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TMI Blog2010 (12) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2002-03, the assessee claimed deduction under section 10B of the Income-tax Act, 1961 (hereinafter referred to as "the Act") in respect of its Kunigal unit. For the assessment year 2002-03, return of income was filed on October 31, 2002, declaring a loss of Rs. 4,79,39,611 which was claimed to be a carried forward loss. This loss was arrived at, after claiming deduction of Rs. 9,35,80,445 under section 10B of the Act. This deduction claimed was considered by the Assessing Officer as incorrect and as such, notice under section 148 was issued to the assessee calling upon to show cause as to why this amount of Rs. 9,35,80,445 is to be not treated as income escaped. In response to this, the assessee filed a revised return on April 27, 2004 showing a loss of Rs. 4,79,39,611. On scrutiny, the Assessing Officer found that the assessee was not for eligible for deduction under section 10B of the Act and disallowed the same by assessment order dated January 31, 2005. 4. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-III, Bangalore, and the appellate authority by order dated February 17, 2005, dismissed the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction is to be adopted and a provision in a taxing statute which grants incentives for promoting growth and development of trade and industry should be construed liberally and restriction on it has to be so construed so as to advance the objective of the provision with which it was enacted and not to frustrate it. He would submit that on a reading of section 10B it would emerge that the Assessing Officer would be entitled to consider the claim for deduction every year and in the event of the assessee being entitled to claim exemption in the accounting year relevant to the assessment year by satisfying the conditions stipulated therein, the assessee should not be deprived of such benefit and he would submit that in the instant case, though the assessee had not claimed exemption from the date of commencement of its production in the year 1996 the said exemption being available to the assessee for 10 consecutive years, the assessee was within its right to claim exemption in the accounting year relevant to the assessment year on account of the conditions stipulated in section 10B was satisfied and when the same is applied to the case on hand, the assessee would be entitled to claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection should alone be adopted. He would contend that in interpreting a taxing statute, courts should refrain itself from embarking upon either adding, altering or modifying the plain language used in the statutory provision unless it leads to unreasonable or un workability of the said provision if it is to be so read and thus he contends that strict construction of the language used in the section is to be made. He would elaborate his submissions by contending that the assessee in question had commenced its production in the year 1996 by purchasing land, building, plant and machinery worth Rs. 5.20 crores and the value of plant and machinery purchased was Rs. 2.60 crores and the assessee had to satisfy the condition stipulated under section 10B in the first year of commencement of production which according to him is the plain and unambiguous language employed in section 10B of the Act. As such, he contends that the assessee having not satisfied the initial test in the year of commencement of production, thereafter in the succeeding year, he cannot alter the situation and cannot contend that by virtue of the conditions having been * See [2005] 272 ITR (St.) 6. satisfied in the suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciate the rival contentions, we are of the considered view that the same has to be examined under the following headings : (1) Provisions of law. (2) Authorities of the hon'ble Supreme Court and other courts. (3) Facts of the present case. (4) Our discussions and findings. 12. The assessee has claimed deduction of its income under section 10B in respect of its Kunigal unit and the claim for deduction has been disallowed by the Assessing Officer. The Tribunal has examined the provisions of section 80J(4)(ii) while considering the grounds urged by the assessee in the appeal memorandum. Explanations 1 and 2 to sub-section (2) of section 80-I having been made applicable to clause (iii) of sub-section (1) of section 10B, the same is also extracted. Hence, these provisions are required to be considered by us for answering the substantial question of law formulated herein above and these provisions as prevailing during the assessment year in question are extracted as under : (1) Provisions of law "10B. Special provisions in respect of newly established hundred per cent. export-oriented undertakings.-(1) Subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established industrial undertakings or shops or hotel business in certain cases.- . . . (4) This section applies to any industrial undertaking, which fulfils all the following conditions, namely :- (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 ; . . . Explanation 2.-Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty percent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking." Section 80-I(2) "Explanation 1.-For the purposes of clause (ii) of this sub-section, any machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95 (SC) whereunder the object of enactment of section 80J came to be considered, analysed and explained by the hon'ble Supreme Court wherein it has been held to encourage setting up of new industrial undertakings, the said provision was brought in by offering tax incentives and the relief is granted under the said provision in respect of profits and gains of an undertaking to the extent which does not exceed the amount calculated at the rate of 6 per cent. per annum on the capital employed in such industrial undertaking. It was held in Nippon's case [1990] 181 ITR 518 (Karn) as under (page 521) : "There are two aspects to be noticed in this connection. First the percentage is to be worked out on a time basis depending on the whole or part of the previous year in which any item of capital is employed in the undertaking at the rate of 6 per cent. The second is that the capital employed in the undertaking during the previous year relevant to the assessment year has to be computed in the manner specified in the provision or under the Rules, as the case may be. After the capital is so computed, tax relief to the extent of 6 per cent. or 7½ per cent. thereof is to be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to clarify its meaning by use of appropriate language, the benefit must go to the taxpayer. Even if there is any doubt as to interpretation, it must be resolved in favour of the subject." (b) In the case of Assessing Authority-cum-Excise and Taxation Officer v. East India Cotton Mfg. Co. Ltd. reported in [1981] 48 STC 239, the hon'ble Supreme Court has held as under (headnote) : "A statute must be construed according to its plain language and neither should anything be added nor should anything be subtracted unless there are adequate grounds to justify the inference that the Legislature clearly so intended." (c) In the case of State of Jharkhand v. Ambay Cements reported in [2004] 3 RC 581 ; [2005] 139 STC 74 (SC), the hon'ble Supreme Court has held as under (page 85) "23. Mr. Bharukha further submitted that in taxing statutes, provision of concessional rate of tax should be liberally construed and in respect of the above submission, he cited the judgment of this court in CST v. Industrial Coal Enterprises [1999] 114 STC 365 ; [1999] 2 SCC 607 and in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) ; [1992] 3 SCC 78. We are unable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation of the undertaking by transfer of the building previously used. The test that follows from this judgment is, is the business or the undertaking the same old one or has it changed beyond recognition and thus, is it a new business and a new undertaking, to which of course some old plant or machine is transferred, but such transfer has a nominal effect, i.e., it is within the limits as indicated in the Explanation aforequoted. For the reasons above, we are inclined to agree with the Gujarat High Court's view and hold accordingly in the case of the assessee before us that it has made out a case that its undertaking is a small-scale industry and that in the year previous to the year of assessment, it has satisfied the requirements of section 80J(4)(ii) of the Act. The reference is answered accordingly. No order as to costs." (ii) Their Lordships having agreed with the view expressed by the hon'ble Gujarat High Court in the case of CIT v. Satellite Engineering Ltd. [1978] 113 ITR 208 (Guj) and the same also having been pressed into ser-vice by learned counsel for the appellant-assessee the same is extracted herein below (page 219) : ". . . the taxing author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment to income-tax for such assessment year that the taxing authority will have to consider for the first time whether the new industrial undertaking was, during the relevant previous year, formed by transfer of building, machinery or plant which were previously used for any purpose, and, if so, whether the condition as to statutory percentage prescribed in the proviso to subsection (3) was satisfied. A new business, at the stage of its coming into existence and long before the manufacture or production commences, might have acquired or be possessed of previously used building, plant or machinery which might constitute but a fraction of the entire building, plant or machinery which it requires in order to start manufacture or production. By the time the stage of manufacture or production arrives, however, it might acquire and instal a new plant or machinery of substantial value and in that manner, the whole manufacturing unit might be set up at a subsequent stage, that is to say, not in the year of birth but in the year of commencement of manufacture or production. Could it ever be said in such a case, in spite of the clear terms of sub-section (7) read with clause (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute is supported also by the object behind the enactment and avoids the frustration of such object. We have already adverted to the object of the enactment, namely, to encourage the setting up of new industrial undertakings in which there is substantial investment of fresh capital. The Legislature could not have intended that the outlay of substantial capital for the purpose of new machinery, plant or building should necessarily be in the very first year of the commencement of manufacture or production. In fact, there are many industrial units which add to their building, machinery or plant as the business grows and more capital becomes available, if the construction for which the revenue contends were accepted, such industrial units would be denied the benefit of tax holiday, even though they are still going through the teething trouble and are still in their infancy. Such a construction would totally nullify the object of the enactment. A converse case than the one illustrated above would, however, still clearly show how the construction for which the Revenue contends will lead to a manifest contradiction of the apparent purpose of the enactment. Take the case of an industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking was a new one. Once this test is satisfied, then clause (i) should be applied reasonably and liberally in keeping with the spirit of section 15C(1) of the Act. While doing so, various situations may arise, for instance, the formation may be without anything to do with any earlier business. That is, the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building. material or plant of any previous business. Such an undertaking undoubtedly would be eligible to the benefit without any difficulty. On the other extreme may be an undertaking, new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two, there may be various other situations. Difficulty arises only in such cases. For instance, a new company may be formed, as in this case-a fact which could not be disputed, even by the Income-tax Officer. But tools and implements worth Rs. 3,500 were transferred to it from the previous firm. Technically speaking, it was transfer of material used in a previous business. One could say, as was vehemently urged by learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not qualify for tax relief under section 80J, subsection (4). We may further mention here that sub-section (4)(ii) has been amended since 1976 in that the words 'a building (not being a building taken on rent or lease)' have been omitted from it and the second proviso and the Explanation, reproduced in an earlier part of this judgment, have been inserted in it. We are not called upon for the purpose of this reference to express any opinion on the effect of these amendments on the transfer to a new business of a building previously used for any purpose by the lessor. So far as previously used machinery is concerned, there is no change in sub-section (4)(ii) even as a result of its amendment in 1976. The Explanations which were inserted into this sub-section in 1976 would, however, further show that if an industrial undertaking is formed by the transfer to it of machinery previously used for any purpose, the capital employed on the acquisition of such machinery would not qualify for tax relief under section 80J. Explanation 1 deals with machinery or plant used outside India. If the assessee acquires such machinery, the capital employed on such acquisition would qualify f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return for deduction of Rs. 9,35,80,445 in respect of the Kunigal unit from its total income. In Form 56G enclosed to the return of income the following qualification was indicated therein. "The assessee contends that the plant and machinery acquired from M/s. Kanfa Chemo Organic Limited amounting to Rs. 5.20 crores does not fall under section 10A(2),(3) as the said machinery was not previously used by the assessee for any purpose which however, is not verifiable by us" In view of this endorsement made or qualification made in Form 56-G, the Assessing Officer doubted the assessee's claim to its entitlement for deduction under section 10B. In reply dated January 28, 2005 the assessee through its auditors submitted a written representation contending that the Kunigal unit was purchased from M/s. Kanfa under the agreement dated March 28, 1996, and the entire unit including land and building was purchased for an aggregate sum of Rs. 5.20 crores and the plant and machinery out of this 14 items purchased by the assessee, the value of the plant and machinery was Rs. 2,65,75,695. It was contended that after acquisition in the year 1996 the assessee has made considerable ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commencement of production may become "new" in so far as the assessee is concerned. However, the assessee also has to establish and demonstrate that said machinery or plant is not or was not previously used for any purpose before being installed or being put into use by the new unit in which the eligibility is claimed and deductions is sought for. This aspect will have to be kept in mind while examining the eligible criteria which is pressed into service and deduction of income so earned from total income is sought for by pressing into service the eligibility criteria prescribed under section 10B. 13. On a reading of section 10B(1), it would emerge that it is a special provision extended to newly established 100 per cent. export oriented unit (EOU) which entitles the said EOU to claim deduction of its profits and gains derived by it from the export of its articles or things or computer software. The period for which the assessee would be entitled to claim deduction of such profits is not eternal. It is for a fixed period of "ten consecutive years" in which the undertaking begins to manufacture or produce articles or things or computer software depending upon the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so fixed. To say that the assessee would not be entitled to claim deduction in that financial year which it had derived profits and gains, would render the provision itself nugatory inasmuch as it is a special provision made to encourage the export oriented unit and particularly when such EOUs would be able to earn foreign exchange for the country. 15. A situation arose where the assessees had set up their units in a domestic tariff area (DTA) which was subsequently approved as 100 per cent. EOU by the Board appointed by the Central Government in exercise of the powers conferred under section 14 of the Industries (Development and Regulations) Act, 1951, and the question which arose before the Central Government was, "Whether such EOUs from DTA would be eligible for deduction under section 10B ?" 16. The Board has issued Circular No. 1 of 2005 dated January 6, 2005 (F.No. 149/194/2004-TPL) and has clarified as under ([2005] 272 ITR (St.) 6, 7) : "4. The matter has been examined and it is hereby clarified that an undertaking set up in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufactured or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the condition prescribed under section 10B(1), namely, "undertaking begins to manufacture" is to be taken or the date on which unit got itself into 100 per cent. EOU from DTA is to be taken is to be examined. At this juncture itself, it would be necessary to extract the judgment of Nippon Electronics referred to in [1990] 181 ITR 518 (Karn), which reads as under (page 522) : "The word 'formed' also suggests that the transfer contemplated is one at the time of formation of the new undertaking. The eligibility for exemption has to be tested in the initial assessment year. There-fore, the exemption would not be available if, in the initial assessment year, the proportion of old assets transferred or utilised for the new business is above 20 per cent. Of the total investment, though in any subsequent year, even if it be within five years, new investment is made so as to reduce the proportion of the value of the old assets below 20 per cent. Therefore, the eligibility stands determined in the initial assessment year and once an industrial undertaking is found eligible in the initial year of manufacture, such benefit could be availed of in any of the succeeding four years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... severe consequences, such requirement would be mandatory. It is the cardinal rule of the interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, noncompliance with the same must result in cancelling the concession made in favour of the grantee-the respondent herein." 19. Sri Sarangan, learned senior counsel appearing for the assessee, has pressed into service Gopal Plastics' case [1995] 215 ITR 136 (Mad) whereunder the scheme of section 80J came up for consideration to distinguish the decision of this court in Nippon Electronics [1990] 181 ITR 518 (Karn). The substantial question of law which came to be formulated therein was as under : "Whether it was disentitled to relief under section 80J although the old machinery was less than the prescribed percentage of 20 per cent., during the relevant year, but in excess of 20 per cent. in an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of tax holiday : first, that the benefit will be available for a total period of five consecutive years only and, secondly, that the starting point of such period would be the year in which the manufacture or production of the article begins". (emphasis supplied by us) 21. When these two decisions are examined with reference to Nippon Electronic's case, we find that the eligibility test has to be in the initial assessment year and if for any reason like not earning profits and gains in the initial years on account of its infancy and on account of non-stabilization of its unit, as the case may be, it may not be able to derive the benefits flowing from section 10B in that year, but would be eligible to avail of the same in any of the succeeding years, once it is found eligible in the initial year of manufacture. It is held in Nippon Electronics [1990] 181 ITR 518 (Karn) as under (page 522) : "Therefore, the eligibility stands determined in the initial assessment near and once an industrial undertaking is found eligible in the initial year of manufacture, such benefit could be availed of in any of the succeeding four years. In the present case, admittedly, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) In the judgments relied upon by learned counsel for the assessee namely Gopal Plastics and Satellite Engineering, what came up for consideration was interpretation of sections 80J and 84 and what we are considering in the instant case is sections 10B and in those two decisions, the issue regarding "starting point of limitation" to claim the benefit was not under active consideration vis-a-vis initial fulfilment of mandatory criteria. (b) When the Assessing Officer sought for reply from the assessee as to why the benefit claimed by the assessee is not to be disallowed, a reply came to be submitted by the assessee through its chartered accountant dated January 28, 2005 whereunder the assessee has enclosed the valuation report of the valuer and it is stated therein as under : "7. Status of the unit.-The unit which started production in 1994-95 by M/s. Kanpha Chemmo Organics Ltd., was taken over by M/s. Sami Chemicals and Extracts during 1996, is in running condition." (c) Even under Explanation 2 to section 80-I which is mutatis mutandis made applicable to clause (iii) of sub-section (2) of section 10B it is to be noticed that "plant and machinery" ..... X X X X Extracts X X X X X X X X Extracts X X X X
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