Case: Deputy Commissioner of Income-Tax, Circle 11 (1), Bangalore Vs. M/s. Ace Multi Axes Systems Ltd

Civil Appeal No. 20854 of 2017 (@ Special Leave Petition(Civil) No.4565 of 2015)Leave granted.This appeal has been preferred against the judgment and order dated 28th 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 considerationonce the eligible business of an assessee is given the benefit of deduction under Section 80 IB on the assessee satisfying the conditions mentioned in(2) of Section 80 IB, can the assessee be denied the benefit of the said deduction on the ground that during the said 10 consecutive years, it ceases to be a small scaleThe 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 was assessed for the assessment yearHowever, the Commissioner 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 16th January, 2009. Thereafter, the Assessing authority on 14th December, 2009 disallowed the claim of Rs. 75,81,910/towards deduction under Section 80 (B(3). The same was upheld by the Commissioner in appeal and the Income Tax Appellate Tribunal in second appeal. However, the High Court has reversed the said orders and upheld the claim.

Court's reasoning:
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. 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 expansion small scale industrial undertakings ceases to be small scale industrial undertakings. We are unable to appreciate the logic for these observations. 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 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.The principle of law considered in Bajaj Tempo (supra) is certainly 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.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 of law, 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 particular assessment year even if in initial year eligibility was satisfied.