Case of Joonktolle Tea & Industries Ltd --Tribunal prescribes certain additional conditions which are not found in the provisions of section 80 IC- a fit case for rectification and also appeal.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Sections  33B, 80 IC,

Joonktolle Tea & Industries Ltd. Versus Dy. CIT 2010 (9) TMI 577 - ITAT, KOLKATA

Khodavat Panmasala (I) Pvt. Ltd Vs. JCIT [2006 (6) TMI 187 - ITAT PATNA-A].

Incentive on substantial expansion:

In any business substantial expansion involves investment of capital in fixed assets. Considering purpose to be achieved, and extent of such purpose the schemes of incentive provides various conditions to be met to satisfy requirement for eligibility of incentive allowed.

The fiscal incentives can be granted in different manner like exemptions or relief on tax otherwise payable on manufacture of goods, sale of goods, purchase of goods, services availed or to be rendered and also tax on income.

General meaning of substantial expansion is that there should be some significant increase in capacity of manufacturing facility or there should be new employment. However, these are not fixed criterion.

Specific criterion:

In any scheme of incentive, various conditions are prescribed, which one has to satisfy to avail the benefit of incentive allowed under the scheme. The scheme is generally a self contained code and any other criterion cannot be prescribed.

Conditions under incentives about Income-tax:

We find that under various schemes or provisions  for allowing incentives by way of reductions of tax liability under the Income-tax Act, 1961 different conditions are provided from time to time and incentives are also allowed under different provisions. We can notice different type of conditions for allowing fiscal incentives under the income-tax Act, for example:

1. a.      Establishment of a new unit  in specified area,
2. b.      Establishment of  a new unit to produce particular product or group of products,
3. c.       Substantial expansion of existing unit,
4. d.      Additional employment,
5. e.       Investment in new plant and machinery with or without expansion in capacity
6. f.       Investment in new buildings for residential purposes of  employees,
7. g.      Scientific or other research,
8. h.      Employees welfare measures,
9. i.        Exports of goods and earning of foreign exchange etc.

Nature of incentives:

We find different type of incentives, for example:

1. 1.      Initial or additional depreciation,
2. 2.      Accelerated depreciation,
3. 3.      Weighted depreciation or amortization or additional deductions like investment allowance, development allowance or employment allowance, weighted deduction etc.,
4. 4.      Full or partial exemption of income from being included in taxable income,
5. 5.      Lower or concessional rate of tax on income.

Conditions as prescribed should be met:

When the provision lays down particular conditions, then assessee is required to meet those conditions only. Any new or additional conditions cannot be imposed by concerned authority and even by Tribunal of Court. In case any authority asks assessee to meet any additional conditions, it will not be as per law.

Conditions for tax relief under section 80 IC:

Deduction from income is allowed as per provisions of Section 80 IC and other provisions adopted therein in case of new units and cases of substantial expansion  of existing units in specified area.

There is specific definition of substantial expansion and other conditions are also laid down in the provisions.

The term substantial expansion is given a meaning in the section itself:   

The Tribunal has reproduced the meaning of ‘substantial expansion’ and the same reads as follows:       

              (ix) ‘substantial expansion’ means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;

An analysis of the meaning:

There is a meaning of ‘substantial expansion’  and it is not merely definition which can be subject to context,

‘substantial expansion’  means increase in the investment in the plant and machinery.

The extent of increase is prescribed to be  by at least fifty per cent ,

Such increase is to be compute with reference to the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. This means that original cost of plant and machinery is to be considered as on the first day of the year in which substantial expansion is undertaken and original cost of plant and machinery in which substantial expansion is completed- this year is called initial year.

Consideration of original cost can be considered as an important condition because on consideration of original cost of plant and machinery, lowering effect of depreciation is avoided. If this condition was not prescribed then a nominal investment could enable to satisfy conditions. For example let us see the following example:

Cost of plant and machinery as on first day of commencement of expansion say Rs. 6 crore.

WDV of  plant and machinery as on first day of commencement of expansion say Rs.2 crore.

Additions investment required 50% of 6 crore that is Rs. 3.00 crore.

If the condition of original cost was not prescribed then an investment of just Rs.1 crore  (50% of WDV) would satisfy the condition of substantial expansion.

Thus  we can say that by applying test of new investment in plant and machinery equal to actual cost of 50% of existing plant and machinery, the legislators have taken care of necessary requirements of desirable investment.

Initial assessment year:

The Tribunal has also reproduced meaning of ‘Initial assessment year’ in the order and the same reads as follows:

        (v) ‘Initial assessment year’ means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion.

In case of substantial expansion the meaning reads as follows:

         ‘Initial assessment year’ means the assessment year relevant to the previous year in which  …  completes substantial expansion.

    Observations of author:

We find that this is also a definite meaning, and the meaning contemplates a year in which undertaking completes substantial expansion. This clearly shows that substantial expansion can be completed in more than one year. There is no condition that substantial expansion should be commenced and completed in a single year. As per provisions substantial expansion can be commenced and completed within the range of period prescribed in the section.

Observations and directions of the Tribunal:

Observations and directions of the Tribunal are reproduced below (with highlights added by author) and remarks of author in right column of table:

Observations and directions of the Tribunal (with highlights added by author)	Remarks of author
11.4 Thus, for being eligible to deduction u/s.80-IC, it should fulfill the following two conditions: -
i) Commences the specified operation on or after 1-4-2003, and
ii) undertakes substantial expansion during the period beginning on 24th day of December, 1997 and ending before the 1st day of April ,2007.	There are periodical limitations prescribed within which the unit has to undertake substantial expansion – this covers ten years.
11.5 It is also to be noted that as per sub-section(4) of section 80IC, the eligible undertaking or enterprise should also fulfill the following two conditions: -
i) It is not formed by splitting up or the reconstruction of a business already in existence; ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.	These provisions make a difference between substantial expansion and reconstruction and reorganization of business.
11.6 The combined reading of the above would show that if there is an existing undertaking/enterprise carrying on a particular operation, it will be eligible for the deduction under this section only when it undertakes substantial expansion of eligible business and such expanded business commences its operation in the Assessment Year 2004-05 or in any of the subsequent Assessment Years.
This would mean substantial expansion would constitute a distinct business, which would be separate from the existing business of the undertaking or enterprise.	The Tribunal has laid down an additional condition of a distinct business, separate from the existing business of the undertaking. In view of the author, with high regards for learned members, there is no such condition. In fact a distinct and separate business cannot be called substantial expansion. That can only be called a new business or new unit.
Any other interpretation would make some of the provisions of section 80-IC of the Act redundant.	The Tribunal has not mentioned which other provision will be redundant if the meaning of substantial expansion as suggested by the Tribunal are not adopted.
The definition of ‘initial AY’ and ‘substantial expansion’ given in sub section (8) of this section would also fortify the above view taken by us.	As per Tribunal, the definition of   ‘initial AY’ and ‘substantial expansion’ given in sub section (8) of this section would also fortify the above view about distinct and separate business. With due respect, author find that meaning of these two terms as discussed earlier, clearly suggest otherwise. These  meanings clearly shows  requirement of existing business, the book value of plant and machinery in the year in which substantial expansion is started and book value in the year in which substantial expansion is completed. Therefore, the view taken by the Tribunals is apparently wrong and contrary to the provisions particularly the definite meanings of these terms.
Let us take an example. Suppose an undertaking or enterprise was already processing tea prior to 1st day of April, 2003 in its unit. If some plant and machineries are replaced in the same unit during the period as specified in section 80IC(2)(b)(iii), it would not amount to substantial expansion, but would merely amount to reconstruction of the existing unit/business. Thus, the assessee would not be entitled to deduction u/s.80-IC of the Act.	The only conditions laid down under provision is that there should be additional investment in new plant and machinery to the extent of 50% of actual cost of plant and machinery in the year of commencement of substantial expansion. There is no condition that a replacement of old plant and machinery will not be eligible. The disentitlement is only when an undertaking is formed by splitting up, or the reconstruction , of a business already in existence. With due respect, author feels that honorable Tribunal has ignored the word ‘ not formed by…’ Replacement of  some of  plant and machinery cannot be called  formation of a unit by reconstruction of old  unit.
However, if in the same unit it starts a new line for processing tea, where all the machineries required for such processing are installed during the period specified in the above clause of the sect ion and the processing starts in the AY 2004-05 or any of the subsequent Assessment Years, then the assessee will be entitled to deduct ion u/s.80IC of the Act, that too if the actual cost of plant and machinery of such new unit is at least 50% of the book value of plant and machinery as on the 1st day of the previous year , in which the substantial expansion was undertaken.	The conditions laid down by the Tribunal for starting a new line for processing is an extra condition laid down by Tribunal. With respect, author find that there is no such condition laid down in the section.
In such a case depreciation on the plant and machinery of the said unit would be availed of for the first time only in the AY, when the plant and machinery of the said unit is first used for the purpose of business. There is nothing in the Board’s circular relied on by the assessee, which goes against the above interpretation of the section.	With due respect, author find that the honorable Tribunal has prescribed a new condition that depreciation on the plant and machinery of the said unit would be availed of for the first time only in the AY, when the plant and machinery of the said unit is first used for the purpose of business. The initial year means year in which substantial expansion is completed, therefore, during the gestation period of expansion assessee is entitled to claim depreciation on plant and machinery already installed in course of substantial expansion which can be commenced in one year and completed some other year. In case of mere replacement, the cost of old asset which is replaced is deducted from block and cost of new asset is added. For example, suppose old asset cost of which is Rs.500/-  is replaced, with new asset of Rs.600/- . In this case Rs. 500/- will be deducted from cost of block and Rs.600/- will be added, thus net addition will be only of Rs.100/- and not Rs. 600/- .Thus the condition of comparison of actual cost of plant and machinery at two points of time  takes into account real spending on new plant and machinery.  This is the reason for which the law provide comparison of actual cost and not WDV for examining completion of substantial expansion by way of additional 50% investment in plant and machinery. Therefore, there is no other condition.
11.7 We find that the above aspect of the matter has not been considered by the Assessing Officer and the ld. Commissioner of Income-tax (Appeals). We, therefore, set aside the orders of the authorities below on this issue, and remit the matter back to the file of the Assessing Officer with the direction that afresh order be passed in the light of our above observations and as per law after giving the assessee adequate opportunity of being heard.	Though the Tribunal has remitted the matter to the AO but directed the AO to examine the issue in light of the observations of the Tribunal. Thus the AO need to apply the observations of the Tribunal about substantial expansion.
12. In the result, the appeal of the assessee being ITA No.110/Kol/10 for AY 2004-05 is allowed for statistical purpose.

 

In view of the above discussion the author feel that learned Tribunal has prescribed certain additional conditions for eligibility of the incentive. Such conditions are not found in the relevant provisions. The Tribunal has also not considered the words ‘it is not formed by…’ as used in clauses (i) and (ii) of sub-section (4).

The Tribunal should have adopted purpose seeking approach:

It is well settled that an incentive provision is to be looked at in a liberal and purpose seeking manner. As per definite meaning (and not merely definition) of ‘substantial expansion’, the main purpose of the incentive is to promote additional investment in plant and machinery and such additional investment should be minimum 50% of book value (at cost) of plant and machinery in the first year in which substantial expansion is started. The Tribunal has also not considered the use of words  ‘as on the first day of the previous year in which the substantial expansion is undertaken’, rather it appears that the tribunal has considered provision as if word used are   ‘as on the first day of the previous year in which the substantial expansion is completed’.

Thus in a sense it can be said that the honorable Tribunal has tried to re-write the conditions about substantial expansion. Such re-writing of provision or additions or modification of words is not permissible.

The provision is very clear that substantial expansion can be over a period of more than one year, and the meaning is clear that substantial expansion means at least 50% additional investment in plant and machinery within the prescribed period.

Prescribing any other condition by the Tribunal is definitely a mistake apparent from record.

Therefore, this is a  fit case for rectification petition  before Tribunal and also an appeal before the High Court.

The order of the Tribunal:

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Joonktolle Tea & Industries Ltd. Versus Dy. CIT  2010 (9) TMI 577 - ITAT, KOLKATA