2018 (8) TMI 1209 - SC - Income Tax

Deduction u/s 80IC - claiming the exemption at the same rate of 100% beyond the period of five years on the ground that the assessee has now carried out substantial expansion in its manufacturing unit - units established in certain special category States - units situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and North-Eastern States. Held that - The essence of Sib-Section 3 as well as Sub-Section 6 have already been reproduced above. Whereas the exemption is provided @ 100% of such profits and gains for five assessment years commencing with the initial assessment years and, thereafter, 25% (or 30% where the assessee is a company) of the profits and gains for next five years. The deduction is limited to a period of 10 years. When we keep in mind the aforesaid scheme and spirit behind this provision, such a situation cannot be countenanced where an assessee is able to secure deduction @ 100% for the entire period of 10 years. If that is allowed it will amount to doing violence to the provisions of sub-section (3) read with sub-section (6) of Section 80-IC. A pragmatic and reasonable interpretation of Section 80-IC would be to hold that once the initial Assessment Year commences and an assessee, by virtue of fulfilling the conditions laid down in sub-section (2) of Section 80-IC, starts enjoying deduction, there cannot be another Initial Assessment Year for the purposes of Section 80-IC within the aforesaid period of 10 years, on the basis that it had carried substantial expansion in its unit. Once the assessees had started claiming deduction under Section 80-IC and the initial Assessment Year has commenced within the aforesaid period of 10 years, there cannot be another initial Assessment Year thereby allowing 100% deduction for the next 5 years also when sub-section (3), in no uncertain terms, provides for deduction @ 25% only for the next 5 years. It may be asserted again that the assessee s accept the legal position that they cannot claim deduction of more than 10 years in all under Section 80-IC. Decided in favor of revenue.

Summary

Issues Involved:
1. Interpretation of Section 80-IC of the Income Tax Act, 1961.
2. Eligibility for 100% tax exemption beyond the initial five-year period following substantial expansion.
3. Limitation of total exemption period to ten years under Section 80-IC.

Detailed Analysis:

Interpretation of Section 80-IC of the Income Tax Act, 1961:
The core issue revolves around Section 80-IC of the Income Tax Act, 1961, which provides tax exemptions to certain undertakings in specified areas, including Himachal Pradesh. The High Court had earlier discussed various aspects of this provision due to different issues raised by the assessees, but the Supreme Court focused on a singular question: whether an assessee who has availed 100% tax exemption for five years can claim the same exemption beyond this period due to substantial expansion.

Eligibility for 100% Tax Exemption Beyond the Initial Five-Year Period Following Substantial Expansion:
The Supreme Court clarified that Section 80-IC(2) applies to undertakings that begin manufacturing in specified areas. Section 80-IC(3) provides two categories of exemptions: one for ten years at 100% and another for five years at 100%, followed by 25% for the next five years. The assessees in this case fall under the second category. They claimed an additional five years of 100% exemption after substantial expansion during the initial five-year period. The Court held that once the initial assessment year starts, the assessees cannot claim another initial assessment year within the ten-year period based on substantial expansion. This interpretation ensures that the assessees cannot enjoy 100% exemption for the entire ten years, which would contravene the statutory provisions.

Limitation of Total Exemption Period to Ten Years Under Section 80-IC:
Section 80-IC(6) explicitly limits the total period of deduction to ten years. The Court emphasized that allowing 100% exemption beyond the first five years due to substantial expansion would violate this provision. The deduction scheme under Section 80-IC is designed to provide 100% exemption for the first five years and 25% (or 30% for companies) for the next five years, making the total exemption period ten years. The Court reiterated that the legislative intent and the statutory language do not permit a second initial assessment year within this ten-year period.

Conclusion:
The Supreme Court concluded that the assessees, after availing 100% exemption for the first five years, are only entitled to 25% (or 30% for companies) exemption for the remaining five years. The question of law was answered in favor of the Revenue, thereby disallowing the assessees' claim for 100% exemption beyond the initial five years based on substantial expansion. All appeals were allowed, and no order as to costs was made.