By TIOL News Story

NEW DELHI, FEB 21, 2019: THE ISSUE BEFORE THE LARGER BENCH IS - Whether the definitions of 'Initial Assessment Year' used in Sections 80IB and 80IC are materially different. YES IS THE VERDICT.

Facts of the case:

In the present case, the assessee company started claiming exemption @ 100% on profits and gains and availed it for a period of five years. During this period, the assessee carried out “substantial expansion” and 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 did admit that the total period during which they were entitled to exemption would not exceed 10 years, as per the mandate of sub-section (6). In this backdrop, the question raised was, as to whether the assessee could 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 it had now carried out substantial expansion.

The High Court answered this question in the affirmative thereby holding that when the assessee industry started availing exemption of 100% tax on the setting up of a new industry of the kind mentioned u/s 80IC(2), which was admissible for 5 years, and either on the expiry of 5 years or thereafter from the date when it started availing exemption, it had carried out substantial expansion, from that year the assessee would become entitled to claim exemption @ 100% again. Hence, present appeal by the Revenue Department.

Apex Court held:

++ it is to be noted that 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. 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, Section 80-IC(3) mentions about the deduction that is permissible, namely, 100% deduction of the profits and gains for first five years and 25% for the next five years, and this sub-section, in any case, does not deal with the ‘initial assessment year’;

++ it is seen that a mistake occurred while pronouncing the judgment in Commissioner of Income Tax vs. M/s. Classic Binding Industries case. In this case, 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. In the said 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. As per the definition u/s 80IC, there can be ‘initial assessment year’, relevant to previous year, in any of the 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 Section 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;

++ as per the definition u/s 80IC, 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. As already noted, in the present case, the assessees had initially set up new industry in the State of Himachal Pradesh of the nature specified u/s 80-IC. 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 said definition. This Court is inclined to accept that 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 tax holiday period of 10 years. As per sub-section (6), cap is on the 10 assessment years and it is not on quantum. The purpose of enactment of Section 80-IC was to establish the business of the nature specified in the said provision in the specified States of Himachal Pradesh and North East. This provision was, thus, aimed at encouraging the undertakings or enterprises to establish and set up such units in the said States to make them industrially advanced States as well. Keeping in mind these objectives for which Section 80-IC was enacted, 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;

++ it is therefore noted that the decision rendered by this Court in 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 80-IB, which does not apply in these cases. The definitions of ‘initial assessment year’ in the two sections, viz. Sections 80-IB and 80-IC are materially different. The definition of ‘initial assessment year’ under Section 80-IC has made all the difference. Therefore, the said judgment does not lay down the correct law. Hence, the judgment of High Court is affirmed and the 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 sub-section (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% of the profits and gains. 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 said 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 been entitled to 100% deductions of the profits and gains.

(See 2019-TIOL-73-SC-IT-LB)