DEPUTY COMMISSIONER OF INCOME-TAX,  CIRCLE 11 (I) BANGALORE versus M/S. ACE MULTI AXES SYSTEMS LTD.
[2017] 12 S.C.R. 21, Supreme Court of India, 2017
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
[2017) 12 S.C.R. 21 
DEPUTY COMMISSIONER OF INCOME-TAX, 
CIRCLE 11 (I) BANGALORE 
v. 
MIS. ACE MULTI AXES SYSTEMS LTD. 
A 
(Civi1Appea1No.20854of2017) 
B 
DECEMBER 05, 2017 
[RANJAN GOGOi, ADARSH KUMAR GOEL AND 
NAVIN SINHA, JJ.] 
Income Tax Act, 1961 -
s.80 18(3) - Deduction in respect of C 
profits and gai11s from certain industrial undertakings other than 
infrastructure development undertakings - Deduction 11/s. 80 IB( 3) 
- Benefit of - Eligible business of an assessee given the benefit of 
deduction 11/s. 80 18 011 the assessee satisfying the conditions 
mentioned in sub-sec. (2) of s. 80 lB - Denial of the benefit of the 
said deduction to the asses.we on the ground that during the said D 
IO consecutil'e years, it ceases to be a small scale industry - Held: 
Assessee having not retained the character of 'small scale industrial 
undertaking', is not eligible to the incentive meant for that category 
- Permitting incentive in such case will he against the object of law 
- Incentive meant for small scale industrial undertakings ca11not 
E 
be availed by industrial undertakings whic/1 do not continue as 
small scale industrial undertakings during the relevant period -
Ec1c/1 assessment year is a different assess me/If year, except for block 
assessment. 
Disposing of the appeals, the Court 
F 
HELD: 1.1 Section 80 IB of the Income Tax Act provides 
for deductions of specified percentage from the profits and gains 
of the specified industrial undertakings other than
infrastructure 
development undertakings (which are separately dealt with under 
Section 80 IA). Clause 2 makes the deductions permissible i.n 
G 
respect of industrial undertakings fulfilling the conditions 
specified therein. The scheme applies to small scale industrial 
undertakings as defined in Clause 14(g) which in terms refers to 
Section 11 B of the Industries (Development and Regulation) 
Act, 1951. The extent of deduction permissible is mentioned in 
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SUPREME COURT REPORTS 
(2017] 12 S.C.R. 
Cfause 3 which is 25% (30% in the case of a company) of the 
profits and gains derived from such industrial undertakings for 
10 consecutive assessment years beginning with the initial 
assessment. [Para 10] [34-E-H] 
1.2 The scheme of the statute does not in any manner 
indicate that the incentive provided has to continue for 10 
consecutive years irrespective of continuation of eligibility 
conditions. Applicability of incentive is directly related to the 
eligibility and not de hors the same. lf an industrial undertaking 
does not remain. small scale undertaking or if it does not earn 
profits, it cannot claim the incentive. [Para 12] [35-D] 
1.3 On examination of the scheme of the provision, there. 
is no manner of doubt that incentive meant for small scale 
industrial undertakings cannot be availed by industrial 
undertakings which do not continue as small scale industrial 
D undertakings during the relevant period. Needless to say, each 
assessment year is a different assessment year, except for block 
assessment. [Para 13] [35-G] 
· 
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1.4 The observations in the impugned order are that the 
object of legislature is to encourage h1dustrial expansion which. 
implies that incentive should remain applicable even where on 
account of industrial expansion small scale industrial undertakings 
ceases to be small scale industrial undertakings. Incentive is 
given to a particular category of industry for a specified
purpose. 
An incentive meant for small scale industrial undertaking cannot 
be availed by an assessee which is not such an undertaking. It 
does not, in any manner, mean that the object of permitting 
industrial expansion is defeated, if benefit is not allowed to other 
undertakings. On this logic, incentive must be given irrespective 
of any condition as the incentive certainly helps further expansion 
by reducing the tax burden. The concept of vertical equity is well 
G known under which all the assessees need not be uniformally 
taxed. Progressive taxation is a well known element of tax policy. 
Higher slabs of tax or higher tax burden on an assessee having 
higher income or higher capacity cannot in any manner, be 
considered unreasonable. [Para 14] [35-H; 36-A-C] 
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DY. COMMNR. OF LT., CIRCLE 11 (1) v. MIS. ACE MULTI 
23 
AXES SYSTEMS LTD. 
1.5 There is no difference in the situation where the A 
assessee, is not initially eligible, or where. the assessee though 
initially eligible loses ·the qualification of eligibililty in subsequent 
assessment years. In both such situations, principle of 
interpretation remains the same. Thus, while there is no conflict 
with the principle that interpretation has to be given to advance 
B 
the object of law, in the instant case, .the assessee having not 
retained the character of 'smaU _scale industrial. undertaking', is 
not eligible to the incentive meant for that category. Permitting 
incentive in such case· will .be. against the object of law. The 
asscssee is not entitled to benefit of exemption if it 1.oses its 
eligibility as a small scale industri:,d undertaking in a particular C 
assessment year even if in initial-year eligibility was satisfied. 
[Paras 21-23] [42-D.F] 
Bajaj Tempo Ltd. v. CH (1992) 196 ITR 188 (SC) : 
(1992) 3 SCC 79 : [1992] 2 SCR 765 - distinguished. 
Citizen Cooperative Society Limited v. Assistant 
Commissioner of Income Tax, Circle-9( l ), ·Hyderabad 
391 ITR 1 : (2017) 9 SCC 364 ; St(lte ofHi1ryana v. 
Bharti Teletech Ltd. (2014) 3 SCC 556 : [2014] 1 SCR 
548 '; Commissioner of Customs v. M. · Alnbalal & Co. 
(2011) 2 SCC 74 : [2010] 15 SCR 937 ; State of 
Jharkhand v. Ambay Cements (2005) 1 SCC 368 : 
[2004] 6 Suppl; SCR 125 - referred to. 
Case Law Reference
[1992] 2 SCR 765 
distinguished 
Para 15 
(2011) 9 sec 364 
referred to 
Para 17 
[2014] 1 SCR 548 
referred to 
Para 18 
[2010] 15 SCR 937 
referred to 
Para 19 
[2004] 6 Suppl. SCR 125 
referred to 
Para 20 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 20854 
of2017. 
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SUPREME COURT REPORTS 
[2017) l 2 S.C.R. 
A 
From the final Judgment and Order dated 28.07.2014 of the High 
Court of Karnataka at Bangalore in ITA No.477 of 2013 
WITH 
Civil Appeal Nos .. 20856, 20857 and 20855 of2017. 
B 
Yashank Adhyaru, Sr. Adv, Ms.Sadhana Sandhu, Merusagar 
Samantray, SubhashAchariya, Ms.Viddusshi, Ms.Lhingneivah, Mrs.Anil 
Katiyar, Ad vs for the Appellant. 
Salil Kapoor, Ms.Ananya Kapoor, Sanat Kapoor, Sumit 
Lalchandani, Ms.Soumya Singh, Praveen Swamp, K.V. Mohan, 
C 
R.K. Raghavan, K.V. Balakrishnan, Advs for the Respondent. 
The Judgment of the Court was delivered by 
ADARSH KUMAR GOEL, J. 
Civil Appeal No.20854 of 2017 (@ Special Leave 
D Petition(Civil) No.4565 of 2015) 
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I. Leave granted. This appeal has been preferred against the 
judgment and order dated 281h July, 2014 of the High Court of Karnataka 
at Bangalore in Income Tax Appeal No.477 of 2013. The High Court 
framed the following question of law for consideration: 
"When once the eligible business of an assessee is given the 
benefit of deduction under Section 80 TB on the assessee 
satisfying the conditions mentioned in sub-sec. (2) of Section 
80 TB, can the assessee be denied the benefit of the said 
deduction on the ground that during the said JO comecutive 
years, it ceases to be a small scale industry?" 
2. The High Court answered the question in the negative and in 
favour of the assessee. The revenue has questioned the said view. 
3. The respondent assessee is engaged
in manufacture and sale 
of components/parts of CNC lathes and similar machines. Its income 
G 
was assessed for the assessment year 2005-2006 at Rs.1,79,82,653/-. 
However, the Commissione1 of Income Tax, interfered with the 
assessment under Section 263 to the extent it allowed deduction under 
Section 80 IB(3) of the Income Tax Act, 1961 (the Act) and directed 
fresh decision on the said issue vide order dated 16'h January, 2009. 
Thereafter, the Assessing authority on 141h December, 2009 disallowed 
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the claim ofRs.75,81,910/- towards deduction under Section 80 (B(3).
DY. COMMNR. OF 1.T., CIRCLE 11 (1) v. · MIS. ACE MULTI 
25 
AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.] 
The same was upheld by the Commissioner in appeal and the Income 
A 
Tax Appellate Tribunal in second appeal. However, the High Court has 
reversed the said orders and upheld the claim. 
4. The relevant Section is as follows : 
"80-IB. Deductio11 i11 respect of profits a11d gains from certain 
industrial undertakings other than infrastructure development 
u11dertaki11gs • (I) Where the grcss total income of an 
assessee includes any profits and gains derived from any 
business referred to in sub-sections ( 3) to (I I), (I I A) lllld 
B 
( 11 B) (such business being herei1u~fter n'.ferred to as the 
eligible business), there shall, in accordllnce with and subject c 
to the provisions of this section, be allowed, in computing the 
total income of the assessee, a deduction from such profits 
and gains of 1111 amount equal to such percentage and for 
such mtmber of assessment yew:1· as specified in this section. 
(2) This section applies to any industrial undertaking which 
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fulfils all the following conditions, namely :-
( i) it is not fmmed by splitting up, or the reconstruction, of 
a business already in existence: 
Provided that this condition shall not apply in respect of 
an industrial undertaking which is formed as a result of E 
the re-establishment, reconstruction or revival hy the 
assessee of t/1e business of any such industrial 
1111dertaki11g as is referred to in
section 338. in the 
circumstance~' and within the period specified ill that 
section; 
(ii) it is not formed by the trunsfer to a new business of 
machinery or plant previously used for any purpose; 
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(iii) it manufactures or produces any article or thing, not 
being any article or thing specified i11 the list in the 
Ele11e11th Schedule, or operates one or more cold storage 
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plant or plants, in any part of India : 
Provided that the condition in this clause shall, in relation 
to a small scale industrial undertaking or an industrial 
undertaking referred to in sub-section ( 4) slwll apply as if 
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SUPREME COURT REPORTS 
(2017) 12 S.C.R. 
the words "not being any article or thing specified in the 
list i11 the Eleventh Sclzedule" had been omitted. 
Explanation /.-For the purposes of clause '(ii). any 
macfzinery or plant which was used outside India by any 
person other than tlze assessee shall not be regarded as 
machine/}' or plant previously used for any putpose, if the 
following conditions are fulfilled, namely :-
(a) such machinery or plallt was not, at any time previous 
to the date of the i11stallation by the assessee, used in India; 
(b) suclz machinery or plant is imported into India from 
any country outside India; and 
( c) no deduction 011 account of depreciation in respect of 
such machinery or plant has been allowed or is allowable 
under the provisions of this Act in computing the total 
income of any person for any period prior to the date of 
the installation of the machinery or plant by the assessee. 
Explanation 2.-Where in the case of an industrial 
undertaking, any machinery or plant or any part thereof 
previously used for any purpose is tran.~ferred to a new 
business and the total mlue of the machinery or plant or 
part so tmmferred does not exceed twenty per cent of the 
total value of the maclzinei)' or plallt used in the business, 
then. for the purposes of clause (ii) <!f this sub-section, tlze 
condition specified therein slzall be deemed to have been 
complied witlz; 
(iv) in a case where the industrial
undertaking 
11urnu/(1ctures or produces articles or things, the 
undertaking employs ten or more workers in a 
manufacturing process carried on witlt the aid of powe1; 
or employs twenty or more workers in a manufacturing 
process carried 011 without tlze aid of power. 
( 3) The amount of deduction in the case of an industrial 
u11dertaking slzall be twenty-five per cent (or thirty per cent 
where tlze assessee is a compa11y), of the profits and gains 
derived from such i11d11strial u11dertaking for a period of ten 
consecutive assesnnent years (or twelve consecutive
DY. CQMMNR. OF l.T., CIRCLE 11 (I) v. MIS. ACE MULTI 
AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.] 
assessment yeai:v where the assessee is a co-opemtive socie(v) 
beginning witlz !he initial assessment year subject to the 
fi1!filment of the fiJ/lowing conditions, namely :-
( i) it begins to manufacture or pmduce. arlicles or things 
or to operate suclz plallf or plants at any time during the 
period beginning ji-om tlze 1st day of April, 199 J and 
ending on the 31st day of Ma1·r:h, 1995 or such further 
period as the Centml Government may, by notification in 
the Official Gazette, spec(f_i: with refe/"i'nce to any particu-
lar undertaking; 
(ii) where it is an industrial undertaking being a small 
scale industrial undertaking, it begins to nw1111facture or 
produce articles or tilings or to operate its cold storage 
plant [not specified in sub-section (4) or sub-section (5)] 
at any time during the period beginning on the Isl day of 
April, 1995 and ending on the 3/st day of March, 2002. 
(4) to (13) 
xxx 
xxx 
( 14) For the pu71Joses of this section,-
27 
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(a) 
"built-up area" means the inner measurements l!t' the 
residential unit at the .floor level, including the projections 
and balconies, as increased by the thickness of the walls 
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but does not include the common areas shared with other 
residential units; 
(aa) "cold chainfacili(r" means a chain of facilities for storage 
or transportation of agricultural produce under 
scientifically controlled
conditions including refrigeration 
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and other facilities necesSl/I)' for tlte preservation of such 
produce; 
(ab) "convention centre" mea11s a building of a prescribed area 
comprising of conve11tio11 halls to be used for the pu1pose 
of holding conferences and seminars, being of such si:e 
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and number and having suclz other facilities and amenities, 
as may be prescribed; 
(b) "hilly area" means·any area located at a height of one 
thousand mC'tres or more above the sea leFel: 
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SUPREME COURT REPORTS 
[2017] 12 S.C.R. 
(c) "i11itial assessment year"-
( i) in the case of an industrial undertaking or cold 
storage plant or ship or hotel, means the assessment year 
relel'Cmt to the pre.vious year in which the industrial 
undertaking begins to manufacture or produce articles or 
things, or to operate its cold storage plant or plants or the 
cold chain facility or the ship is first brought into use or 
the business of the hotel starts functioning; 
(ii) in the case of a company carrying on scientific and 
industrial research a11d development, means the assessment 
year relevant to the previous year in which the company is 
approved by the prescribed authority for the purposes of 
sub-section ( 8); 
(iii) in the case of an undertaking engaged in the business 
of commercial production or refining of mineral oil referred 
to in sub-section (9), means the assessment year relevant 
to the previous ye(ir in which the undertaking commences 
the commercial production or refi11ing of mineral oil; 
(iv) in the case of an undertaking engaged in the bus i11ess 
of processing, preservation and packaging of fruits or 
vegetables or i11 the integrated business of ha11dli11g, 
storage and tra11sportation of foodgrains, means the 
assessment year relevant to the previous year in which the 
undertaking begins such business; 
(v) 
in the case of a multiplex theatre, means the 
asse.1·s111e11t year relevant to the previous year in which a
ci11e111a hall, being a part of the said multiplex theatre, starts 
operati11g 011 a commercial basis; 
(vi) in the case of a conl'ention centre, means the 
assessment year relevant to the previous year in which the 
convention centre starts operating on a commercial basis; 
(vii) i11 the case of mi undertaking engaged i11 01>eruti11g 
a11d maintaining a hospital in a rural area, mea11s the 
assessmellt year relevant to the previous year in wliicli the 
undertaking begins to provide medical services;
DY. COMMNR. OF I.T., CIRCLE 11 (1) v. MIS. ACE MULTI 
29 
AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.] 
(d) "North-Eastern Region" me<ms the region comprising 
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the States of Arunachal Pruclesh, Assam, Manip111~ 
Meglwlaya, Mizoram, Nagalcmd, Sikkim und Tripum; 
(d<1) "multiplex themre" mem1s a building of 11 pre.l'cribed 
arcw, comprising of two or more cinema theatres and 
commercial shop.Y <!f .rnch size and member a11d /1m•i11g such 
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other facilities and mnenities as may be prescribed; 
(e) "place of pilgrimage" means a place where any temple, 
mosque, gurdwara, church or other place of public 
worship of renown throughout any State or States is situ-
ak~ 
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(j) "rural area" means any area other tlzan-
(i) an area which is comprised witllin the jurisdiction of a 
municipality (whether known as a municipalit;.; municipal 
corporation, notified area committee, town area 
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committee or by any other name) or a cantonment board 
and which lws a population of not less than ten thousand 
according to the preceding census of which relevant 
figures have been published before the first day of the pre-
vious year; or 
(ii) an area within such distance not being more than 
fifteen kilometres from the local limits of any municipality 
or cantonment board referred to i11 sub-clause (i), as the 
Centrnl Government may, having regard to the stage of 
development of such area including the extent of: and scope 
for, urbanisation of such area <tnd other relevant 
conside/'(/fio11s
spec(f.'v i11 this behalf by not(flcC1tio11 in the 
Official Gazette; 
(g) "small-scale industri<ll undertC'lking" means an 
industrial undertaking which is, as 011 the last day of tlle 
previous ye<ir, regarded as " sm<1ll-scale industrial 
undertaking under section 11 B of the Industries 
(Developmellt and Regulation) Act, 1951 (65 of 1951)." 
S. Before we consider the issue of correct interpretation of the 
above provision, it may be necessary to note the observations of the 
statutory authorities and the High Court on the issue. 
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SUPREME COURT REPORTS 
[2017) 12 S.C.R. 
A 
6. The assessment order dated 14'h December, 2009, disallowing 
the deduction is as follows : 
"The same is not acceptable on the ground that the value of 
plant and machinery has exceeded Rs. I crores as per the 
depreciation schedule annexed to the 3CD report which do 
B 
not come under the purview of the definition of small scale 
industry for the year ending 04-05 (A. Y.05-06). 
c 
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Jn view of the above, I am constrained to hold that the assessee 
company is not eligible for claim of 8018(3) deduction 
amounting to Rs. 75,81,9101- and hence same is disallowed." 
7. The Commissioner of Income Tax (Appeals) in order dated 
I S'h February, 2011 observed: 
"/ agree with the learned CIT who while passing the order 
u/s 263 has pointed out that the industrial undertaking, here 
initially SS! unit, has to fulfil all conditions in each of the 
block years of its entitlement or otherwise such claim has to 
be denied. He rightly points out that Section 80 JB(3) only 
forms the basis of entitlement and its scope. The fi1:~t condition 
is that it must be a SS/ unit in the year of claim and entitlement 
Section 80 TB ( 14)(g) defines what is a SS! and an exact date 
has been prescribed therein so that AO can examine whether 
on that date it is an SS! or not. The date is the last day of the 
relevant previous year in this case 31.03.2005 and such date 
is exclusively for the purpose of this section only. Admittedly 
the
investment in plant and machinery on 31.03.2005 was 
i.e., Rs.4,05,21,730/- which was more than the prescribed limit 
of that year i.e., 1 crore. Hence it no longer renwins a SST 
and hence the disallowance has to be held justified. 
xxx 
xxx 
xxx 
17. Summary: 
Section 80 TB is an incentive provision. It stipulates deduction 
in respect of profits and gains from certain industrial 
undertakings. Within this section a plethora of industries 
and busine.Ys types ha11e been gi11e11 the benefit of such 
deduction if they fulfill the conditions mentioned in the 
concerned sub section of Section 80!B of the Act. Some of
DY. COMMNR. OF l.T., CIRCLE 11 (I) v. MIS. ACE MULTI 
31 
AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.] 
A 
suclz concerns/industries are ship, hotel multiplex, theatres, 
housing projects etc. Sub-Section (2) of Section 8018 provides 
such conditions for industrial undertakings including cold 
storage and cold clzain facility and also Small Scale Industrial 
undertakings (in short henceforth SSIU). All the four 
conditions mentioned in Section 8018 (2) must be fui/illed to 
B 
make the industrial undertaking eligible for the benefit of 
the claim u/s 8018 of the I. T. Act. Condition No. I is that the 
industrial undertaking must not have been formed by splitting 
up or reconstruction of a business already in existence with 
an exception that in case of units specified u/s 338 of the I. T. 
Act this condition will not apply. The second condition is that 
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such undertaking must not have been formed by transfer of 
machinery or plant previously used with the exception that 
the value of such machinery and plant previously used must 
not exceed 20% of the value of the total cost of the plant and 
machinery of such industricil undertaking. The third condition 
D 
is that the industrial undertaking must produce or 
manufacture any article or thing other than any article or 
thing specified in the Eleventh Schedule. Exception to this 
third condition is that an SSIU can avail the 80lB benefit 
even if manufactures or produces articles or things specified 
in Eleventh Schedule. The
fourth condition is that the 
industrial undertaking running with the aid of power must 
not have less than JO employees and if it is run without power, 
the number of employees must be more thc111 20 employees. 
Thus all the/our conditions narrated above must be fulfilled 
if the industrial undertaking desires to avail benefit uls 80/B 
of the I.T. Act. For a SSIU there is also an extra conditio11 
i.e., it must be an SSI unit as per explanation. (g) give11 i11 
80/B ( 14) of I. T. Act which refers to Sectio11 JIB of tl1e IDR 
Act 1951 which in turn prescribes a limit for i11vest11ie11t i11 
pla11t and 111achi11ery to desig11ate the i11dustrial u11dertaki11g 
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as SSI unit. Thus out of these five conditions, tile first two 
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conditio11s may be called static or uncha11geable. /ti other 
words if in tile initial year of ma11ufacture or productio11 it is 
substantiated that it has fulfilled these two conditio11s tile A.O. 
ca11not on this ground in subseque11t eligible years of the block 
period deny the benefit uls 80/B. The rest three conditions 
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SUPREME COURT REPORTS 
[2017] 12 S.C.R. 
are volatile and unstable. The industrial undertaking must 
show in each subsequent year of claim that these three 
conditions llave not bee11 violated. Such claims of tlle assessee 
llas to face tlle a11alysis a11d scrutiny of tlie A.O. Thus, si11ce 
eacll A. Y. is separate a11d i11dependent, tl1e reve1111e authorities 
llad every power to examine and analyse tlle facts and figures 
as well as relevant law points of each year to find out wlletller 
all these three co11ditio11s are fuljilled or not. It is also the 
ratio of the cited case of Natraj Stationery 312 /TR 22 (Delhi) 
vide page l 4 supra. It has been stated in that case that the 
first two conditions have already been satisfied and it is 
assumed that the fourth condition has been fulfilled in that 
year and hence the relief The same is also tile ratio in the 
case of -
Mis. Janak Dehydration ( P) Limited vs. 
Asst. CIT (2010). 134 TTJ Ahd. D-Trib-1. The filcts of that 
case was that the assessee was allowed deductio11 u/s 80/B 
from 1993-94 to 2002-03 but in the A.Y. 2003-04 the claim 
was disallowed on the grou11d that in the i11ititil year the 
industrial unit has been formed by reconstruction or splitting 
up of the existing unit. The !TAT held that it is not open to the 
A.O. to doubt the earlier acceptance of the depurtment in 
respect of reconstruction and splitting up to deny the claim ill 
subsequent yeur because that violates the
principles of 
consistency. But it also laid down that -
"Under the /. T. Act eClch year is a separate unit of 
assessmellf mid taxable income as well as tax liability are 
to be determined keeping in view of the fi1cts prevailing 
in tl1at year and the law ClS applicable in that year. " 
In tlze light of the c1bove lege1l matrix as elclborated i11 PC1ra 
l 5 above it can be palpably seen that the "ppellant lws 
1 lolafc'd, tlze mandatory fifth condition. It is not doubted thClt 
in 111, i11itial A. Y. the "ppellant was cm SS/ unit, but i11 the A. Y. 
2005-06 the investment in plC1nt cmd machinery hC1s admittedly 
exceeded the prescribed limit of Rs. l Crore. Therefore, ii 
cc11111ot be held as an SS!U. Thus the fifth condition being 
violated openly cmd admittedly by the appellant, the relief 
sought for has to be denied in the A. Y. 2005-06.
DY. COMMNR. OF 1.T., CIRCLE 11 (I) v. MIS. ACE MULTI 
33 
AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.] 
18. In view of the above, additionldisallowance is upheld. 
A 
Appeal is dismissed. " 
8. The ITAT in its order dated 24'h May, 2013 observed : 
"5.3.6. Taki11g into account all tlie facts and circumstances 
of tire issue as discussed in Ille fore going paragraplls and 
also, as rightly highlighted by the AO, tire value of plant and B 
machinery had exceeded Rs.l crore duri11g the year under 
consideration which incidentally deprive the assessee to call 
itself as a Small Scale Industry, we are of the considered 
view that the authorities below were justified in denying the 
assessee's claim for deduction u/s 80-18(3) of the Act. It is c 
ordered accordingly." 
9. Considering the question framed by it, the High Court held: 
"5. In the entire pm11ision, there is no indication that these 
conditions had to be fulfilled by the assessee all the JO years. 
When once the benefit of JO years, commencing fmm the initial D 
year, is granted, if the undertaking satisfv all these conditions 
initially, the undertaking is entitled to the benefit of JO 
consecutive years. The argument that, in the course of I 0 
years, if the growth of the industry is fast and it acquires 
machinery and the total value of the machinery exceeds Rs. I 
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crore, it ceases to ha11e the said benefit, do not follow from 
any of the pro11isions. It is true that there is no express 
provision indicating either
way, what would be the position if 
the s11utll scale industl)' ceases to be a small scale industry 
during tlle said period of I 0 years. Because of tlwt ambiguity, 
a need for inteqJretation.c1rises. If we keep in mind the object 
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of the legislature providing for these incenti11es and when Cl 
period of 10 yee1rs is prescribed, that is the period, probably, 
which is required for cmy industry to stabilize itself. During 
that period the industry not only manufactures products, it 
generates employment e111d it adds to the wealth of the country. 
0 
Merely because a11 i11dustry stabilizes early, makes profits, 
makes future i11vestme11t i11 tire said busi11ess, a11d it goes out 
of tile defl11itio11 of the small scale industry, the benefit under 
Sec. 8018 cannot be denied. If suc/1 a literal interpretation is 
placed on the said provision, it would run counter to the very 
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. object of granting incentives. It would kill the industry. 
Therefore, keeping in mind the object with which these 
provisions are enacted, keeping in mind the industrial growth 
which is required to be achieved, if two interpretations are 
possible, the courts have to lean in favour of extending the 
benefit of deduction to an assessee who has availed the 
opportunity given to him under law and has grown in his 
business. Therefore we are of the view, if a small scale 
industry, in the course of IO years, stabilizes early, makes 
further investments in the business and it results in it'.~ going 
outside the purview of the definition of a small scale industry, 
that should not come in the way of its claiming benefit under 
Sec.80/B for IO consecutive years, from the initial assessment 
vear. Therefore, the approach of the authorities runs counter 
. . 
. 
to the scheme and the intent of the Legislature. Thereby they 
have denied the legitimate benefit, an incentive granted to 
the assessee. Both the said orders cannot be sustained. 
Therefore the substantial question of law is answered in favour 
of the assessee and against the Revenue." 
(emphasis in quotations is ours) 
I 0. Section 80 IB is in Chapter VI A of the Act which provides 
for deductions to be allowed from total income which is to be computed 
under the relevant provisions. The scheme is to provide incentives for 
purposes mentioned in
different provisions of the said Chapter. Section 
80 IB provides for deductions of specified percentage from the profits 
and gains of the specified industrial undertakings other than infrastructure 
development undertakings (which are separately dealt with under Section 
80 IA). The clause relevant for purposes of this appeal is Clause 2 
which makes the deductions permissible in respect of industrial 
undertakings fulfilling the conditions specified therein. The scheme applies 
to sm:1!1 scale industrial undertakings as defined in Clause 14(g) which in 
terms refers to Section 11 B of the Industries (Development and 
Regulation) Act, 1951. The extent of deduction permissible is mentioned 
in Clause 3 which is 25% (30% in the case of a company) of the profits 
and gains derived from such industrial undertakings for 10 consecutive 
assessment years beginning with the initial assessment. The 'initial 
assessment year' is defined in Clause 14 (c) as the year in whjch 
manufacturing/production commences.
DY. COMMNR. OF I.T., CIRCLE 11 (1) v. MIS. ACE MULTI 
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11. As already noted, the question for consideration is whether 
A 
deduction under Clause 3 for I 0 consecutive assessment years remains 
permissible irrespective of compliance of conditions subject to which 
the said deduction is permitted in the relevant assessment years. For 
purposes of deduction, the industrial undertakings covered by Section 80 
IB are of different categories. Under the second proviso to Clause 2, 
disqualification applicable to industrial undertaking, other than small scale 
industrial undertakings, i.e., not being in 81h Schedule is not applicable. 
The small scale industrial undertakings eligible are only those which begin 
manufacture or produce, articles or things during the beginning of I" 
day of April, 1995 and ending on 31" day of March, 2002 [Clause 3(ii)]. 
For other categories of industrial undertakings, different periods are 
prescribed, e.g. under sub-clause (i) of Clause (3). 
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12. The scheme of the statute does not in any manner indicate 
that the incentive provided has to continue for 10 consecutive years 
irrespective of continuation of eligibility conditions. Applicability of 
incentive is directly related to the eligibility and not de hors the same. If D 
an industrial undertaking does not remain small scale undertaking or if it 
does not earn profits, it cannot claim the incentive. No doubt, certain 
qualifications are
required only in the initial assessment year, e.g. 
requirements of initial constitution of the undertaking. Clause 2 limits 
eligibility only to those undertakings as are not formed by splitting up of 
.existing business, transfer to a new business of machinery or plant 
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previously used. Certain other qualifications have to continue to exist 
for claiming the incentive such as employment of particular number of 
workers as per sub-clause 4(i) of Clause 2 in an assessment year. For 
industrial undertakings other than small scale industrial undertakings, not 
manufacturing or producing an mticle or things specified in 8'
11 Schedule 
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is a requirement of continuing nature. 
13. On examination of the scheme of the provision, there is no 
manner of doubt that incentive meant for small scale industrial 
undertakings cannot be availed by industrial undertakings which do not 
continue as small scale industrial undertakings during the relevant period. a 
Needless to say, each assessment year is a different assessment year, 
except for block assessment 
14. The observations in the impugned order are that the object of 
legislature is to encourage industrial expansion which implies that 
incentive should remain applicable even where on account of industrial 
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expansion small scale industrial undertakings ceases to be smttll scale 
industrial undertakings. We are unable to appreciate the logic for these 
observations. Incentive is given to u particular category of industry for a 
specified purpose. An incentive meant for small scale industrial 
undertaking cannot be availed by an assessee which is not such an 
undertaking. It does not, in any manner, mean that the object of permitting 
industrial expansion is defeated, if benefit is not allowed to other 
undertakings. On this logic, incentive must be given irrespective of any 
condition as the incentive certainly helps further expansion by reducing 
the tax burden. The concept of vertical equity is well known under 
which all the assessees need not be uniformally taxed. Progressive 
taxation is a well known element of tax policy. Higher slabs of tax or 
higher tax burden on an assessee having higher income or higher capacity 
cannot in any manner, be considered unreasonal:-le. 
15. We may now refer to some of the decisions which have been 
cited at the bar. It is submitted on behalf of the assessee that a provision 
D relating to incentive should be construed liberally to advance the objective 
of the provision. Reliance has been placed on Bajaj Tempo Ltd. versus 
CIT'. Therein the assessee claimed exemption meant for a new industrial 
undert;1king which had not been formed by transfer of earlier business 
in terms of Section 1
SC of the Income Tux Act, 1922. After recording a 
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finding of fact that the assessee wus a genuine new industrial undertaking, 
it was observed that a provision of a taxing statute granting incentive for 
promoting growth and development should be construed liberally. The 
judgment is distinguishable. Construing liberally does not mean ignoring 
conditions for exemption. The main issue considered in the said judgment 
was that though the undertaking was u genuine 'new industrial 
undertaking' which was the qualification for the exemption, a nominal 
part of the undertaking was out of the existing undertaking and building 
of an existing undertaking was taken on lease. The relevant observations 
are: 
"9. Initial exercise, therefore, should be to find out if the 
undertaking was new. Once this test is satisfied then clause 
(i) should be applied reasonably and liberally in keeping with 
spirit of Section 15-C( 1) of the Act. While doing so various 
situations may arise for instance the formation may be 
without anything to do with any earlier business. That is the 
1 (1992) 196 JTR 188 csc> = (1992) 3 sec 78
DY. COMMNR. OF l.T., CIRCLE 11 (1) v. MIS. ACE MULTI 
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undertaking may be formed without splitting up or 
reconstructing any existing business or without transfer of 
any building material or plant of any previous business. Such 
w1 undertaking undoubtedly would be eligible to benefit 
without any difficulty. On tlze other extreme may be an 
undertaking 11ew in its form but not in substance. It may be 
new in name only. Such an undertaking would obviously not 
be entitled to the benefit. In between the two there may be 
various other situations. The difficulty arises in such cases. 
For instance a 11ew company may be formed, as was in this 
case a fact which could not be disputed, even by the Income 
Tax Officer. But tools and implements worth Rs 3,500 were 
transferred to it of previous firm. Technically speaking it was 
transfer of material used in previous business. One could say 
as was vehemently urged by the learned counsel for the 
department that where the language of statute was clear there 
was no scope for interpretation. If the submission of the 
learned counsel is accepted then once it is found that the 
material used in the undertaking was of a previous business 
there was an end of inquiry and the assessee was precluded 
from claiming any benefit. Words of a statute are undoubtedly 
the best guide. But if their meaning gets clouded then courts 
are required to clear the haze. Sub-section (2) advances the 
objective of
sub-section (I) by including in it every 
undertaking except if it is covered by clause (i) for which it is 
necessary that it should not be formed by tramfer of building 
or machinery. The restriction or denial of benefit arises not 
by transfer of building or material to the new company but 
that it should not be formed by such transfer. This is the key 
to the i11terpretation. The formation should not be by such 
transfer. The emphasis is on formation not on use. Therefore 
it is not transfer of building or nwterial but the one which 
can be held to have resulted in formation of the undertaking. 
Ill Textile Machinery Corporation Ltd. v. CIT {( 1977) 2 SCC 
368] this Court while interpreting Section 15-C observed : 
(SCC p. 375, para 18) 
"The true test, is not whether the new industrial 
undertaking connotes expansion of the existing business 
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of the assessee but whether it is all the same a new and 
identifiable undertaking separate and distinct from the 
existing business. No particular decision in one case can 
lay down an inexorable test to determine whether a given 
case comes under Section I 5-C or not. In order that the 
new undertaking can be said to be not formed out of the 
already existing business, there must be a new emergence 
of a physically separate industrial unit which may exist 
on its own as a viable unit. An undertaking is formed out 
of the existing business if the physical identity with the · 
old unit is preserved." 
Even though this decision was concerned with the clause 
dealing with reconstruction of existing business but the 
expression 'not formed' was construed to mean that the 
undertaking should not be a continuation of the old but 
emergence of a new unit. Therefore even if the undertaking is 
established by transfer of building, plant or machinery but it 
is not formed as a result of such transfer the assessee could 
not be denied the benefit." 
16. The principle of law considered in Bajaj Tempo (supra) is 
cert[tinly a valid principle of interpretation where there is ambiguity or 
absurdity or where conditions of eligibility are substantially complied. In 
the present case, the scheme of the statute is clear that the incentive is 
applicable to a small scale industrial undertaking. The intention of 
legislature
is in no manner defeated by not allowing the said incentive if 
the assessee ceases to be the class of industrial undertaking for which 
the incentive is provided even if it was eligible in the initial year. Each 
assessment year is a separate unit. 
17. In Citizen Cooperative Society Limited versus Assistant 
Commissioner of Income Tax, Circle-9(1), Ilyderabad1 this Court 
considered the incentive under Section 80-P meant for a primary 
agricultural credit society or a primary cooperntive agricultural and rural 
development bank. The assessee was held not to be entitled to the said 
incentive as business of the assessee was held to be finance business to 
which the incentive was not admissible even though the principle of 
liberal interpretation in terms of Bajaj Tempo (supra) was applied. 
'391 ITR l = c2011J 9 sec 364
DY. COMMNR. OF LT., CIRCLE 11 (I) v. MIS. ACE MULTI 
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18. Iri State of Harya11a versus Bharti Teletech Ltd. 3, eligibility 
A 
of an assessee to get benefit of exemption from tax was an issue. It was 
observed that while the exemption notification should be liberally construed, 
the beneficiary must fall within the ambit of the exemption and fulfill the 
conditions thereof. In case such conditions are not fulfilled, the issue of 
application of the notification does not arise. The principle of B 
interpretation in the judgment in Bajaj Tempo (supra) and other 
judgments was dealt with as follows : 
"22. We will be failing in our duty if we do not address a 
submission, albeit the last straw, of M1: Jain that any provision 
relating to grant of exemption, be it under a rule or c 
notification, should be considered liberally. In this regard, 
we may profitably refer to the decision in Hansraj 
Gordhandas v. CCE and Customs [AIR 1970 SC 755] wherein 
it has been held as follows: (AIR p. 759, para 5) 
"5 . ... It is well established that in a taxing statute there is 
no room for any illfend111e11t but regard must be had to the 
clear meaning of the words. The entire matter is governed 
wholly by the language of the notification. If the tax-payer 
·is within the plain terms of the exemption it cwuwt be 
denied its benefit by calling in aid any supposed intention 
of the exempting authority. If such intention can be 
gathered from the
construction of the words of the 
notification or by necessary implication therefrom, the 
matter is different." 
23. In CST v. Industrial Coal Enterprises [(1999) 2 SCC 605], 
after referring to CIT v. Straw Board Mfg. Co. Ltd. [(1989 
(Supp.) 2 SCC 529] and Bajaj Tempo Ltd. v. CIT, the Court 
ruled that an exemption notification, as is well known, should 
be construed liberally once it is found that the el/frepreneur 
fulfils all the eligibility criteria. In reading an exemption 
notification, no condition should be read into it when there is 
none. If w1 entrepreneur is entitled to the benefit thereof, the 
same should not be denied. 
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"32. It may be true that the exemption notification should 
receive a strict construction as has been held by this Court 
in Novopan India Ltd. v. CCE and Customs[ 1994 (Supp) 
3 sec 606], but it is also true that once it is found that 
tlze industry is entitled to the benefit of exemption 
notification, it would received a broad construction. (See 
TISCO Ltd. v. State of Jharkhandf (2005) 4 SCC 272] and 
A.P. Steel Re-Rolling Mill Ltd. v. State of Keralaf (2007) 2 
sec 725 ].) A notification granting exemptio11 Call be 
withdrawn in public interest. What would be the public 
interest would, howeve1; depend upon the facts of each 
case. " 
25. From the aforesaid authorities, it is clear as crystal that a 
statutory rule or an exemption notification which confers 
benefit on the assessee on certai11 conditions should be 
liberally construed but the beneficiary should fall withi11 the 
ambit of the rule or 11otification and further if there are 
co11ditions and violation thereof are provided, then the concept 
of liberal construction would not arise. Exemption being an 
exception has to be respected regard being had to its nature 
and purpose. There can be cases where liberal interpretation 
or understanding would be permissible, but in the present 
case, the rule position being clear, the same does not arise. " 
19. Same view was taken in Commissioner of Customs versus 
M. Ambalal & Co.4 as follows : 
"16.
It is settled law that the notification has to be read as a 
whole. If any of the conditions laid down in tl1e notification 
is not fulfilled, the party is not entitled to the benefit of that 
notification. The rule regarding exemptions is that exemptions 
should generally be strictly interpreted but beneficial 
exemptions having their purpose as encouragement or 
promotion of certain activities should be liberally interpreted. 
This composite rule is not stated in any particular judgment 
in so many words. In fact, majority of judgments emphasise 
that exemptions are to be strictly interpreted while some of 
them insist that exemptions in fiscal statutes are to be liberally 
• (2011) 2 sec 74
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interpreted giving an apparent impression that they are 
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contradictory to each other. But this is only apparent. A close 
scrutiny will reveal that there is no real contradiction amongst 
the judgments at all. The synthesis of the views is quite clearly 
that the general rule is strict interpretation while special rule 
in tlze case of beneficial and promotional exemption is liberal 
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interpretation. The two go very well with each other because 
they relate to two different sets of circumstances." 
20. In State of Jharkhand versus Ambay Ceme11ts5, the question 
was whether exemption for newly set up industrial units was applicable 
to the assessee therein. The High Court having allowed the benefit 
even though the assessee did not qualify for the same, this Court reversed 
the view of the High Court and held that the conditions for grant of 
exemption from tax are mandatory and in absence thereof exemption 
could not be granted. Distinguishing the judgments of this Court in Bajaj 
Tempo (supra), it was observed : 
"23. Mr Bharuka further submitted that in taxing statutes, 
provision of concessional rate of tax should be liberally 
construed and in respect of the above submission, he cited 
the judgment of this Court in CST v. Industrial Coal 
Enterprises [( 1992) 3 SCC 78] and in the case of Bajaj Tempo 
Ltd. v. CIT. We are unable to countenance the above 
submission. Jn
our view, the provisions of exemption clause 
should be strictly construed and if the condition under which 
the exemption was granted stood cha11ged 011 account of any 
subsequent event the exemption would not operate. 
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taxing statute should be construed strictly and it is not open 
to the court to ignore the conditions prescribed in the 
industrial policy and the exemption notifications. 
25. In our view, the failure to comply with the requirements 
renders the writ petition filed by the respondellt liable to be 
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dismissed. While mandatory rule must be strictly observed, 
substantial compliance might suffice in the case of a directory 
rule. 
' c2oos) 1 sec 368 
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26. Whenever the statute prescribes that a particular act is to 
be done in a particular manner and also lays down that failure 
to comply with the said requirement leads to severe 
consequences, such requirement would be mandatory. It is 
the cardinal rule of interpretation that where a statute provides 
that a particular thing should be done, it should be done in 
the manner prescribed and not in any other way. It is also 
settled rule of interpretation that where a statute is penal in 
character, it must be strictly construed and followed. Since 
the requirement, in the instant case, of obtaining prior 
permission is mandatory, therefore, non-compliance with the 
same must result in cancelling the concession made in favour 
of the grantee, the respondent herein." 
21. In view of the above judgments, we do not see any difference 
in the situation where the assessee, is not initially eligible, or where the 
assessee though initially eligible loses the qualification of eligibililty in 
subsequent assessment years. In both such situations, principle of 
interpretation remains the same. 
22. Thus, while there is no conflict with the principle that 
interpretation has to be given to advance the object oflaw, in the present 
case, the assessee having not retained the character of 'small scale 
industrial undertaking', is not eligible to the incentive meant for that 
category. Permitting incentive in such case
will be against the object of 
law. 
23. For the above reasons, we hold that the assessee is not entitled 
to benefit of exemption if it loses its eligibility as a small scale industrial 
undertaking in a part.icular assessment year even if in initial year eligibility 
was satisfied. 
The appeal is accordingly disposed of in the above terms. 
Civil Appeal No. 20856 of 2017 
(@ Special Leave Petition(Civil) No.8331 of 2016) 
Civil Appeal No.20857 of 2017 
(@ Special Leave Petition(Civil) No.3323 of 2016) 
Civil Appeal No.20855 of 2017 
(@ Special Leave Petition(Civil) No.148 of 2016)

DY. COMMNR. OF l.T., CIRCLE 11 (1) v. MIS. ACE MULTI 
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24. Leave granted. In view of the judgment in the main matter, 
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these appeals are disposed of in the same terms. 
25. The assessing authority may pass an order of compliance by 
applying the above principle to the facts of individual cases. 
Nidhi Jain 
Appeals disposed of. 
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