COMMISSIONER OF INCOME TAX versus M/S. CLASSIC BINDING INDUSTRIES on 20 August 2018

COMMISSIONER OF INCOME TAX

v.

M/S. CLASSIC BINDING INDUSTRIES

(Civil Appeal No. 7208 of 2018)

AUGUST 20, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Income Tax Act, 1961: s.80-IC – Whether an assessee whosets up a new industry of a kind mentioned in sub-section (2) ofs.80-IC of the Act and starts availing exemption of 100% tax undersub-section (3) of s.80-IC (which is admissible for five years) canstart claiming the exemption at the same rate of 100% beyond theperiod of five years on the ground that the assessee has now carriedout substantial expansion in its manufacturing unit – Held: Apragmatic and reasonable interpretation of s.80-IC is that once theinitial Assessment Year commences and an assessee, by virtue offulfilling the conditions laid down in sub-section (2) of s.80-IC,starts enjoying deduction, there cannot be another “InitialAssessment Year” for the purposes of s.80-IC within the said periodof 10 years, on the basis that it had carried substantial expansionin its unit – Thus, after availing deduction for a period of 5 years@ 100% of such profits and gains from the ‘units’, the assesseeswould be entitled to deduction for remaining 5 Assessment Years @25% (or 30% where the assessee is a company), as the case maybe, and not @ 100%.

Income Tax Act, 1961: ss.80-IA, 80-IB and 80-IC – Gist ofthe legislative history and purpose behind the insertion of ss.80-IA,80-IB and 80-IC – Discussed.

Allowing the appeals, the Court

HELD: 1.1 Sub-section (2) of Section 80-IC provides fortax benefit to those undertakings or enterprises which had setup their manufacturing units in certain specified areas includingState of Himachal Pradesh to which this case is pertaining. It alsogives benefit to these undertakings and enterprises which haveundertaken substantial expansion during the periods mentionedtherein. [Paras 14, 15] [955-B]

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Conclusion

A1.2 Section 80-IC of the Act makes special provisions inrespect of certain undertakings or enterprises in certain specialcategory States. Section 80-IC was inserted by the Finance Act,2003 w.e.f. April 1, 2004. As per this provision, certainundertakings or enterprises in certain special category Statesare allowed deduction from such profits and gains, as specified inBsub-section (3) of Section 80-IC. The provisions of Section 80-IC provided deduction to manufacturing units situated in the Stateof Sikkim, Himachal Pradesh and Uttaranchal and North-EasternStates. The deduction was provided to new units established inthe aforesaid States, and also to existing units in those States ifCsubstantial expansion was carried out. The deduction wasavailable @ 100% for ten Assessment Years for the units locatedin North-Eastern and in the State of Sikkim and for the unitslocated in Himachal Pradesh, the deduction was available @ 100%for five years and @ 25% for next five years. [Para 18] [956-E-G]D1.3 This deduction is allowable from the initial AssessmentYear. “Initial Assessment Year” is defined in Section 80-IB(14)(c)of the Act. (c) The deduction is @ 100% of such profits andgains for first 5 Assessment Years and thereafter a deduction ispermissible @ 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. Keeping in mind the said scheme and spirit behind thisprovision, such a situation cannot be countenanced where anassessee is able to secure deduction @ 100% for the entire periodFof 10 years. If that is allowed it will amount to doing violence tothe provisions of sub-section (3) read with sub-section (6) ofSection 80-IC. Once the assessees had started claimingdeduction under Section 80-IC and the initial Assessment Yearhas commenced within the aforesaid period of 10 years, therecannot be another initial Assessment Year thereby allowing 100%Gdeduction for the next 5 years also when sub-section (3), in nouncertain terms, provides for deduction @ 25% only for the next5 years. [Paras 19, 20, 21] [957-C-F; 958-E-F]

Mahabir Industries v. Principal Commissioner ofIncome Tax 2018 (7) SCALE 618 – distinguished.H

COMMISSIONER OF INCOME TAX v. M/S. CLASSICBINDING INDUSTRIES

Case Law Reference

2018 (7) SCALE 618distinguished

Para 21

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7208of 2018.

From the Judgment and Order dated 28.11.2017 of the High Courtof Himachal Pradesh, Shimla in ITA No. 62 of 2016.

WITH

C.A. Nos. 7223, 7220, 7215, 7230, 7216, 7232, 7233, 7224, 7214,7213, 7212, 7231, 7211, 7229, 7228, 7227, 7226, 7234, 7238, 7210, 7217,7218, 7219, 7239, 7221, 7222, 7209, 7236, 7225 of 2018

A.N.S. Nadkarni, Sandeep Sethi, ASGs, Gaurav Banerjee, AjayVohra, Sr. Advs., Ashok K. Srivastava, Arijit Prasad, Sanjai Kumar Pathak,Ms. Shirin Khajuria, Ms. Sanskriti Bhardwaj, Mrs. Anil Katiyar, AbhinavMukerji, Ms. Bihu Sharma, Ms. Pratishtha Vij, Ms. Purnima Krishna,Ms. Kavita Jha, Gaurav Jain, Jay Savla, Ms. Renuka Sahu, JasdeepSingh Dhillon, Prabhat Chaurasia, Advs. for the appearing parties.

The Judgment of the Court was delivered by

A. K. SIKRI, J. 1. A neat question of law which arises in theseappeals revolve around Section 80-IC of the Income Tax Act, 1961(hereinafter referred to as the ‘Act’). The High Court by its impugnedjudgment dated 28[th] November, 2017 has discussed various aspects andnuances of the aforesaid provisions which had arisen because of variedkinds of issues raised in a batch of appeals filed by the assessees beforethe High Court. We are not concerned with all those issues. The onlyquestion which needs to be answered in these appeals is as follows:

“Whether an assessee who sets up a new industry of a kindmentioned in sub-section (2) of Section 80-IC of the Act andstarts availing exemption of 100 per cent tax under sub-section(3) of Section 80-IC (which is admissible for five years) canstart claiming the exemption at the same rate of 100% beyondthe period of five years on the ground that the assessee has nowcarried out substantial expansion in its manufacturing unit?”

2. To understand the aforesaid question of law in clear terms, itmay be mentioned at this stage itself that sub-section (2) of Section 80-IC applies to an undertaking or enterprise which has, inter alia, begun or A

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Abegins 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.BThe present appeals do not fall in that category. Other clause relates toanother category of undertakings or enterprises (these cases belong tothat category) where the exemption is at the rate of 100% of profits andgains for five assessment years commencing with the initial assessmentyear and, thereafter, 25% of profits and gains. Total exemption, thus, isCfor a period of 10 years, namely, @100% for 1[st] five years and @ 25%for remaining five years. In these cases, all the assessees started claimingexemption @ 100% on profits and gains and availed it for a period offive years. During this period these assessees carried out “substantialexpansion” and they claimed that, on that basis, they should be allowed exemption from profits and gains for another five years @ 100% insteadDof 25% from 6[th] to 10[th] year as well. Interestingly, they admit that thetotal period during which they are entitled to exemption would not exceed10 years, as per the mandate of sub-section (6). In this backdrop, thequestion is as to whether the assessees can again start claiming 100%exemption for the next five years from profits and gains after availingEthe same for first five years on the ground that they have now carriedout substantial expansion. The High Court has answered the question inaffirmative and for this reason, it is the department which has come upto this Court challenging the said decision by filing these appeals.

3. Though, the aforesaid question of law is identical in all theFaforesaid cases and arises in the same fact situation mentioned above,for the sake of convenience, we may record the facts of Civil AppealNo. 7208 of 2018 (@ SLP(C) 16851 of 2018).

4. Section 80-IA was inserted by the Finance (No. 2) Act, 1991,with effect from 1[st] April, 1991. By virtue of said Section, the grossGtotal income (profits and gains) of an assessee derived from any businessof an industrial undertaking, so specified therein, was entitled to certaindeductions for a period commencing from 1[st] April, 1993. With effectfrom 1[st] 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, theH

Legislator, 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 1[st] 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 theAssessment Years commencing from 1[st] April, 2004 (Sub-section (4) ofSection 80-IB).

5. The assessee firm derives income from manufacturing ofprinted embossed book binding cover material of cotton in sheet fromand security fiber of dual coloured combination. The assessee firmcomprised of nine partners during the relevant assessment year. Theassessee started its business activity/operation on 11[th] July, 2005 andinitial Assessment Year for claim of deduction under Section 80-IC ofthe Act was Assessment Year 2006-07. The assessee had alreadyclaimed deduction under Section 80-IC to the extent of the 100% eligibleprofit 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 substantialexpansion in Financial Year 2010-11.

6. Return declaring income of Rs. 27,93,410/- after claimingdeduction under Section 80-IC of Rs. 12,62,77,168/- was e-filed by theassessee firm on 28[th] September, 2012. The case was selected fromscrutiny through CAS and accordingly, statutory notices under Section143(2)/142(1) were issued by Income Tax Office (ITO) Ward-I, Solan.

7. The assessee was asked to furnish the reasons and justificationfor the said claim of 100% as against the eligible norm of 25%. theassessee vide letter dated 12[th] January, 2015 submitted its reasons forclaim stating that the assessee fulfills all the conditions for the claim of100% deduction.

8. The Assessing Officer found that in view of the provisions ofSection 80-IC of the Act assessee firm had already claimed deductionunder Section 80-IC of the Act at the rate of 100% for five years fromAssessment Year 2006-07 to Assessment Year 2010-11, i.e., from thedate 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 businessprofits for the remaining five years, i.e., from Assessment Year 2011- AB

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A2012 to Assessment Year 2015-2016. The Assessing Officer denied theclaim of the enhanced deduction in view of the substantial expansionwas claimed by the assessee and, accordingly, restricted the deductionto 25% of eligible profits for the assessment year under Consideration.

9. Aggrieved by the order of the Assessing Officer dated 27[th]BFebruary, 2015, the assessee preferred an appeal on 6[th] April, 2015.

10. CIT(A) following the decision of the jurisdictional tribunal inthe case of M/s. Hycron Electronics Vs. ITO and other related cases,upheld the order of the Assessing Officer and dismissed the appeal ofthe assessee for 100% deduction. Feeling aggrieved, the assessee filedCfurther appeal before the ITAT.

11. While observing that both the parties agreed that the issueinvolved in appeals, was squarely covered against the assessee in viewof the decision of the coordinate bench of ITAT in the case of HycronElectronics, dismissed the appeals by a composite order dated 11[th]DAugust, 2016 for Assessment Year 2011-12 and Assessment Year 2012-13 by holding that assessee is eligible for deduction under Section 80 ofthe Act @ 25% of the profit derived from industrial undertaking forthese years and not @ 100% of deduction claimed by the assessee.

12. Dissatisfied with the aforesaid order dated 11[th] August, 2016,Eassessee filed appeal under Section 260A of the Act, 1961 before theHigh Court of Himachal Pradesh, Shimla raising therein substantialquestions of law. The result of other assessees was also on almost samepattern, who filed their respective appeals as well. The High Court hasdecided the issue in a composite judgment, in favour of all theseassessees. The High Court held that there is no restriction that undertakingFor enterprise established after 7[th] January, 2003 cannot carried out‘Substantial Expansion’ cannot be carried out more than once as long asperiod of eligibility for claiming deduction under Section 80-IC of theAct. The High Court further held that since the language of Section isvery clear, reliance cannot be placed on Circular No. 7 of 2003 issuedGby CBDT on this issue substantial questions of law were answered infavour of assessee and appeals were allowed with direction that withrespect to each of the assessees the Assessing Officer shall carry outfresh assessment and pass appropriate orders.

13. With the aforesaid factual background, we now proceed toanswer the question of law formulated above.H

14. A gist of the legislative history and purpose behind the insertionof Section 80-IA, 80-IB and 80-IC has already been mentioned above.We have to keep in mind that these cases are confined to Section 80-ICalone. As mentioned above, sub-section (2) of Section 80-IC providesfor tax benefit to those undertakings or enterprises which had set uptheir manufacturing units in certain specified areas including State ofHimachal Pradesh to which this case is belonged.

15. It also gives benefit to these undertakings and enterpriseswhich have undertaken substantial expansion during the periods mentionedtherein. As there is no dispute that all these assessees are covered bythe provisions of sub-section (2), that aspect need not be stated in detail.We, thus, reproduce those portions of the provision which are relevantfor our discussion:

“S.80-IC. Special Provisions in respect of certainundertakings or enterprises in certain special categoryStates.— (1) Where the gross total income of an assesseeincludes any profits and gains derived by an undertaking or anenterprise from any business referred to in sub-section (2), thereshall, in accordance with and subject to the provisions of thissection, be allowed, in computing the total income of the assessee,a deduction from such profits and gains, as specified in sub-section (3).

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(3) The deduction referred to in sub-section (1) shall be-(I) in the case of any undertaking or enterprise referred to insub-clauses (I) and (iii) of clause (a) or sub-clauses (I) and (iii)or clause (b), of sub-section (2), one hundred per cent, of suchprofits and gains for ten assessment years commencing with theinitial assessment years;

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

(6) Notwithstanding anything contained in this Act, no deductionshall be allowed to any undertaking or enterprise under this A

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Asection, where the total period of deduction inclusive of the periodof deduction under this section, or under the second proviso tosub-section (4) of section 80-IB or under section 10C, as thecase may be, exceeds ten assessment years………..”

16. The essence of Section 3 as well as Section 6 have alreadyBbeen reproduced above. Whereas the exemption is provided @ 100%of such profits and gains for five assessment years commencing withthe initial assessment years and, thereafter, 25% (or 30% where theassessee is a company) of the profits and gains for next five years. Thededuction is limited to a period of 10 years.

C17. In this backdrop, the question is as to whether these assessees,who had availed deductions @ 100% for first five years on the groundthat they had set up a manufacturing unit as prescribed under sub-section(2) of the Act, can start claiming deductions @ 100% again for next fiveyears as they had undertaking “substantial expansion” during the periodmentioned in sub-section (2)? The answer has to be in the negative forDthe following the reasons:

18. We are dealing with the deductions in respect of profits andgains under Section 80-IC of the Act. No other provision is involved.This section makes special provisions in respect of certain undertakingsor enterprises in certain special category States. Section 80-IC wasEinserted by the Finance Act, 2003 w.e.f. April 1, 2004. As per thisprovision, certain undertakings or enterprises in certain special categoryStates are allowed deduction from such profits and gains, as specified insub-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 wasFprovided 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%Gfor five years and @ 25% for next five years.

19. In the instant case, we are concerned with the assessees whohad established their undertakings in the State of Himachal Pradesh.Sub-section (3), as noted above, mentions the period of 10 yearscommencing with the initial Assessment Year. Sub-section (6) puts aHcap of 10 years, which is the maximum period for which the deduction can 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 andgains 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. Cumulative reading of these provisions brings out thefollowing aspects:

(a) Those undertakings or enterprises fulfilling the conditionsmentioned in sub-section (2) of Section 80-IC become entitledto 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) ofthe Act.

(c) The deduction is @ 100% of such profits and gains for first5 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 and25% (or 30% where the assessee is a company) for the next 5years.

20. When we keep in mind the aforesaid scheme and spirit behindthis provision, such a situation cannot be countenanced where an assesseeis able to secure deduction @ 100% for the entire period of 10 years. Ifthat is allowed it will amount to doing violence to the provisions of sub-section (3) read with sub-section (6) of Section 80-IC. A pragmatic andreasonable interpretation of Section 80-IC would be to hold that oncethe initial Assessment Year commences and an assessee, by virtue offulfilling the conditions laid down in sub-section (2) of Section 80-IC,starts enjoying deduction, there cannot be another “Initial AssessmentYear” for the purposes of Section 80-IC within the aforesaid period of10 years, on the basis that it had carried substantial expansion in its unit.

21. We are conscious of our recent judgment rendered by thisvery Bench in Mahabir Industries v. Principal Commissioner ofIncome Tax (Civil Appeal Nos. 4765-4766 of 2018 decided on May 18,2018). However, a fine distinction needs to be noted between the twosets of cases. In Mahabir Industries, the assessees had availed theinitial deduction under a different provision, namely, Section 80-IA of the A

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AAct, i.e. by fulfilling the conditions mentioned in sub-section (4) of Section80-IA. Those conditions are altogether different. Deduction in respectof profits and gains under the said provision is admissible when theseprofits and gains are from industrial undertakings or enterprises engagedin infrastructure development etc. Even this availment started at a timewhen Section 80-IC was not even on the statute book. As mentionedBabove, Section 80-IC was inserted by the Finance Act, 2003 with effectfrom April 01, 2004. The assessees in those cases had started claimingand were allowed deductions from the Assessment Years 1998-99 and1999-2000 under Section 80-IA and from the Assessment Year 2000-01to Assessment Year 2005-06 under Section 80-IB of the Act. TheCdeduction was, thus, claimed by the assessees in those appeals underthe new provision i.e. Section 80-IC on fulfilling conditions contained insub-section (2) of Section 80-IC for the first time for the AssessmentYear 2006-07. Thus, insofar as those cases are concerned, the initialAssessment Year under Section 80-IC started only from the AssessmentYear 2006-07. In contrast, position here is altogether different. TheseDassessees have availed deduction under Section 80-IC alone. Initially,they claimed the deduction on the ground that they had set up their unitsin the State of Himachal Pradesh and after availing the deduction @100% they want continuation of this rate of 100% for the next 5 yearsalso under the same provision on the ground that they have madeEsubstantial expansion. As pointed out above, once the assessees hadstarted claiming deduction under Section 80-IC and the initial AssessmentYear has commenced within the aforesaid period of 10 years, therecannot be another initial Assessment Year thereby allowing 100%deduction for the next 5 years also when sub-section (3), in no uncertainterms, provides for deduction @ 25% only for the next 5 years. It mayFbe asserted again that the assessees accept the legal position that theycannot claim deduction of more than 10 years in all under Section 80-IC.

22. In view of the aforesaid discussion, we hold that after availingdeduction for a period of 5 years @ 100% of such profits and gains fromthe ‘units’, the assessees would be entitled to deduction for remaining 5GAssessment Years @ 25% (or 30% where the assessee is a company),as the case may be, and not @ 100%. The question of law is, thus,answered in favour of the Revenue thereby allowing all these appeals.

No order as to costs.Devika Gujral Appeals allowed.H