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Deputy Commissioner of Income-Tax, Circle 11 (1) , Bangalore Versus M/s. Ace Multi Axes Systems Ltd.

2017 (12) TMI 372 - SUPREME COURT OF INDIA

Benefit of deduction u/s 80IB - eligible business - assessee ceases to be a small scale industry - Held that:- We do not see any difference in the situation where the assessee, is not initially eligible, or where the assessee though initially eligible loses the qualification of eligibililty in subsequent assessment years. In both such situations, principle of interpretation remains the same. - Thus, while there is no conflict with the principle that interpretation has to be given to advance .....

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- CIVIL APPEAL NO. 20854 OF 2017, (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.4565 OF 2015), CIVIL APPEAL NO. 20856 OF 2017, (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.8331 OF 2016) - Dated:- 5-12-2017 - Mr. Ranjan Gogoi, Mr. Adarsh Kumar Goel And Mr. Navin Sinha CIVIL APPEAL NO. 20857 OF 2017, (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.3323 OF 2016) And CIVIL APPEAL NO. 20855 OF 2017, (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.148 OF 2016) JUDGMENT ADARSH KUMAR GOEL, .....

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sec. (2) of Section 80 IB, can the assessee be denied the benefit of the said deduction on the ground that during the said 10 consecutive years, it ceases to be a small scale industry? 2. The High Court answered the question in the negative and in favour of the assessee. The revenue has questioned the said view. 3. The respondent assessee is engaged in manufacture and sale of components/parts of CNC lathes and similar machines. Its income was assessed for the assessment year 2005-2006 at ₹ .....

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ppellate Tribunal in second appeal. However, the High Court has reversed the said orders and upheld the claim. 4. The relevant Section is as follows : 80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as .....

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y in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any .....

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ses of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in resp .....

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per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with; (iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of .....

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produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st day of March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage .....

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aa) "cold chain facility" means a chain of facilities for storage or transportation of agricultural produce under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce; (ab) "convention centre" means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, .....

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t brought into use or the business of the hotel starts functioning; (ii) in the case of a company carrying on scientific and industrial research and development, means the assessment year relevant to the previous year in which the company is approved by the prescribed authority for the purposes of sub-section (8); (iii) in the case of an undertaking engaged in the business of commercial production or refining of mineral oil referred to in sub-section (9), means the assessment year relevant to th .....

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previous year in which a cinema hall, being a part of the said multiplex theatre, starts operating on a commercial basis; (vi) in the case of a convention centre, means the assessment year relevant to the previous year in which the convention centre starts operating on a commercial basis; (vii) in the case of an undertaking engaged in operating and maintaining a hospital in a rural area, means the assessment year relevant to the previous year in which the undertaking begins to provide medical se .....

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her place of public worship of renown throughout any State or States is situated; (f) "rural area" means any area other than- (i) an area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the preceding census of which relevant figures have been published before t .....

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uot; means an industrial undertaking which is, as on the last day of the previous year, regarded as a small-scale industrial undertaking under section 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951). 5. Before we consider the issue of correct interpretation of the above provision, it may be necessary to note the observations of the statutory authorities and the High Court on the issue. 6. The assessment order dated 14th December, 2009, disallowing the deduction is as fo .....

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ncome Tax (Appeals) in order dated 15th February, 2011 observed : I agree with the learned CIT who while passing the order u/s 263 has pointed out that the industrial undertaking, here initially SSI unit, has to fulfil all conditions in each of the block years of its entitlement or otherwise such claim has to be denied. He rightly points out that Section 80 IB(3) only forms the basis of entitlement and its scope. The first condition is that it must be a SSI unit in the year of claim and entitlem .....

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I and hence the disallowance has to be held justified. Xxx xxx xxx 17. Summary: Section 80 IB is an incentive provision. It stipulates deduction in respect of profits and gains from certain industrial undertakings. Within this section a plethora of industries and business types have been given the benefit of such deduction if they fulfill the conditions mentioned in the concerned sub section of Section 80IB of the Act. Some of such concerns/industries are ship, hotel multiplex, theatres, housing .....

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of a business already in existence with an exception that in case of units specified u/s 33B of the I.T. Act this condition will not apply. The second condition is that such undertaking must not have been formed by transfer of machinery or plant previously used with the exception that the value of such machinery and plant previously used must not exceed 20% of the value of the total cost of the plant and machinery of such industrial undertaking. The third condition is that the industrial undert .....

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all the four conditions narrated above must be fulfilled if the industrial undertaking desires to avail benefit u/s 80IB of the I.T. Act. For a SSIU there is also an extra condition i.e., it must be an SSI unit as per explanation (g) given in 80IB (14) of I.T. Act which refers to Section 11B of the IDR Act 1951 which in turn prescribes a limit for investment in plant and machinery to designate the industrial undertaking as SSI unit. Thus out of these five conditions, the first two conditions may .....

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and scrutiny of the A.O. Thus, since each A.Y. is separate and independent, the revenue authorities had every power to examine and analyse the facts and figures as well as relevant law points of each year to find out whether all these three conditions are fulfilled or not. It is also the ratio of the cited case of Natraj Stationery 312 ITR 22 (Delhi) vide page 14 supra. It has been stated in that case that the first two conditions have already been satisfied and it is assumed that the fourth con .....

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the A.O. to doubt the earlier acceptance of the department in respect of reconstruction and splitting up to deny the claim in subsequent year because that violates the principles of consistency. But it also laid down that - Under the I.T. Act each year is a separate unit of assessment and taxable income as well as tax liability are to be determined keeping in view of the facts prevailing in that year and the law as applicable in that year. In the light of the above legal matrix as elaborated in .....

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the above, addition/disallowance is upheld. Appeal is dismissed. 8. The ITAT in its order dated 24th May, 2013 observed : 5.3.6. Taking into account all the facts and circumstances of the issue as discussed in the foregoing paragraphs and also, as rightly highlighted by the AO, the value of plant and machinery had exceeded ₹ 1 crore during the year under consideration which incidentally deprive the assessee to call itself as a Small Scale Industry, we are of the considered view that the au .....

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it of 10 consecutive years. The argument that, in the course of 10 years, if the growth of the industry is fast and it acquires machinery and the total value of the machinery exceeds ₹ 1 crore, it ceases to have the said benefit, do not follow from any of the provisions. It is true that there is no express provision indicating either way, what would be the position if the small scale industry ceases to be a small scale industry during the said period of 10 years. Because of that ambiguity, .....

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the definition of the small scale industry, the benefit under Sec. 80IB cannot be denied. If such a literal interpretation is placed on the said provision, it would run counter to the very object of granting incentives. It would kill the industry. Therefore, keeping in mind the object with which these provisions are enacted, keeping in mind the industrial growth which is required to be achieved, if two interpretations are possible, the courts have to lean in favour of extending the benefit of d .....

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ch of the authorities runs counter to the scheme and the intent of the Legislature. Thereby they have denied the legitimate benefit, an incentive granted to the assessee. Both the said orders cannot be sustained. Therefore the substantial question of law is answered in favour of the assessee and against the Revenue. (emphasis in quotations is ours) 10. Section 80 IB is in Chapter VI A of the Act which provides for deductions to be allowed from total income which is to be computed under the relev .....

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ing the conditions specified therein. The scheme applies to small scale industrial undertakings as defined in Clause 14(g) which in terms refers to Section 11 B of the Industries (Development and Regulation) Act, 1951. The extent of deduction permissible is mentioned in Clause 3 which is 25% (30% in the case of a company) of the profits and gains derived from such industrial undertakings for 10 consecutive assessment years beginning with the initial assessment. The initial assessment year is def .....

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alification applicable to industrial undertaking, other than small scale industrial undertakings, i.e., not being in 8th Schedule is not applicable. The small scale industrial undertakings eligible are only those which begin manufacture or produce, articles or things during the beginning of 1st day of April, 1995 and ending on 31st day of March, 2002 [Clause 3(ii)]. For other categories of industrial undertakings, different periods are prescribed, e.g. under sub-clause (i) of Clause (3). 12. The .....

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ents 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 qualifications 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 man .....

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ns in the impugned order are that 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 availe .....

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ax 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. 15. We may now refer to some of the decisions which have been cited at the bar. It is submitted on behalf of the assessee that a provision relating to incentive should be construed liberally to advance the objective of the provision. Reliance has been placed on Bajaj Tempo Ltd. versus CIT (1992) 196 ITR 188 (SC) = (1992) 3 SCC 78. Therein th .....

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for exemption. The main issue considered in the said judgment was that though the undertaking was a genuine new industrial undertaking which was the qualification for the exemption, a nominal part of the undertaking was out of the existing undertaking and building of an existing undertaking was taken on lease. The relevant observations are : 9. Initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then clause (i) should be applied reasonably .....

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ng new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in this case a fact which could not be disputed, even by the Income Tax Officer. But tools and implements worth ₹ 3,500 were transferred to it of previous firm. Technically speaking it was transfer of material use .....

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ed then courts are required to clear the haze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by suc .....

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undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15-C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the .....

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ajaj Tempo (supra) is certainly a valid principle of interpretation where there is ambiguity or absurdity or where conditions of eligibility are substantially complied. In the present case, the scheme of the statute is clear that the incentive is applicable to a small scale industrial undertaking. The intention of legislature is in no manner defeated by not allowing the said incentive if the assessee ceases to be the class of industrial undertaking for which the incentive is provided even if it .....

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siness to which the incentive was not admissible even though the principle of liberal interpretation in terms of Bajaj Tempo (supra) was applied. 18. In State of Haryana versus Bharti Teletech Ltd. (2014) 3 SCC 556, eligibility of an assessee to get benefit of exemption from tax was an issue. It was observed that while the exemption notification should be liberally construed, the beneficiary must fall within the ambit of the exemption and fulfill the conditions thereof. In case such conditions a .....

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v. CCE and Customs [AIR 1970 SC 755] wherein it has been held as follows: (AIR p. 759, para 5) 5. … It is well established that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. If the tax-payer is within the plain terms of the exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority. If such intentio .....

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on notification, no condition should be read into it when there is none. If an entrepreneur is entitled to the benefit thereof, the same should not be denied. 24. In this context, reference to T.N. Electricity Board v. Status Spg. Mills Ltd.[(2008) 7 SCC 353] would be fruitful. It has been held therein: (SCC p. 367, para 32) 32. It may be true that the exemption notification should receive a strict construction as has been held by this Court in Novopan India Ltd. v. CCE and Customs[ 1994 (Supp) .....

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r as crystal that a statutory rule or an exemption notification which confers benefit on the assessee on certain conditions should be liberally construed but the beneficiary should fall within the ambit of the rule or notification and further if there are conditions and violation thereof are provided, then the concept of liberal construction would not arise. Exemption being an exception has to be respected regard being had to its nature and purpose. There can be cases where liberal interpretatio .....

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y be strictly interpreted but beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted. This composite rule is not stated in any particular judgment in so many words. In fact, majority of judgments emphasise that exemptions are to be strictly interpreted while some of them insist that exemptions in fiscal statutes are to be liberally interpreted giving an apparent impression that they are contradictory to each other. But this .....

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or newly set up industrial units was applicable to the assessee therein. The High Court having allowed the benefit even though the assessee did not qualify for the same, this Court reversed the view of the High Court and held that the conditions for grant of exemption from tax are mandatory and in absence thereof exemption could not be granted. Distinguishing the judgments of this Court in Bajaj Tempo (supra), it was observed : 23. Mr Bharuka further submitted that in taxing statutes, provision .....

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e. 24. In our view, an exception or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications. 25. In our view, the failure to comply with the requirements renders the writ petition filed by the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule. 26. Whenever .....

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