2019 (2) TMI 1285 - SC - Income Tax

Deduction u/s 80IC - substantial expansion - 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 - HELD THAT - 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. 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 we see 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. Judgment in the case of Mahabir Industries v. Principal Commissioner of Income Tax 2018 (5) TMI 1278 - SUPREME COURT OF INDIA would in fact help the assessee. The fine distinction pointed out in Classic Binding Industries elopes thereby. To recapitulate in Mahabir Industries it was held that if an assessee get 100% exemption under Section 80-IB of the Act for five years and thereafter carries out the substantial expansion because of which said assessee becomes entitled to exemption under the new provision i.e. Section 80-IC of the Act the assessee would be entitled to deduction @ 100% even after five years. This ruling was predicated on the ground that there can be two initial assessment years one for the purpose of Section 80-IB and other for the purposes of Section 80-IC of the Act. Once we find that there can be two initial assessment years even as per the definition thereof in Section 80-IC itself the legal position comes at par with the one which was discussed in Mahabir Industries. Order - Judgment of Classic Binding Industries case 2018 (8) TMI 1209 - SUPREME COURT OF INDIA 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 we are of the opinion that the aforesaid judgment does not lay down the correct law. 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 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% (or 30% where the assessee is a company) of the profits and gains. 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 been entitled to 100% deductions of the profits and gains. 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 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. - Decided in favour of assessee.

Summary

Issues Involved:
1. Interpretation of the term "initial assessment year" under Section 80-IC of the Income Tax Act.
2. Eligibility for 100% tax exemption beyond the initial five-year period after substantial expansion of the manufacturing unit.
3. Application of the cap on the total period of deduction under Section 80-IC.

Detailed Analysis:

1. Interpretation of the Term "Initial Assessment Year" under Section 80-IC:
The core issue revolves around the interpretation of the term "initial assessment year" as defined in Section 80-IC(8)(v) of the Income Tax Act. The judgment clarifies that the "initial assessment year" can be the year in which the manufacturing begins, operations commence, or substantial expansion is completed. This definition is crucial as it determines the eligibility for tax exemptions.

2. Eligibility for 100% Tax Exemption Beyond the Initial Five-Year Period After Substantial Expansion:
The judgment addresses whether an assessee can claim 100% tax exemption beyond the initial five years if they have carried out substantial expansion within the ten-year period. The High Court had affirmed that upon substantial expansion, the assessee becomes entitled to claim 100% exemption again from the year of such expansion. The Supreme Court upheld this view, interpreting that substantial expansion triggers a new "initial assessment year," allowing for continued 100% exemption within the overall ten-year cap.

3. Application of the Cap on the Total Period of Deduction Under Section 80-IC:
The judgment also examines the cap on the total period of deduction, which is ten years as per Section 80-IC(6). The Supreme Court clarified that while substantial expansion can reset the "initial assessment year" for the purpose of claiming 100% exemption, the total period of deduction cannot exceed ten years. This means that even with substantial expansion, the total deduction period remains capped at ten years from the first "initial assessment year."

Conclusion:
The Supreme Court concluded that the definition of "initial assessment year" in Section 80-IC allows for multiple initial assessment years within the ten-year period due to substantial expansion. However, the total period of deduction remains capped at ten years. The appeals by the Revenue were dismissed, and the judgment of the High Court was affirmed, allowing the assessees to claim 100% exemption upon substantial expansion within the ten-year period.