2019 (7) TMI 879 - HC - Income Tax

Deduction u/s 80IC - 'initial assessment year - 100% deductions after first five year - substantial expansion is undertaken - HELD THAT - As decided in M/S. AARHAM SOFTRONICS 2019 (2) TMI 1285 - SUPREME COURT substantial expansion is carried out as defined in clause (ix) of sub-section (8) of Section 80-IC by such an undertaking or enterprise, within the aforesaid period of 10 years, the said previous year in which the substantial expansion is undertaken would become initial assessment year , and from that assessment year the assessee shall be entitled to 100% deductions of the profits and gains. Such deduction, however, would be for a total period of 10 years, as provided in sub-section (6). For example, if the expansion is carried out immediately, on the completion of first five years, the assessee would be entitled to 100% deduction again for the next five years. On the other hand, if substantial expansion is undertaken, say, in 8th year by an assessee such an assessee would be entitled to 100% deduction for the first five years, deduction @ 25% of the profits and gains for the next two years and @ 100% again from 8th year as this year becomes initial assessment year once again. However, this 100% deduction would be for remaining three years, i.e., 8th, 9th and 10th assessment years.

Summary

Issues:
1. Appeal filed by Revenue under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal for the assessment year 2012-2013.
2. Interpretation of the definition of 'initial assessment year' under Sections 80-IB and 80-IC for deduction of profits and gains.
3. Entitlement to deduction for undertaking or enterprise setting up a new unit in Himachal Pradesh between specific dates.
4. Impact of substantial expansion on the 'initial assessment year' and the duration of deductions.

Analysis:
The High Court judgment pertains to an appeal filed by the Revenue against the Income Tax Appellate Tribunal's order for the assessment year 2012-2013 under Section 260A of the Income Tax Act, 1961. The Counsel for the Revenue acknowledged that the issue in question aligns with a judgment of the Apex Court in Commissioner of Income Tax Vs. Aarham Softronics, emphasizing the importance of the definition of 'initial assessment year' under Sections 80-IB and 80-IC. The Apex Court's decision highlighted the material difference in the definitions under these sections and emphasized that the judgment in Classic Binding Industries case did not accurately reflect the law due to this distinction.

The Apex Court's ruling clarified that an undertaking or enterprise establishing a new unit in Himachal Pradesh between specific dates is entitled to deductions based on the 'initial assessment year.' For the first five assessment years, a deduction of 100% of profits and gains is permitted, followed by a reduced deduction in the subsequent five years. However, if substantial expansion, as defined in the relevant section, occurs within the ten-year period, the year in which the expansion takes place becomes the new 'initial assessment year,' allowing for a reset of deductions at 100% for the remaining years.

The judgment further elaborated on the scenario where expansion is undertaken at different points within the ten-year period, outlining the corresponding deductions for each phase. Notably, the total period for deductions is limited to ten years, with variations based on the timing and nature of the expansion activities. Ultimately, the High Court dismissed the appeal in line with the Apex Court's interpretation, emphasizing the critical importance of the definitions and timelines specified in the relevant sections of the Income Tax Act.

In conclusion, the judgment provides a comprehensive analysis of the interpretation of the 'initial assessment year' under Sections 80-IB and 80-IC, clarifying the entitlement to deductions for eligible undertakings or enterprises. The impact of substantial expansion on the deduction timeline and the specific conditions for resetting the 'initial assessment year' are crucial aspects addressed in the ruling, ensuring clarity and consistency in the application of tax laws related to profits and gains deductions.