was entitled to certaindeductions for a period commencing from 1st April, 1993. With effectfrom 1st April, 2000, the said provision was bifurcated with the insertionof another Section, i.e., 80-IB, dealing with “certain industrial undertakingsother than infrastructure development undertakings.” Thereafter, theFLegislator, in its wisdom, enacted a special provision, in respect of “units”established in certain special category States. Thus, Section 80-IC cameto be inserted by virtue of Finance Act, 2003, applicable with effectfrom 1st April, 2004. At this point., It may only be noticed thatcorrespondingly certain provisions of Section 80-IB were also amended/repealed. Deductions under the said Section were discontinued for theGAssessment Years commencing from 1st April, 2004 (Sub-section (4) ofSection 80- IB).

7. At this juncture, we would like to take note of the relevantprovisions of Section 80-IC of the Act. Therefore, we extract below therelevant portion of this provision:H

“[80-IC. Special provisions in respect of certainundertakings or enterprises in certain special categoryStates.—(1) Where the gross total income of an assessee includesany profits and gains derived by an undertaking or an enterprisefrom any business referred to in sub-section (2), there shall, inaccordance with and subject to the provisions of this section, beallowed, in computing the total income of the assessee, a deductionfrom such profits and gains, as specified in sub-section (3).

(2) This section applies to any undertaking or enterprise,—

(a) which has begun or begins to manufacture or produce anyarticle or thing, not being any article or thing specified in theThirteenth Schedule, or which manufactures or produces anyarticle or thing, not being any article or thing specified in theThirteenth Schedule and undertakes substantial expansion duringthe period beginning—

(i) on the 23rd day of December, 2002 and ending before the 2[1st day of April, 2007], in any Export Processing Zone orIntegrated Infrastructure Development Centre or IndustrialGrowth Centre or Industrial Estate or Industrial Park orSoftware Technology Park or Industrial Area or Theme Park,as notified by the Board in accordance with the scheme framedand notified by the Central Government in this regard, in theState of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1stday of April, 2012, in any Export Processing Zone or IntegratedInfrastructure Development Centre or Industrial Growth Centreor Industrial Estate or Industrial Park or Software TechnologyPark or Industrial Area or Theme Park, as notified by the Boardin accordance with the scheme framed and notified by theCentral Government in this regard, in the State of HimachalPradesh or the State of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the1st day of April, 2007, in any Export Processing Zone orIntegrated Infrastructure Development Centre or IndustrialGrowth Centre or Industrial Estate or Industrial Park orSoftware Technology Park or Industrial Area or Theme Park,as notified by the Board in accordance with the scheme framed AB

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and notified by the Central Government in this regard, in anyof the North-Eastern States;

(b) which has begun or begins to manufacture or produce anyarticle or thing, specified in the Fourteenth Schedule orcommences any operation specified in that Schedule, or whichmanufactures or produces any article or thing, specified in theFourteenth Schedule or commences any operation specified inthat Schedule and undertakes substantial expansion during theperiod beginning—

(i) on the 23rd day of December, 2002 and ending before the 2[1st day of April, 2007], in the State of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1st dayof April, 2012, in the State of Himachal Pradesh or the State ofUttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1stday of April, 2007, in any of the North-Eastern States.

(3) The deduction referred to in sub-section (1) shall be—

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(ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains forfive assessment years commencing with the initial assessmentyear and thereafter, twenty-five per cent. (or thirty per cent. wherethe assessee is a company) of the profits and gains.

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(6) Notwithstanding anything contained in this Act, no deductionshall be allowed to any undertaking or enterprise under this section,where the total period of deduction inclusive of the period ofdeduction under this section, or under the second proviso to sub-section (4) of section 80-IB or under section 10C, as the casemay be, exceeds ten assessment years.

(8) For the purposes of this section,—

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PR. COMMISSIONER OF INCOME TAX, SHIMLA v.M/S. AARHAM SOFTRONICS [A. K. SIKRI, J.]

(v) “Initial assessment year” means the assessment year relevantto the previous year in which the undertaking or the enterprisebegins to manufacture or produce articles or things, or commencesoperation or completes substantial expansion; xxxxxxxxx

(ix) “Substantial expansion” means increase in the investment inthe plant and machinery by at least fifty per cent of the bookvalue of plant and machinery (before taking depreciation in anyyear), as on the first day of the previous year in which thesubstantial expansion is undertaken.

8. This section makes special provisions in respect of certainundertakings or enterprises in certain special category States. Section80-IC was inserted by the Finance Act, 2003 w.e.f. Civil Appeal No.7208 OF 2018 & Ors. Page 12 of 17 April 1, 2004. As per this provision,certain undertakings or enterprises in certain special category Statesare allowed deduction from such profits and gains, as specified in sub-section (3) of Section 80-IC. The provisions of Section 80-IC provideddeduction to manufacturing units situated in the State of Sikkim, HimachalPradesh and Uttaranchal and North-Eastern States. The deduction wasprovided to new units established in the aforesaid States, and also toexisting units in those States if substantial expansion was carried out.The deduction was available @ 100% for ten Assessment Years for theunits located in North-Eastern and in the State of Sikkim and for theunits located in Himachal Pradesh, the deduction was available @ 100%for five years and @ 25% for next five years.

9. In all these cases assessees had started availing exemptionunder Section 80-IC on the setting up of new industrial units. All theseassessees have availed 100% deduction for a period of 5 years. Asnoticed above, from sixth year, in normal course, deduction is admissible@ 25% of the profits and gains, for next five years (or 30% where theassessee is a company. However, all these assessees, after the expiryof five years, carried out substantial expansion of their existing units.This substantial expansion is in accordance with the provisions of Section80-IC and there is no dispute about the same. From the year suchsubstantial explanations were carried out by the assessees, the assesseesdemanded deduction @ 100%, instead of 25%/30% for the remainingperiod of 10 years which is the maximum period for which deduction isadmissible.

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A10. Sub-section (3), as noted above, mentions the period of 10years commencing with the initial Assessment Year. Subsection (6) putsa cap of 10 years, which is the maximum period for which the deductioncan be allowed to any undertaking or enterprise under this section, startingfrom the initial Assessment Year. Another significant feature under sub-section (3) is that the deduction allowable is 100% of such profits andBgains from an undertaking or an enterprise for five Assessment Yearscommencing with the initial Assessment Year and thereafter the deductionis allowable at 25% (or 30% where the assessee is a company) of theprofits and gains. It brings out the following aspects:

(a) Those undertakings or enterprises fulfilling the conditionsCmentioned in sub-section (2) of Section 80-IC become entitled todeduction under this provision.

(b) This deduction is allowable from the initial Assessment Year.‘Initial Assessment Year’ is defined in Section 80-IB(14)(c) ofthe Act.

D(c) The deduction is @ 100% of such profits and gains for first 5Assessment 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%Ededuction for first 5 years from the initial Assessment Year and25% (or 30% where the assessee is a company) for the next 5years.

11. In the judgment dated 20[th] August, 2018, while holding thatdeduction @ 100% cannot be allowed for more than 5 years from the’initial assessment year’, the reasoning that was given is contained inFparagraph 20 of the judgment. Which reads as under:

“When we keep in mind the aforesaid scheme and spirit behindthis provision, such a situation cannot be countenanced where anCivil Appeal No. 7208 OF 2018 & Ors. Page 14 of 17 assessee isable to secure deduction @ 100% for the entire period of 10 years.GIf that is allowed it will amount to doing violence to the provisionsof sub-section (3) read with sub-section (6) of Section 80-IC. Apragmatic and reasonable interpretation of Section 80-IC wouldbe to hold that once the initial Assessment Year commences andan assessee, by virtue of fulfilling the conditions laid down in sub- H

section (2) of Section 80-IC, starts enjoying deduction, there cannotbe another “Initial Assessment Year” for the purposes of Section80-IC within the aforesaid period of 10 years, on the basis that ithad carried substantial expansion in its unit.”

12. As can be seen from the aforesaid passage, this Court tookthe view that once ‘initial assessment year’ starts on fulfilling the conditionslaid down in sub-section (2) of Section 80-IC, there cannot be another‘initial assessment year’ for the purposes of Section 80-IC within theaforesaid period of 10 years. While doing so, the Court referred toSection 80-IB(14)(c) of the Act, on the basis of which an opinion wasformed that there cannot be another ‘initial assessment year’ for thepurpose of Section 80-IC within the aforesaid period of 10 years. Aspointed out in the later part of the judgment, this is the apparent errorwhich was committed. Section 80-IB(14) starts with the words ‘for thepurpose of this section’. Thus, ‘initial assessment year’ defined thereinis relatable only to the deductions that are provided under the provisionsof Section 80-IB, namely, in respect of profits and gains from certainindustrial undertakings other than infrastructure developmentundertakings. Section 80-IB is materially different from Section 80-ICof the Act. Inasmuch as Section 80-IC is a special provision in respectof certain undertakings, all enterprises mentioned in Section 80-IC arelimited in contrast with Section 80-IB, the deduction under this Section isavailable only when such undertakings or enterprises are established inparticular States, Sikkim, Himachal Pradesh, Uttaranchal or any of theNorth-Eastern States. Therefore, definition of ‘initial assessment year’mentioned in Section 80-IB could not have been the basis of finding outthe definition of ‘initial assessment year’ which is different from thedefinition contained in Section 80-IB. Further, Sub-section (3) of Section80-IC mentions about the deduction that is permissible, namely, 100%deduction of the profits and gains for first five years and 25% (or 30%where the assessee is a company) for the next five years. This sub-section, in any case, does not deal with the ‘initial assessment year’.

13. Learned counsel appearing for the assessees pointed out beforeus that clause (v) of sub-section (8) of Section 80-IC is the concernedprovision which provides definition of ‘initial assessment year’, for thepurpose of this very Section, i.e., Section 80-IC, which was not noticedwhile pronouncing the judgment in Commissioner of Income Tax vs.M/s. Classic Binding Industries case. We find substance in this A

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Asubmission of the assessees. We have no hesitation to accept this mistakewhich occurred in the aforesaid judgment. The Court specifically dealtwith ‘initial assessment year’ and came into conclusion that there cannotbe two initial assessment years within a span of 10 years which is themaximum period for allowing deduction as per sub-section (6) of Section80-IC. As the issue directly concerned with initial assessment year, itsBdefinition contained in that very Section was missed out. To that extent,there is an error in the judgment dated 20[th] August, 2018 in ClassicBinding Industries case.

14. In the aforesaid conspectus, the focus has to be on the questionas to whether definition of ‘initial assessment year’ contained in clauseC(v) of sub-section (8) of Section 80-IC makes any difference? We wouldlike to reproduce the said definition once again, hereunder, for the purposeof continuity of thought process.

“S. 80-IC : xxxxxxxxx

D(8) xxxxxxxxx

(v) - Initial assessment year means the assessment year relevantto the previous year in which the undertaking or the enterprisebegins to manufacture or produce articles or things, or commencesoperation or completes substantial expansion”

E15. On the basis of this definition, counsel for the assessees beforeus have argued that there can be more than one ‘initial assessment year’which can be triggered by the contingency provided therein.

16. As per this definition, there can be ‘initial assessment year’,relevant to previous year, in any of the following contingencies:

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(i) The previous year in which the undertaking or the enterprisebegins to manufacture or produce article or things; or

(ii) Commences operation; or

(iii) Completes substantial expansionGFirst two events are relatable to new units whereas third incidentwould occur in respect of existing units. The benefit of Seciton 80-IC is,thus, admissible not only when an undertaking or enterprise sets up newunit and starts manufacturing or producing article or things. Theadvantage of this provisions is also accrued to those existing units, ifHthey carry out “substantial expansion” of their units by investing required capital, in the assessment year relevant to the previous year. “Substantialexpansion” is defined in clause (ix) of sub-section (8) of Section 80-ICand it reads as under:

“(ix) “Substantial expansion” means increase in the investment inthe plant and machinery by at least fifty per cent of the bookvalue of plant and machinery (before taking depreciation in anyyear), as on the first day of the previous year in which thesubstantial expansion is undertaken;

17. As per the aforesaid definition, an existing unit would be treatedas having carried out substantial expansion when there is increase in theinvestment in the plant and machinery by at least 50% of the book valueof the plant and machinery (before taking depreciation in any year). Asalready noted above, in all these cases at hand, the assessees had initiallyset up new industry in the State of Himachal Pradesh of the naturespecified under Section 80-IC of the Act. As a result, they becameentitled to avail the concession provided in the said provision. It is alsoan admitted fact that after five years and before the expiry of 10 years,the assessees had carried substantial expansion of their units in terms ofthe aforesaid definition. When we consider the definition of ‘initialassessment year’, keeping in view these factors, we find substance inthe submissions made by the learned counsel for the assessees and areinclined to accept that there can be another ‘initial assessment year’ onthe fulfillment of the condition mentioned in the said definition, namely,completion of substantial expansion of the existing unit.

18. The Court is supposed to give effect to the provisions of Section80-IC by reading various provisions conjointly. For the purpose of thesecases, relevant provisions are sub-section (2)(a)(ii), sub-section 3(ii),sub-section (6) and sub-section (8)(v) and (ix). Clause (ii) of sub-section(2) provides that in case an undertaking or enterprise sets up a unit ofthe nature specified therein in the State of Himachal Pradesh or theState of Uttaranchal between the 7[th] January, 2003 and 1[st] April, 2015,such an undertaking or enterprise shall become eligible for the deductionsfrom such profits and gains, as specified in sub-section (3). In respectof State of Himachal Pradesh (in respect of which these cases pertainto) sub-section (3) enumerates the extent of deduction. It is 100% ofprofits and gains for first five initial assessment years commencing withthe initial assessment year and thereafter 25% (or 30% where theassessee is a company) of the profits and gains. The deduction @ 25%

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Afor the neat five years in on the assumption that the new unit remainsstatic insofar as expansion thereof is concerned. However, the momentsubstantial expansion takes place, another ‘initial assessment year’ getstriggered. This new event entitles that unit to start getting deduction @100% of the profits and gains. At the same time, new period of 10 yearsdoes not start. It is because of the reason that total period for whichBdeduction can be allowed is capped at 10 years, inasmuch as sub-section(6) in no uncertain terms stipulates that deduction shall be not allowedfor a period exceeding 10 assessment years. In fact, this period of 10years relates not only in respect of deduction under Section 80-IC butunder the second proviso to sub-section (4) of Section 80-IB as well. ItCwould mean that total deduction under Section 80-IB as well as 80-IC isfor a period of 10 years.

19. Having examined the scheme in the aforesaid manner, wearrive at the conclusion that the definition of ‘initial assessment year’contained in clause (v) of sub-section (8) of Section 80-IC can lead to aDsituation where there can be more than one “initial assessment year”within the said period of 10 years. As per sub-section (6), cap is on the10 assessment years. It is not on quantum. We have also to keep inmind the purpose for which Section 80-IC was enacted. The purposewas to establish the business of the nature specified in the said provisionin the specified States. This provision was, thus, aimed at encouragingEthe undertakings or enterprises to establish and set up such units in theaforesaid States to make them industrially advanced States as well.Undoubtedly, these are difficult States as most of these States fall inhilly areas. Therefore, cost of production and transportation may alsogo up.F

20. When we keep in mind these objectives for which Section 80-IC was enacted, an irresistible conclusion would be to grant 100%deduction of the profits and gains even from the year when there issubstantial expansion in the existing unit. After all, this substantialexpansion involves great deal of investment which has to be, at leastG50% in the plant and machinery, of the book value thereof before takingdepreciation in any year. With an expansion of such a nature not onlythere would be increase in production but generation of more employmentas well, which would benefit the local populace. It is for this reason,carrying out substantial expansion by itself is treated as ‘initial assessmentyear’. It would mean that even when an old unit completes substantialH

expansion, such a unit also becomes entitled to avail the benefit of Section80-IC. If that is the purpose of the legislature, we see no reason as towhy 100% deduction of the profits and gains be not allowed to eventhose units who had availed this deduction on setting up of a new unitand have now invested huge amount with substantial expansion of thoseunits. We would like to reproduce following discussions from theConstitution Bench judgment in Commissioner of Customs (Import),Mumbai vs. Dilip Kumar and Company and Others[1] :

“20. It is well accepted that a statute must be construed accordingto the intention of the legislature and the courts should act uponthe true intention of the legislation while applying law and whileinterpreting law. If a statutory provision is open to more than onemeaning, the Court has to choose the interpretation whichrepresents the intention of the legislature. In this connection, thefollowing observations made by this Court in District MiningOfficer v. TISCO [District Mining Officer v. TISCO, (2001) 7 SCC358] , may be noticed: (SCC pp. 382-83, para 18)

“18. … A statute is an edict of the legislature and in construinga statute, it is necessary, to seek the intention of its maker. Astatute has to be construed according to the intent of them thatmake it and the duty of the court is to act upon the true intentionof the legislature. If a statutory provision is open to more thanone interpretation the court has to choose that interpretationwhich represents the true intention of the legislature. This taskvery often raises difficulties because of various reasons,inasmuch as the words used may not be scientific symbolshaving any precise or definite meaning and the language maybe an imperfect medium to convey one’s thought or that theassembly of legislatures consisting of persons of various shadesof opinion purport to convey a meaning which may be obscure.It is impossible even for the most imaginative legislature toforestall exhaustively situations and circumstances that mayemerge after enacting a statute where its application may becalled for. Nonetheless, the function of the courts is only toexpound and not to legislate. Legislation in a modern State isactuated with some policy to curb some public evil or toeffectuate some public benefit. The legislation is primarily 1 (2018) 9 SCC 1

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directed to the problems before the legislature based oninformation derived from past and present experience. It mayalso be designed by use of general words to cover similarproblems arising in future. But, from the very nature of things,it is impossible to anticipate fully the varied situations arising infuture in which the application of the legislation in hand maybe called for, and, words chosen to communicate such indefinitereferents are bound to be in many cases lacking in clarity andprecision and thus giving rise to controversial questions ofconstruction. The process of construction combines both literaland purposive approaches. In other words, the legislativeintention i.e. the true or legal meaning of an enactment is derivedby considering the meaning of the words used in the enactmentin the light of any discernible purpose or object whichcomprehends the mischief and its remedy to which theenactment is directed.”

“28. The decision of this Court in Punjab Land Developmentand Reclamation Corpn. Ltd. v. Labour Court [Punjab LandDevelopment and Reclamation Corpn. Ltd.v. Labour Court,(1990) 3 SCC 682 : 1991 SCC (L&S) 71] , made the said distinction,and explained the literal rule: (SCC p. 715, para 67)

“67. The literal rules of construction require the wording ofthe Act to be construed according to its literal and grammaticalmeaning, whatever the result may be. Unless otherwiseprovided, the same word must normally be construed throughoutthe Act in the same sense, and in the case of old statutes regardmust be had to its contemporary meaning if there has been nochange with the passage of time.”

That strict interpretation does not encompass strict literalism intoits fold. It may be relevant to note that simply juxtaposing “strictinterpretation” with “literal rule” would result in ignoring animportant aspect that is “apparent legislative intent”. We are aliveto the fact that there may be overlapping in some cases betweenthe aforesaid two rules. With certainty, we can observe that, “strictinterpretation” does not encompass such literalism, which lead toabsurdity and go against the legislative intent. As noted above, ifliteralism is at the far end of the spectrum, wherein it accepts noimplications or inferences, then “strict interpretation” can be implied to accept some form of essential inferences which literalrule may not accept.

29. We are not suggesting that literal rule dehors the strictinterpretation nor one should ignore to ascertain the interplaybetween “strict interpretation” and “literal interpretation”. We mayreiterate at the cost of repetition that strict interpretation of astatute certainly involves literal or plain meaning test. The othertools of interpretation, namely, contextual or purposive interpretationcannot be applied nor any resort be made to look to other supportingmaterial, especially in taxation statutes. Indeed, it is well settledthat in a taxation statute, there is no room for any intendment; thatregard must be had to the clear meaning of the words and that thematter should be governed wholly by the language of thenotification. Equity has no place in interpretation of a tax statute.Strictly one has to look to the language used; there is no room forsearching intendment nor drawing any presumption. Furthermore,nothing has to be read into nor should anything be implied otherthan essential inferences while considering a taxation statute.

30. Justice G.P. Singh, in his treatise Principles of StatutoryInterpretation (14th Edn. 2016 p. 879) after referringto Micklethwait, In re [Micklethwait, In re, (1855)LR 11 Ex 452 : 156 ER 908]; Partington v. AttorneyGeneral [Partington v. Attorney General, (1869) LR 4 HL 100], Rajasthan Rajya Sahakari Spg. & Ginning Mills FederationLtd. v. CIT [Rajasthan Rajya Sahakari Spg. & Ginning MillsFederation Ltd. v. CIT, (2014) 11 SCC 672] , State Bank ofTravancore v. CIT [State Bank of Travancore v. CIT, (1986) 2SCC 11 : 1986 SCC (Tax) 289] and Cape BrandySyndicate v. IRC [Cape Brandy Syndicate v. IRC, (1921) 1 KB64] , summed up the law in the following manner:

“A taxing statute is to be strictly construed. The well-establishedrule in the familiar words of Lord Wensleydale, reaffirmed byLord Halsbury [Ed.: Tennant v. Smith, 1892 AC 150 at p. 154]and Lord Simonds [Ed.: St Aubyn v. Attorney General, 1952AC 15 at p. 32 (HL)] , means:

‘“The subject is not to be taxed without clear words for thatpurpose; and also that every Act of Parliament must be readaccording to the natural construction of its words.”’

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AIn a classic passage Lord Cairns stated the principle thus:

‘If the person sought to be taxed comes within the letter of thelaw he must be taxed, however great the hardship may appearto the judicial mind to be. On the other hand, if the Crownseeking to recover the tax, cannot bring the subject within theletter of the law, the subject is free, however apparently withinthe spirit of law the case might otherwise appear to be. Inother words, if there be admissible in any statute, what is calledan equitable construction, certainly, such a construction is notadmissible in a taxing statute where you can simply adhere tothe words of the statute.’

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Viscount Simon quoted [Ed.: Canadian Eagle Oil Co.Ltd. v. Selection Trust Ltd., 1946 AC 119 at p. 140 (HL)] withapproval a passage [Cape Brandy Syndicate v. IRC, (1921) 1KB 64] from Rowlatt, J. expressing the principle in the followingwords: (Cape Brandy case [Cape Brandy Syndicate v. IRC,D(1921) 1 KB 64] , KB p. 71)

‘… in a taxing Act one has to look merely at what is clearlysaid. There is no room for any intendment. There is no equityabout a tax. There is no presumption as to a tax. Nothing is tobe read in, nothing is to be implied. One can only look fairly atEthe language used.’”

21. The High Court has interpreted these provisions in the followingmanner:

“80-IC(3)(ii) [for Himachal Pradesh] stipulates that deduction shallbe @ 100% for five years commencing with “initial assessmentyear” and thereafter @ 25%. “Initial assessment year”, as perSection 80-IC (8)(v) means, year in which the unit begins/commences to manufacture/produce or completes “substantialexpansion” [As per Section 80-IC(8)(ix)].

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46. The moment “substantial expansion” is completed as perSection 80-IC(8)(ix), the statutory definition of “initial assessmentyear” [Section 80-IC(8)(v)] comes into play. And consequently,Section 80-IC(3)(ii) entitles the unit to 100% deduction for fiveyears commencing with completion of “substantial expansion”,subject to maximum of ten years as per Section 80-IC(6).

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PR. COMMISSIONER OF INCOME TAX, SHIMLA v.M/S. AARHAM SOFTRONICS [A. K. SIKRI, J.]

47. A unit that started operating/existed before 7.1.2003 was entitledto 100% deduction for first five years under Section 80-IB(4). Ifthis unit completes substantial expansion during the window period(7.1.2003 to 31.3.2012), it would be eligible for 100% deductionagain for another five years under Section 80-IC(3)(ii), subject toceiling of ten years as stipulated under Section 80-IC(6).”

We are inclined to agree with the aforesaid interpretation.

22. It would be pertinent to point out that in Para 20 of the judgmentin Classic Binding Industries, this Court observed that if deduction @100% for the entire period of 10 years, it would be doing violence to thelanguage of sub-section (6) of Section 80-IC. However, this observationcame without noticing the definition of ‘initial assessment year’ containedin the same very provision.

23. Having examined the matter in the aforesaid perspective,judgment in the case of Mahabir Industries v. Principal Commissionerof Income Tax[2] would, in fact, help the assessee. The fine distinctionpointed out in Classic Binding Industries elopes thereby. Torecapitulate, in Mahabir Industries, it was held that if an assessee get100% exemption under Section 80-IB of the Act for five years andthereafter carries out the substantial expansion because of which saidassessee becomes entitled to exemption under the new provision i.e.Section 80-IC of the Act, the assessee would be entitled to deduction @100% even after five years. This ruling was predicated on the groundthat there can be two initial assessment years, one for the purpose ofSection 80-IB and other for the purposes of Section 80-IC of the Act.Once we find that there can be two initial assessment years, even as perthe definition thereof in Section 80-IC itself, the legal position comes atpar with the one which was discussed in Mahabir Industries.

24. The aforesaid discussion leads us to the following conclusions:

(a) Judgment dated 20[th] August, 2018 in Classic BindingIndustries case omitted to take note of the definition ‘initialassessment year’ contained in Section 80-IC itself and insteadbased its conclusion on the definition contained in Section 80-IB,which does not apply in these cases. The definitions of ‘initialassessment year’ in the two sections, viz. Sections 80-IB and 80- 2 Civil Appeal Nos. 4765-4766 of 2018 decided on May 18, 2018

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IC are materially different. The definition of ‘initial assessmentyear’ under Section 80-IC has made all the difference. Therefore,we are of the opinion that the aforesaid judgment does not laydown the correct law.

(b) An undertaking or an enterprise which had set up a new unitbetween 7[th] January, 2003 and 1[st] April, 2012 in State of HimachalPradesh of the nature mentioned in clause (ii) of sub-section (2)of Section 80-IC, would be entitled to deduction at the rate of100% of the profits and gains for five assessment yearscommencing with the ‘initial assessment year’. For the next fiveyears, the admissible deduction would be 25% (or 30% where theassessee is a company) of the profits and gains.

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(c) However, in case substantial expansion is carried out as definedin clause (ix) of sub-section (8) of Section 80-IC by such anundertaking or enterprise, within the aforesaid period of 10 years,the said previous year in which the substantial expansion isundertaken would become ‘initial assessment year’, and from thatassessment year the assessee shall been entitled to 100%deductions of the profits and gains.

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(d) Such deduction, however, would be for a total period of 10years, as provided in sub-section (6). For example, if the expansionis carried out immediately, on the completion of first five years,the assessee would be entitled to 100% deduction again for thenext five years. On the other hand, if substantial expansion isundertaken, say, in 8[th] year by an assessee such an assessee wouldbe entitled to 100% deduction for the first five years, deduction@ 25% of the profits and gains for the next two years and @100% again from 8[th] year as this year becomes ‘initial assessmentyear’ once again. However, this 100% deduction would be forremaining three years, i.e., 8[th], 9[th] and 10[th] assessment years.

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25. In view of the aforesaid, we affirm the judgment of the HighGCourt on this issue and dismiss all these appeals of the Revenue. Likewise,appeals filed by the assessees are hereby allowed.

Divya Pandey

Appeals disposed of.

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