2019 (3) TMI 13 - HC - Income Tax

Deduction u/s 80IC - substantial expansion - initial Assessment Year - claiming deduction at the rate of 100% again for the next five years as had undertaken substantial expansion under Section 80IC - HELD THAT - Assessee have availed deduction under Section 80-IC alone. Initially, they claimed the deduction on the ground that they had set up their units in the State of Himachal Pradesh and after availing the deduction @ 100% they want continuation of this rate of 100% for the next 5 years also under the same provision on the ground that they have made substantial expansion. As pointed out once the assessee had started claiming deduction under Section 80-IC and the initial Assessment Year has commenced within the aforesaid period of 10 years, there cannot be another initial Assessment Year thereby allowing 100% deduction for the next 5 years also when sub-section (3), in no uncertain terms, provides for deduction @ 25% only for the next 5 years. It may be asserted again that the assessee accept the legal position that they cannot claim deduction of more than 10 years in all under Section 80-IC. See COMMISSIONER OF INCOME TAX VERSUS M/S. CLASSIC BINDING INDUSTRIES 2018 (8) TMI 1209 - SUPREME COURT OF INDIA - Decided against the assessee

Issues Involved:
1. Deletion of addition by ITAT under Section 80IC.
2. Multiple "substantial expansions" under Section 80IC.
3. Deduction rates under Section 80IC for different periods.
4. Initial assessment year and substantial expansion.
5. Admissibility of depreciation.

Issue-wise Detailed Analysis:

1. Deletion of Addition by ITAT under Section 80IC:
The appellant-revenue challenged the ITAT's decision to delete the addition of ?2,10,51,286/- under Section 80IC, arguing that the ITAT erred by relying on the Himachal Pradesh High Court's decision in the case of M/s Stovekraft India, which had not been accepted by the department on merits. The ITAT had allowed the assessee's appeal without discussing the merits of the issue involved.

2. Multiple "Substantial Expansions" under Section 80IC:
The revenue contended that the ITAT erred in holding that undertakings which commenced production after 07.01.2003 could carry out multiple "substantial expansions" as long as the provisions of Section 80IC(8)(ix) were met, without appreciating that as per Section 80IC and CBDT Circular No. 7/2003, such enterprises could not carry out any "substantial expansion."

3. Deduction Rates under Section 80IC for Different Periods:
The revenue argued that the ITAT erred in allowing the deduction under Section 80IC at 100% for the assessee for 10 years, ignoring the statutory provisions that specified different deduction rates for different periods. According to the revenue, the deduction should be 100% for the first five years and 30% for the next five years for units in Himachal Pradesh, while units in North-Eastern regions were allowed 100% deduction for 10 years.

4. Initial Assessment Year and Substantial Expansion:
The revenue challenged the ITAT's decision that an undertaking which carried out substantial expansion in any assessment year prior to 01.04.2012 could opt for that assessment year as the initial assessment year for claiming deduction under Section 80IC. The revenue argued that an undertaking set up after 07.01.2003 was not entitled to the benefit of "substantial expansion" as per Section 80IC and CBDT Circular No. 7/2003.

5. Admissibility of Depreciation:
The revenue contended that the ITAT failed to adjudicate the issue of depreciation on merits, holding that the matter was academic in view of the allowance of 80IC. The revenue argued that the admissible depreciation, which had been correctly restricted by the AO based on the finding of facts, should have been adjudicated by the ITAT.

Judgment Analysis:

Deletion of Addition by ITAT:
The High Court noted that the issue of whether the assessee could claim deduction at 100% again for the next five years after undertaking substantial expansion had been decided against the assessee in the case of M/s Admac Formulations Vs. Commissioner of Income Tax, Panchkula. The Court held that once the initial assessment year commenced, there could not be another initial assessment year within the period of ten years based on substantial expansion.

Multiple "Substantial Expansions":
The Court referred to the Supreme Court's decision in Commissioner of Income Tax vs. M/s Classic Binding Industries, which held that an assessee could not start claiming deduction at 100% again for the next five years after undertaking substantial expansion. The Court emphasized that a pragmatic and reasonable interpretation of Section 80IC would not allow multiple initial assessment years within the ten-year period.

Deduction Rates under Section 80IC:
The Court reiterated that the deduction under Section 80IC for units in Himachal Pradesh was 100% for the first five years and 25% for the next five years, as specified in the statutory provisions. The Court held that the ITAT erred in allowing 100% deduction for the entire ten-year period.

Initial Assessment Year and Substantial Expansion:
The Court held that the ITAT's decision allowing an undertaking to opt for any assessment year prior to 01.04.2012 as the initial assessment year based on substantial expansion was incorrect. The Court emphasized that the provisions of Section 80IC and CBDT Circular No. 7/2003 did not allow for such an interpretation.

Admissibility of Depreciation:
The Court found that the ITAT erred in failing to adjudicate the issue of depreciation, which had substantial ramifications for the taxable income. The Court held that the ITAT, being the final fact-finding authority, should have addressed the issue of depreciation on merits.

Conclusion:
The High Court decided all the substantial questions of law in favor of the revenue and against the assessee. Consequently, the appeals were allowed, and the impugned orders passed by the ITAT were set aside.

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