BY TIOL News Service

NEW DELHI, AUG 21, 2018: THE ISSUE BEFORE THE APEX COURT WAS - Whether 100% deduction u/s 80IC is restricted to the first five AYs since commencement of operations & that only 25% deduction is available for the next five AYs. YES is the verdict.

Facts of the case

The assessee company, engaged in manufacture of printed embossed book binding cover in form of sheets, commenced operations in 2005. For the first five AYs, being 2006-2011 since commencement of business, the assessee claimed deduction u/s 80IC. During the relevant AY, the assessee declared income of about Rs 27.9 lakhs after claiming deduction of about Rs 12.6 crores. On assessment, the AO noted that the assessee had again claimed 100% deduction against eligible profits in the relevant AY 2012-13, which was seventh year of production, by claiming substantial expansion in AY 2010-11. The assessee was asked to justify the claim of 100% deduction as against the eligible norm of 25%. The AO opined that as the assessee had already claimed 100% deduction for the first five AYs and in view of substantial expansion claimed, it was eligible for deduction @ 25% for the next five years. On appeal, the CIT(A) upheld the findings of the AO as did the Tribunal. On further appeal, the High Court held there to be no restriction to the effect that any undertaking could not undertake substantial expansion more than once as long as they remained within the period of eligibility for deduction u/s 80IC. It further held that considering the clear meaning of the provisions of Section 80IC, reliance could not be placed on CBDT Circular No. 7 of 2003 to deny such deduction.

On appeal, the Apex Court was of the view that,

++ the question is as to whether these assessees, who had availed deductions @ 100% for first five years on the ground that they had set up a manufacturing unit as prescribed under sub-section (2) of the Act, can start claiming deductions @ 100% again for next five years as they had undertaking "substantial expansion" during the period mentioned in subsection (2)? The answer has to be in the negative;

++ In the instant case, we are concerned with the assessees who had established their undertakings in the State of Himachal Pradesh. Sub-section (3) of Section 80IC 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 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. Cumulative reading of these provisions brings out certain aspects, such as that this deduction is allowable from the initial Assessment Year. Also that deduction is @ 100% of such profits and gains for first 5 Assessment Years and thereafter a deduction is permissible @ 25%. Lastly, 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;

++ considering the spirit behind the scheme, such a situation cannot be countenanced where an 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-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;

++ hence after availing deduction for a period of 5 years @ 100% of such profits and gains from the 'units', the assessees would be entitled to deduction for remaining 5 Assessment Years @ 25% (or 30% where the assessee is a company), as the case may be, and not @ 100%. The question of law is, thus, answered in favour of the Revenue thereby allowing all these appeals.

(See 2018-TIOL-339-SC-IT)