2017 (12) TMI 372 - SC - Income Tax

Benefit of deduction u/s 80IB - eligible business - assessee ceases to be a small scale industry - Held that - We do not see any difference in the situation where the assessee, is not initially eligible, or where the assessee though initially eligible loses the qualification of eligibililty in subsequent assessment years. In both such situations, principle of interpretation remains the same. Thus, while there is no conflict with the principle that interpretation has to be given to advance the object of law, in the present case, the assessee having not retained the character of small scale industrial undertaking , is not eligible to the incentive meant for that category. Permitting incentive in such case will be against the object of law. For the above reasons, we hold that the assessee is not entitled to benefit of exemption if it loses its eligibility as a small scale industrial undertaking in a particular assessment year even if in initial year eligibility was satisfied.

Issues Involved:
1. Eligibility for deduction under Section 80 IB of the Income Tax Act.
2. Interpretation of conditions for claiming deduction under Section 80 IB.
3. Continuity of eligibility conditions for deduction over the specified period.
4. Impact of exceeding the prescribed limit for small-scale industrial undertakings on eligibility for deduction.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80 IB:
The primary issue was whether an assessee, initially qualifying for a deduction under Section 80 IB as a small-scale industry, can continue to claim this benefit if it ceases to be classified as a small-scale industry during the eligible period. The High Court had ruled in favor of the assessee, allowing the deduction despite the change in classification, but this view was challenged by the revenue authorities.

2. Interpretation of Conditions for Claiming Deduction under Section 80 IB:
The High Court interpreted that the conditions for eligibility under Section 80 IB need only be satisfied in the initial assessment year, allowing the benefit to continue for the full 10-year period irrespective of subsequent changes in the status of the industrial undertaking. The Supreme Court, however, disagreed, emphasizing that the incentive is directly related to the eligibility conditions and must be maintained throughout the period for which the deduction is claimed.

3. Continuity of Eligibility Conditions for Deduction Over the Specified Period:
The Supreme Court clarified that the eligibility conditions for claiming the deduction under Section 80 IB must be met in each assessment year, not just the initial year. The Court stated that the scheme of the statute does not indicate that the incentive should continue for 10 years irrespective of the continuation of eligibility conditions. If an industrial undertaking ceases to be a small-scale industry or fails to meet other conditions, it cannot claim the deduction for that year.

4. Impact of Exceeding the Prescribed Limit for Small-Scale Industrial Undertakings on Eligibility for Deduction:
The Court noted that for an industrial undertaking to qualify as a small-scale industry, it must meet the criteria defined under Section 11B of the Industries (Development and Regulation) Act, 1951, which includes not exceeding a specified limit on investment in plant and machinery. If the value of plant and machinery exceeds this limit, the undertaking loses its status as a small-scale industry and, consequently, its eligibility for the deduction under Section 80 IB. The Supreme Court held that the incentive meant for small-scale industrial undertakings cannot be availed by those which do not continue to meet the definition during the relevant assessment years.

Conclusion:
The Supreme Court concluded that the assessee is not entitled to the benefit of deduction under Section 80 IB if it loses its eligibility as a small-scale industrial undertaking in any assessment year, even if it was eligible in the initial year. The appeal was disposed of with the direction that the assessing authority should apply this principle to the individual cases. The judgment emphasizes the importance of maintaining eligibility conditions throughout the period for which tax incentives are claimed.

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