Pr. Commissioner of Income Tax, Shimla vs M/s. Aarham Softronics

HELD: 1.1 Sub-section (2) of Section 80-IC, Income Tax Act, 1961 applies to an undertaking or enterprise which has, inter alia, begun or begins to manufacture or produce any article or thing by setting up a new factory in the area specified therein which includes State of Himachal Pradesh as well. Sub-section

(3) of Section 80-IC inter alia states that a category of undertakings or enterprises (present cases belong to that category) where the exemption is at the rate of 100% of profits and gains for five assessment years commencing with the initial assessment year and, thereafter, 25% of profits and gains. Total exemption, thus, is for a period of 10 years, namely, @100% for 1st five years and @ 25% for remaining five years. The provisions of Section 80-IC provided deduction to manufacturing units situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and North-Eastern States. The deduction was provided to new units established in the aforesaid States, and also to existing units in those States if substantial expansion was carried out. [Paras 8, 9][417-F-H; 418-A, B; 421-D, E]

1.2 Sub-section (3) mentions the period of 10 years commencing with the initial Assessment Year. Subsection (6) puts a cap of 10 years, which is the maximum period for which the deduction can be allowed to any undertaking or enterprise under this section, starting from the initial Assessment Year. Another significant feature under sub-section (3) is that the deduction allowable is 100% of such profits and gains from an undertaking or an enterprise for five Assessment Years commencing with the initial Assessment Year and thereafter the deduction is allowable at 25% (or 30% where the assessee is a company) of the profits and gains. [Para 10][422-A, B]

1.3 In Commissioner of Income Tax vs. M/s. Classic Binding Industries case Supreme Court took the view that once ‘initial assessment year’ starts on fulfilling the conditions laid down in sub-section (2) of Section 80-IC, there cannot be another ‘initial assessment year’ for the purposes of Section 80-IC within the aforesaid period of 10 years. While doing so, the Court referred to Section 80-IB(14)(c) of the Act, on the basis of which an opinion was formed that there cannot be another ‘initial assessment year’ for the purpose of Section 80-IC within the aforesaid period of 10 years. This is the apparent error which was committed. Section 80-IB(14) starts with the words ‘for the purpose of this section’. Thus, ‘initial assessment year’ defined therein is relatable only to the deductions that are provided under the provisions of Section 80-IB, namely, in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Section 80-IB is materially different from Section 80-IC of the Act. Inasmuch as Section 80-IC is a special provision in respect of certain undertakings, all enterprises mentioned in Section 80-IC are limited in contrast with Section 80-IB, the deduction under this Section is available only when such undertakings or enterprises are established in particular States, Sikkim, Himachal Pradesh, Uttaranchal or any of the North-Eastern States. Further, Subsection (3) of Section 80-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’. Clause (v) of sub-section

(8) of Section 80-IC is the concerned provision which provides definition of ‘initial assessment year’, for the purpose of this very Section, i.e., Section 80-IC, which was not noticed while pronouncing the judgment in Commissioner of Income Tax vs. M/s. Classic Binding Industries case. There is substance in this submission of the assessees. The Court has no hesitation to accept this mistake which occurred in the aforesaid judgment. The Court specifically dealt with ‘initial assessment year’ and came to conclusion that there cannot be two initial assessment years within a span of 10 years which is the maximum period for allowing deduction as per sub-section (6) of Section 80-IC. As the issue directly concerned with initial assessment year, its definition contained in that very Section was missed out. To that extent, there is an error in the judgment dated 20th August, 2018 in 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 ‘initial assessment year’, relevant to previous year, in any of the following contingencies: (i) The previous year in which the undertaking or the enterprise begins to manufacture or produce article or things; or (ii) Commences operation; or (iii) Completes substantial expansion. First two events are relatable to new units whereas third incident would occur in respect of existing units. The benefit of Seciton 80-IC is, thus, admissible not only when an undertaking or enterprise sets up new unit and starts manufacturing or producing article or things. The advantage of this provisions is also accrued to those existing units, if they carry out “substantial expansion” of their units by investing required capital, in the assessment year relevant to the previous year. “Substantial expansion” is defined in clause (ix) of sub-section (8) of Section 80-IC. As per the aforesaid definition, an existing unit would be treated as having carried out substantial expansion when there is increase in the investment in the plant and machinery by at least 50% of the book value of the plant and machinery (before taking depreciation in any year). In all these cases at hand, the assessees had initially set up new industry in the State of Himachal Pradesh of the nature specified under Section 80-IC of the Act. As a result, they became entitled to avail the concession provided in the said provision. It is also an admitted fact that after five years and before the expiry of 10 years, the assessees had carried substantial expansion of their units in terms of the aforesaid definition. There can be another ‘initial assessment year’ on the fulfillment 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 in clause (v) of sub-section (8) of Section 80-IC can lead to a situation 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 the

10 assessment years. It is not on quantum. The purpose for which Section 80-IC was enacted was to establish the business of the nature specified in the said provision in the specified States. This provision was, thus, aimed at encouraging the undertakings or enterprises to establish and set up such units in the aforesaid States to make them industrially advanced States as well. Undoubtedly, these are difficult States as most of these States fall in hilly areas. Therefore, cost of production and transportation may also go up. [Para 19][426-D-F]

1.6 When these objectives for which Section 80-IC was enacted, are kept in mind an irresistible conclusion would be to grant 100% deduction of the profits and gains even from the year when there is substantial expansion in the existing unit. After all, this substantial expansion involves great deal of investment which has to be, at least 50% in the plant and machinery, of the book value thereof before taking depreciation in any year. With an expansion of such a nature not only there would be increase in production but generation of more employment as well, which would benefit the local populace. It is for this reason, carrying out substantial expansion by itself is treated as ‘initial assessment year’. It would mean that even when an old unit completes substantial expansion, such a unit also becomes entitled to avail the benefit of Section 80-IC. If that is the purpose of the legislature, there is no reason as to why 100% deduction of the profits and gains be not allowed to even those units who had availed this deduction on setting up of a new unit and have now invested huge amount with substantial expansion of those units. It would be pertinent to point out that in Para 20 of the judgment in Classic Binding Industries, this Court observed that if deduction @ 100% for the entire period of 10 years, it would be doing violence to the language of sub-section (6) of Section 80IC. However, this observation came without noticing the definition of ‘initial assessment year’ contained in the same very provision. [Paras 20, 22][426-F-H; 427-A, B; 431-B, C]

1.7 The aforesaid discussion leads to the following conclusions:

(a) Judgment dated 20th August, 2018 in Classic Binding Industries case omitted to take note of the definition ‘initial assessment year’ contained in Section 80-IC itself and instead based its conclusion on the definition contained in Section 80IB, which does not apply in these cases. The definitions of ‘initial assessment year’ in the two sections, viz. Sections 80-IB and 80IC are materially different. The definition of ‘initial assessment year’ under Section 80-IC has made all the difference. Therefore, we are of the opinion that the aforesaid judgment does not lay down the correct law.

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

(c) However, in case substantial expansion is carried out as defined in clause (ix) of sub-section (8) of Section 80-IC by such an undertaking or enterprise, within the aforesaid period of

10 years, the said previous year in which the substantial expansion is undertaken would become ‘initial assessment year’, and from that 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 of

10 years, as provided in sub-section (6). For example, if the expansion is carried out immediately, on the completion of first five years, the assessee would be entitled to 100% deduction again for the next five years. On the other hand, if substantial expansion is undertaken, say, in 8th year by an assessee such an assessee would be 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 8th year as this year becomes ‘initial assessment year’ once again. However, this 100% deduction would 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 Binding Industries (2018) 9 SCC 753 – held not correct law.

Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and Others (2018) 9 SCC 1 :

[2018] 7 SCR 1191 – followed.

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