Conditions u/s 80IA are disjoint not cumulative. Conditions stipulated under section 80IA(4)(i) and 80IA(4)(iv) are held as disjointed by the High Court
ABCAUS Case Law Citation:
ABCAUS 2127 (2017) (11) HC
Important Case Laws Cited/relied upon by the parties:
Liberty India v. CIT 1 183 TAXMAN 349 (SC)
Brief Facts of the Case:
The appellant-assessee was a private limited company which had took over the power distribution network and tea plantations of TAT Tea Limited. The assessee company was thus engaged in the business of growing, manufacturing, and selling tea and other produce. It was also engaged in the business of distributing electricity taken from the State-owned Electricity Board.
For the relevant assessment year the company had claimed deduction under section 80IA. However, the Assessing Officer (AO) selected the assessee company for scrutiny and determined the total income after making certain disallowances which included disallowance of deduction claimed u/s 80IA.
Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal in part. Further aggrieved, the assessee approached the Income Tax Appellate Tribunal (ITAT). The only issue before the ITAT was to answer if the AO was justified in disallowing the deduction under Section 80-IA?
Contention of the Appellant Assessee:
The assessee submitted that it had fulfilled all the eligibility criteria prescribed under Section 80-IA of the Act. To elaborate, it was submitted that the assessee substantially improved and increased the distribution network spending huge amounts. According to him the increase was beyond 50% of the then existing establishment’s value.
It was submitted that in the relevant assessment year, the assessee invested Rs. 50,30,952/-, and because of this investment, the transmission network has been renovated and modernised. Relying upon a clarificatory circular of CBDT and the legislative purpose of Section 80-IA as spelt out in the Finance Act, 2004, it was contended that the statutory provision enables an assessee to claim certain deductions if the investment has led to renovation and modernisation of the transmission and distribution network.
It was submitted that one company taking over the entire undertaking of another company would hardly make any difference to the undertaking itself. That the tax benefits are undertaking-specific, and they do not run with the undertaking’s owner.
Contentions of the Respondent Department:
The Department (Revenue) contended that the assessee’s business was not a new industrial undertaking. Also the assessee had failed to establish that it had spent more than 50% of the plant’s book value on any renovation or modernisation.
It was submitted that the plant and machinery used by the assessee had been used by its predecessor company. So the assessee had only used machinery or plant which had been continuously used by the previous owner and that cannot entail the assessee to any tax concessions. It was also contended that the conditions imposed under section 80-IA(3) of the Act are cumulative but the assessee failed to prove that it has fulfilled all those conditions.
Observations made by the High Court:
Are the Conditions prescribed u/s 80IA Cumulative?
The Hon’ble High Court opined that conditions under clause (i) of sub section (4) of section 80IA that an enterprise may (i) develop, or (ii) operate and maintain, or (iii) develop, operate, and maintain any infrastructural facility are disjoint.
The Hon’ble High Court expressed its dissent with the view of the department that contingencies prescribed in clause (iv) of sub-section (4) are cumulative which mandates that an undertaking in India may (a) generate or generate and distribute power at any time between 1.4.1993 and 31.3.2010; (b) transmit and distribute by laying a network of new transmission or distribution lines between the above-mentioned period; or (c) substantially renovate or modernize the existing network of transmission or distribution lines between the same period.
The Hon’ble High Court opined that the clauses (a), (b), and (c) of clause (iv)are disjointed and, in fact, unconnected. Clauses (b) and (c), especially, cannot go together. Under clause (b) a network of new transmission or distribution lines must be laid, whereas under clause (c), they must be renovated or modernized. Laying down a new network of transmission lines under clause (b) and simultaneously renovating them under clause (c) exposes a temporal impossibility and linguistic incongruity.
The Hon’ble High Court clarified that one can only renovate what has already been in use; second, linguistically, one cannot renovate what is new. So legislative intent is unmistakable, and the conditions are disjoint and independent. The assessee’s fulfilling any one of them will suffice. And the assessee did fulfil clause (c).
Reverting to the question whether the conditions under sub-Section (4)(i) are cumulative, the Hon’ble High Court explained that clause (a) mandates that the company must have been registered in India under any Central or State Act. It should contract with the Central Government, or State Government, or any other statutory authority to develop, or operate and maintain or, develop, operate and maintain a new infrastructure facility. Under clause (c), the operating and maintaining infrastructure facility must have commenced after the 1 st April, 1995.
It was held that all these three activities are cumulative and the assessee fulfilled them all.
Has the Machinery Been Used?
As per the conditions stipulated in section 80IA(3), the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. The Hon’ble High Court observed that clause (ii) provides that the undertaking should not have been formed by transferring to a new business any machinery or plant used earlier for any purpose. However, the restriction under clause (ii) will not apply to the machinery or plant used abroad by any other person than the assessee, as stated in the Explanation-I. But it does not apply to this case; nor does the Explanation 2, which permits an assessee’s new business to use less than 20% of the used machinery.
The Statutory Purpose:
It was noted that deduction under Section 80-IA was introduced only through Finance (No.2) Act, 2004; the Act spelled out that it is to encourage investment in existing undertakings. CBDT Circular No. 5 of 2005, dated 15th July, 2005, clarified the legislative intention by stating that ‘Substantial renovation and modernisation’ means 50 per cent increase in the book value of plant and machinery in the network of transmission or distribution lines, as on 01-04-2004′.
The Hon’ble High Court observed that according to the Supreme Court judgment when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What merits the incentives under Section 80-IA/80-IB is the generation of profits (operational profits).
The Hon’ble High Court further observed that the scheme of Section 80-IA(2) does not speak about the business of assessee but of “undertaking” or “enterprise”. Then, an undertaking or an enterprise alone matters for the Revenue to decide the eligibility. Significantly, section 80-IA (2), the charging provision, does not refer to “business” as such.
The Hon’ble High Court observed that the assessee produced an audited certificate that the written down value of the plant and machinery as on 01/04/2004 was Rs. 88,39,340/-. It was claimed that it had spent for Rs.50.31 Lakh to renovate and modernize its transmission network. So, the amount spent was over 50% of the then existing establishment’s book value. Thus, the undertaking squarely fall under Section 80-1A(4)(iv) (c) of the Act. The assessee claimed that the undertaking’s renovation or modernization has brought about “substantial improvement in the ‘line loss.’ Substantial renovation and modernization has been done by replacement of High Tension distribution lines and installation of new CT/PT units.
The Assessing Officer’s disallowing deduction under section 80-IA of the Act, as affirmed by the Appellate Authority and the Tribunal could not be sustained