2010 (9) TMI 577 - AT - Income Tax

Deduction u/s.80-IC - substantial expansion - Held that - substantial expansion would constitute a distinct business, which would be separate from the existing business of the undertaking or enterprise. Any other interpretation would make some of the provisions of section 80-IC of the Act redundant. 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. 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. 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 - 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 - 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 - Appeal are allowed

Summary

Issues Involved:
1. Rejection of the appellant's claim of deduction under Section 80-IC of the Income Tax Act.
2. Determination of the initial assessment year for the purpose of claiming deduction under Section 80-IC.
3. Interpretation of the term "substantial expansion" under Section 80-IC.
4. Whether the substantial expansion needs to be completed in a single assessment year or can span multiple years.

Issue-Wise Detailed Analysis:

1. Rejection of the appellant's claim of deduction under Section 80-IC of the Income Tax Act:
The appellant claimed a deduction under Section 80-IC of the Income Tax Act for the assessment years 2004-05 and 2005-06, asserting that it had undertaken substantial expansion in its tea manufacturing business. The Assessing Officer (AO) rejected this claim on the grounds that the appellant commenced its business operations before 24-12-1997 and did not fulfill the condition of completing substantial expansion in a single assessment year. The Commissioner of Income-tax (Appeals) upheld this rejection, leading the appellant to file an appeal before the Tribunal.

2. Determination of the initial assessment year for the purpose of claiming deduction under Section 80-IC:
The appellant argued that the initial assessment year for claiming the deduction should be 2004-05, as the substantial expansion was completed in the financial year 2003-04. The appellant contended that the expansion process, which began in the financial year 1997-98, involved significant additions to plant and machinery over several years and was completed in 2003-04. The Tribunal noted that the definition of "initial assessment year" under Section 80-IC(8)(v) includes the year in which substantial expansion is completed.

3. Interpretation of the term "substantial expansion" under Section 80-IC:
The appellant maintained that substantial expansion, as defined in Section 80-IC(8)(ix), involves increasing investment in plant and machinery by at least 50% of the book value. The appellant provided evidence of such expansion through reports and financial data, showing a significant increase in production capacity and investment in plant and machinery. The Tribunal examined the relevant provisions and the Board's Circular No.7/03 para 49, which supports the appellant's interpretation that substantial expansion can span multiple years.

4. Whether the substantial expansion needs to be completed in a single assessment year or can span multiple years:
The AO and the Commissioner of Income-tax (Appeals) held that substantial expansion should be completed within a single assessment year. However, the appellant argued that such an interpretation is impractical for large-scale expansions involving significant investments and multiple stages. The Tribunal agreed with the appellant, stating that substantial expansion can span multiple years, provided it is completed within the specified period (24-12-1997 to 31-03-2007). The Tribunal emphasized that the definition of "initial assessment year" and "substantial expansion" supports the appellant's claim.

Conclusion:
The Tribunal set aside the orders of the lower authorities and remitted the matter back to the AO for fresh consideration in light of the Tribunal's observations. The Tribunal directed the AO to re-examine the appellant's claim of substantial expansion and determine the initial assessment year accordingly, ensuring compliance with the provisions of Section 80-IC. The appeals for both assessment years 2004-05 and 2005-06 were allowed for statistical purposes, pending further examination by the AO.