2021 (1) TMI 916 - AT - Income Tax

Exemption u/s 80IC - initial assessment year - AO has rejected claim of the assessee of claiming 100% deduction under section 80-IC and allowed deduction only to the extent of 25% as per clause (ii) of sub-section 3 of section 80-IC - whether an assessee who sets up a new industry of a kind mentioned in sub-section (2) of Section 80-IC of the Act and starts availing exemption of 100 per cent tax under sub-section (3) of Section 80-IC (which is admissible for five years) can start 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? - assessee contended that the Act does not create distinction between the old units i.e. units established prior to 7.1.2003 and new units established thereafter, which is being specifically highlighted by the Assessing Officer HELD THAT - In Prl.CIT Vs. Aarham Softronics Civil 2019 (2) TMI 1285 - SUPREME COURT the Hon ble Supreme Court overruled its earlier decision in the case of Classic Binding Industries 2017 (12) TMI 69 - HIMACHAL PRADESH HIGH COURT by observing that it omitted to take note of the definition initial assessment year contained in Section 80-IC itself and instead based its conclusion on the definition contained in Section 80-IB, which does not apply in these cases. The definitions of initial assessment year in the two sections, viz. Sections 80-IB and 80-IC are materially different. The definition of initial assessment year under Section 80-IC has made all the difference. The Court therefore held that judgement in the case of Classic Binding Industries (supra) does not lay down the correct law. An undertaking or an enterprise which had set up a new unit between 7th January, 2003 and 1st April, 2012 in State of Himachal Pradesh of the nature mentioned in clause (ii) of sub-section (2) of Section 80-IC, would be entitled to deduction at the rate of 100% of the profits and gains for five assessment years commencing with the initial assessment year . For the next five years, the admissible deduction would be 25% (or 30% where the assessee is a company) of the profits and gains. - in case 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 been 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). 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 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. In the light of the decision of the Hon ble Supreme Court in Aarham Softronics that there is merit in this appeal by the assessee and the same is allowed.

Summary

Issues Involved:
1. Eligibility of the assessee to claim 100% deduction under Section 80-IC of the Income Tax Act after substantial expansion of the manufacturing unit.
2. Distinction between old and new units established before and after 7.1.2003 for claiming deductions.
3. Interpretation of "initial assessment year" under Section 80-IC in light of substantial expansion.

Issue-Wise Detailed Analysis:

1. Eligibility of the assessee to claim 100% deduction under Section 80-IC after substantial expansion:
The assessee, engaged in the production of power electronic products and handheld computer devices, set up a manufacturing unit in Parwanoo, Himachal Pradesh, starting business activities on 1st April 2007. The assessee claimed a 100% deduction under Section 80-IC from AY 2008-09 for five years. After carrying out substantial expansion on 28th March 2012, the assessee claimed 100% deduction again for AY 2015-16, which was the 4th year post-expansion. The Assessing Officer (AO) rejected this claim, allowing only a 25% deduction, arguing that substantial expansion benefits are not available for entities incorporated after 7.1.2003 and that allowing 100% deduction for 10 years would disadvantage pre-existing undertakings.

2. Distinction between old and new units established before and after 7.1.2003 for claiming deductions:
The AO contended that Section 80-IC creates distinct categories for units established before and after 7.1.2003, with different conditions for claiming deductions. The AO argued that new units established post-7.1.2003 cannot claim deductions meant for substantial expansion. The assessee countered this by stating that the Act does not distinguish between old and new units concerning substantial expansion and that any unit undertaking substantial expansion before 31.03.2012 is eligible for 100% deduction. The assessee relied on the decision in M/s Stovekraft India vs. CIT, where a similar issue was decided in favor of the assessee.

3. Interpretation of "initial assessment year" under Section 80-IC in light of substantial expansion:
The CIT(A) disagreed with the AO and directed the AO to allow a 100% deduction. The Tribunal considered the Supreme Court's decision in Prl.CIT Vs. Aarham Softronics, which clarified that the definition of "initial assessment year" under Section 80-IC is materially different from Section 80-IB. The Supreme Court held that substantial expansion within the 10-year period would reset the "initial assessment year," allowing 100% deductions for another five years, provided the total deduction period does not exceed 10 years. The Tribunal concluded that the assessee's claim was valid, as the substantial expansion in AY 2012-13 entitled them to 100% deduction for five years starting from AY 2012-13.

Conclusion:
The Tribunal allowed the appeal by the assessee, affirming that substantial expansion within the specified period resets the "initial assessment year," thus entitling the assessee to 100% deduction for another five years, subject to the 10-year cap on total deductions. The judgment aligns with the Supreme Court's interpretation in Prl.CIT Vs. Aarham Softronics, ensuring that the assessee's claim for AY 2015-16 is valid.