# PR. COMMISSIONER OF INCOME TAX, SHIMLA v. M/S. AARHAM SOFTRONICS

- **Citation:** [2019] 4 S.C.R. 409
- **Court:** Supreme Court of India
- **Decided:** 2019-02-20
- **Case number:** Civil Appeal No. 1784 of 2019
- **Bench:** A. K. Sikri, S. Abdul Nazeer, M. R. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pr-commissioner-of-income-tax-shimla-v-m-s-aarham-softronics-33651
- **Pages:** 24

## Headnote

Income Tax Act, 1961 - ss.80-IA, 80-IB, 80-IC - 'Initial
Assessment Year' u/s.80-IC - U/s.80-IC an undertaking or enterprise,
in certain special category states, which has inter alia, begun or
begins to manufacture or produce any article or thing by setting up
a new factory in the area specified therein, is allowed, deduction
from profits and gains u/sub-s.(3) of s.80-IC- Sub-s.(3) of s.80-IC
inter alia states that a category of undertakings or enterprises
(present cases belong to this category) are allowed exemption @
100% of profits and gains for five assessment years commencing
with the initial assessment year and @ 25% of profits and gains for
the next five years, thus deduction being for a total of 10 years -
Deduction was also provided to existing units if substantial expansion
thereof was carried out - Assessees set up new industrial units and
availed 100% deduction for 5 years and after carrying out
"substantial expansion" claimed deduction @ 100% instead of 25%
for another 5 years - If entitled to - High Court answered in
affirmative - Held: Sub-sec.(6) of s.80-IC puts a cap of 10 years,
which is the maximum period for which the deduction can be allowed
to any undertaking or enterprise under this section, starting from
the initial Assessment Year - Clause (v) of sub-sec.(8) of s.80-IC
provides definition of 'initial assessment year', for the purpose of
this very section, i.e.s.80-IC - As per this definition, there can be
'initial assessment year', relevant to previous year, in any of the
following contingencies:(i) the previous year in which the
undertaking or the enterprise begins to manufacture or produce
article or things; or (ii) completes substantial expansion - Thus,
benefit of s.80-IC is admissible not only when an undertaking or
enterprise sets up new unit and starts manufacturing or producing
article or things but, is also accrued to those existing units, if they
carry out "substantial expansion" of their units by investing required
[2019] 4 S.C.R. 409
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capital, in the assessment year relevant to the previous year - Thus,
definition of 'initial assessment year' contained in clause (v) of subsec.(8) of s.80-IC can lead to a situation where there can be more
than one "initial assessment year" within the period of 10 years -
Judgment in Classic Binding Industries holding that there cannot
be two assessment years within a span of 10 years u/sub-sec.(6) of
s.80-IC does not lay down correct law - No reason as to why 100%
deduction of the profits and gains be not allowed to even those
units who availed this deduction on setting up a new unit and have
now invested huge amount with substantial expansion of those units.
Income Tax Act, 1961 - ss.80-IB(14) and 80-IC -
Held: s. 80-IB(14) starts with the words 'for the purpose of this
section' - Thus, 'initial assessment year' defined therein is relatable
only to the deductions that are provided under the provisions of
s.80-IB - s.80-IB is materially different from s.80-IC.
Income Tax Act, 1961 - s.80-IC - Purpose of - Explained.
Disposing of the appeals, the Court
HELD: 1.1 Sub-section (2) of Section 80-IC, Income Tax
Act, 1961 applies to an undertaking or enterprise which has, inter
alia, begun or begins to manufacture or produce any article or
thing by setting up a new factory in the area specified therein
which includes State of Himachal Pradesh as well. Sub-section
(3) of Section 80-IC inter alia states that a category of
undertakings or enterprises (present cases belong to that
category) where the exemption is at the rate of 100% of profits
and gains for five assessment years commencing with the initial
assessment year and, thereafter, 25% of profits and gains. Total
exemption, thus, is for a period of 10 years, namely, @100% for
1st five years and @ 25% for remaining five years. The provisions
of Section 80-IC provided deduction to manufacturing uni

## Text

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PR. COMMISSIONER OF INCOME TAX, SHIMLA
v.
M/S. AARHAM SOFTRONICS
(Civil Appeal No. 1784 of 2019)
FEBRUARY 20, 2019
[A. K. SIKRI, S. ABDUL NAZEER AND M. R. SHAH, JJ.]
Income Tax Act, 1961 - ss.80-IA, 80-IB, 80-IC - 'Initial
Assessment Year' u/s.80-IC - U/s.80-IC an undertaking or enterprise,
in certain special category states, which has inter alia, begun or
begins to manufacture or produce any article or thing by setting up
a new factory in the area specified therein, is allowed, deduction
from profits and gains u/sub-s.(3) of s.80-IC- Sub-s.(3) of s.80-IC
inter alia states that a category of undertakings or enterprises
(present cases belong to this category) are allowed exemption @
100% of profits and gains for five assessment years commencing
with the initial assessment year and @ 25% of profits and gains for
the next five years, thus deduction being for a total of 10 years -
Deduction was also provided to existing units if substantial expansion
thereof was carried out - Assessees set up new industrial units and
availed 100% deduction for 5 years and after carrying out
"substantial expansion" claimed deduction @ 100% instead of 25%
for another 5 years - If entitled to - High Court answered in
affirmative - Held: Sub-sec.(6) of s.80-IC puts a cap of 10 years,
which is the maximum period for which the deduction can be allowed
to any undertaking or enterprise under this section, starting from
the initial Assessment Year - Clause (v) of sub-sec.(8) of s.80-IC
provides definition of 'initial assessment year', for the purpose of
this very section, i.e.s.80-IC - As per this definition, there can be
'initial assessment year', relevant to previous year, in any of the
following contingencies:(i) the previous year in which the
undertaking or the enterprise begins to manufacture or produce
article or things; or (ii) completes substantial expansion - Thus,
benefit of s.80-IC is admissible not only when an undertaking or
enterprise sets up new unit and starts manufacturing or producing
article or things but, is also accrued to those existing units, if they
carry out "substantial expansion" of their units by investing required
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capital, in the assessment year relevant to the previous year - Thus,
definition of 'initial assessment year' contained in clause (v) of subsec.(8) of s.80-IC can lead to a situation where there can be more
than one "initial assessment year" within the period of 10 years -
Judgment in Classic Binding Industries holding that there cannot
be two assessment years within a span of 10 years u/sub-sec.(6) of
s.80-IC does not lay down correct law - No reason as to why 100%
deduction of the profits and gains be not allowed to even those
units who availed this deduction on setting up a new unit and have
now invested huge amount with substantial expansion of those units.
Income Tax Act, 1961 - ss.80-IB(14) and 80-IC -
Held: s. 80-IB(14) starts with the words 'for the purpose of this
section' - Thus, 'initial assessment year' defined therein is relatable
only to the deductions that are provided under the provisions of
s.80-IB - s.80-IB is materially different from s.80-IC.
Income Tax Act, 1961 - s.80-IC - Purpose of - Explained.
Disposing of the appeals, the Court
HELD: 1.1 Sub-section (2) of Section 80-IC, Income Tax
Act, 1961 applies to an undertaking or enterprise which has, inter
alia, begun or begins to manufacture or produce any article or
thing by setting up a new factory in the area specified therein
which includes State of Himachal Pradesh as well. Sub-section
(3) of Section 80-IC inter alia states that a category of
undertakings or enterprises (present cases belong to that
category) where the exemption is at the rate of 100% of profits
and gains for five assessment years commencing with the initial
assessment year and, thereafter, 25% of profits and gains. Total
exemption, thus, is for a period of 10 years, namely, @100% for
1st five years and @ 25% for remaining five years. The provisions
of Section 80-IC provided deduction to manufacturing units
situated in the State of Sikkim, Himachal Pradesh and Uttaranchal
and North-Eastern States. 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.
[Paras 8, 9][417-F-H; 418-A, B; 421-D, E]
1.2 Sub-section (3) mentions the period of 10 years
commencing with the initial Assessment Year. Subsection (6) puts
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a cap of 10 years, which is the maximum period for which the
deduction can be allowed to any undertaking or enterprise under
this section, starting from the initial Assessment Year. Another
significant feature under sub-section (3) is that the deduction
allowable is 100% of such profits and gains from an undertaking
or an enterprise for five Assessment Years commencing with the
initial Assessment Year and thereafter the deduction is allowable
at 25% (or 30% where the assessee is a company) of the profits
and gains. [Para 10][422-A, B]
1.3 In Commissioner of Income Tax vs. M/s. Classic
Binding Industries case Supreme Court took the view that once
'initial assessment year' starts on fulfilling the conditions laid
down in sub-section (2) of Section 80-IC, there cannot be another
'initial assessment year' for the purposes of Section 80-IC within
the aforesaid period of 10 years. While doing so, the Court
referred to Section 80-IB(14)(c) of the Act, on the basis of which
an opinion was formed that there cannot be another 'initial
assessment year' for the purpose of Section 80-IC within the
aforesaid period of 10 years. This is the apparent error which
was committed. Section 80-IB(14) starts with the words 'for the
purpose of this section'. Thus, 'initial assessment year' defined
therein is relatable only to the deductions that are provided under
the provisions of Section 80-IB, namely, in respect of profits and
gains from certain industrial undertakings other than
infrastructure development undertakings. Section 80-IB is
materially different from Section 80-IC of the Act. Inasmuch as
Section 80-IC is a special provision in respect of certain
undertakings, all enterprises mentioned in Section 80-IC are
limited in contrast with Section 80-IB, the deduction under this
Section is available only when such undertakings or enterprises
are established in particular States, Sikkim, Himachal Pradesh,
Uttaranchal or any of the North-Eastern States. Further, Subsection (3) of Section 80-IC mentions about the deduction that is
permissible, namely, 100% deduction of the profits and gains for
first five years and 25% (or 30% where the assessee is a company)
for the next five years. This sub-section, in any case, does not
deal with the 'initial assessment year'. Clause (v) of sub-section
(8) of Section 80-IC is the concerned provision which provides
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definition of 'initial assessment year', for the purpose of this very
Section, i.e., Section 80-IC, which was not noticed while
pronouncing the judgment in Commissioner of Income Tax vs.
M/s. Classic Binding Industries case. There is substance in this
submission of the assessees. The Court has no hesitation to
accept this mistake which occurred in the aforesaid judgment.
The Court specifically dealt with 'initial assessment year' and
came to conclusion that there cannot be two initial assessment
years within a span of 10 years which is the maximum period for
allowing deduction as per sub-section (6) of Section 80-IC. As
the issue directly concerned with initial assessment year, its
definition contained in that very Section was missed out. To that
extent, there is an error in the judgment dated 20th August, 2018
in Classic Binding Industries case. [Paras 12, 13][423-B-H;
424-A, B]
1.4 As per definition in Section 80-IC, there can be 'initial
assessment year', relevant to previous year, in any of the following
contingencies: (i) The previous year in which the undertaking or
the enterprise begins to manufacture or produce article or things;
or (ii) Commences operation; or (iii) Completes substantial
expansion. First two events are relatable to new units whereas
third incident would occur in respect of existing units. The benefit
of Seciton 80-IC is, thus, admissible not only when an undertaking
or enterprise sets up new unit and starts manufacturing or
producing article or things. The advantage of this provisions is
also accrued to those existing units, if they carry out "substantial
expansion" of their units by investing required capital, in the
assessment year relevant to the previous year. "Substantial
expansion" is defined in clause (ix) of sub-section (8) of Section
80-IC. As per the aforesaid definition, an existing unit would be
treated as having carried out substantial expansion when there
is increase in the investment in the plant and machinery by at
least 50% of the book value of the plant and machinery (before
taking depreciation in any year). In all these cases at hand, the
assessees had initially set up new industry in the State of Himachal
Pradesh of the nature specified under Section 80-IC of the Act.
As a result, they became entitled to avail the concession provided
in the said provision. It is also an admitted fact that after five
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years and before the expiry of 10 years, the assessees had carried
substantial expansion of their units in terms of the aforesaid
definition. There can be another 'initial assessment year' on the
fulfillment of the condition mentioned in the said definition, namely,
completion of substantial expansion of the existing unit.
[Paras 16, 17][424-F-H; 425-A, C-E]
1.5 The definition of 'initial assessment year' contained in
clause (v) of sub-section (8) of Section 80-IC can lead to a situation
where there can be more than one "initial assessment year" within
the said period of 10 years. As per sub-section (6), cap is on the
10 assessment years. It is not on quantum. The purpose for
which Section 80-IC was enacted was to establish the business
of the nature specified in the said provision in the specified States.
This provision was, thus, aimed at encouraging the undertakings
or enterprises to establish and set up such units in the aforesaid
States to make them industrially advanced States as well.
Undoubtedly, these are difficult States as most of these States fall
in hilly areas. Therefore, cost of production and transportation
may also go up. [Para 19][426-D-F]
1.6 When these objectives for which Section 80-IC was
enacted, are kept in mind an irresistible conclusion would be to
grant 100% deduction of the profits and gains even from the year
when there is substantial expansion in the existing unit. After
all, this substantial expansion involves great deal of investment
which has to be, at least 50% in the plant and machinery, of the
book value thereof before taking depreciation in any year. With
an expansion of such a nature not only there would be increase in
production but generation of more employment as well, which
would benefit the local populace. It is for this reason, carrying
out substantial expansion by itself is treated as 'initial assessment
year'. It would mean that even when an old unit completes
substantial expansion, such a unit also becomes entitled to avail
the benefit of Section 80-IC. If that is the purpose of the
legislature, there is no reason as to why 100% deduction of the
profits and gains be not allowed to even those units who had
availed this deduction on setting up of a new unit and have now
invested huge amount with substantial expansion of those units.
It would be pertinent to point out that in Para 20 of the judgment
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in Classic Binding Industries, this Court observed that if
deduction @ 100% for the entire period of 10 years, it would be
doing violence to the language of sub-section (6) of Section 80IC. However, this observation came without noticing the
definition of 'initial assessment year' contained in the same very
provision. [Paras 20, 22][426-F-H; 427-A, B; 431-B, C]
1.7 The aforesaid discussion leads to the following
conclusions:
(a) Judgment dated 20th August, 2018 in Classic Binding
Industries case omitted to take note of the definition 'initial
assessment year' contained in Section 80-IC itself and instead
based its conclusion on the definition contained in Section 80IB, which does not apply in these cases. The definitions of 'initial
assessment year' in the two sections, viz. Sections 80-IB and 80IC are materially different. The definition of 'initial assessment
year' under Section 80-IC has made all the difference. Therefore,
we are of the opinion that the aforesaid judgment does not lay
down the correct law.
(b) An undertaking or an enterprise which had set up a
new unit between 7th January, 2003 and 1st April, 2012 in State of
Himachal Pradesh of the nature mentioned in clause (ii) of subsection (2) of Section 80-IC, would be entitled to deduction at
the rate of 100% of the profits and gains for five assessment
years commencing with the 'initial assessment year'. For the
next five years, the admissible deduction would be 25% (or 30%
where the assessee is a company) of the profits and gains.
(c) However, in case substantial expansion is carried out
as defined in clause (ix) of sub-section (8) of Section 80-IC by
such an undertaking or enterprise, within the aforesaid period of
10 years, the said previous year in which the substantial expansion
is undertaken would become 'initial assessment year', and from
that assessment year the assessee shall be entitled to 100%
deductions of the profits and gains.
(d) Such deduction, however, would be for a total period of
10 years, as provided in sub-section (6). For example, if the
expansion is carried out immediately, on the completion of first
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five years, the assessee would be entitled to 100% deduction
again for the next five years. On the other hand, if substantial
expansion is undertaken, say, in 8th year by an assessee such an
assessee would be entitled to 100% deduction for the first five
years, deduction @ 25% of the profits and gains for the next two
years and @ 100% again from 8th year as this year becomes 'initial
assessment year' once again. However, this 100% deduction
would be for remaining three years, i.e., 8th, 9th and 10th
assessment years. [Para 24][431-F-H; 432-A-F]
Commissioner of Income Tax v. M/s. Classic Binding
Industries (2018) 9 SCC 753 - held not correct law.
Commissioner of Customs (Import), Mumbai v. Dilip
Kumar and Company and Others (2018) 9 SCC 1 :
[2018] 7 SCR 1191 - followed.
Mahabir Industries v. Principal Commissioner of
Income Tax Civil Appeal Nos. 4765-4766 of 2018
decided on May 18, 2018 - referred to.
Case Law Reference
(2018) 9 SCC 753
held not correct law
Para 13
[2018] 7 SCR 1191
followed
Para 20
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1784
of 2019
From the Judgment and Order dated 26.02.2018 of the High
Court of Himachal Pradesh, Shimla in I.T.A. No. 25 of 2015
With
Civil Appeal Nos. 1785, 1786, 1787, 1788, 1789, 1790, 1797, 1796,
1795, 1798, of 2019, Misc. Application No. 2840 of 2018 in Civil Appeal
No. 7217 of 2018, Misc. Application No. 2880 of 2018 in Civil Appeal
No. 7218 of 2018, Misc. Application No. 2841 of 2018 in Civil Appeal
No. 7221 of 2018, Misc. Application No. 2976 of 2018 in Civil Appeal
No. 7223 of 2018, Misc. Application No. 2850 of 2018 in Civil Appeal
No. 7215 of 2018, Misc. Application No. 2852 of 2018 in Civil Appeal
No. 7236 of 2018, Misc. Application No. 2879 of 2018 in Civil Appeal
No. 7222 of 2018.
PR. COMMISSIONER OF INCOME TAX, SHIMLA v.
M/S. AARHAM SOFTRONICS
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A. N. S. Nadkarni, ASG, K. Radhakrishnan, Mukul Rohatgi, Kapil
Sibal, Arvind P. Datar, Sr. Advs., H. Raghavendra Rao, Arijit Prasad,
A. K. Srivastav, Mrs. Anil Katiyar, Jay Savla, Sameer Rohatgi,
Ms. Renuka Sahu, Jasdeep Singh Dhillon, Prabhat Kumar Chaurasia,
Dushyant Tiwari, Rohit Kaura, Anish R. Shah, Puneet Jain, Ms. Christi
Jain, Abhinav Gupta, Harsh Jain, Ms. Ankita Gupta, Abhinav Deshwal,
R. Jawahar Lal, Siddharth Bawa, Shyamal Anand, Mayankshir Sagar,
Balaji Srinivasan, Advs. for the appearing parties.
The Judgment of the Court was delivered by
A. K. SIKRI, J.
SLP(C) Nos. 23172 of 2018, 23176 of 2018, 23179 of 2018,
24678 of 2018, 23414 of 2018, 24679 of 2018, 2296 of 2019,
1983 of 2019, 3278 of 2019 and 4483 of 2019 :
1. Leave granted.
2. Origin of these appeals can be traced to the judgment dated
28th November, 2017 rendered by High Court of Himachal Pradesh in a
batch of appeals. Vide the said judgment, the High Court decided many
issues. However, in these proceedings we are concerned with only one
question of law which is formulated in the following terms:
"Whether an assessee who sets up a new industry of a kind
mentioned in sub-section (2) of Section 80-IC of the Act and starts
availing exemption of 100 per cent tax under sub-section (3) of
Section 80-IC (which is admissible for five years) can start claiming
the exemption at the same rate of 100% beyond the period of five
years on the ground that the assessee has now carried out
substantial expansion in its manufacturing unit?"
3. The High Court has answered the aforesaid question in the
affirmative thereby holding that when the assessees started availing
exemption of 100% tax on the setting up of a new industry of the kind
mentioned in sub-section (2) of Section 80IC, which is admissible for 5
years, and either on the expiry of 5 years or thereafter (but within 10
years) from the date when these assessees started availing exemption,
they carried out substantial expansion of its industry, from that year the
assessees become entitled to claim exemption @ 100% again.
4. The Income Tax Department (hereinafter referred to as the
'Revenue') had challenged the judgment of the High Court on the
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aforesaid issue by filing number of special leave petitions which were
converted into appeals after leave was granted in those special leave
petitions. Thereafter, these appeals were heard and decided by a Division
Bench of this Court, which comprised one of us (A.K. Sikri, J.). By its
judgment dated August 20, 2018. The judgment of the High Court was
reversed on the aforesaid issue.
5. It so happened that in some of the appeals, assessees who
were respondents, were not served with the notice and they remained
unrepresented. Since the appeals in respect of these assessees were
decided in their absence, they filed miscellaneous applications for recall
of the order, with prayer to decide the appeals afresh after giving hearing
to them. Since, these assessees remained unrepresented, as even the
notice was not served upon them, by a separate order passed in their
cases, those applications have been allowed and their appeals being C.A.
No. 7218, 7222, 7236, 7215, 7221, 7217 and 7223 of 2018 have been
restored. Even the Revenue has filed few SLPs against the common
judgment of the High Court as these SLPs were not filed earlier when
batch of appeals was decided on 20th August, 2018 by this Court. Appeals
arising out of these SLPs have also been heard along with other appeals
in which the earlier judgment rendered has been recalled. All these
appeals have been heard afresh and are being disposed of by the present
judgment.
6. We have already taken note of the question of law that arises
for determination. Factual background in which this question of law
arises for consideration has been taken note of in the judgment dated
20th August, 2018 which may again be reiterated, in order to understand
the niceties of this issue:
To understand the aforesaid question of law in clear terms, it may
be mentioned at this stage itself that sub-section (2) of Section 80-IC
applies to an undertaking or enterprise which has, inter alia, begun or
begins to manufacture or produce any article or thing by setting up a
new factory in the area specified therein which includes State of Himachal
Pradesh as well. Sub-section (3) of Section 80-IC is in two parts: in
certain cases, exemption from income is provided at the rate of 100% of
such profits and gains earned from the aforesaid undertaking or enterprise
for 10 assessment years commencing with the initial assessment year.
The present appeals do not fall in that category. Other clause relates to
another category of undertakings or enterprises (these cases belong to
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that category) where the exemption is at the rate Civil Appeal No. 7208
OF 2018 & Ors. Page 4 of 17 of 100% of profits and gains for five
assessment years commencing with the initial assessment year and,
thereafter, 25% of profits and gains. Total exemption, thus, is for a period
of 10 years, namely, @100% for 1st five years and @ 25% for remaining
five years. In these cases, all the assessees started claiming exemption
@ 100% on profits and gains and availed it for a period of five years.
During this period these assessees carried out "substantial expansion"
and they claimed that, on that basis, they should be allowed exemption
from profits and gains for another five years @ 100% instead of 25%
from 6th to 10th year as well. Interestingly, they admit that the total
period during which they are entitled to exemption would not exceed 10
years, as per the mandate of sub-section (6). In this backdrop, the question
is as to whether the assessees can again start claiming 100% exemption
for the next five years from profits and gains after availing the same for
first five years on the ground that they have now carried out substantial
expansion. The High Court has answered the question in affirmative
and for this reason, it is the department which has come up to this Court
challenging the said decision by filing these appeals.
Section 80-IA was inserted by the Finance (No. 2) Act, 1991,
with effect from 1st April, 1991. By virtue of said Section, the gross total
income (profits and gains) of an assessee derived from any business of
an industrial undertaking, so specified therein, was entitled to certain
deductions for a period commencing from 1st April, 1993. With effect
from 1st April, 2000, the said provision was bifurcated with the insertion
of another Section, i.e., 80-IB, dealing with "certain industrial undertakings
other than infrastructure development undertakings." Thereafter, the
Legislator, in its wisdom, enacted a special provision, in respect of "units"
established in certain special category States. Thus, Section 80-IC came
to be inserted by virtue of Finance Act, 2003, applicable with effect
from 1st April, 2004. At this point., It may only be noticed that
correspondingly certain provisions of Section 80-IB were also amended/
repealed. Deductions under the said Section were discontinued for the
Assessment Years commencing from 1st April, 2004 (Sub-section (4) of
Section 80- IB).
7. At this juncture, we would like to take note of the relevant
provisions of Section 80-IC of the Act. Therefore, we extract below the
relevant portion of this provision:
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"[80-IC. Special provisions in respect of certain
undertakings or enterprises in certain special category
States.-(1) Where the gross total income of an assessee includes
any profits and gains derived by an undertaking or an enterprise
from any business referred to in sub-section (2), there shall, in
accordance with and subject to the provisions of this section, be
allowed, in computing the total income of the assessee, a deduction
from such profits and gains, as specified in sub-section (3).
(2) This section applies to any undertaking or enterprise,-
(a) which has begun or begins to manufacture or produce any
article or thing, not being any article or thing specified in the
Thirteenth Schedule, or which manufactures or produces any
article or thing, not being any article or thing specified in the
Thirteenth Schedule and undertakes substantial expansion during
the period beginning-
(i) on the 23rd day of December, 2002 and ending before the 2
[1st day of April, 2007], in any Export Processing Zone or
Integrated Infrastructure Development Centre or Industrial
Growth Centre or Industrial Estate or Industrial Park or
Software Technology Park or Industrial Area or Theme Park,
as notified by the Board in accordance with the scheme framed
and notified by the Central Government in this regard, in the
State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st
day of April, 2012, in any Export Processing Zone or Integrated
Infrastructure Development Centre or Industrial Growth Centre
or Industrial Estate or Industrial Park or Software Technology
Park or Industrial Area or Theme Park, as notified by the Board
in accordance with the scheme framed and notified by the
Central Government in this regard, in the State of Himachal
Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the
1st day of April, 2007, in any Export Processing Zone or
Integrated Infrastructure Development Centre or Industrial
Growth Centre or Industrial Estate or Industrial Park or
Software Technology Park or Industrial Area or Theme Park,
as notified by the Board in accordance with the scheme framed
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and notified by the Central Government in this regard, in any
of the North-Eastern States;
(b) which has begun or begins to manufacture or produce any
article or thing, specified in the Fourteenth Schedule or
commences any operation specified in that Schedule, or which
manufactures or produces any article or thing, specified in the
Fourteenth Schedule or commences any operation specified in
that Schedule and undertakes substantial expansion during the
period beginning-
(i) on the 23rd day of December, 2002 and ending before the 2
[1st day of April, 2007], in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day
of April, 2012, in the State of Himachal Pradesh or the State of
Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st
day of April, 2007, in any of the North-Eastern States.
(3) The deduction referred to in sub-section (1) shall bexxx
xxx
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(ii) in the case of any undertaking or enterprise referred to in subclause (ii) of clause (a) or sub-clause (ii) of clause (b), of subsection (2), one hundred per cent of such profits and gains for
five assessment years commencing with the initial assessment
year and thereafter, twenty-five per cent. (or thirty per cent. where
the assessee is a company) of the profits and gains.
xxx
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(6) Notwithstanding anything contained in this Act, no deduction
shall be allowed to any undertaking or enterprise under this section,
where the total period of deduction inclusive of the period of
deduction under this section, or under the second proviso to subsection (4) of section 80-IB or under section 10C, as the case
may be, exceeds ten assessment years.
(8) For the purposes of this section,-
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(v) "Initial assessment year" means the assessment year relevant
to the previous year in which the undertaking or the enterprise
begins to manufacture or produce articles or things, or commences
operation or completes substantial expansion;
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(ix) "Substantial expansion" means increase in the investment in
the plant and machinery by at least fifty per cent of the book
value of plant and machinery (before taking depreciation in any
year), as on the first day of the previous year in which the
substantial expansion is undertaken.
8. This section makes special provisions in respect of certain
undertakings or enterprises in certain special category States. Section
80-IC was inserted by the Finance Act, 2003 w.e.f. Civil Appeal No.
7208 OF 2018 & Ors. Page 12 of 17 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 subsection (3) of Section 80-IC. The provisions of Section 80-IC provided
deduction to manufacturing units situated in the State of Sikkim, Himachal
Pradesh and Uttaranchal and North-Eastern States. 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 in North-Eastern and 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.
9. In all these cases assessees had started availing exemption
under Section 80-IC on the setting up of new industrial units. All these
assessees have availed 100% deduction for a period of 5 years. As
noticed above, from sixth year, in normal course, deduction is admissible
@ 25% of the profits and gains, for next five years (or 30% where the
assessee is a company. However, all these assessees, after the expiry
of five years, carried out substantial expansion of their existing units.
This substantial expansion is in accordance with the provisions of Section
80-IC and there is no dispute about the same. From the year such
substantial explanations were carried out by the assessees, the assessees
demanded deduction @ 100%, instead of 25%/30% for the remaining
period of 10 years which is the maximum period for which deduction is
admissible.
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10. Sub-section (3), as noted above, mentions the period of 10
years commencing with the initial Assessment Year. Subsection (6) puts
a cap of 10 years, which is the maximum period for which the deduction
can be allowed to any undertaking or enterprise under this section, starting
from the initial Assessment Year. Another significant feature under subsection (3) is that the deduction allowable is 100% of such profits and
gains from an undertaking or an enterprise for five Assessment Years
commencing with the initial Assessment Year and thereafter the deduction
is allowable at 25% (or 30% where the assessee is a company) of the
profits and gains. It brings out the following aspects:
(a) Those undertakings or enterprises fulfilling the conditions
mentioned in sub-section (2) of Section 80-IC become entitled to
deduction under this provision.
(b) This deduction is allowable from the initial Assessment Year.
'Initial Assessment Year' is defined in Section 80-IB(14)(c) of
the Act.
(c) The deduction is @ 100% of such profits and gains for first 5
Assessment Years and thereafter a deduction is permissible @
25% (or 30% where the assessee is a company).
(d) Total period of deduction is 10 years, which means 100%
deduction for first 5 years from the initial Assessment Year and
25% (or 30% where the assessee is a company) for the next 5
years.
11. In the judgment dated 20th August, 2018, while holding that
deduction @ 100% cannot be allowed for more than 5 years from the
'initial assessment year', the reasoning that was given is contained in
paragraph 20 of the judgment. Which reads as under:
"When we keep in mind the aforesaid scheme and spirit behind
this provision, such a situation cannot be countenanced where an
Civil Appeal No. 7208 OF 2018 & Ors. Page 14 of 17 assessee is
able to secure deduction @ 100% for the entire period of 10 years.
If that is allowed it will amount to doing violence to the provisions
of sub-section (3) read with sub-section (6) of Section 80-IC. A
pragmatic and reasonable interpretation of Section 80-IC would
be to hold that once the initial Assessment Year commences and
an assessee, by virtue of fulfilling the conditions laid down in sub-
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section (2) of Section 80-IC, starts enjoying deduction, there cannot
be another "Initial Assessment Year" for the purposes of Section
80-IC within the aforesaid period of 10 years, on the basis that it
had carried substantial expansion in its unit."
12. As can be seen from the aforesaid passage, this Court took
the view that once 'initial assessment year' starts on fulfilling the conditions
laid down in sub-section (2) of Section 80-IC, there cannot be another
'initial assessment year' for the purposes of Section 80-IC within the
aforesaid period of 10 years. While doing so, the Court referred to
Section 80-IB(14)(c) of the Act, on the basis of which an opinion was
formed that there cannot be another 'initial assessment year' for the
purpose of Section 80-IC within the aforesaid period of 10 years. As
pointed out in the later part of the judgment, this is the apparent error
which was committed. Section 80-IB(14) starts with the words 'for the
purpose of this section'. Thus, 'initial assessment year' defined therein
is relatable only to the deductions that are provided under the provisions
of Section 80-IB, namely, in respect of profits and gains from certain
industrial undertakings other than infrastructure development
undertakings. Section 80-IB is materially different from Section 80-IC
of the Act. Inasmuch as Section 80-IC is a special provision in respect
of certain undertakings, all enterprises mentioned in Section 80-IC are
limited in contrast with Section 80-IB, the deduction under this Section is
available only when such undertakings or enterprises are established in
particular States, Sikkim, Himachal Pradesh, Uttaranchal or any of the
North-Eastern States. Therefore, definition of 'initial assessment year'
mentioned in Section 80-IB could not have been the basis of finding out
the definition of 'initial assessment year' which is different from the
definition contained in Section 80-IB. Further, Sub-section (3) of Section
80-IC mentions about the deduction that is permissible, namely, 100%
deduction of the profits and gains for first five years and 25% (or 30%
where the assessee is a company) for the next five years. This subsection, in any case, does not deal with the 'initial assessment year'.
13. Learned counsel appearing for the assessees pointed out before
us that clause (v) of sub-section (8) of Section 80-IC is the concerned
provision which provides definition of 'initial assessment year', for the
purpose of this very Section, i.e., Section 80-IC, which was not noticed
while pronouncing the judgment in Commissioner of Income Tax vs.
M/s. Classic Binding Industries case. We find substance in this
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submission of the assessees. We have no hesitation to accept this mistake
which occurred in the aforesaid judgment. The Court specifically dealt
with 'initial assessment year' and came into conclusion that there cannot
be two initial assessment years within a span of 10 years which is the
maximum period for allowing deduction as per sub-section (6) of Section
80-IC. As the issue directly concerned with initial assessment year, its
definition contained in that very Section was missed out. To that extent,
there is an error in the judgment dated 20th August, 2018 in Classic
Binding Industries case.
14. In the aforesaid conspectus, the focus has to be on the question
as to whether definition of 'initial assessment year' contained in clause
(v) of sub-section (8) of Section 80-IC makes any difference? We would
like to reproduce the said definition once again, hereunder, for the purpose
of continuity of thought process.
"S. 80-IC : xxx
xxx
xxx
(8) xxx
xxx
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(v) - Initial assessment year means the assessment year relevant
to the previous year in which the undertaking or the enterprise
begins to manufacture or produce articles or things, or commences
operation or completes substantial expansion"
15. On the basis of this definition, counsel for the assessees before
us have argued that there can be more than one 'initial assessment year'
which can be triggered by the contingency provided therein.
16. As per this definition, there can be 'initial assessment year',
relevant to previous year, in any of the following contingencies:
(i) The previous year in which the undertaking or the enterprise
begins to manufacture or produce article or things; or
(ii) Commences operation; or
(iii) Completes substantial expansion
First two events are relatable to new units whereas third incident
would occur in respect of existing units. The benefit of Seciton 80-IC is,
thus, admissible not only when an undertaking or enterprise sets up new
unit and starts manufacturing or producing article or things. The
advantage of this provisions is also accrued to those existing units, if
they carry out "substantial expansion" of their units by investing required
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capital, in the assessment year relevant to the previous year. "Substantial
expansion" is defined in clause (ix) of sub-section (8) of Section 80-IC
and it reads as under:
"(ix) "Substantial expansion" means increase in the investment in
the plant and machinery by at least fifty per cent of the book
value of plant and machinery (before taking depreciation in any
year), as on the first day of the previous year in which the
substantial expansion is undertaken;
17. As per the aforesaid definition, an existing unit would be treated
as having carried out substantial expansion when there is increase in the
investment in the plant and machinery by at least 50% of the book value
of the plant and machinery (before taking depreciation in any year). As
already noted above, in all these cases at hand, the assessees had initially
set up new industry in the State of Himachal Pradesh of the nature
specified under Section 80-IC of the Act. As a result, they became
entitled to avail the concession provided in the said provision. It is also
an admitted fact that after five years and before the expiry of 10 years,
the assessees had carried substantial expansion of their units in terms of
the aforesaid definition. When we consider the definition of 'initial
assessment year', keeping in view these factors, we find substance in
the submissions made by the learned counsel for the assessees and are
inclined to accept that there can be another 'initial assessment year' on
the fulfillment of the condition mentioned in the said definition, namely,
completion of substantial expansion of the existing unit.
18. The Court is supposed to give effect to the provisions of Section
80-IC by reading various provisions conjointly. For the purpose of these
cases, relevant provisions are sub-section (2)(a)(ii), sub-section 3(ii),
sub-section (6) and sub-section (8)(v) and (ix). Clause (ii) of sub-section
(2) provides that in case an undertaking or enterprise sets up a unit of
the nature specified therein in the State of Himachal Pradesh or the
State of Uttaranchal between the 7th January, 2003 and 1st April, 2015,
such an undertaking or enterprise shall become eligible for the deductions
from such profits and gains, as specified in sub-section (3). In respect
of State of Himachal Pradesh (in respect of which these cases pertain
to) sub-section (3) enumerates the extent of deduction.