REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO(S). 4765-4766 OF 2018 MAHABIR INDUSTRIES .....APPELLANT(S) VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX .....RESPONDENT(S) WITH CIVIL APPEAL NO. 4767 OF 2018 JUDGMENT A.K.SIKRI, J. short question of law arises for consideration in these appeals. All appeals are filed by same party, namely, Mahabir Industries (hereinafter referred to as assessee ) in which common respondent is Principal Commissioner of Income Tax (hereinafter referred to as Department ). Before stating Signature Not Verified question of law, it may be necessary to mention in brief Digitally signed by SUSHIL KUMAR RAKHEJA Date: 2018.05.18 background under which said question of law has arisen 17:05:49 IST Reason: Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 1 of 15 inasmuch as this background would be enabling factor in understanding true ambit and scope of question of law. assessee manufactures polythene for which it is having its factory in Shimla, Himachal Pradesh. activity undertaken by assessee, industrial undertaking, qualified for exemption from income tax under Section 80-IA of Income Tax Act (hereinafter referred to as Act ). Section 80-IA of Act provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc. if it fulfills conditions mentioned in sub- section (4) thereof. Such deduction is of amount equal to hundred per cent of profits and gains derived from such business for ten consecutive Assessment Years. In nutshell, those undertakings or enterprises, which fulfill conditions mentioned in sub-section (4) of Section 80-IA of Act, are entitled to total deductions of their profits, which means, no tax is payable and period for which such undertakings or enterprises are exempted from payment of tax is ten consecutive Assessment Years. assessee admittedly qualified for this deduction which it started availing from Assessment Year 1998-99. This deduction under Section 80-IA was claimed and allowed for two Assessment Years i.e. 1998-99 and 1999-2000. Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 2 of 15 2. Section 80-IA of Act was originally introduced in year 1991 by Finance (No.2) Act, 1991 w.e.f. April 1, 1991. There were amendments in Section from time to time. This Section was amended by Finance Act, 1999 w.e.f. April 1, 2000. Along with this provision, Section 80-IB was also introduced for first time by same Finance Act, 1999. This provision allows deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Deduction from such profits and gains is of amount equal to such percentage and for such number of Assessment Years as specified in Section 80-IB. Sub-section (4) of Section 80-IB provides for hundred per cent deduction for period of five years and thereafter twenty-five per cent. First proviso thereto states that total period of deduction is not to exceed ten consecutive Assessment Years. Second proviso is specific provision for industries in North-Eastern Region to which we shall advert to at appropriate stage. Sub-section (2) enumerates conditions which are to be fulfilled by such industrial undertakings in order to qualify for deductions from profits and gains under that provision. Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 3 of 15 3. As mentioned above, for Assessment Years 1998-99 and 1999-2000 (i.e. two Assessment Years), assessee was allowed deduction under Section 80-IA. From Assessment Year 2000-01 to Assessment Year 2005-06, assessee claimed deduction under Section 80-IB. 4. Interestingly, another provision in form of Section 80-IC was inserted by Finance Act, 2003 w.e.f. April 1, 2004. As per this provision, certain undertakings or enterprises in certain special category States are allowed deduction from such profits and gains, as specified in sub-section (3) of Section 80-IC. provisions of Section 80-IC provided deduction to manufacturing units situated in State of Sikkim, Himachal Pradesh and Uttaranchal and North-Eastern States. deduction was provided to new units established in aforesaid States, and also to existing units in those States if substantial expansion was carried out. deduction was available @100% for ten Assessment Years for units located in North-Eastern and in State of Sikkim and for units located in Himachal Pradesh, deduction was available @100% for five years and @25% for next five years. assessee completed substantial expansion (by investing in new plant and machinery of value more than 50% of value of plant and machinery already installed as on 1 April, Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 4 of 15 2005) to manufacturing unit situated at Baddi, Himachal Pradesh in Assessment Year 2006-07. In view of substantial expansion, accused claimed deduction under Section 80-IC @100% for Assessment Years 2006-07 and 2007- 08, which was also allowed by Assessing Officer (AO) after passing order under Section 143(3) of Act. 5. Sub-section (3), as noted above, mentions period of ten Assessment Years commencing with initial Assessment Year. Sub-section (6) may also be taken note of at this stage which reads as under: (6) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or enterprise under this section, where total period of deduction inclusive of period of deduction under this section, or under second proviso to sub-section (4) of section 80- IB or under section 10C, as case may be, exceeds ten assessment years. 6. As noted above, assessee had carried out substantial expansion in Assessment Year 2006-07 and, therefore, claimed exemption under Section 80-IC of Act for Assessment Year 2006-07 onwards. Deductions for year 2006-07 and 2007-08 were allowed. However, thereafter, deductions for Assessment Year 2008-09 and Assessment Year 2009-2010 were rejected by AO on ground that this was 11 th and 12th year of deduction and as per Section 80-IC(6), total deductions under Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 5 of 15 Section 80-IC and Section 80-IB cannot exceed total period of ten years. Commissioner of Income Tax (Appeals) {CIT(A)} and Income Tax Appellate Tribunal (ITAT) upheld order of AO. High Court took up appeals of assessee along with other similar enterprises who had claimed benefits. It framed following question in those appeals: moot issue involved in these appeals, inter alia, is as to whether undertaking or enterprise (hereinafter referred to as Unit), established after 7 th January, 2003, carrying out substantial expansion within specified window period, i.e. between 7.1.2003 and 1.4.2012, would be entitled to deduction on profits @100%, under Section 80-IC of Income Tax Act. Also, if so, then for what period. 7. This question has been decided in favour of all assessees. However, insofar as assessee herein is concerned, keeping in view that there is ceiling of ten years as stipulated under Section 80-IC(6), High Court has held that ten years period shall be counted from Assessment Year 1998-99 when assessee had claimed deduction for first time under Section 80-IA and, therefore, deductions for Assessment Years 2008- 09 and 2009-2010 would not be allowed. This is clear from following discussion in High Court judgment: 46. moment substantial expansion is completed as per Section 80-IC (8)(ix), statutory definition of initial assessment year [Section 80-IC(8)(v)] comes into play. And consequently, Section 80-IC(3)(ii) entitles unit to 100% deduction for five years commencing with completion Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 6 of 15 of substantial expansion , subject to maximum of ten years as per Section 80-IC(6). 47. unit that started operating/existed before 7.1.2003 was entitled to 100% deduction for first five years under Section 80-IB(4). If this unit completes substantial expansion during window period (7.1.2003 to 31.3.2012), it would be eligible for 100% deduction again for another five years under Section 80-IC(3)(ii), subject to ceiling of ten years as stipulated under Section 80-IC(6). 48. Applying aforesaid interpretation, we find there can be different fact situations, some of which, we have tried to illustrate; (i) Unit established prior to 7.1.2003, claiming deduction under Section 80-IB, post insertion of Section 80-IC carries out substantial expansion, would be entitled to deduction only under Section 80-IC, at admissible percentage, for remaining period, which in any case when combined, cannot exceed ten years, (ii) just as in case of present assessee, unit established after 7.1.2003, carries out substantial expansion only in 8th year of its establishment, for first five years would have already claimed deduction @ 100%; for 6th and 7th years @ 25%, and then for period post substantial expansion, in our considered view, initial year of assessment being in 8th year, would be entitled for deduction @ 100%, subject to cap of ten assessment years, (iii) assessee establishes unit after January 2003, say in year 2005-06 and claims deduction under Section 80-IC for first time in assessment year 2006-2007 @ 100% of its profits. Thereafter, substantially expands Unit in year 2009-10, relevant to Assessment Year 2010-11 can claim deduction @ 100% for next five years subject to cap of ten assessment years, (iv) existing unit not claiming any deduction under Section 80-IA, 80-IB or 80-IC substantially expands in year 2003 and claims deduction under Section 80-IC first time in Assessment Year 2004-2005 and then substantially expands in year 2007-2008, can claim deduction @ 100% w.e.f. Assessment Year 2008-2009 for next five years, (v) assessee sets up its unit in year 2000- 2001, claiming deduction under Section 80-IB till Assessment Year 2003-2004 and thereafter under Section 80-IC as per law. Carrying out Substantial expansion in Assessment Year 2004-2005, now claims deduction @ 100% w.e.f. Assessment Year 2004-05 again substantially expands in Assessment Year 2008-2009 can claim Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 7 of 15 100% deduction w.e.f. 2008-2009, (vi) assessee sets up unit in year 2005-2006 and does not undergo substantial expansion at all can claim deduction under Section 80-IC. 8. As can be discerned, all other aspects are decided in favour of assessees except what is illustrated at (i) and (iv). However, effect thereof is that insofar as appeals of assessee herein are concerned, they are dismissed on ground that it cannot claim deduction under Sections 80-IC, 80-IB or 10C for period exceeding ten years. 9. In this backdrop, questions of law which have been framed by assessee in these appeals are following: (a) Whether Hon ble High Court was justified in holding that petitioner was not entitled to deduction under Section 80-IC of Act by virtue of provision sub-section (6), when same was not even applicable to petitioner? (b) Whether Hon ble High Court was justified in holding that provisions of Section 80-IC(6) of Act apply to all undertaking claiming deduction under Section 80-IB(4) of Act when 80-IC(6) refers to only those undertakings which are covered by second proviso to Section 80-IB(4)? (c) Whether Hon ble High Court was justified in holding that petitioner is not eligible for deduction under Section 80-IC for period of 10 assessment years when substantial expansion was carried out by Petitioner and substantially new unit was claiming deduction under Section 80-IC of Act? (d) Whether Hon ble High Court was justified in holding that petitioner was not entitled to deduction under Section 80-IC of Act for assessment year 2008-09 and Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 8 of 15 2009-10 when total period of deduction of ten years was expiring after assessment year 2009-10? 10. As can be seen from reading of paras 46 and 47 of High Court judgment, it has taken categorical view that moment substantial expansion is completed as per Section 80-IC(8)(ix), statutory definition of initial assessment year {Section 80- IC(8)(v)} comes into play. As consequence, Section 80-IC(3)(ii) would entitle unit to hundred per cent deduction for five years commencing with completion of substantial expansion followed by twenty-five per cent deduction for next five years i.e. subject to maximum of ten years. Thus, High Court accepts that when substantial expansion is done in particular Assessment Year and that is made during period mentioned in sub-section (2) of Section 80-IC, not only benefit admissible under Section 80-IC shall get triggered, year in which such substantial expansion is completed is to be treated as initial assessment year . Having said so, it has put cap of ten years by invoking provision of Section 80-IC(6). We have already reproduced provisions of sub-section (6) of Section 80-IC. As per this provision, no deduction is allowed to any undertaking or enterprise under this Section, where total period of deduction inclusive of period of deduction under this Section, or under second Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 9 of 15 proviso to sub-section (4) of Section 80-IB or under Section 10C, as case may be, exceeds ten assessment years. total period of ten years, thus, is to be counted in following three circumstances: (a) When deduction has been given under Section 80-IC for period of ten years, no further deduction is admissible. (b) When deduction is given under second proviso to sub- section (4) of Section 80-IB. said second proviso reads as under: Provided further than in case of such industries in North-Eastern Region, as may be notified by Central Government, amount of deduction shall be hundred per cent. of profits and gains for period of ten assessment years, and total period of deduction shall in such case not exceed ten assessment years. This provision pertains to those industries which are in North-Eastern Region. (c) When deduction is claimed under Section 10C. It is again special provision in respect of certain industrial undertakings in North-Eastern Region. 11. assessee in instant case has not got deduction under Section 80-IC for period of ten years as he started claiming deduction under this provision w.e.f. Assessment Year 2006-07. Situation Nos. (b) and (c) mentioned above would not apply to Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 10 of 15 assessee as it s undertaking/enterprise is not established in North-Eastern Region. It is, thus, clear that High Court has failed to appreciate that provisions of Section 80-IC(6) of Act state that total period of deduction under Section 80-IC and Section 80-IB cannot exceed ten assessment years only if manufacturing unit was claiming deduction under second proviso to Section 80-IB(4) of Act i.e. units located in North-Eastern State. 12. matter can be looked into from another angle. Under Section 80-IA, deduction is provided to such industrial undertakings or enterprises which are engaged in infrastructure development etc. provided they fulfill conditions mentioned in sub-section (4) thereof. Section 80-IB makes provisions for deduction in respect of those industrial undertakings, other than infrastructure development undertakings, which are enumerated in said provision. On other hand, intention behind Section 80-IC is to grant deduction to units making new investments in State by establishing new manufacturing unit or even to existing manufacturing unit which carried out substantial expansions. purport behind three types of deductions specified in Section 80-IA, Section 80-IB and Section 80-IC is, thus, different. Section 80-IC stipulates period for which Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 11 of 15 hundred per cent deduction is to be given and then deduction at reduced rates is to be given. If assessee had earlier availed deduction under Section 80-IA and Section 80-IB, that would be of no concern inasmuch as on carrying out substantial expansion, which was carried out and completed in Assessment Year 2006-07, assessee became entitled to deduction under Section 80-IC from initial year. term initial year is referable to year in which substantial expansion has been completed, which legal position is stated by High Court itself and even accepted by Department as it has not challenged that part of judgment. inclusion of period for deduction is availed under Section 80-IA and Section 80-IB, for purpose of counting ten years, is provided in sub-section (6) of Section 80-IC and it is limited to those industrial undertakings or enterprises which are set-up in North-Eastern Region. By making specific provision of this kind, Legislature has shown its intent, namely, where industry is not located in North- Eastern State, period for which deduction is availed earlier by assessee under Section 80-IA and Section 80-IB will not be reckoned for purpose of availing benefit of deduction under Section 80-IC of Act. Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 12 of 15 13. Learned counsel for Revenue could not dispute that sub- section (6) of Section 80-IC would get attracted when industry is located in North-Eastern Region. Having faced with this situation, he raised altogether different argument for consideration by referring to Section 15C of Income Tax Act, 1922 (hereinafter referred to as 1922 Act ), which was also provision which granted exemption from income in respect of newly established industrial undertaking. He submitted that this Court in Textile Machinery Corporation Limited, Calcutta v. Commissioner of Income Tax, West Bengal, Calcutta 1 has held that true test for ascertaining whether industrial undertaking is formed by reconstruction of business already in existence (which was expression used in Section 15C of 1922 Act), is not whether new industrial undertaking connotes expansion of existing business of assessee but whether it is new and identifiable undertaking separate and distinct from existing business. In fine, endeavour of learned senior counsel was that assessee cannot be treated as industrial undertaking which has reconstructed business i.e. made substantial expansion. This argument has to be rejected for at least two reasons: 1 (1977) 2 SCC 368 Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 13 of 15 (i) Section 15C of 1922 Act provided exemption from tax to newly established industrial undertaking if they are not formed by reconstruction of business already in existence . Thus, under said provision, if it was found that industrial undertaking is formed by reconstruction of business already in existence, then it was entitled to any exemption under Section 15C. It is in that context Court was considering meaning of reconstruction of business. On other hand, words under Section 80-IC are substantial expansion . Thus, discussion contained in said judgment would have no application to instant case. (ii) Insofar as factum of substantial expansion of assessee s unit in Assessment Year 2006-07 is concerned, same is not subject matter of any controversy in instant case. It has been accepted by Department that assessee had carried out substantial expansion. Precisely, for this reason, AO had allowed deduction for Assessment Years 2006-07 and 2007-08. Therefore, issue is not as to whether there is substantial expansion or not. issue is only as to how period of ten years is to be calculated, namely, whether those Assessment Years in respect of which deduction under Section 80-IA and Section 80-IB was allowed are to be counted for purpose of giving deduction under Section 80-IC. Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 14 of 15 14. Thus, we are of opinion that it was wrong on part of AO not to allow deduction to assessee under Section 80-IC for Assessment Years 2008-09 and 2009-2010. As result, judgment of High Court on this aspect is set aside and appeals are accordingly allowed. ........J. (A.K. SIKRI) .......J. (ASHOK BHUSHAN) NEW DELHI; MAY 18, 2018. Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 15 of 15 Mahabir Industries v. Principal Commissioner of Income-tax