2011 (3) TMI 1541 - HC - VAT and Sales Tax

Benefit of the exemption under the diversification scheme - Held that - In case of the first diversification on the additional investment exceeding 25 per cent of the original (initial) investment would make the unit eligible to claim exemption under the diversification, then why not unit cannot claim the exemption for further diversification making further investment exceeding 25 per cent of the original (initial) capital investment. In case if the interpretation of the Revenue is accepted, it would mean that the additional investment should be exceeding 25 per cent of the total investment, including the original investment plus the further investment as on the date of the claim of, the diversification. Thus this cannot be the intention of the Legislature. Thus the unit is entitled for the benefit of the exemption under the diversification scheme, in case if it invests further 25 per cent of the original investment, that is, the initial investment in the unit and not 25 per cent of the total investment including the original investment and the further investment, as on the date of the claim of exemption. Revision allowed.

Issues Involved:
1. Definition and interpretation of "original fixed capital investment" under section 4A of the U.P. Trade Tax Act, 1948.
2. Eligibility for tax exemption under the diversification scheme.

Issue-wise Detailed Analysis:

1. Definition and Interpretation of "Original Fixed Capital Investment":
The core issue in this case revolves around the interpretation of the term "original fixed capital investment" as used in section 4A of the U.P. Trade Tax Act, 1948. The applicant argued that "original fixed capital investment" should refer to the initial investment made at the time of the establishment of the unit, which was Rs. 99,54,118. The applicant contended that the additional investment made during the third diversification, amounting to Rs. 40,54,702, was more than 25% of the original fixed capital investment, thereby qualifying for tax exemption.

The Tribunal, however, interpreted "original fixed capital investment" differently. It stated that for subsequent expansions or diversifications, the term should include not only the initial fixed capital investment but also any additional investments made prior to the proposed expansion or diversification. This interpretation was based on the understanding that allowing the applicant's interpretation would frustrate the purpose of the law, as it would enable units to repeatedly claim exemptions without making significant new investments.

2. Eligibility for Tax Exemption under the Diversification Scheme:
The applicant's claim for tax exemption under the diversification scheme was initially rejected by the Divisional Level Committee and subsequently by the State Level Committee. Both committees based their rejection on the grounds that the additional fixed capital investment did not meet the required threshold of 25% of the "original fixed capital investment" as interpreted by them.

The applicant argued that the object of section 4A is to promote industrialization and increase production, and thus, the term "original" should be interpreted in its plain and ordinary sense to mean the initial investment made at the time of the establishment of the unit. The applicant supported this argument by citing dictionary definitions of the term "original" and various judicial precedents emphasizing the need for a liberal and purposive interpretation of tax exemption provisions aimed at promoting industrial growth.

The court considered several judicial precedents, including:
- Hira Lal Rattan Lal v. Sales Tax Officer: Emphasized the principle of literal construction of statutory provisions.
- Cape Brandy Syndicate v. Commissioners of Inland Revenue: Highlighted the need for strict interpretation of taxing statutes.
- State of Kerala v. Vattukalam Chemicals Industries: Stressed the primary object of tax and the necessity for strict construction of exemption notifications.
- Union of India v. Suksha International and Nutan Gems: Warned against unduly restricting the scope of beneficial provisions.
- Commissioner of Income-tax, Amritsar v. Strawboard Manufacturing Co. Ltd.: Advocated for a liberal construction of provisions granting concessional tax rights.
- Commissioner of Sales Tax v. Industrial Coal Enterprises: Affirmed that section 4A should be construed reasonably and purposively to encourage production and industrial development.
- Bajaj Tempo Ltd., Bombay v. Commissioner of Income-tax, Bombay City III: Supported a liberal interpretation of provisions promoting economic growth.

The court concluded that the term "original fixed capital investment" should be interpreted to mean the initial investment made at the time of the establishment of the unit. Consequently, the applicant's additional investment during the third diversification, which exceeded 25% of the initial investment, qualified for tax exemption under the diversification scheme.

Conclusion:
The revision was allowed, and the Divisional Level Committee was directed to pass an appropriate order in light of the court's interpretation. The court held that the unit is entitled to the benefit of tax exemption under the diversification scheme if it invests an additional 25% of the initial fixed capital investment, rather than 25% of the total investment including previous expansions or diversifications.

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