MAHABIR INDUSTRIES versus PRINCIPAL COMMISSIONER OF INCOME TAX on 18 May 2018

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SUPREME COURT REPORTS

[2018] 4 S.C.R.

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MAHABIR INDUSTRIES

v.

PRINCIPAL COMMISSIONER OF INCOME TAX

(Civil Appeal Nos. 4765-4766 of 2018)

BMAY 18, 2018

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

Income Tax Act, 1961:

s.80-IC – Deduction under – Entitlement for – To the industrialCundertakings which completed substantial expansion – The assessee-industrial undertaking in question started availing deduction u/s.80-IA from the assessment year 1998-99 for two assessment years –From the assessment years 2000-01 to assessment year 2005-06,the assessee availed deduction u/s. 80-IB – After s. 80-IC came intoeffect, the assessee having carried out substantial expansion in theDassessment year 2006-07, claimed exemption u/s. 80-IC forassessment years 2006-07 onwards – Deductions for assessmentyears 2006-07 and 2007-08 were allowed by Assessing Officer –However, deductions for assessment years 2008-09 and 2009-10were rejected on the ground that the years 2008-09 and 2009-10Ebeing 11[th] and 12[th] years of deduction cannot be permitted in viewof s.80-IC(6) – The order of Assessing Officer was upheld byappellate authority as well as appellate Tribunal – High Court alsoheld that ten years period to be counted from the assessment year1998-99 i.e. when the assessee had claimed deduction for the firsttime u/s. 80-IA and hence deductions for the years 2008-09 andF2009-10 not to be allowed – On appeal, held: The purport behindthree types of deductions u/ss.80-IA, 80-IB and 80-IC is different –Therefore, the deductions u/ss.80-IA and 80-IB would be of noconcern so far as deduction for carrying out substantial expansionu/s.80-IC is concerned – The assessee became entitled to deductionGu/s.80-IC from the initial year i.e. the year in which substantialexpansion was completed – The inclusion of period of deductionu/ss.80-IA and 80-IB for the purpose of counting 10 years asprovided in s. 80-IC (6) is limited to those industries which are set-upin North-Eastern region – Therefore, period of deduction u/ss. 80-IAand 80-IB not to be reckoned for the purpose of benefit of deductionHu/s.80-IC to the assessee.

Allowing the appeals, the Court

HELD: 1. It was wrong on the part of the Assessing Officernot to allow deduction to the assessee under Section 80-IC forthe Assessment Years 2008-09 and 2009-2010. [Para 14][495-C]

2. As per the provisions of sub-section (6) of Section 80-ICno deduction is allowed to any undertaking or enterprise underthis Section, where the total period of deduction inclusive of theperiod of deduction under this Section, or under the secondproviso to sub-section (4) of Section 80-IB or under Section 10C,as the case may be, exceeds ten assessment years. The totalperiod of ten years, thus, is to be counted in the threecircumstances: (a) When the deduction has been given underSection 80-IC for a period of ten years, no further deduction isadmissible. (b) When the deduction is given under second provisoto sub-section (4) of Section 80-IB. This provision pertains tothose industries which are in the North-Eastern Region. (c) Whenthe deduction is claimed under Section 10C. It is again a specialprovision in respect of certain industrial undertakings in North-Eastern Region. [Para 10][492-D-H]

3. The assessee in the instant case has not got deductionunder Section 80-IC for a period of ten years as he started claimingdeduction under this provision w.e.f. Assessment Year 2006-07.Situation Nos. (b) and (c) mentioned above would not apply tothe assessee as it’s undertaking/enterprise is not established inNorth-Eastern Region. It is, thus, clear that the High Court hasfailed to appreciate that the provisions of Section 80-IC(6) of theAct state that the total period of deduction under Section 80-ICand Section 80-IB cannot exceed ten assessment years only ifthe manufacturing unit was claiming deduction under secondproviso to Section 80-IB(4) of the Act i.e. units located in theNorth-Eastern State. [Para 11][492-A-C]

4. The purport behind the three types of deductionsspecified in Section 80-IA, Section 80-IB and Section 80-IC isdifferent. Section 80-IC stipulates the period for which hundredper cent deduction is to be given and then deduction at reducedrates is to be given. If the assessee had earlier availed deductionunder Section 80-IA and Section 80-IB, that would be of no concern A

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[2018] 4 S.C.R.

Ainasmuch as on carrying out substantial expansion, which wascarried out and completed in the Assessment Year 2006-07, theassessee became entitled to deduction under Section 80-IC fromthe initial year. The term ‘initial year’ is referable to the year inwhich substantial expansion has been completed, which legalposition is stated by the High Court itself and even accepted byBthe Department as it has not challenged that part of the judgment.The inclusion of period for the deduction is availed under Section80-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 tothose industrial undertakings or enterprises which are set-up inCthe North-Eastern Region. By making specific provision of thiskind, the Legislature has shown its intent, namely, where theindustry is not located in North-Eastern State, the period for whichdeduction is availed earlier by an assessee under Section 80-IAand Section 80-IB will not be reckoned for the purpose of availing benefit of deduction under Section 80-IC of the Act. [Para 12][493-DE-H; 494-A]

Textile Machinery Corporation Limited, Calcutta v. TheCommissioner of Income Tax, West Bengal, Calcutta(1977) 2 SCC 368: [1977] 2 SCR 762 – heldinapplicable.E

Case Law Reference

[1977] 2 SCR 762held inapplicable

Para 13

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4765-4766 of 2018.F

From the Judgment and Order dated 28.11.2017 of the High Courtof Himachal Pradesh at Shimla in Income Tax Appeal No. 7 and 10 of2016 respectively WITH

GCivil Appeal No.4767 of 2018.

Arvind P. Datar, Sr. Adv, Jay Savla, Ms. Renuka Sahu, HitenChande, Advs for the Appellant.

K. Radhakrishnan, Sr. Adv, Ms. Anita Sahani, H.R. Rao,Mrs. Anil Katiyar, Advs for the Respondent.H

The Judgment of the Court was delivered by

A. K. SIKRI, J. A short question of law arises for considerationin these appeals. All the appeals are filed by the same party, namely,Mahabir Industries (hereinafter referred to as the ‘assessee’) in whichcommon respondent is Principal Commissioner of Income Tax(hereinafter referred to as the ‘Department’). Before stating the questionof law, it may be necessary to mention in brief the background underwhich the said question of law has arisen inasmuch as this backgroundwould be an enabling factor in understanding the true ambit and scopeof the question of law.

The assessee manufactures polythene for which it is having itsfactory in Shimla, Himachal Pradesh. The activity undertaken by theassessee, an industrial undertaking, qualified for exemption from incometax under Section 80-IA of the Income Tax Act (hereinafter referred toas the ‘Act’). Section 80-IA of the Act provides for deductions in respectof profits and gains from industrial undertakings or enterprises engagedin infrastructure development etc. if it fulfills the conditions mentioned insub-section (4) thereof. Such a deduction is of an amount equal tohundred per cent of the profits and gains derived from such business forten consecutive Assessment Years. In nutshell, those undertakings orenterprises, which fulfill the conditions mentioned in sub-section (4) ofSection 80-IA of the Act, are entitled to total deductions of their profits,which means, no tax is payable and the period for which such undertakingsor enterprises are exempted from payment of tax is ten consecutiveAssessment Years. The assessee admittedly qualified for this deductionwhich it started availing from the Assessment Year 1998-99. Thisdeduction under Section 80-IA was claimed and allowed for twoAssessment Years i.e. 1998-99 and 1999-2000.

2. Section 80-IA of the Act was originally introduced in the year1991 by the Finance (No.2) Act, 1991 w.e.f. April 1, 1991. There wereamendments in the Section from time to time. This Section was amendedby 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 FinanceAct, 1999. This provision allows deduction in respect of profits andgains from certain industrial undertakings other than infrastructuredevelopment undertakings. Deduction from such profits and gains is ofan amount equal to such percentage and for such number of Assessment A

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AYears as specified in Section 80-IB. Sub-section (4) of Section 80-IBprovides for hundred per cent deduction for a period of five years andthereafter twenty-five per cent. First proviso thereto states that totalperiod of deduction is not to exceed ten consecutive Assessment Years.Second proviso is a specific provision for industries in the North-EasternRegion to which we shall advert to at the appropriate stage. Sub-sectionB(2) enumerates the conditions which are to be fulfilled by such industrialundertakings in order to qualify for deductions from profits and gainsunder that provision.

3. As mentioned above, for the Assessment Years 1998-99 and1999-2000 (i.e. two Assessment Years), the assessee was allowedCdeduction under Section 80-IA. From the Assessment Year 2000-01 toAssessment Year 2005-06, the assessee claimed deduction under Section80-IB.

4. Interestingly, another provision in the form of Section 80-ICwas inserted by Finance Act, 2003 w.e.f. April 1, 2004. As per thisDprovision, 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 wasEprovided 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. The assessee completedFsubstantial expansion (by investing in new plant and machinery of valuemore than 50% of the value of plant and machinery already installed ason 1 April, 2005) to the manufacturing unit situated at Baddi, HimachalPradesh in the Assessment Year 2006-07. In view of the substantialexpansion, the accused claimed deduction under Section 80-IC @100%Gfor Assessment Years 2006-07 and 2007-08, which was also allowed bythe Assessing Officer (AO) after passing the order under Section 143(3)of the Act.

5. Sub-section (3), as noted above, mentions the period of tenAssessment Years commencing with the initial Assessment Year. Sub-Hsection (6) may also be taken note of at this stage which reads as under:

“(6) Notwithstanding anything contained in this Act, no deductionshall be allowed to any undertaking or enterprise under thissection, 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 the casemay be, exceeds ten assessment years.”

6. As noted above, the assessee had carried out substantialexpansion in the Assessment Year 2006-07 and, therefore, claimedexemption under Section 80-IC of the Act for Assessment Year 2006-07onwards. Deductions for the year 2006-07 and 2007-08 were allowed.However, thereafter, deductions for the Assessment Year 2008-09 andAssessment Year 2009-2010 were rejected by the AO on the groundthat this was 11[th] and 12[th] year of deduction and as per Section 80-IC(6), total deductions under Section 80-IC and Section 80-IB cannotexceed the total period of ten years. Commissioner of Income Tax(Appeals) {CIT(A)} and Income Tax Appellate Tribunal (ITAT) upheldthe order of the AO. The High Court took up the appeals of the assesseealong with other similar enterprises who had claimed the benefits.It framed the following question in those appeals:

“The moot issue involved in these appeals, inter alia, is as towhether an “undertaking or an enterprise” (hereinafter referredto as the Unit), established after 7[th] January, 2003, carrying out“substantial expansion” within the specified window period, i.e.between 7.1.2003 and 1.4.2012, would be entitled to deduction onprofits @100%, under Section 80-IC of the Income Tax Act. Also,if so, then for what period.”

7. This question has been decided in favour of all the assessees.However, insofar as the assessee herein is concerned, keeping in viewthat there is a ceiling of ten years as stipulated under Section 80-IC(6),the High Court has held that ten years period shall be counted from theAssessment Year 1998-99 when the assessee had claimed deductionfor the first time under Section 80-IA and, therefore, deductions for theAssessment Years 2008-09 and 2009-2010 would not be allowed. Thisis clear from the following discussion in the High Court judgment:

“46. The moment “substantial expansion” is completed as perSection 80-IC (8)(ix), the statutory definition of “initialassessment year” [Section 80-IC(8)(v)] comes into play. And A

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consequently, Section 80-IC(3)(ii) entitles the unit to 100%deduction for five years commencing with completion of“substantial expansion”, subject to maximum of ten years as perSection 80-IC(6).

47. A unit that started operating/existed before 7.1.2003 wasentitled to 100% deduction for first five years under Section80-IB(4). If this unit completes substantial expansion during thewindow period (7.1.2003 to 31.3.2012), it would be eligible for100% deduction again for another five years under Section80-IC(3)(ii), subject to ceiling of ten years as stipulated underSection 80-IC(6).

48. Applying the aforesaid interpretation, we find there can bedifferent fact situations, some of which, we have tried to illustrate;(i) a “Unit” established prior to 7.1.2003, claiming deduction underSection 80-IB, post insertion of Section 80-IC carries outsubstantial expansion, would be entitled to deduction only underSection 80-IC, at the admissible percentage, for the remainingperiod, which in any case when combined, cannot exceed tenyears, (ii) just as in the case of the present assessee, a unitestablished after 7.1.2003, carries out substantial expansion onlyin the 8th year of its establishment, for the first five years wouldhave already claimed deduction @ 100%; for the 6th and 7thyears @ 25%, and then for the period post substantial expansion,in our considered view, the initial year of assessment being in the8th year, would be entitled for deduction @ 100%, subject to thecap of ten assessment years, (iii) the assessee establishes a unitafter January 2003, say in the year 2005-06 and claims deductionunder Section 80-IC for the first time in the assessment year 2006-2007 @ 100% of its profits. Thereafter, substantially expands theUnit in the year 2009-10, relevant to Assessment Year 2010-11can claim deduction @ 100% for next five years subject to thecap of ten assessment years, (iv) an existing unit not claiming anydeduction under Section 80-IA, 80-IB or 80-IC substantiallyexpands in the year 2003 and claims deduction under Section80-IC first time in Assessment Year 2004-2005 and thensubstantially expands in the year 2007-2008, can claim deduction@ 100% w.e.f. Assessment Year 2008-2009 for next five years, MAHABIR INDUSTRIES v. PRINCIPAL COMMISSIONER OFINCOME TAX [A. K. SIKRI, J.]

(v) the assessee sets up its unit in the year 2000-2001, claimingdeduction under Section 80-IB till the Assessment Year2003-2004 and thereafter under Section 80-IC as per law.Carrying out Substantial expansion in the Assessment Year2004-2005, now claims deduction @ 100% w.e.f. AssessmentYear 2004-05 again substantially expands in the Assessment Year2008-2009 can claim 100% deduction w.e.f. 2008-2009, (vi) theassessee sets up a unit in the year 2005-2006 and does notundergo substantial expansion at all can claim deduction underSection 80-IC.”

8. As can be discerned, all other aspects are decided in favour ofthe assessees except what is illustrated at (i) and (iv). However, theeffect thereof is that insofar as appeals of the assessee herein areconcerned, they are dismissed on the ground that it cannot claim deductionunder Sections 80-IC, 80-IB or 10C for a period exceeding ten years.

9. In this backdrop, the questions of law which have been framedby the assessee in these appeals are the following:

“(a) Whether the Hon’ble High Court was justified in holding thatthe petitioner was not entitled to deduction under Section 80-ICof the Act by virtue of provision sub-section (6), when the samewas not even applicable to the petitioner?

(b) Whether the Hon’ble High Court was justified in holding thatthe provisions of Section 80-IC(6) of the Act apply to all theundertaking claiming deduction under Section 80-IB(4) of the Actwhen 80-IC(6) refers to only those undertakings which are coveredby second proviso to Section 80-IB(4)?

(c) Whether the Hon’ble High Court was justified in holding thatthe petitioner is not eligible for deduction under Section 80-IC fora period of 10 assessment years when substantial expansion wascarried out by the Petitioner and a substantially new unit wasclaiming deduction under Section 80-IC of the Act?

(d) Whether the Hon’ble High Court was justified in holding thatthe petitioner was not entitled to deduction under Section 80-ICof the Act for assessment year 2008-09 and 2009-10 when thetotal period of deduction of ten years was expiring afterassessment year 2009-10?”

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A10. As can be seen from the reading of paras 46 and 47 of theHigh Court judgment, it has taken a categorical view that the moment‘substantial expansion’ is completed as per Section 80-IC(8)(ix), thestatutory definition of ‘initial assessment year’ {Section 80-IC(8)(v)}comes into play. As a consequence, Section 80-IC(3)(ii) would entitlethe unit to hundred per cent deduction for five years commencing withBcompletion of ‘substantial expansion’ followed by twenty-five per centdeduction for next five years i.e. subject to maximum of ten years. Thus,the High Court accepts that when the substantial expansion is done in aparticular Assessment Year and that is made during the period mentionedin sub-section (2) of Section 80-IC, not only benefit admissible underCSection 80-IC shall get triggered, the year in which such substantialexpansion 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 ofSection 80-IC(6). We have already reproduced the provisions of sub-section (6) of Section 80-IC. As per this provision, no deduction is allowedto any undertaking or enterprise under this Section, where the total periodDof deduction inclusive of the period of deduction under this Section, orunder the second proviso to sub-section (4) of Section 80-IB or underSection 10C, as the case may be, exceeds ten assessment years. Thetotal period of ten years, thus, is to be counted in the following threecircumstances:E(a) When the deduction has been given under Section 80-IC for a periodof 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 than in the case of such industries in the North-FEastern Region, as may be notified by the Central Government,the amount of deduction shall be hundred per cent. of profits andgains for a period of ten assessment years, and the total period ofdeduction shall in such a case not exceed ten assessment years.”

GThis provision pertains to those industries which are in theNorth-Eastern Region.

(c) When the deduction is claimed under Section 10C. It is again aspecial provision in respect of certain industrial undertakings inNorth-Eastern Region.

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11. The assessee in the instant case has not got deduction underSection 80-IC for a period of ten years as he started claiming deductionunder this provision w.e.f. Assessment Year 2006-07. Situation Nos. (b)and (c) mentioned above would not apply to the assessee as it’sundertaking/enterprise is not established in North-Eastern Region. It is,thus, clear that the High Court has failed to appreciate that the provisionsof Section 80-IC(6) of the Act state that the total period of deductionunder Section 80-IC and Section 80-IB cannot exceed ten assessmentyears only if the manufacturing unit was claiming deduction under secondproviso to Section 80-IB(4) of the Act i.e. units located in the North-Eastern State.

12. The matter can be looked into from another angle. UnderSection 80-IA, deduction is provided to such industrial undertakings orenterprises which are engaged in infrastructure development etc.provided they fulfill the conditions mentioned in sub-section (4) thereof.Section 80-IB makes provisions for deduction in respect of those industrialundertakings, other than infrastructure development undertakings, whichare enumerated in the said provision. On the other hand, the intentionbehind Section 80-IC is to grant deduction to the units making newinvestments in the State by establishing new manufacturing unit or evento the existing manufacturing unit which carried out substantialexpansions. The purport behind the three types of deductions specifiedin Section 80-IA, Section 80-IB and Section 80-IC is, thus, different.Section 80-IC stipulates the period for which hundred per cent deductionis to be given and then deduction at reduced rates is to be given. If theassessee had earlier availed deduction under Section 80-IA and Section80-IB, that would be of no concern inasmuch as on carrying out substantialexpansion, which was carried out and completed in the Assessment Year2006-07, the assessee became entitled to deduction under Section 80-ICfrom the initial year. The term ‘initial year’ is referable to the year inwhich substantial expansion has been completed, which legal position isstated by the High Court itself and even accepted by the Department asit has not challenged that part of the judgment. The inclusion of periodfor the deduction is availed under Section 80-IA and Section 80-IB, forthe purpose of counting ten years, is provided in sub-section (6) of Section80-IC and it is limited to those industrial undertakings or enterpriseswhich are set-up in the North-Eastern Region. By making specificprovision of this kind, the Legislature has shown its intent, namely, where A

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Athe industry is not located in North-Eastern State, the period for whichdeduction is availed earlier by an assessee under Section 80-IA andSection 80-IB will not be reckoned for the purpose of availing benefit ofdeduction under Section 80-IC of the Act.

13. Learned counsel for the Revenue could not dispute thatBsub-section (6) of Section 80-IC would get attracted when the industryis located in the North-Eastern Region. Having faced with this situation,he raised an altogether different argument for consideration by referringto Section 15C of the Income Tax Act, 1922 (hereinafter referred to asthe ‘1922 Act’), which was also a provision which granted exemptionfrom income in respect of newly established industrial undertaking. HeCsubmitted that this Court in Textile Machinery Corporation Limited,Calcutta v. The Commissioner of Income Tax, West Bengal, Calcutta[1]has held that the true test for ascertaining whether industrial undertakingis ‘formed by reconstruction of business already in existence’ (whichwas the expression used in Section 15C of 1922 Act), is not whether theDnew industrial undertaking connotes expansion of the existing businessof the assessee but whether it is a new and identifiable undertakingseparate and distinct from existing business. In fine, the endeavour oflearned senior counsel was that the assessee cannot be treated as anindustrial undertaking which has reconstructed the business i.e. madesubstantial expansion. This argument has to be rejected for at least twoEreasons:

(i) Section 15C of the 1922 Act provided exemption from tax tonewly established industrial undertaking if they are not ‘formed byreconstruction of business already in existence’. Thus, under thesaid provision, if it was found that an industrial undertaking is formed byFreconstruction of business already in existence, then it was entitled toany exemption under Section 15C. It is in that context the Court wasconsidering the meaning of reconstruction of business. On the otherhand, the words under Section 80-IC are ‘substantial expansion’. Thus,discussion contained in the said judgment would have no application toGthe instant case.

(ii) Insofar as the factum of substantial expansion of the assessee’sunit in the Assessment Year 2006-07 is concerned, the same is not subjectmatter of any controversy in the instant case. It has been accepted by 1(1977) 2 SCC 368H

MAHABIR INDUSTRIES v. PRINCIPAL COMMISSIONER OFINCOME TAX [A. K. SIKRI, J.]

the Department that assessee had carried out substantial expansion.Precisely, for this reason, the AO had allowed deduction for AssessmentYears 2006-07 and 2007-08. Therefore, issue is not as to whether thereis a substantial expansion or not. The issue is only as to how a period often years is to be calculated, namely, whether those Assessment Yearsin respect of which deduction under Section 80-IA and Section 80-IBwas allowed are to be counted for the purpose of giving deduction underSection 80-IC.

14. Thus, we are of the opinion that it was wrong on the part ofthe AO not to allow deduction to the assessee under Section 80-IC forthe Assessment Years 2008-09 and 2009-2010. As a result, the judgmentof the High Court on this aspect is set aside and the appeals areaccordingly allowed.

Kalpana K. Tripathy

Appeals allowed.

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