SC on 80-IC: A Bold and Beautiful decision

Section 80-IC was introduced to provide tax holiday to newly set up industrial undertakings at different places including, inter alia, Himachal Pradesh. This tax holiday was also available to those units that carried out substantial expansion. What constitutes 'substantial expansion' is defined in the statute and there was no dispute on that issue.

This tax holiday was available for a period of ten years out of which, for the first five years beginning with the 'initial assessment year', the taxpayer was entitled to a deduction of 100% of the profits of the eligible undertaking and for the balance five years at the rate of 30% (companies) or 25% (other assessees) of the profits of the eligible undertaking.

Several assessees carried out substantial expansion after setting up an undertaking during the tax holiday period. After carrying out substantial expansion, they claimed deduction for 100% profit of the eligible undertaking, even after expiry of five years of first setting up the unit. This claim was apparently well founded in view of the definition of 'initial assessment year' as contained in section 80-IC(8)(v) which reads: "'Initial assessment year' means the assessment year relevant to the previous year which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion."

This claim was resisted by the revenue on the ground that there could not be two initial assessment years for one undertaking, and that the reference to initial assessment year in the context of substantial expansion applied only in cases where there an undertaking already existed at the beginning of the tax holiday period and when that undertaking carried out a substantial expansion.

At the level of the ITAT the issue was first decided in favour of the assessee by the Delhi Bench in the case of Tirupati LPG Industries. In a later decision in the case of Hycron Electronics, the Chandigarh Bench disagreed with the Delhi Bench decision and ruled that the assessee won't be eligible for 100% deduction after the first five years even if it had carried out substantial expansion.

Subsequently, the Himachal Pradesh High Court in Stovekraft India vs CIT held the assessees' contention to be correct and that the definition of the term 'initial assessment year' did enable the assessee, who had carried out substantial expansion, to claim higher deduction of 100% from the year in which such expansion was carried out. The High Court noted that the only restriction was that the claim could not exceed a total period of ten years in view of sub-section (6) of section 80-IC.

Supreme Court, in CIT vs M/s Classic Binding Industries reversed the decision of the Himachal Pradesh High Court and held that a pragmatic and reasonable interpretation of the provision would be that once the initial AY commences and a taxpayer, by virtue of fulfilling the conditions laid down in under the Act, starts enjoying deduction, there cannot be another ‘Initial AY’ within the aforesaid period of 10 years, on the basis that it had carried substantial expansion in its unit. The SC distinguished its decision in case of Mahabir Industries, wherein the assesses had claimed deduction from the initial assessment year under a separate provision under the Act and thereafter claimed deduction under the current provisions upon its introduction by Finance Act 2003, on the ground that claim in that case was made under different tax holiday provisions on fulfillment of conditions prescribed therein.

I was a little disappointed with the decision in the case of Classic Binding Industries because the Supreme Court appeared to have overlooked the clear wording of the statute in defining 'initial assessment year', and seemed to place significance on what ought to be the law than what was the law as written. I had continued to hope that one day the Supreme Court would reconsider its decision.

In this background, the recent decision of the Supreme Court in the case of Pr. CIT vs M/s Aarham Softronics came as a whiff of fresh air. Acceding to the prayers of several assessees, the Supreme Court recalled its decision in Classic Binding Industries case on the ground that several assessees had not received the notice of hearing and went unrepresented, and that several pertinent arguments were not brought to the Court's notice. After examining the contents of the definition of 'initial assessment year' in 80-IC(8)(v) the Court agreed that this term could indeed be used both for the first setting up of an undertaking, as well as with reference to substantial expansion. Thus, the assessees who carried out substantial expansion were held eligible to claim deduction for 100% of profit of the industrial undertaking beyond a period of five years from the date of commencement of production, subject tot he overall limit of ten years.

The willingness to reconsider the issue within a few months after taking a negative view in the matter is indeed a heart warming step that saved a very large number of tax payers from suffering the consequences of the earlier order.