[2017) 12 S.C.R. 21

DEPUTY COMMISSIONER OF INCOME-TAX,

CIRCLE 11 (I) BANGALORE

MIS. ACE MULTI AXES SYSTEMS LTD.

(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 H 21

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] ·

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]

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.

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)

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 H the claim ofRs.75,81,910/- towards deduction under Section 80 (B(3).

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

( 11 B) (such business being herei1ufter 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 D 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;

(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 G 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 H

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 Ma1r: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 particular 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,-

(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 E 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 F 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 G and number and having suclz other facilities and amenities, as may be prescribed;

(b) "hilly area" meansany area located at a height of one thousand mC'tres or more above the sea leFel:

(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.1s111e11t 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;

(d) "North-Eastern Region" me<ms the region comprising A 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 B 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 situak~ C

(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 D 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 previous 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.

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).

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. 75,81,9101and 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

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 C 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

as SSI unit. Thus out of these five conditions, tile first two G 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 H

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.

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 E 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 F 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 H

. 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.

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).

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 E 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 F 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 H

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

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

AXES SYSTEMS LTD. [ADARSH KUMAR GOEL, J.]

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

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

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.

'c2014) 3 sec 556

"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

interpreted giving an apparent impression that they are A 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 B 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.

24. In our vie11: an exception or an exempting provision in a F 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 G dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule.

' c2oos) 1 sec 368

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)

24. Leave granted. In view of the judgment in the main matter, A 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.