Case: MAHABIR INDUSTRIES Vs. PRINCIPAL COMMISSIONER OF INCOME TAX

All the appeals are filed by the same party, namely, Mahabir Industries (hereinafter referred to as the ‘assessee?) in which common respondent is Principal Commissioner of Income Tax (hereinafter referred to as the ‘Department?). Before stating the question of law, it may be necessary to mention in brief the background under which the said question of law has arisen inasmuch as this background would be an enabling factor in understanding the true ambit and scope of the question of law. The assessee manufactures polythene for which it is having its factory in Shimla, Himachalactivity undertaken by the assessee, an industrial undertaking, qualified for exemption from income tax under Sectionof the Income Tax Act (hereinafter referred to as the ‘Act?). Sectionof the Act provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc. if it fulfills the conditions mentioned in subsection (4) thereof. Such a deduction is of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive Assessment Years. In nutshell, those undertakings or enterprises, which fulfill the conditions mentioned in(4) of Sectionof the Act, are entitled to total deductions of their profits, which means, no tax is payable and the period for which such undertakings or enterprises are exempted from payment of tax is ten consecutive Assessment Years. The assessee admittedly qualified for this deduction which it started availing from the Assessment YearThis deduction under Sectionwas claimed and allowed for two Assessment Years i.e.3. As mentioned above, for the Assessment Years00 (i.e. two Assessment Years), the assessee was allowed deduction under SectionFrom the Assessment Yearto Assessment YearInterestingly, another provision in the form of Sectionwas 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(3) of SectionThe provisions of Sectionprovided deduction to manufacturing units situated in the State of Sikkim, Himachal Pradesh and Uttaranchal andStates. 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. The deduction was available @100% for ten Assessment Years for the units located inand in the State of Sikkim and for the units located in Himachal Pradesh, the deduction was available @100% for five years and @25% for next five years. The assessee completed substantial expansion (by investing in new plant and machinery of value more than 50% of the value of plant and machinery already installed as on 1 April, 2005) to the manufacturing unit situated at Baddi, Himachal Pradesh in the Assessment YearIn view of the substantial expansion, the accused claimed deduction under Section@100% for Assessment Years08, which was also allowed by the Assessing Officer (AO) after passing the order under Section 143(3) of the Act.As noted above, the assessee had carried out substantial expansion in the Assessment Yearand, therefore, claimed exemption under Sectionof the Act for Assessment Yearonwards. Deductions for the year08 were allowed. However, thereafter, deductions for the Assessment Yearand Assessment Yearwere rejected by the AO on the ground that this was 11 th and 12 th year of deduction and as per Sectiontotal deductions under Section

Court's reasoning:
11. The assessee in the instant case has not got deduction under Sectionfor a period of ten years as he started claiming deduction under this provision w.e.f. Assessment YearSituation Nos. (b) and (c) mentioned above would not apply to the assessee as it?s undertaking/enterprise is not established inRegion. It is, thus, clear that the High Court has failed to appreciate that the provisions of Sectionof the Act state that the total period of deduction under Sectioncannot exceed ten assessment years only if the manufacturing unit was claiming deduction under second proviso to Sectionof the Act i.e. units located in the. Learned counsel for the Revenue could not dispute that subsection (6) of Sectionwould get attracted when the industry is located in theRegion. Having faced with this situation, he raised an altogether different argument for consideration by referring to Section 15C of the Income Tax Act, 1922 (hereinafter referred to as the ‘1922 Act?), which was also a 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. The Commissioner of Income Tax, West Bengal, Calcutta 1 has held that the true test for ascertaining whether industrial undertaking is ‘formed by reconstruction of business already in existence? (which was the expression used in Section 15C of 1922 Act), is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is a new and identifiable undertaking separate and distinct from existing business. In fine, the endeavour of learned senior counsel was that the assessee cannot be treated as an industrial undertaking which has reconstructed the business i.e. made substantial expansion.This argument has to be rejected for at least two reasons: (i) Section 15C of the 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 the said provision, if it was found that an 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 the Court was considering the meaning of reconstruction of business. On the other hand, the words under Sectionare ‘substantial expansion?. Thus, discussion contained in the said judgment would have no application to the instant case.(ii) Insofar as the factum of substantial expansion of the assessee?s unit in the Assessment Yearis concerned, the same is not subject matter of any controversy in the instant case. It has been accepted by the Department that assessee had carried out substantial expansion. Precisely, for this reason, the AO had allowed deduction for Assessment Years8. Therefore, issue is not as to whether there is a substantial expansion or not. The issue is only as to how a period of ten years is to be calculated, namely, whether those Assessment Years in respect of which deduction under SectionThus, we are of the opinion that it was wrong on the part of the AO not to allow deduction to the assessee under Sectionfor the Assessment Years