Stovekraft India vs. CIT (Himachal Pradesh High Court)

DATE: November 28, 2017 (Date of pronouncement)
DATE: December 7, 2017 (Date of publication)
AY: 2005-06
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S. 80-IC: Entire law on concept of "initial assessment year" and "substantial expansion" explained. Also, law on interpretation of statutes which confer incentives for promoting development explained. Law on interpretation when there is doubt also explained. Law on whether CBDT Circulars are mere external aids in interpretation of a statute or more also explained

The moot issue involved in the appeals filed by the assessee, inter alia, is as to whether an “undertaking or an enterprise” (hereinafter referred to as the Unit), established after 7th January, 2003, carrying out “substantial expansion” within the specified window period, i.e. between 7.1.2003 and 1.4.2012, would be entitled to deduction on profits @ 100%, under Section 80-IC of the Income Tax Act. Also, if so, then for what period.

HELD by the High Court allowing the appeals:

18. The Section applies to an undertaking or an enterprise. What is an “undertaking” or an “enterprise” (already referred to as Unit) is not defined under the Section/Act and we need not dwell thereupon, for it is not an issue before us. However, what is of importance is the stipulation under sub-clause (ii) of clause (b) of sub-section 2 of Section 80-IC, insofar as State of Himachal Pradesh is concerned. If between 7.1.2003 and 1.4.2012, a “Unit” has “begun” or “begins” to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation “and undertakes substantial expansion” during the said period, then by virtue of subsection (3), it shall be entitled to deduction at the rate of 100% of profits and gains for five assessment years, commencing from “initial assessment year” and thereafter at the rate of 25% of the profits and gains. The only restriction being that such substantial expansion is not formed by splitting up, or reconstruction, of the business already in existence. At this stage, we may note under subsection (6) of Section 80-IC, there is a cap with regard to the total period for which a “Unit” is entitled to such deduction.

19. Sub-section (1) of Section 80-IC entitles a unit for deduction; sub-section (2) lays down eligibility criteria; sub-section (3) specifies the extent of entitlement. Subsection (3), in turn, is controlled by sub-section (8), in case of substantial expansion of a unit.

20. Language of the statute is clear, simple and unambiguous. To our mind, there cannot be any two views or interpretations about the same. If an undertaking or an enterprise (“Unit”), which has “begun” or “begins” to manufacture/produce/commence operation of any article or thing specified in the Fourteenth Schedule and carries out/undertakes substantial expansion during the prescribed period, then it is entitled to the benefits of deduction for such percentage, as is provided under sub-section (3) of Section 80-IC.

21. Can there be more than one “initial assessment year”, as the authorities below have held it not to be so? Clause (v) of sub-section (8) of Section 80-IC, defines what is an “initial assessment year”. It is only for the purpose of this Section. Now, “initial assessment year” has been held to mean the assessment year relevant to the previous year in which the “Unit” begins to manufacture or produce article or thing or commences operation or completes substantial expansion. Significantly, the Act does not stipulate that only units established prior to 7.1.2003 shall be entitled to the benefits under Section 80-IC. The definition of “initial assessment year” is disjunctive and not conjunctive. The initial assessment year has to be subsequent to the year in which the “Unit” completes substantial expansion or commences manufacturing etc., as the case may be.

22. A bare look at Explanation (b) of Section 80-IB (11C) and Section 80-IB(14)(c) would reflect that, earlier [till Section 80-IC was inserted w.e.f. 1.4.2004], “substantial expansion” was not included in the definition of “initial assessment year”. Earlier definition had used words “starts functioning”, “company is approved”, “commences production”, “begins business”, “starts operating”, “begins to provide services”. But Section 80-IC (8)(v) changed wordings [of “initial assessment year”] to “begins to manufacture”, “commences operation”, or “completes substantial expansion”. Thus, legislature consciously extended the benefit of “initial assessment year” to a unit that completed substantial expansion.

23. This is absolutely in conjunction and harmony with clause (b) of sub-section (2) of Section 80-IC, which postulates two things – (a) an undertaking or an enterprise has “begun”, it is in the past tense or (b) “begins”, which is in presenti. Significantly, what is important is the word “and” prefixed to the words “undertakes substantial expansion” during the period 7.1.2003 to 1.4.2012.

24. Words “commencing with the initial Assessment Year” are relevant. It is the trigger point for entitling the unit, subject to the fulfillment of its eligibility for deduction @ 100%, for had it not been so, there was no purpose or object of having inserted the said words in the Section. If the intent was only to give 100% deduction for the first five years and thereafter at the rate of 25% for next five years, the Legislatures would not have inserted the said words. They would have plainly said, ‘for the first initial five years a unit would be entitled to deduction at the rate of 100% and for the remaining five years at the rate of 25%’.

25. Thus, the question, which further arises for consideration, is as to whether, it is open for a “Unit” to claim deduction for a period of ten years @ 100% or not. To our mind, it is legally permissible. The statute provides for the same.

26. Significantly, Section does not restrict grant of deduction @ 100% only for a period of five years. It does not provide that deduction(s) have to be in one stretch or in continuity, ending or succeeding with each Financial Year/Initial Financial Year. It does not state that ten assessment years have to be in continuity. All that it provides for is that no deduction shall be allowed to a “Unit”, either under Section 80-IC or 80-IB or 10-C, for a period exceeding ten assessment years. This Section does not curtail the percentage of exemption, to which a “Unit” may be entitled for a period of ten assessment years.

27. Also, in our considered view, “substantial expansion” can be on more than one occasion. Meaning of expression “substantial expansion” is defined in clause [8(ix)] of Section 80-IC and with each such endeavour, if the assessee fulfills the criteria then there cannot be any prohibition with regard thereto. For what is important, in our considered view, is not the number of expansions, but the period within which such expansions can be carried out within the window period [7.1.2003 to 1.4.2012], and it is here we find the words “begun” or “begins” and “undertakes substantial expansion” during the said period, as stipulated under clause (b) sub-section 2 of Section 80- IC, to be of significance. The only rider imposed is by virtue of sub-section (6) of Section 80-IA, which caps the deduction with respect to Assessment Years to which a unit is entitled to.

28. Of course, one thing is certain. Also, we are clear that under no circumstances, an assessee can claim deductions, be it under Section 80-IC, 80-IB or 10-C of the Act, for a period exceeding ten years, as is sought to be urged by some of the assessees.

29. What was the intent and the object sought to be achieved by the Legislature by inserting the new Section. To our mind, it was to promote and enhance activities envisaged under the Fourteenth Schedule, which could also be by carrying out substantial expansion of the “Unit”. It is to give incentives to “Units” for setting up or expanding in special category States.

30. It is a settled principle of law that exigibility to tax is different from the concept of exemption/ concession. [Padinjarekkara Agencies Ltd. vs. State of Kerala, (2008) 3 SCC 597 (Two Judges)]

31. It is also a settled principle of law that doubt, if any, in the construction of provisions of a taxing statute must be resolved in favour of the assessee. [The Indian Aluminium Co. Ltd. vs. The C.I.T., West Bengal, Calcutta, (1972) 2 SCC 150 (Five Judges); Star Industries vs. Commissioner of Customs (Imports), Raigad, (2016) 2 SCC 362 (Two Judges); and Eveready Industries India Limited vs. State of Karanataka, (2016) 12 SCC 551 (Two Judges)].

32. It is also a settled principle of law that exemption being an exception has to be respected regard being had to its nature and purpose. [State of Haryana and others vs. Bharti Teletech Limited, (2014) 3 SCC 556 (Three Judges)].

33. While arguing that Fiscal Statute has to be interpreted on the basis of the language used therein, Mr. Kuthiala, learned Senior Counsel, invites our attention to the decision rendered by the Apex Court in Orissa State Warehousing Corporation v. Commissioner of Income Tax, (1999) 4 SCC 197.

41. We may notice that the Act does not create distinction between the old units, i.e the units which stand established prior to 7.1.2003 (the cutoff date), and the new units established thereafter.

42. Artificial distinction sought to be inserted by the Revenue, in our considered view, only results into discrimination. The object, intent and purpose of enactment of the Section in question is only to provide incentive for economic development, industrialization and enhanced employment opportunities. The continued benefit of deduction at higher rates is available only to such of those units, which fulfill such object by carrying out “substantial expansion”.

43. While supporting the view taken by the authorities below, Revenue seeks reliance upon the provisions of sub-clauses (i) & (iii) of clause (b) of subsection (2) of Section 80-IC, which provide for benefit of deduction @ 100% for ten assessment years. We do not comprehend as to how would that make any difference. This provision deals with the establishments established within the State of Sikkim or North Eastern States of India.

44. In our considered view, though Section 80-IC deals with certain special category States, but however, the Legislators in their wisdom drew distinction and classified the State of Sikkim and other North Eastern States in one and State like Himachal Pradesh in another category. Taking into consideration the peculiar attending circumstances of the State of Sikkim and other North Eastern States, these States would constitute a class in itself, which classification is based on intelligible differentia and cannot be compared with other States, like the State of Himachal Pradesh. Thus, a unit established in the North Eastern States after 7.1.2003, regardless whether it carries out substantial expansion or not, is entitled to deduction @ 100% for ten assessment years, unlike the State of Himachal Pradesh, wherein a “Unit” established after 7.1.2003 will have to undertake substantial expansion before 1.4.2012, for further claiming deduction @ 100% for next five years, subject to over all cap of ten years.

45. Section 80-IC(3)(ii) [for Himachal Pradesh] stipulates that deduction shall be @ 100% for five years commencing with “initial assessment year” and thereafter @ 25%. “Initial assessment year”, as per Section 80-IC (8)(v) means, year in which the unit begins/commences to manufacture/produce or completes “substantial expansion” [As per Section 80-IC(8)(ix)].

46. The moment “substantial expansion” is completed as per Section 80-IC (8)(ix), the statutory definition of “initial assessment year” [Section 80-IC(8)(v)] comes into play. And consequently, Section 80-IC(3)(ii) entitles the unit to 100% deduction for five years commencing with completion of “substantial expansion”, subject to maximum of ten years as per Section 80-IC(6).

47. A unit that started operating/existed before 7.1.2003 was entitled to 100% deduction for first five years under Section 80-IB(4). If this unit completes substantial expansion during the window period (7.1.2003 to 31.3.2012), it would be eligible for 100% deduction again for another five years under Section 80-IC(3)(ii), subject to ceiling of ten years as stipulated under Section 80-IC(6).

48. Applying the aforesaid interpretation, we find there can be different fact situations, some of which, we have tried to illustrate;

(i) a “Unit” established prior to 7.1.2003, claiming deduction under Section 80-IB, post insertion of Section 80-IC carries out substantial expansion, would be entitled to deduction only under Section 80-IC, at the admissible percentage, for the remaining period, which in any case when combined, cannot exceed ten years,

(ii) just as in the case of the present assessee, a unit established after 7.1.2003, carries out substantial expansion only in the 8th year of its establishment, for the first five years would have already claimed deduction @ 100%; for the 6th and 7th years @ 25%, and then for the period post substantial expansion, in our considered view, the initial year of assessment being in the 8th year, would be entitled for deduction @ 100%, subject to the cap of ten assessment years,

(iii) the assessee establishes a unit after January 2003, say in the year 2005-06 and claims deduction under Section 80-IC for the first time in the assessment year 2006-2007 @ 100% of its profits. Thereafter, substantially expands the Unit in the year 2009-10, relevant to Assessment Year 2010-11 can claim deduction @ 100% for next five years subject to the cap of ten assessment years,

(iv) an existing unit not claiming any deduction under Section 80-IA, 80-IB or 80-IC substantially expands in the year 2003 and claims deduction under Section 80-IC first time in Assessment Year 2004-2005 and then substantially expands in the year 2007-2008, can claim deduction @ 100% w.e.f. Assessment Year 2008-2009 for next five years,

(v) the assessee sets up its unit in the year 2000-2001, claiming deduction under Section 80-IB till the Assessment Year 2003-2004 and thereafter under Section 80-IC as per law. Carrying out Substantial expansion in the Assessment Year 2004-2005, now claims deduction @ 100% w.e.f. Assessment Year 2004-05 again substantially expands in the Assessment Year 2008-2009 can claim 100% deduction w.e.f. 2008-2009,

(vi) the assessee sets up a unit in the year 2005-2006 and does not undergo substantial expansion at all can claim deduction under Section 80-IC.

49. In view of above discussion, we do not find the impugned orders to be sustainable in law.

50. Facts are not in dispute. The assessee established its “Unit” after 7.1.2003. In fact, it was established in the Financial Year 2005-2006, and since then, in terms of Section 80-IC, claimed and was allowed deduction @ 100% for five years and thereafter at the rate of 25%.

51. Sometime in the year 2008, assessee carried out certain expansions, which it termed to be “substantial expansion”. The fact that such expansion is in fact “substantial expansion”, in terms of clause (ix) of subsection (8) of Section 80-IC, cannot be disputed, for there is increase in the investment in the plant and machinery by at least 50% of the Book Value of the plant and machinery than the first day of the previous year in which such investment was made. Eligibility of benefits to the unit under Section 80-IC is not in dispute.

52. Both the Assessing Officer as well as the Appellate Authority(s)/Tribunal erred in not appreciating as to what was the intent and purpose of insertion of Section 80 IC.

53. In fact, we find that the conclusions arrived at by the Assessing Officer as well as the Appellate Authority/ Tribunal are not based on correct appreciation and interpretation of the statutory provisions. While arriving at their respective conclusions, in interpreting Section 80 IC, they have relied upon Notifications under the Central Excise Laws as well as Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), Government of India and Department of Income Tax. While doing so, the said authorities erred in not appreciating that Section 80 IC of the Act is a self contained and a complete code in itself, which, for the purpose of its interpretation, did not require assistance of any Notification(s), much less that of other Department.

54. In fact, we find the said Authorities to have erred in creating an artificial distinction between the “Units” set up before 7.1.2003 and after 7.1.2003 while holding that such of the “Units”, which were set up after 7.1.2003, were not entitled to deduction @ 100% even if they undertook substantial expansion between the period 7.1.2003 and 1.4.2012. The distinction created by the said Authorities is not borne out from the provisions of Section 80 IC. In other words, there is no prohibition that a Unit set up after 7.1.2003, having claimed deduction for first five years, cannot again claim deduction at such percentage within the prescribed period after undertaking substantial expansion. This we say so with a sense of conviction. Plain reading of the Statute demonstrates that there is no such bar in the statute as stands held by the authorities below. We further find that in fact both the authorities have misconstrued the definition of “Initial Assessment Year”. The Assessment Officer as well as the Appellate Authority have held that there cannot be two “Initial Assessment Years” between 07.01.2003 and 01.04.2012, which conclusion, in our considered view, is totally perverse. We reiterate that Sub clause (v) of Sub section (8) of Section 80 IC itself contemplates more than one “Initial Assessment Years”. The said Clause envisages that for a “Unit”, which begins to manufacture or produce any article or things or commences operation, the Initial Assessment Year means Assessment Year relevant to the previous year, in which, it begins to manufacture and produce article or thing or commences operation and for a “Unit”, which completes substantial expansion, Initial Assessment Year means Assessment Year relevant to the previous year, in which it completes substantial expansion. This very important aspect of the matter has been completely overlooked by the Assessment Officer as well as the Appellate Authority. Therefore, the conclusion arrived at by all the authorities below, that new industrial Units cannot carry out substantial expansion to claim benefits envisaged under Section 80 IC is perverse and not sustainable in law.

55. Thus, in view of the above discussion, these appeals are allowed and orders passed by the Assessment Officer as well as the Appellate Authority and the Tribunal, in the case of each one of the assessees, are quashed and set aside, holding as under:

(a) Such of those undertakings or enterprises which were established, became operational and functional prior to 7.1.2003 and have undertaken substantial expansion between 7.1.2003 upto 1.4.2012, should be entitled to benefit of Section 80-IC of the Act, for the period for which they were not entitled to the benefit of deduction under Section 80-IB.

(b) Such of those units which have commenced production after 7.1.2003 and carried out substantial expansion prior to 1.4.2012, would also be entitled to benefit of deduction at different rates of percentage stipulated under Section 80-IC.

(c) Substantial expansion cannot be confined to one expansion. As long as requirement of Section 80-IC(8)(ix) is met, there can be number of multiple substantial expansions.

(d) Correspondingly, there can be more than one initial Assessment Years.

(e) Within the window period of 7.1.20013 upto 1.4.2012, an undertaking or an enterprise can be entitled to deduction @ 100% for a period of more than five years.

(f) All this, of course, is subject to a cap of ten years. [Section 80-IC(6)].

(g) Units claiming deduction under Section 80-IC shall not be entitled to deduction under any other Section, contained in Chapter VI-A or Section 10A or 10B of the Act [Section 80- IB(5)].

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