DEDUCTION UNDER SECTION 80IC OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Section 80IC of the Income Tax Act, 1961 (‘Act’ for short) is a provision that provides tax incentives for businesses operating in specific industries and locations in India. The purpose of this provision is to encourage entrepreneurship and investment in regions that may not have seen much economic development.  Section 80IC provides a deduction on profits and gains of an eligible business. This deduction is available to businesses that are operating in specific areas of India and engaged in certain industries. The deduction is available for a specific period of time, which varies depending on the industry and the location of the business.

The conditions for claiming such deductions are as detailed below-

• The business entity must file its income tax returns in time;
• The business entity must maintain proper books of accounts and records;
• The business entity must have obtained all necessary approvals and registrations required for the business;
• The business entity must not claim any other deduction under the Act.

If the above said conditions are not complied with the Income Tax Department may not allow the deductions and levy the tax accordingly. 

The Income Tax Department filed appeal before the Delhi High Court against the two orders of Income Tax Appellate Tribunal which were in favor of the assessee Niraj Publishers and Printers Private Limited - one for AY 2011 - 2012 and the another for AY 2012-2013.  The assessee is a publisher of books and also causes printing activities.  The assessee filed its income tax returns for the assessment years 2011 - 12 and 2012 - 13 in time.  The same were selected for scrutiny by the Department.  Notices were issued by the Department on the assessee.

The Assessing Officer noticed that the assessee had claimed deductions under Section 80IC of the Act to the tune of Rs.7.89 crores for the assessment year 2011 - 12 and Rs.10.40 crore for the assessment year 2012 - 13.  The Assessing Officer directed the assessee to furnish explanation for the claim the assessee submitted in detail.  The Assessing Officer did not consider the explanation given by the assessee.  The Assessing Officer was of the view that the assessee did not carry out any printing or binding of books in the eligible undertaking at Rudrapur as neither the paper nor the printed material reached the eligible unit for printing, cutting and binding.  No manufacturing activity has been carried out in the premises and therefore the deduction claimed Rs.7.89 crores under Section 80IC.  The Assessing Officer held that the deduction claimed by the assessee will not in accordance with the law.  The Assessing Officer also made an addition to the income of the assessee to the tune of Rs. 6.04 crore.  This addition was made under Section 40(a) (ia) on the ground that the same was in the nature of commission which was tax deductible under section 194H of the Act.  The assessee did not deduct tax at source. 

In regard to the case related to AY 2012 - 13, the Assessing Officer followed his procedure for the AY 2011 -12.  The Assessing Officer held that the assessee had not carried out any printing or binding of books in the eligible undertaking at Rudrapur.  The Assessing Officer disallowed the claim of the assessee to the tune of Rs.10.37 crore and added Rs.3.97 crore to the income of the assessee.  The amount pertains to commission for which the assessee failed to deduct tax under Section 194(H) of the Act.

Against the order of the Assessing Officer the assessee filed appeals before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax (Appeals) allowed both the appeals filed by the assessee.  The Commissioner of Income Tax (Appeals) held that the material on record including the additional evidence established the claim of the assessee that from the premises of eligible undertaking, printing activities had genuinely be carried out.  Therefore the claim of the assessee under Section 80IC was fully available.  The material on record including the additional evidence clearly established that the payment made by the assessee to S.Chand & Co was in the nature of trade discount not in the nature of commission.  Therefore it is not necessary to deduct tax under Section 194(H) of the Act and as such addition made under section 40a(ia) of the Act was not sustainable.

The Income Tax Department filed an appeal before ITAT against these two orders of Commissioner of Income Tax (Appeals).  The ITAT dismissed the appeals filed by the Revenue.  The Tribunal has also noted that the discount offered by the respondent/assessee was in the nature of trade discount and not commission.  The ITAT found that in the case of the appellant, the Assessing Officer has not disallowed the deduction under section  80-IC on the ground of violation of prescribed conditions but on the basis of finding that the appellant did not actually carry out any operation at the premise of the eligible undertaking. Without prejudice, as the issue has been independently examined on merit and the appellant's claim of deduction u/s 80-IC in respect of publishing activity carried out from the premise of the eligible undertaking is found to be genuine, based on facts substantiated by relevant evidences, which have not been refuted by the Assessing Officer  in the remand report, the appellant's claim for deduction under section  80-IC is held as fully allowable. Accordingly, the appellant gets full relief on this ground.

Against the orders of ITAT the Income Tax Department filed appeal before the High Court in THE PR. COMMISSIONER OF INCOME TAX -6 VERSUS NIRJA PUBLISHERS & PRINTERS PVT. LTD. - 2024 (1) TMI 559 - DELHI HIGH COURT.  The Revenue has proposed the following questions of law for the consideration of the High Court-

• Whether on the facts and circumstances of the case, the ITAT was justified in not considering the facts that no new product was manufactured by assessee after material received from holding company and as such assessee was not eligible for deduction under Section 80IC of the Act?
• Whether on the facts and circumstances of the case, the ITAT was justified in not considering the fact that the total sale of assessee was made to the holding company, to be sold solely under the brand name of the holding company and as such payment of trade discount to augment sale is a false claim and consequently the Assessing Officer was justified in treating the expenditure as commission payment?

The High Court considered the second question.  The High Court observed that the ITAT has returned a finding of fact that the assessee sold books to its holding company S. Chand Company Limited at a discount.  This discount is a trader discount and not a commission.  The ITAT correctly ruled that the assessee is not required to deduct tax under Section 194H of the Act.  Therefore the High Court held that in so far as the proposed question no. (ii) is concerned that question did not arise for the consideration of the High Court.

The High Court held that since the Revenue did not raise any ground alleging perversity in the said finding of facts.  Therefore the High Court could not take venture into that aspect. The High Court found that no substantial question of law arises in the above appeals and dismissed the appeals filed by the Revenue.  The said judgment was pronounced on 10.01.2024.