2004 (8) TMI 711 - AT - Income Tax

Issues Involved:

1. Eligibility for deduction under section 80-I of the Income-tax Act.
2. Whether the value of old machinery exceeding 20% of the total value disqualifies the assessee from deduction under section 80-I.
3. Interpretation of section 80-I(2)(ii) and its applicability in subsequent years after the initial formation year.

Detailed Analysis:

Issue 1: Eligibility for Deduction under Section 80-I

The core issue is whether the assessee is entitled to a deduction under section 80-I concerning profits and gains derived from an industrial undertaking. The assessee claimed this deduction for the first time in the assessment year 1991-92, which was allowed, and continued to claim the deduction up to the assessment year 1995-96. However, for the assessment years 1996-97 and 1997-98, the Assessing Officer denied the deduction on the grounds that the value of old machinery exceeded 20% of the total value of the machinery.

Issue 2: Value of Old Machinery Exceeding 20%

The Assessing Officer observed that the value of old machinery, with the addition of purchases in the previous year relevant to the assessment year 1996-97, exceeded 20% of the total machinery value. This observation led to the denial of the deduction under section 80-I for the assessment years 1996-97 and 1997-98. The CIT(A) initially supported the Assessing Officer's decision for the assessment year 1996-97 but reversed it for the assessment year 1997-98, relying on the Supreme Court's decision in Bajaj Tempo Ltd. v. CIT. According to the CIT(A), the industrial undertaking was not formed by the transfer of old machinery exceeding 20% of the total value, thus entitling the assessee to the deduction.

Issue 3: Interpretation of Section 80-I(2)(ii)

Section 80-I(2)(ii) stipulates that an industrial undertaking must not be formed by transferring old machinery exceeding 20% of the total value. The explanation clarifies that if the transferred old machinery does not exceed 20%, the condition is deemed satisfied. The Supreme Court in Bajaj Tempo Ltd. v. CIT emphasized a liberal and purposive interpretation of such provisions to encourage industrialization. The formation of an industrial undertaking should be considered at the initial stage, and subsequent additions of old machinery should not affect the eligibility for deductions if the initial conditions were met.

Final Analysis:

The Tribunal concluded that the assessee's industrial undertaking was formed in 1990 and met all conditions under section 80-I until the assessment year 1995-96. The purchase of old machinery in the sixth year (1996-97) did not imply that the undertaking was initially formed by transferring old machinery exceeding 20% of the total value. The Tribunal emphasized that the formation of the industrial undertaking was a one-time event, and subsequent additions should not disqualify the assessee from deductions if the initial formation conditions were met.

The Tribunal upheld the CIT(A)'s order for the assessment year 1997-98, allowing the deduction under section 80-I. It also set aside the orders of the CIT(A) and the Assessing Officer for the assessment year 1996-97, directing the Assessing Officer to grant the deduction for both the assessment years 1996-97 and 1997-98.

Conclusion:

The appeal of the assessee for the assessment year 1996-97 is allowed, and the appeal of the revenue for the assessment year 1997-98 is dismissed. The Tribunal directed the Assessing Officer to grant the deduction under section 80-I for both the assessment years 1996-97 and 1997-98, affirming that the industrial undertaking was not formed by the transfer of old machinery exceeding 20% of the total value.

← Previous Next →