2016 (3) TMI 686 - HC - Income Tax

Eligibility of deduction under section 80I - ITAT held that as Industrial Undertaking of the assessee during the assessment year 1989-90 situate at Rishra was not eligible for the benefit under Section 80I - Held that - The object of introducing section 80I was to encourage the entrepreneurs to set up industry. If the meaning or interpretation given by Mr. Agarwal is to be accepted, that would mean that an industrial undertaking cannot seek to derive the advantage of section 80I by fulfilling the conditions set out in sub-section (2) of section 80I; whereas the object according to us is that the benefit shall be given to an industrial undertaking which fulfills the conditions set out in subsection (2). The assessee in this case does fulfill that condition and there is no dispute with regard thereto. In the present case, the transfer is less than 20% of the total value of the machinery installed in the Konnagar plant. Therefore the prohibition does not operate against eligibility of the assessee to claim deduction. The Tribunal has erroneously denied the benefit of Section 80I to the assessee on the ground that the Industrial Undertaking of the assessee during the assessment year 1989-90 situate at Rishra was not eligible for the benefit under Section 80I. But that ground, according to us, is no reason to deny the benefit in the subsequent years when the assessee has set up a new plant at a different place and also fulfills all the terms and conditions laid down in sub-section (2) of Section 80I.- Decided in favour of the assessee.

Summary

Issues Involved:

1. Entitlement to the benefit under section 80I of the Income-tax Act.
2. Validity of reopening proceedings under section 147.
3. Compliance with conditions in sub-section (2) of section 80I.
4. Interpretation of sub-section (5) of section 80I regarding initial assessment year.

Issue-wise Detailed Analysis:

1. Entitlement to the benefit under section 80I of the Income-tax Act:

The primary issue was whether the assessee was entitled to the benefit under section 80I for the assessment years 1995-96, 1996-97, and 1997-98. The Tribunal had denied the benefit on the ground that the initial year of production, 1989-90, did not meet the conditions of section 80I due to the use of old machinery exceeding 20% of the total plant and machinery. The High Court, however, noted that the total value of the machinery transferred from Rishra to Konnagar was less than 20% of the total value of the new plant, thus complying with Explanation 2 of sub-section (2) of section 80I. Therefore, the assessee was entitled to the deduction under section 80I.

2. Validity of reopening proceedings under section 147:

The Assessing Officer initially allowed the deduction but later reopened the proceedings under section 147 and withdrew the benefit. The CIT restored the benefit, but the Tribunal set aside the CIT's order. The High Court did not specifically address the validity of reopening under section 147 but focused on the compliance with section 80I conditions.

3. Compliance with conditions in sub-section (2) of section 80I:

The High Court examined whether the assessee met the conditions laid out in sub-section (2) of section 80I. The conditions include that the industrial undertaking should not be formed by splitting up or reconstructing an existing business or by transferring old machinery exceeding 20% of the total value. The Court found that the assessee's new plant at Konnagar, with machinery transferred from Rishra worth Rs. 73 lakhs against a total value of Rs. 6.78 crores, complied with these conditions. Thus, the assessee fulfilled the necessary conditions for the deduction.

4. Interpretation of sub-section (5) of section 80I regarding initial assessment year:

The Tribunal had held that the assessee was not entitled to the deduction in subsequent years if it did not qualify in the initial year of production (1989-90). The High Court disagreed, stating that sub-section (5) provides the time limit for enjoying the benefit, which is seven assessment years following the initial assessment year, provided the eligibility is retained. The Court emphasized that the objective of section 80I is to encourage setting up new industries, and the benefit should be available if the conditions are met in any of the subsequent years.

Conclusion:

The High Court concluded that the assessee was entitled to the benefit under section 80I for the assessment years in question. The Tribunal's decision to deny the benefit based on the initial year's non-qualification was incorrect. The appeal was allowed, and the Tribunal's order was set aside. All three appeals for the respective assessment years were allowed by this order.