Case: PR. COMMISSIONER OF INCOME TAX SHIMLA Vs. M/S AARHAM SOFTRONICS

3. The High Court has answered the aforesaid question in the affirmative thereby holding that when the assessees started availing exemption of 100% tax on the setting up of a new industry of the kind mentioned in sub-section (2) of Section 80IC, which is admissible for 5 years, and either on the expiry of 5 years or thereafter (but within 10 years) from the date when these assessees started availing exemption, they carried out substantial expansion of its industry, from that year the assessees become entitled to claim exemption @ 100% again.  4. The Income Tax Department (hereinafter referred to as the Revenue) had challenged the judgment of the High Court on the aforesaid issue by filing number of special leave petitions which were converted into appeals after leave was granted in those special leave petitions. Thereafter, these appeals were heard and decided by a Division Bench of this Court, which comprised one of us (A.K. Sikri, J.). By its judgment dated August 20, 2018. The judgment of the High Court was reversed on the aforesaid issue.  5. It so happened that in some of the appeals, assessees who were respondents, were not served with the notice and they remained unrepresented. Since the appeals in respect of these assessees were decided in their absence, they filed miscellaneous applications for recall of the order, with prayer to decide the appeals afresh after giving hearing to them. Since, these assessees remained unrepresented, as even the notice was not served upon them, by a separate order passed in their cases, those applications have been allowed and their appeals being C.A. No. 7218, 7882, 7236, 7215, 7221, 7217 and 7223 of 2018 have been restored. Even the Revenue has filed few SLPs against the common judgment of the High Court as these SLPs were not filed earlier when batch of appeals was decided on 20 th August, 2018 by this Court. Appeals arising out of these SLPs have also been heard along with other appeals in which the earlier judgment rendered has been recalled. All these appeals have been heard afresh and are being disposed of by the present judgment.  6. We have already taken note of the question of law that arises for determination. Factual background in which this question of law arises for consideration has been taken note of in the judgment dated 20 th August, 2018 which may again be reiterated, in order to understand the niceties of this issue:  To understand the aforesaid question of law in clear terms, it may 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 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 is in two parts: in certain cases, exemption from income is provided at the rate of 100% of such profits and gains earned from the aforesaid undertaking or enterprise for 10 assessment years commencing with the initial assessment year. The present appeals do not fall in that category. Other clause relates to another category of undertakings or enterprises (these cases belong to that category) where the exemption is at the rate Civil Appeal No. 7208 OF 2018 & Ors. Page 4 of 17 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. In these cases, all the assessees started claiming exemption @ 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 exemption from profits and gains for another five years @ 100% instead of 25% from 6th to 10th year as well. Interestingly, they admit that the total period during which they are entitled to exemption would not exceed 10 years, as per the mandate of sub-section (6). In this backdrop, the question is as to whether the assessees can again start claiming 100% exemption for the next five years from profits and gains after availing the same for first five years on the ground that they have now carried out substantial expansion. The High Court has answered the question in affirmative and for this reason, it is the department which has come up to this Court challenging the said decision by filing these appeals.

Reasoning:
9. In all these cases assessees had started availing exemption under Section 80-IC on the setting up of new industrial units. All these assessees have availed 100% deduction for a period of 5 years. As noticed above, from sixth year, in normal course, deduction is admissible @ 25% of the profits and gains, for next five years (or 30% where the assessee is a company. However, all these assessees, after the expiry of five years, carried out substantial expansion of their existing units. This substantial expansion is in accordance with the provisions of Section 80-IC and there is no dispute about the same. From the year such substantial explanations were carried out by the assessees, the assessees demanded deduction @ 100%, instead of 25%/30% for the remaining period of 10 years which is the maximum period for which deduction is admissible12.As can be seen from the aforesaid passage, this 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. As pointed out in the later part of the judgment, 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. Therefore, definition of initial assessment year mentioned in Section 80-IB could not have been the basis of finding out the definition of initial assessment year which is different from the definition contained in Section 80-IB. Further, Sub-section (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 year13.Learned counsel appearing for the assessees pointed out before us that 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. We find substance in this submission of the assessees. We have no hesitation to accept this mistake which occurred in the aforesaid judgment. The Court specifically dealt with initial assessment year and came into 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 20 th August, 2018 in Classic Binding Industries case15.On the basis of this definition, counsel for the assessees before us have argued that there can be more than one initial assessment year which can be triggered by the contingency provided therein17.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). As already noted above, 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. When we consider the definition of initial assessment year, keeping in view these factors, we find substance in the submissions made by the learned counsel for the assessees and are inclined to accept that 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 unit18.The Court is supposed to give effect to the provisions of Section 80-IC by reading various provisions conjointly. For the purpose of these cases, 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 of the nature specified therein in the State of Himachal Pradesh or the State of Uttaranchal between the 7 th January, 2003 and 1 st April, 2015, such an undertaking or enterprise shall become eligible for the deductions from such profits and gains, as specified in sub-section (3). In respect of State of Himachal Pradesh (in respect of which these cases pertain to) sub-section (3) enumerates the extent of deduction. It is 100% of profits and gains for first five initial assessment years commencing with the initial assessment year and thereafter 25% (or 30% where the assessee is a company) of the profits and gains. The deduction @ 25% for the neat five years in on the assumption that the new unit remains static insofar as expansion thereof is concerned. However, the moment substantial expansion takes place, another initial assessment year gets triggered. This new event entitles that unit to start getting deduction @ 100% of the profits and gains. At the same time, new period of 10 years does not start. It is because of the reason that total period for which deduction can be allowed is capped at 10 years, inasmuch as sub-section (6) in no uncertain terms stipulates that deduction shall be not allowed for a period exceeding 10 assessment years. In fact, this period of 10 years relates not only in respect of deduction under Section 80-IC but under the second proviso to sub-section (4) of Section 80-IB as well. It would mean that total deduction under Section 80-IB as well as 80-IC is for a period of 10 years19.Having examined the scheme in the aforesaid manner, we arrive 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 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. We have also to keep in mind the purpose for which Section 80-IC was enacted. The purpose 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 up20.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 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, we see 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.We are inclined to agree with the aforesaid interpretation23.Having examined the matter in the aforesaid perspective, judgment in the case of Mahabir Industries v. Principal Commissioner of Income Tax Civil Appeal Nos. 4765-4766 of 2018 decided on May 18, 2018would, in fact, help the assessee. The fine distinction pointed out in Classic Binding Industries elopes thereby. To recapitulate, in Mahabir Industries, it was held that if an assessee get 100% exemption under Section 80-IB of the Act for five years and thereafter carries out the substantial expansion because of which said assessee 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 ground that there can be two initial assessment years, one for the purpose of Section 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 per the definition thereof in Section 80-IC itself, the legal position comes at par with the one which was discussed in Mahabir Industries.