2025 (6) TMI 499 - HC - Income Tax

Deduction u/s 80-IC - AO denied deduction u/s 80-IC @ 100% of profit derived from the newly expanded unit but allowed the same @ 25% of profit by taking the relevant AY (i.e. A.Y. 2013-14) as the 9th Assessment year instead of 4th Assessment year for the existing unit set-up in the previous year relevant to A.Y. 2005- 06 HELD THAT - Hon ble Supreme Court in Aarham Softronics 2019 (2) TMI 1285 - SUPREME COURT as clearly held that an assessee who sets up a new industry of a kind mentioned in Section 80-IC(2) and starts availing exemption of 100% tax under Section 80-IC(3) (which is admissible for five years) can start claiming exemption at same rate of 100% beyond the period of five years on the ground that the assessee now carried out substantial expansion in terms of Section 80-IC(8)(ix) within aforesaid period of ten years in its manufacturing unit. Respondent has also not been able to dispute the legal position. Obviously in such circumstances the judgment of the Constitution Bench of the Hon ble Supreme Court is binding and therefore appellant is held entitled to the benefit under Section 80-IC @ 100% of its profit and findings to the contrary cannot be sustained and are accordingly set aside. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the appellant is entitled to claim 100% deduction under Section 80-IC of the Income Tax Act, 1961 for the assessment year 2010-11, despite having already availed such deduction for five years since commencement of its manufacturing unit.

- Whether the condition of "substantial expansion" under Section 80-IC(8)(ix) applies to units established after 07.01.2003 and permits renewal of 100% deduction upon expansion within the ten-year period.

- Whether the order of the Income Tax Appellate Tribunal (ITAT), denying 100% deduction and restricting it to 25% on the ground that the appellant had exhausted the five-year exemption period, is sustainable in law.

- The applicability and binding nature of the Supreme Court judgments, particularly the two-Judge Bench decision in CIT vs. M/s Classic Binding Industries (2018) and the subsequent five-Judge Constitution Bench ruling in Principal Commissioner of Income Tax, Shimla vs. Aarham Softronics (2019), on the interpretation of Section 80-IC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to 100% deduction under Section 80-IC for the year 2010-11 after substantial expansion

Relevant legal framework and precedents: Section 80-IC of the Income Tax Act provides fiscal incentives in the form of tax deductions for profits derived from specified industrial undertakings in certain states, including Himachal Pradesh. Sub-section (3) allows 100% deduction for the first five assessment years, while sub-section (8)(ix) permits renewal of such deduction if the unit undergoes substantial expansion within ten years of commencement.

The two-Judge Bench decision in CIT vs. M/s Classic Binding Industries had earlier held that the benefit of substantial expansion does not apply to units established after 07.01.2003, effectively limiting the deduction to five years. However, this was overruled by the five-Judge Constitution Bench in Principal Commissioner of Income Tax, Shimla vs. Aarham Softronics, which clarified that units established after the specified date can claim renewed 100% deduction upon substantial expansion within ten years.

Court's interpretation and reasoning: The Court recognized the binding authority of the Constitution Bench ruling, which explicitly overruled the earlier two-Judge Bench decision relied upon by the ITAT. The Court interpreted Section 80-IC(8)(ix) as permitting a unit that undertakes substantial expansion (defined as investment exceeding 50% of the opening book value of plant and machinery) within ten years of commencement to claim a fresh 100% deduction for the profits attributable to the expanded unit.

Key evidence and findings: The appellant commenced operations on 28.01.2004 and claimed 100% deduction for the first five years (A.Y. 2005-06 to 2009-10). For A.Y. 2010-11, the appellant made additional investment exceeding 50% of the opening book value of plant and machinery, constituting substantial expansion. The appellant filed its return claiming 100% deduction on profits derived from the expanded unit.

Application of law to facts: Applying the Constitution Bench ruling, the Court found that the appellant's claim for 100% deduction for the expanded unit in the sixth year was legally valid. The expansion triggered a new five-year period of full deduction under Section 80-IC, extending the benefit beyond the initial five years.

Treatment of competing arguments: The revenue's argument, upheld by the ITAT, was that the appellant had exhausted the five-year deduction period and was only entitled to 25% deduction thereafter. This was based on the earlier two-Judge Bench decision. The Court rejected this view, holding that the subsequent Constitution Bench ruling is binding and clarifies the law in favor of the appellant.

Conclusions: The appellant is entitled to claim 100% deduction under Section 80-IC for the assessment year 2010-11 on profits attributable to the substantially expanded unit.

Issue 2: Applicability of substantial expansion condition to units established after 07.01.2003

Relevant legal framework and precedents: Section 80-IC was introduced to incentivize industrial development, with a window period starting 07.01.2003. The question arose whether the substantial expansion benefit applies only to units operational as of that date or also to those established thereafter.

Court's interpretation and reasoning: The Court referred to the Constitution Bench judgment which held that the substantial expansion benefit is not limited to units existing on 07.01.2003 but extends to any eligible industrial unit established within the ten-year period, provided the expansion conditions are met.

Key evidence and findings: The appellant's unit was established after 07.01.2003, in January 2004, and undertook substantial expansion within the ten-year period. The Court found no legal bar to the applicability of Section 80-IC(8)(ix) in such a case.

Application of law to facts: Since the appellant's unit qualifies as a new industrial unit under Section 80-IC(2) and undertook substantial expansion as defined, it is eligible for renewed 100% deduction.

Treatment of competing arguments: The revenue's reliance on the earlier judgment to exclude units established post 07.01.2003 was rejected as contrary to the binding Constitution Bench ruling.

Conclusions: The substantial expansion benefit under Section 80-IC applies to units established after 07.01.2003.

Issue 3: Validity of ITAT's order denying 100% deduction and restricting to 25%

Relevant legal framework and precedents: The ITAT relied on the two-Judge Bench decision in CIT vs. M/s Classic Binding Industries to deny the full deduction and restrict it to 25% on the ground that the appellant had already availed five years of 100% exemption.

Court's interpretation and reasoning: The Court held that the ITAT's reliance on the two-Judge Bench decision was misplaced and not sustainable in view of the subsequent Constitution Bench ruling which is binding on all lower authorities.

Key evidence and findings: The appellant was not served with notice of the appeal before the ITAT, and the order was passed ex parte, which was also noted by the Court but the primary focus was on the correctness of the legal principle applied.

Application of law to facts: The Court set aside the ITAT order and restored the appellant's entitlement to 100% deduction under Section 80-IC for the year in question.

Treatment of competing arguments: The Court noted that the respondent could not dispute the binding nature of the Constitution Bench judgment and therefore had no valid legal basis to sustain the ITAT order.

Conclusions: The ITAT order denying full deduction under Section 80-IC is quashed and set aside.

3. SIGNIFICANT HOLDINGS

"The judgment of the Constitution Bench of the Hon'ble Supreme Court is binding and, therefore, in terms thereof, the appellant is held entitled to the benefit under Section 80-IC @ 100% of its profit and findings to the contrary cannot be sustained and are accordingly set aside."

The Court established the principle that an assessee who sets up a new industrial unit as per Section 80-IC(2) and claims 100% deduction under Section 80-IC(3) for five years can claim a renewed 100% deduction beyond the initial five years if substantial expansion is undertaken within ten years, as defined under Section 80-IC(8)(ix).

The Court conclusively held that the benefit of substantial expansion is applicable to units established after 07.01.2003 and that denial of such benefit based on the earlier two-Judge Bench decision is unsustainable.

Accordingly, the appellant's claim for 100% deduction under Section 80-IC for the assessment year 2010-11 was allowed, and the ITAT order denying the same was quashed and set aside.