By TIOL News Service

NEW DELHI, DEC 05, 2017: THE issue before the Larger Bench is - Whether if assessee was initially entitled to Sec 80IB benefits as an elegible undertaking for 10 years, it would continue to be eligible for such benefits even if it no longer satisfies eligibility conditions by virtue of its expansion. NO is the answer.

Facts of the case

The assessee is engaged in manufacture and sale of components of CNC lathes and similar machines. Its income was assessed for the assessment year 2005-2006 at Rs.1,79,82,653/-. However, the Commissioner of Income Tax, interfered with the assessment under Section 263 to the extent it allowed deduction under Section 80 IB(3) of the Income Tax Act, 1961 and directed fresh decision on the said issue. Thereafter, the Assessing authority disallowed the claim of Rs.75,81,910/- towards deduction under Section 80IB(3). The same was upheld by the Commissioner in appeal and the Income Tax Appellate Tribunal in second appeal. However, the High Court reversed the said orders and upheld the claim.

On appeal, the Apex Court held that,

++ 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 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 previously used. Certain other qualificcations 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 article or things specified in 8th Schedule is a requirement of continuing nature;

++ on examination of the scheme of the provision, there is no manner of doubt that incentive meant for small scale industrial undertakings cannot be availed by industrial undertakings which do not continue as small scale industrial undertakings during the relevant period. Needless to say, each assessment year is a different assessment year, except for block assessment;

++ the object of legislature is to encourage industrial expansion which implies that incentive should remain applicable even where on account of industrial expansion small scale industrial undertakings ceases to be small scale industrial undertakings. We are unable to appreciate the logic for these observations. Incentive is given to a particular category of industry for a specified purpose. An incentive meant for small scale industrial undertaking cannot be availed by an assessee which is not such an undertaking. It does not, in any manner, mean that the object of permitting industrial expansion is defeated, if benefit is not allowed to other undertakings. On this logic, incentive must be given irrespective of any condition as the incentive certainly helps further expansion by reducing the tax burden. The concept of vertical equity is well known under which all the assessees need not be uniformally taxed. Progressive taxation is a well known element of tax policy. Higher slabs of tax or higher tax burden on an assessee having higher income or higher capacity cannot in any manner, be considered unreasonable;

++ while there is no conflict with the principle that interpretation has to be given to advance the object of law, in the present case, the assessee having not retained the character of ‘small scale industrial undertaking’, is not eligible to the incentive meant for that category. Permitting incentive in such case will be against the object of law;

++ the assessee is not entitled to benefit of exemption if it loses its eligibility as a small scale industrial undertaking in a particular assessment year even if in initial year eligibility was satisfied.

(See 2017-TIOL-452-SC-IT-LB)