2015 (8) TMI 616 - HC - Income Tax

Entitlement to benefit under section 80-IB - whether 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? - Held that - Section 80-IB is an incentive provision. It provides deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. For an industrial undertaking to be eligible for the said deduction, it has to fulfill all the conditions mentioned under sub-section (2) of section 80-IB. 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 deduction to an assessee who has availed of the opportunity given to him under law and has grown in his business. Therefore we are of the view, if a small scale industry, in the course of 10 years, stabilizes early, makes further investments in the business and it results in it s going outside the purview of the definition of a small scale industry, that should not come in the way of its claiming benefit under section 80-IB for 10 consecutive years, from the initial assessment year. Therefore the approach 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 . See Ace Multi Axes Systems Ltd. vs. Deputy Commissioner of Income Tax 2014 (8) TMI 596 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 80IB for the assessment year 2007-08.
2. Reasonableness of interest paid to persons specified in Section 40A(2)(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB for the assessment year 2007-08:

The primary issue was whether the assessee was entitled to a deduction under Section 80IB for the assessment year 2007-08, despite losing its status as a Small Scale Industrial Unit (SSI) in the previous year and not claiming the deduction in the assessment year 2006-07. The appellant argued that the deduction should not be allowed as the assessee did not qualify as an SSI in the previous year.

Section 80-IB(3) of the Income Tax Act, 1961, provides deductions for industrial undertakings, including SSIs, for a period of ten consecutive assessment years. Section 80-IB(14)(g) defines an SSI as an industrial undertaking regarded as such under Section 11B of the Industries (Development and Regulation) Act, 1951 (IDR Act).

In the assessment year 2006-07, the assessee did not claim the deduction due to a notification reducing the investment limit for SSIs. However, the assessee claimed the deduction again in the assessment year 2007-08, following a notification under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), which raised the investment limit.

The court noted that once an assessee is entitled to a deduction under Section 80-IB, they are entitled to it for ten consecutive years, provided they meet the initial conditions. The court emphasized that there is no provision in Section 80-IB that disqualifies an assessee from the deduction if they cease to be an SSI during the ten-year period. The court supported its view by referencing the Karnataka High Court's judgment in Ace Multi Axes Systems Ltd. vs. Deputy Commissioner of Income Tax, which held that an SSI is entitled to the deduction for ten consecutive years, even if it ceases to be an SSI during that period.

The court concluded that the assessee was entitled to the deduction under Section 80-IB for the assessment year 2007-08, despite not claiming it in the previous year or losing its SSI status. The appeal regarding this question was dismissed in favor of the respondent/assessee.

2. Reasonableness of interest paid to persons specified in Section 40A(2)(b):

The second issue was whether the interest paid to persons specified in Section 40A(2)(b) of the Income Tax Act, 1961, at 15% per annum was reasonable, given that the average rate of interest paid by the assessee to financial institutions and banks was not more than 12%.

The court found that this issue did not raise a substantial question of law. The Commissioner of Income Tax (CIT) observed that the loans from family members and other specified persons were available for longer periods and without formalities, which justified the higher interest rate. The CIT noted that the risk element in such advances was higher, and it was not unusual to pay a higher rate of interest to non-bank lenders.

The court agreed with the CIT's reasoning and dismissed the appeal on this issue, concluding that the interest rate of 15% was reasonable under the circumstances.

Conclusion:

The appeals were dismissed. The court upheld the assessee's entitlement to the deduction under Section 80-IB for the assessment year 2007-08 and found the interest rate of 15% paid to specified persons reasonable.