Inclusion of period of deduction u/s 80-IA and 80-IB for counting ten years for Section 80-IC clarified by Supreme Court

Inclusion of period of deduction u/s 80-IA and 80-IB for counting ten years for Section 80-IC is limited to industrial undertakings set-up in North-Eastern Region-Supreme Court

ABCAUS Case Law Citation:
ABCAUS 2341 (2018) (05) SC

The assessee was a manufacturer in Himachal Pradesh and being  an industrial undertaking, qualified for exemption from income tax under Section 80-IA of the Income Tax Act, 1961 (The Act). The assessee qualified for this deduction which it started availing from the Assessment Year 1998-99. This deduction under Section 80-IA was claimed and allowed for two Assessment Years i.e. 1998-99 and 1999-2000.

The Finance Act, 1999 introduced Section 80-IB which allows deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. From the Assessment Year 2000-01 to Assessment Year 2005-06, the assessee claimed deduction under Section 80-IB.

Another provision in the form of Section 80-IC was inserted by Finance Act, 2003 w.e.f. April 1, 2004. As per this provision, certain undertakings or enterprises in certain special category States. The provisions provided deduction to manufacturing units situated in the State of Sikkim, Himachal Pradesh and Uttaranchal and North-Eastern States. The deduction was provided to new units established in the aforesaid States, and also to existing units in those States if substantial expansion was carried out. The deduction was available @100% for ten Assessment Years for the units located in North-Eastern and in the State of Sikkim and for the units located in Himachal Pradesh, the deduction was available @100% for five years and @25% for next five years.

In view of the substantial expansion carried out by the assessee in AY 2006-07, it claimed deduction under Section 80-IC @ 100% for Assessment Years 2006-07 and 2007- 08, which was also allowed by the Assessing Officer (AO) after passing the order under Section 143(3) of the Act.

However, thereafter, deductions for the Assessment Year 2008-09 and Assessment Year 2009-2010 were rejected by the AO on the ground that this was 11th and 12th year of deduction and as per Section 80-IC(6), total deductions under Section 80-IC and Section 80-IB cannot exceed the total period of ten years.

Commissioner of Income Tax (Appeals) {CIT(A)} and Income Tax Appellate Tribunal (ITAT) upheld the order of the AO. The High Court, in view that there is a ceiling of ten years as stipulated under Section 80-IC(6), held that ten years period shall be counted from the Assessment Year 1998-99 when the assessee had claimed deduction for the first time under Section 80-IA and, therefore, deductions for the Assessment Years 2008- 09 and 2009-2010 would not be allowed.

In other words, High Court dismissed the appeals of the assessee on the ground that it cannot claim deduction under Sections 80-IC, 80-IB or 10C for a period exceeding ten years.

The Hon’ble Supreme Court observed that under the provisions of the provisions of sub-section (6) of Section 80-IC, no deduction is allowed to any undertaking or enterprise, where the total period of deduction inclusive of the period of deduction under this Section, or under the second proviso to sub-section (4) of Section 80-IB or under Section 10C, as the case may be, exceeds ten assessment years. The total period of ten years, thus, is to be counted in the following three circumstances:

(a) When the deduction has been given under Section 80-IC for a period of ten years, no further deduction is admissible.

(b) When the deduction is given under second proviso to subsection (4) of Section 80-IB which pertains to those industries which are in the North-Eastern Region

(c) When the deduction is claimed under Section 10C which is a special provision in respect of certain industrial undertakings in North-Eastern Region.

The Supreme Court observed that the assessee in had not got deduction under Section 80-IC for a period of ten years as he started claiming deduction under this provision w.e.f. Assessment Year 2006-07. Situation Nos. (b) and (c) mentioned above would not apply to the assessee as it’s undertaking/enterprise was not established in North-Eastern Region. Thus, the High Court failed to appreciate that the provisions of Section 80-IC(6) of the Act state that the total period of deduction under Section 80-IC and Section 80-IB cannot exceed ten assessment years only if the manufacturing unit was claiming deduction under second proviso to Section 80-IB(4) of the Act i.e. units located in the North-Eastern State.

The Apex Court clarified that the matter could be looked into from another angle. Under Section 80-IA, deduction is provided to such industrial undertakings or enterprises which are engaged in infrastructure development etc. provided they fulfill the conditions mentioned in sub-section (4) thereof. Section 80-IB makes provisions for deduction in respect of those industrial undertakings, other than infrastructure development undertakings, which are enumerated in the said provision. On the other hand, the intention behind Section 80-IC is to grant deduction to the units making new investments in the State by establishing new manufacturing unit or even to the existing manufacturing unit which carried out substantial expansions.

The Supreme Court opined that the purport behind the three types of deductions specified in Section 80-IA, Section 80-IB and Section 80-IC was  thus, different. Section 80-IC stipulates the period for which hundred per cent deduction is to be given and then deduction at reduced rates is to be given. If the assessee had earlier availed deduction under Section 80-IA and Section 80-IB, that would be of no concern inasmuch as on carrying out substantial expansion, which was carried out and completed in the Assessment Year 2006-07, the assessee became entitled to deduction under Section 80-IC from the initial year.

The Hon’ble Supreme Court further clarified that the term ‘initial year’ is referable to the year in which substantial expansion has been completed, and this legal position was stated by the High Court itself and even accepted by the Department as it had not challenged that part of the judgment. The inclusion of period for the deduction is availed under Section 80-IA and Section 80-IB, for the purpose of counting ten years, is provided in sub-section (6) of Section 80-IC and it is limited to those industrial undertakings or enterprises which are set-up in the North-Eastern Region. By making specific provision of this kind, the Legislature has shown its intent, namely, where the industry is not located in North Eastern State, the period for which deduction is availed earlier by an assessee under Section 80-IA and Section 80-IB will not be reckoned for the purpose of availing benefit of deduction under Section 80-IC of the Act.

Thus the Supreme Court held that it was wrong on the part of the AO not to allow deduction to the assessee under Section 80-IC for the Assessment Years 2008-09 and 2009-2010. As a result, the judgment of the High Court on this aspect was set aside.

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