2019 (5) TMI 781 - HC - Income Tax

Deduction u/s 80IC - substantial expansion - whether an assessee is entitled to deduction @ 100% of its profits or @ 25% only, where the substantial expansion is carried out by it after initial period of five years from the date of setting up of the industrial unit? - HELD THAT - In the assessment year 2011-12, the assessee carried out substantial expansion and claimed deduction @ 100% u/s 80IC for the assessment year 2012-13. The Assessing Officer allowed only 25% of deduction claimed u/s 80IC being the sixth year as a firm and disallowed 75% of the deduction claimed under Section 80IC of the Act. The CIT(A) confirmed the disallowance. The Tribunal allowed the appeal and directed the Assessing Officer to grant deduction of 100% of its eligible profits to the assessee following decision of Hon'ble Himachal Pradesh High Court in the case of M/s Stoverkraft India 2017 (12) TMI 69 - HIMACHAL PRADESH HIGH COURT . The matter is no longer res integra. The Apex Court has finally in M/S. AARHAM SOFTRONICS 2019 (2) TMI 1285 - SUPREME COURT held that 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). - Decided in favour of assessee. Disallowance u/s 37 and 36(1)(iii) - HELD THAT - Tribunal had held that the disallowances challenged in the additional grounds pertaining to interest and bad debts resulted in increasing the business profits of the assessee. Since the assessee was held entitled to claim deduction of its profits at the rate of 100%, therefore, the additions so made were entitled to deduction u/s 80IC as accepted by the Department also vide the Circular dated 2.11.2016 resulting in no addition to the taxable income of the assessee. No illegality or perversity could be pointed out by the learned counsel for the revenue in the aforesaid findings recorded by the Tribunal in the appeals which may warrant interference by this Court. No question of law, muchless a substantial question of law arises in these appeals - revenue appeals are dismissed

Summary

Issues:
1. Interpretation of Section 80IC of the Income Tax Act for deduction eligibility.
2. Disallowance under Sections 37 and 36(1)(iii) of the Act and its impact on deduction eligibility.
3. Consideration of additional grounds raised by the assessee.

Issue 1: Interpretation of Section 80IC for deduction eligibility
The case involved a dispute over the deduction under Section 80IC of the Income Tax Act, specifically whether an assessee is entitled to a deduction at 100% or 25% when substantial expansion occurs after the initial five-year period from the industrial unit's setup. The judgment referred to a previous case, Commissioner of Income Tax v. Aarham Softronics, which clarified that an undertaking setting up a new unit within a specified period in Himachal Pradesh is entitled to 100% deduction for five years and 25% for the next five years. If substantial expansion occurs within the initial ten years, the year of expansion becomes the new "initial assessment year" for 100% deduction.

Issue 2: Disallowance under Sections 37 and 36(1)(iii) and its impact on deduction eligibility
The Tribunal allowed the appeal, directing the Assessing Officer to grant 100% deduction of eligible profits to the assessee. The disallowances under Sections 37 and 36(1)(iii) were held to increase the business profits of the assessee. As the assessee was entitled to claim deduction at 100%, the additions made due to disallowances were also eligible for deduction under Section 80IC of the Act, as per a Circular dated 2.11.2016, resulting in no addition to the taxable income of the assessee.

Issue 3: Consideration of additional grounds raised by the assessee
The Tribunal considered additional grounds raised by the assessee as legal grounds that required no further investigation of facts and arose from the order of the CIT(A). The Tribunal found merit in the arguments presented by the assessee, stating that the disallowances challenged in the additional grounds increased the business profits, making them eligible for deduction under Section 80IC of the Act. The Tribunal's findings were upheld, and no substantial question of law was found to warrant interference by the Court.

In conclusion, the judgment clarified the interpretation of Section 80IC for deduction eligibility, addressed the impact of disallowances under Sections 37 and 36(1)(iii) on deduction eligibility, and affirmed the consideration of additional grounds raised by the assessee. The appeals by the revenue were dismissed, and the judgment favored the assessee in each issue discussed.