Exemption Period of 10 years u/s 80-IC is to be calculated from the Initial Year of Substantial Expansion: Supreme Court [Read Judgment]

The Supreme Court in Mahabir Industries vs. Principal Commissioner of Income Tax, held that the periods for which deductions were availed earlier by an assessee under Section 80-IA and Section 80-IB of the Income Tax Act would not be counted for the purpose of availing benefit of deduction under Section 80-IC of the Income Tax Act, 1961, provided the industry is not located in North Eastern State.

In the instant case, the assessee produces polythene from his factory in Himachal Pradesh. He claimed deduction under Section 80-IA of the Income Tax Act, 1961, which provides that for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, if it fulfills the conditions mentioned in subsection (4) thereof. those undertakings or enterprises, which fulfil the conditions mentioned in sub-section (4) of Section 80-IA of the Act do not need to pay tax for a period of 10 consecutive years. The assessee was received benefit under the section for 2 assessment years i.e. 1998-99 and 1999-2000.

Another provision 80-IB, including subsection (4) introduced in the year 2000 allows deduction of an amount equal to hundred per cent for a period of five years and thereafter twenty-five per cent, in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. First proviso thereto states that total period of deduction is not to exceed ten consecutive Assessment Years. Second proviso is a specific provision for industries in the North-Eastern Region which provides that the total period of deduction shall in such a case not exceed ten assessment years. Under this section also the assessee claimed deduction from 2000-2001 to 2005-06.

Section 80-IC was introduced from the year 2003. The provisions of Section 80-IC 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 these 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.  The assessee completed substantial expansion in 2005 and benefited the deduction under this provision for Assessment Years 2006-07 and 2007-08. Sub-section (3), as noted above, mentions the period of ten Assessment Years commencing with the initial Assessment Year.

Sub-section (6) of 80-IC provides that total deductions under Section 80-IC and Sub-section (4) of Section 80-IB cannot exceed the total period of ten years. On this ground the Assessing Officer rejected the claim of the assessee for the assessment year 2008-09 and 2009-10 stating that deduction could not be granted as this would become 11^th and 12^th year of deduction. The Commissioner of Income Tax (Appeals), Income Tax Appellate Tribunal (ITAT) and even the High Court upheld the A. O’s order. Appeal was filed before Supreme Court.

The bench comprising of Justice A.K. Sikri and Justice Ashok Bhushan noted that the High Court had 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 couldn’t 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 bench explained that the term ‘initial year’ is referable to the year in which substantial expansion has been completed. The Court pointed out that 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.

Setting aside the judgment of the High Court, the Bench observed “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, we are of the opinion 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.”