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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE  JURISDICTION

CIVIL APPEAL NO. 20854    OF 2017 (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.4565 OF 2015)

DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE  11 (1), BANGALORE  …APPELLANT

VERSUS M/S. ACE MULTI AXES SYSTEMS LTD.         ...RESPONDENTS

WITH CIVIL APPEAL NO. 20856    OF 2017

(ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.8331 OF 2016)

WITH CIVIL APPEAL NO. 20857    OF 2017

(ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.3323 OF 2016)

WITH CIVIL APPEAL NO. 20855    OF 2017

(ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.148 OF 2016)

J U D G M E N T   ADARSH KUMAR GOEL, J.

Civil Appeal No. 20854    of 2017 (@ Special Leave Petition(Civil) No.4565 of 2015)

1. Leave granted.  This appeal has been preferred against the

judgment  and  order  dated  28th July,  2014 of  the  High Court  of

Karnataka at Bangalore in Income Tax Appeal No.477 of 2013.  The

High Court framed the following question of law for consideration :

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“When once the eligible business of an assessee is given the benefit of deduction under Section 80 IB on the assessee satisfying the conditions mentioned in sub-sec. (2) of  Section 80 IB, can the assessee be denied  the  benefit  of  the  said  deduction  on  the ground that during the said 10 consecutive  years, it ceases to be a small scale industry?”

2. The High Court answered the question in the negative and in

favour of the assessee.  The revenue has questioned the said view.

3. The respondent assessee is engaged in manufacture and sale

of  components/parts  of  CNC  lathes  and  similar  machines.   Its

income  was  assessed  for  the  assessment  year  2005-2006   at

Rs.1,79,82,653/-.   However,  the  Commissioner  of  Income  Tax,

interfered with the assessment under Section 263 to the extent it

allowed deduction under Section 80 IB(3) of the Income Tax Act,

1961 (the Act)  and directed fresh decision on the said issue vide

order  dated  16th January,  2009.   Thereafter,  the  Assessing

authority  on  14th December,  2009  disallowed  the  claim  of

Rs.75,81,910/-  towards  deduction  under  Section  80  (B(3).   The

same was upheld by the Commissioner in appeal and the Income

Tax Appellate Tribunal in second appeal.  However, the High Court

has reversed the said orders and upheld the claim.   

4. The relevant Section is as follows :

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“80-IB.  Deduction  in  respect  of  profits  and gains  from  certain  industrial  undertakings other  than  infrastructure  development undertakings - (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11),  (11A)  and  (11B)  (such  business  being hereinafter  referred  to  as  the  eligible  business), there  shall,  in  accordance with  and subject  to  the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage  and  for  such  number  of  assessment years as specified in this section.

(2) 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:

Provided that this condition shall not apply in respect  of  an  industrial  undertaking  which  is formed  as  a  result  of  the  re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is  referred  to  in section  33B,  in  the circumstances and within the period specified in that section;

(ii)  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or  more  cold  storage plant  or  plants,  in any part of India :

Provided that  the  condition  in  this  clause shall,  in  relation  to  a  small  scale  industrial undertaking  or  an  industrial  undertaking referred to in sub-section (4) shall apply as if the  words  "not  being  any  article  or  thing

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specified in the list in the Eleventh Schedule" had been omitted.

Explanation 1.—For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall  not  be  regarded as  machinery  or  plant previously  used  for  any  purpose,  if  the following conditions are fulfilled, namely :—

(a)  such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b)  such machinery or plant is imported into India from any country outside India; and

(c)  no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation  of  the machinery  or  plant  by the assessee.

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 per cent  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;

(iv) in a case where the industrial undertaking manufactures  or  produces  articles  or  things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid  of  power,  or  employs  twenty  or  more workers in a manufacturing process carried on without the aid of power.

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(3)  The  amount  of  deduction  in  the  case  of  an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking  for  a  period  of  ten  consecutive assessment  years  (or  twelve  consecutive assessment  years  where  the  assessee  is  a co-operative  society)  beginning  with  the  initial assessment  year  subject  to  the  fulfilment  of  the following conditions, namely :—

(i)  it  begins  to  manufacture  or  produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st  day of  March,  1995 or  such further period  as  the  Central  Government  may,  by notification in the Official Gazette, specify with reference to any particular undertaking;

(ii)  where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant [not specified in  sub-section  (4)  or  sub-section  (5)]  at  any time during  the  period  beginning  on  the  1st day of April, 1995 and ending on the 31st day of March, 2002.

(4) to (13)     xxx         xxx xxx

(14) For the purposes of this section,—

(a)  "built-up  area"  means  the  inner measurements  of  the  residential  unit  at  the floor  level,  including  the  projections  and balconies, as increased by the thickness of the walls but does not include the common areas shared with other residential units;

(aa) "cold chain facility" means a chain of facilities for  storage  or  transportation  of  agricultural produce  under  scientifically  controlled conditions  including  refrigeration  and  other facilities necessary for the preservation of such produce;

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(ab)  "convention  centre"  means  a  building  of  a prescribed area comprising of convention halls to  be  used  for  the  purpose  of  holding conferences and seminars, being of such size and  number  and  having  such  other  facilities and amenities, as may be prescribed;

(b)  "hilly area" means any area located at a height of one thousand metres or more above the sea level;

(c)  "initial assessment year"—

(i)  in the case of an industrial undertaking or cold storage plant or ship or hotel, means the assessment year relevant to the previous year in which the industrial  undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the cold chain facility or the ship is first brought into  use  or  the  business  of  the  hotel  starts functioning;

(ii)  in  the  case  of  a  company  carrying  on scientific  and  industrial  research  and development,  means  the  assessment  year relevant  to  the  previous  year  in  which  the company  is  approved  by  the  prescribed authority for the purposes of sub-section (8);

(iii) in the case of an undertaking engaged in the  business  of  commercial  production  or refining of mineral oil referred to in sub-section (9),  means  the  assessment  year  relevant  to the  previous  year  in  which  the  undertaking commences  the  commercial  production  or refining of mineral oil;

(iv) in the case of an undertaking engaged in the  business  of  processing,  preservation  and packaging  of  fruits  or  vegetables  or  in  the integrated  business  of  handling,  storage  and transportation  of  foodgrains,  means  the assessment year relevant to the previous year in which the undertaking begins such business;

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(v)  in the case of a multiplex theatre, means the assessment year relevant to the previous year in which a cinema hall, being a part of the said  multiplex  theatre,  starts  operating  on  a commercial basis;

(vi) in the case of a convention centre, means the assessment year relevant to the previous year  in  which  the  convention  centre  starts operating on a commercial basis;

(vii) in the case of an undertaking engaged in operating and maintaining a hospital in a rural area, means the assessment year relevant to the  previous  year  in  which  the  undertaking begins to provide medical services;

(d)  "North-Eastern Region" means the region comprising  the  States  of  Arunachal  Pradesh, Assam,  Manipur,  Meghalaya,  Mizoram, Nagaland, Sikkim and Tripura;

(da) "multiplex theatre" means a building of a prescribed  area,  comprising  of  two  or  more cinema theatres and commercial shops of such size  and  number  and  having  such  other facilities and amenities as may be prescribed;

(e)  "place of pilgrimage" means a place where any  temple,  mosque,  gurdwara,  church  or other  place  of  public  worship  of  renown throughout any State or States is situated;

(f)  "rural area" means any area other than—

(i)  an  area  which  is  comprised  within  the jurisdiction  of  a  municipality  (whether  known as  a  municipality,  municipal  corporation, notified area committee, town area committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the preceding census of which  relevant  figures  have  been  published before the first day of the previous year; or

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(ii)  an  area  within  such  distance  not  being more  than  fifteen  kilometres  from  the  local limits of any municipality or cantonment board referred  to  in  sub-clause  (i),  as  the  Central Government may, having regard to the stage of  development  of  such  area  including  the extent of, and scope for, urbanisation of such area and other relevant considerations specify in  this  behalf  by  notification  in  the  Official Gazette;

(g) "small-scale industrial undertaking" means an industrial  undertaking which is,  as on the last  day of  the previous year,  regarded as a small-scale  industrial  undertaking  under section  11B  of  the  Industries  (Development and Regulation) Act, 1951 (65 of 1951).”

5. Before we consider the issue of correct interpretation of the

above provision, it may be necessary to note the observations of

the statutory authorities and the High Court on the issue.   

6. The assessment order dated 14th December, 2009, disallowing

the deduction is as follows :

“The same is not acceptable on the ground that the value  of  plant  and  machinery  has  exceeded  Rs.1 crores as per the depreciation schedule annexed to the 3CD report which do not come under the purview of the definition of small scale industry for the year ending 04-05 (A.Y.05-06).

In view of the above, I am constrained to hold that the  assessee  company  is  not  eligible  for  claim  of 80IB(3) deduction amounting to Rs.75,81,910/- and hence same is disallowed.”

7. The Commissioner of Income Tax (Appeals) in order dated 15 th

February, 2011 observed :

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“I agree with the learned CIT who while passing the order  u/s  263  has  pointed  out  that  the  industrial undertaking,  here  initially  SSI  unit,  has  to  fulfil  all conditions  in  each  of  the  block  years  of  its entitlement or otherwise such claim has to be denied. He rightly points out that Section 80 IB(3) only forms the  basis  of  entitlement  and  its  scope.   The  first condition is that it must be a SSI unit in the year of claim and entitlement Section 80 IB (14)(g) defines what is a SSI and an exact date has been prescribed therein so that AO can examine whether on that date it is an SSI or not.  The date is the last day of the relevant  previous year in  this  case 31.03.2005 and such date is exclusively for the purpose of this section only.  Admittedly  the  investment  in  plant  and machinery  on 31.03.2005 was  i.e.,  Rs.4,05,21,730/- which was more than the prescribed limit of that year i.e., 1 crore.  Hence it no longer remains a SSI and hence the disallowance has to be held justified.

xxx xxx xxx

17. Summary: Section 80 IB is an incentive provision.  It stipulates deduction in respect of profits and gains from certain industrial undertakings.  Within this section a plethora of industries and business types have been given the benefit of such deduction if they fulfill the conditions mentioned in  the concerned sub section  of  Section 80IB of the Act.  Some of such concerns/industries are ship, hotel multiplex, theatres, housing projects etc. Sub-Section  (2)  of  Section  80IB  provides  such conditions  for  industrial  undertakings including cold storage and cold chain facility and also Small Scale Industrial undertakings (in short henceforth SSIU).  All the  four  conditions  mentioned  in  Section  80IB  (2) must be fulfilled to make the industrial  undertaking eligible for the benefit of the claim u/s 80IB of the I.T. Act.  Condition No.1 is that the industrial undertaking must  not  have  been  formed  by  splitting  up  or reconstruction of a business already in existence with an exception that in case of units specified u/s 33B of the I.T. Act this condition will not apply.  The second condition  is  that  such  undertaking  must  not  have

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been  formed  by  transfer  of  machinery  or  plant previously used with the exception that the value of such machinery and plant previously used must not exceed 20% of the value of the total cost of the plant and machinery of  such industrial  undertaking.   The third condition is that the industrial undertaking must produce  or  manufacture  any  article  or  thing  other than  any  article  or  thing  specified  in  the  Eleventh Schedule.  Exception to this third condition is that an SSIU can avail the 80IB benefit even if manufactures or  produces  articles  or  things  specified in  Eleventh Schedule.  The fourth condition is that the industrial undertaking running with the aid of power must not have less than 10 employees and if it is run without power, the number of employees must be more than 20  employees.   Thus  all  the  four  conditions narrated  above  must  be  fulfilled  if  the industrial  undertaking desires to avail  benefit u/s 80IB of the I.T. Act.  For a SSIU there is also an extra condition i.e., it must be an SSI unit as per explanation (g) given in 80IB (14) of I.T. Act which refers to Section 11B of the IDR Act 1951 which in turn prescribes a limit for investment in  plant  and  machinery  to  designate  the industrial undertaking as SSI unit.  Thus out of these five conditions,  the first two conditions may be called static or unchangeable.  In other words if  in the initial  year of  manufacture or production  it  is  substantiated  that  it  has fulfilled these two conditions the A.O.  cannot on this ground in subsequent eligible years of the block period deny the benefit u/s 80IB.  The rest three conditions are volatile and unstable. The industrial undertaking must show in each subsequent  year  of  claim  that  these  three conditions have not been violated.  Such claims of  the assessee has  to  face the analysis  and scrutiny of  the A.O.   Thus,  since each A.Y.  is separate  and  independent,  the  revenue authorities  had  every  power  to  examine  and analyse  the  facts  and  figures  as  well  as relevant  law  points  of  each  year  to  find  out whether all these three conditions are fulfilled or not.  It is also the ratio of the cited case of Natraj Stationery 312 ITR 22 (Delhi) vide page 14 supra.  It has  been  stated  in  that  case  that  the  first  two

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conditions  have  already  been  satisfied  and  it  is assumed that the fourth condition has been fulfilled in that year and hence the relief.  The same is also the ratio in the case of – M/s.  Janak  Dehydration (P)  Limited   vs.   Asst.  CIT  (2010)  134  TTJ  Ahd. D-Trib-1.  The facts of that case was that the assessee was  allowed  deduction  u/s  80IB  from  1993-94  to 2002-03  but  in  the  A.Y.  2003-04  the  claim  was disallowed on the ground that in the initial year the industrial unit has been formed by reconstruction or splitting up of the existing unit.  The ITAT held that it is  not  open  to  the  A.O.  to  doubt  the  earlier acceptance  of  the  department  in  respect  of reconstruction and splitting up to deny the claim in subsequent year because that violates the principles of consistency.  But it also laid down that –

“Under the I.T. Act each year is a separate  unit  of  assessment  and taxable  income  as  well  as  tax liability  are  to  be  determined keeping  in  view  of  the  facts prevailing in that year and the law as applicable in that year.”

In the light of the above legal matrix as elaborated in Para  15  above  it  can  be  palpably  seen  that  the appellant has violated, the mandatory fifth condition. It is not doubted that in the initial A.Y. the appellant was  an  SSI  unit,  but  in  the  A.Y.  2005-06  the investment  in  plant  and  machinery  has  admittedly exceeded  the  prescribed  limit  of  Rs.1  Crore. Therefore, it cannot be held as an SSIU.  Thus the fifth condition being violated openly and admittedly by the appellant, the relief sought for has to be denied in the A.Y. 2005-06.

18. In  view of  the above,  addition/disallowance is upheld.   Appeal is dismissed.”

8. The ITAT in its order dated 24th May, 2013 observed :

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“5.3.6.  Taking into account all  the facts and circumstances of the issue as discussed in the foregoing  paragraphs  and  also,  as  rightly highlighted by the AO, the value of plant and machinery had exceeded Rs.1 crore during the year  under  consideration  which  incidentally deprive the assessee to call  itself as a Small Scale Industry, we are of the considered view that  the  authorities  below  were  justified  in denying the assessee’s claim for deduction u/s 80-IB(3) of the Act.  It is ordered accordingly.”

9. Considering the question framed by it, the High Court held :

“5. In  the entire  provision,  there is  no indication that  these  conditions  had  to  be  fulfilled  by  the assessee all the 10 years.  When once the benefit of 10  years,  commencing  from  the  initial  year,  is granted,  if  the  undertaking  satisfy  all  these conditions initially, the undertaking is entitled to the benefit of 10 consecutive years.  The argument that, in  the  course  of  10  years,  if  the  growth  of  the industry is  fast  and it  acquires machinery and the total value of the machinery exceeds Rs.1 crore, it ceases to have the said benefit, do not follow from any of  the  provisions.   It  is  true  that  there  is  no express provision indicating either way, what would be the position if the small scale industry ceases to be a small scale industry during the said period of 10 years.   Because  of  that  ambiguity,  a  need  for interpretation arises. If we keep in mind the object of the  Legislature  providing  for  these  incentives  and when a period of 10 years is prescribed, that is the period, probably, which is required for any industry to stabilize itself.  During that period the industry not only  manufactures  products,  it  generates employment and it adds to the wealth of the country. Merely  because  an  industry  stabilizes  early, makes profits, makes future investment in the said business, and it goes out of the definition of the small scale industry, the benefit under Sec.  80IB  cannot  be  denied.   If  such  a  literal interpretation  is  placed  on  the  said  provision,  it

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would  run  counter  to  the  very  object  of  granting incentives.   It  would  kill  the  industry.   Therefore, keeping  in  mind  the  object  with  which  these provisions  are  enacted,  keeping  in  mind  the industrial growth which is required to be achieved, if two interpretations are possible, the courts have to lean in favour of extending the benefit of deduction to  an  assessee  who  has  availed  the  opportunity given  to  him  under  law  and  has  grown  in  his business.  Therefore we are of the view, if  a small scale industry, in the course of 10 years, stabilizes early, makes further investments in the business and it  results  in  it’s  going  outside  the  purview  of  the definition of a small scale industry, that should not come  in  the  way  of  its  claiming  benefit  under Sec.80IB for  10 consecutive  years,  from the initial assessment  year.   Therefore,  the  approach  of  the authorities  runs  counter  to  the  scheme  and  the intent of the Legislature.  Thereby they have denied the legitimate benefit,  an incentive granted to the assessee.  Both the said orders cannot be sustained. Therefore  the  substantial  question  of  law  is answered in favour of the assessee and against the Revenue.” (emphasis  in quotations is ours)

10. Section 80 IB is in Chapter VI A of the Act which provides for

deductions  to  be  allowed  from  total  income  which  is  to  be

computed under the relevant provisions.  The scheme is to provide

incentives  for  purposes  mentioned in  different  provisions  of  the

said Chapter.  Section 80 IB provides for deductions of specified

percentage from the profits and gains of the specified industrial

undertakings other than infrastructure development undertakings

(which are separately dealt with under Section 80 IA).  The clause

relevant for purposes of this appeal is Clause 2 which makes the

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deductions  permissible  in  respect  of  industrial  undertakings

fulfilling the conditions specified therein.  The scheme applies to

small  scale  industrial  undertakings  as  defined  in  Clause  14(g)

which  in  terms  refers  to  Section  11  B  of  the  Industries

(Development and Regulation) Act, 1951.  The extent of deduction

permissible is mentioned in Clause 3 which is  25% (30% in the

case of  a  company)  of  the profits  and gains  derived from such

industrial  undertakings  for  10  consecutive  assessment  years

beginning  with  the  initial  assessment.   The  ‘initial  assessment

year’  is   defined  in  Clause  14  (c)  as  the  year  in  which

manufacturing/production commences.

11. As  already noted,  the question for  consideration  is  whether

deduction  under  Clause  3  for  10  consecutive  assessment  years

remains  permissible  irrespective  of  compliance  of  conditions

subject to which the said deduction is permitted in the relevant

assessment  years.   For  purposes  of  deduction,  the  industrial

undertakings covered by Section 80 IB are of different categories.

Under the second proviso to Clause 2, disqualification applicable to

industrial  undertaking,  other  than  small  scale  industrial

undertakings, i.e., not being in 8th Schedule is not applicable.  The

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small  scale industrial  undertakings eligible are only those which

begin  manufacture  or  produce,  articles  or  things  during  the

beginning  of  1st day  of  April,  1995  and  ending  on  31st day  of

March,  2002  [Clause  3(ii)].  For  other  categories  of  industrial

undertakings,  different  periods  are  prescribed,  e.g.  under

sub-clause (i) of Clause (3).

12. The scheme of the statute does not in any manner indicate

that  the  incentive  provided  has  to  continue  for  10  consecutive

years  irrespective  of  continuation  of  eligibility  conditions.

Applicability of incentive is directly related to the eligibility and not

de hors the same.  If  an industrial undertaking does not remain

small  scale  undertaking or  if  it  does  not  earn  profits,  it  cannot

claim the incentive.  No doubt, certain qualifications are required

only  in  the  initial  assessment  year,  e.g.  requirements  of  initial

constitution of the undertaking.  Clause 2 limits eligibility only to

those undertakings as are not formed by splitting up of existing

business,  transfer  to  a  new  business  of  machinery  or  plant

previously used.  Certain other qualifications have to continue to

exist for claiming the incentive such as employment of particular

number  of  workers  as  per  sub-clause  4(i)  of  Clause  2  in  an

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assessment year. For industrial undertakings other than small scale

industrial undertakings, not manufacturing or producing an article

or things specified in 8th Schedule is a requirement of continuing

nature.

13. On examination of  the scheme of  the provision, there is  no

manner of  doubt that  incentive meant for small  scale industrial

undertakings cannot be availed by industrial undertakings which

do not continue as small scale industrial undertakings during the

relevant  period.  Needless  to  say,  each  assessment  year  is  a

different assessment year, except for block assessment

14. The observations in the impugned order are that the object of

legislature is to encourage industrial expansion which implies that

incentive  should  remain  applicable  even  where  on  account  of

industrial expansion small scale industrial undertakings ceases to

be  small  scale  industrial  undertakings.   We  are  unable  to

appreciate the logic for these observations. Incentive is given to a

particular category of industry for a specified purpose. An incentive

meant for small scale industrial undertaking cannot be availed by

an assessee which is not such an undertaking. It does not, in any

manner, mean that the object of permitting industrial expansion is

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defeated, if benefit is not allowed to other undertakings.  On this

logic, incentive must be given irrespective of any condition as the

incentive  certainly  helps  further  expansion  by  reducing  the  tax

burden.  The concept of vertical equity is well known under which

all  the  assessees  need  not  be  uniformally  taxed.   Progressive

taxation is a well known element of tax policy.  Higher slabs of tax

or  higher  tax  burden  on  an  assessee  having  higher  income or

higher  capacity  cannot  in  any  manner,  be  considered

unreasonable.

15. We may now refer to some of the decisions which have been

cited at the bar.  It is submitted on behalf of the assessee that a

provision  relating  to  incentive  should  be  construed  liberally  to

advance the objective of the provision. Reliance has been placed

on Bajaj Tempo  Ltd. versus CIT1.  Therein the assessee claimed

exemption meant for a new industrial undertaking which had not

been formed by transfer of earlier business in terms of Section 15C

of the Income Tax Act, 1922.  After recording a finding of fact that

the  assessee  was  a  genuine  new industrial  undertaking,  it  was

observed that a provision of a taxing statute granting incentive for

promoting growth and development should be construed liberally.

1  (1992) 196 ITR 188 (SC) = (1992) 3 SCC 78

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The  judgment  is  distinguishable.   Construing  liberally  does  not

mean  ignoring  conditions  for  exemption.  The  main  issue

considered in the said judgment was that though the undertaking

was  a  genuine  ‘new  industrial  undertaking’  which  was  the

qualification for the exemption, a nominal part of the undertaking

was out  of  the existing  undertaking and building  of  an existing

undertaking was taken on lease.  The relevant observations are :

“9. Initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then  clause  (i)  should  be  applied  reasonably  and liberally in keeping with spirit of Section 15-C(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 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.  The difficulty  arises  in such  cases.  For  instance  a  new company  may be formed, as was 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  of  previous  firm.  Technically  speaking  it  was transfer of material used in previous business. One could say as was vehemently urged by the learned counsel for the department that where the language of  statute  was  clear  there  was  no  scope  for interpretation.  If  the  submission  of  the  learned counsel  is  accepted then once it  is  found that the material used in the undertaking was of a previous business  there  was  an  end  of  inquiry  and  the

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assessee was precluded from claiming any benefit. Words of a statute are undoubtedly the best guide. But  if  their  meaning gets  clouded then courts  are required to clear the haze. Sub-section (2) advances the  objective  of  sub-section  (1)  by  including  in  it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. Therefore it is not transfer of building or material but the  one  which  can  be  held  to  have  resulted  in formation  of  the  undertaking.  In  Textile  Machinery Corporation Ltd. v. CIT [(1977) 2SCC 368] this Court while  interpreting Section 15-C observed :  (SCC p. 375, para 18)

“The true test, is not whether the new industrial  undertaking  connotes expansion of  the existing business of the assessee but whether it is all the same  a  new  and  identifiable undertaking separate and distinct from the  existing  business.  No  particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15-C or  not.  In  order  that  the  new undertaking  can  be  said  to  be  not formed  out  of  the  already  existing business,  there  must  be  a  new emergence  of  a  physically  separate industrial  unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved.”

Even though this  decision was concerned with the clause  dealing  with  reconstruction  of  existing business  but  the  expression  ‘not  formed’  was construed to mean that the undertaking should not

20

be a continuation of the old but emergence of a new unit. Therefore even if the undertaking is established by transfer of building, plant or machinery but it is not formed as a result of such transfer the assessee could not be denied the benefit.”

16. The principle  of  law considered in  Bajaj  Tempo (supra) is

certainly  a  valid  principle  of  interpretation  where  there  is

ambiguity  or  absurdity  or  where  conditions  of  eligibility  are

substantially  complied.  In  the present case, the scheme of the

statute is  clear that the incentive is  applicable to a small  scale

industrial undertaking.  The intention of legislature is in no manner

defeated by not allowing the said incentive if the assessee ceases

to be the class of  industrial undertaking for which the incentive is

provided even if it was eligible in the initial year.  Each assessment

year is a separate unit.

17. In Citizen Cooperative Society Limited versus Assistant

Commissioner  of  Income Tax,  Circle-9(1),  Hyderabad2 this

Court  considered  the  incentive  under  Section  80-P  meant  for  a

primary  agricultural  credit  society  or  a  primary  cooperative

agricultural and rural development bank.  The assessee was held

not to be entitled to the said incentive as business of the assessee

was held to be finance business to which the incentive was not

2  391 ITR 1 = (2017) 9 SCC 364

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admissible  even though  the  principle  of  liberal  interpretation  in

terms of Bajaj Tempo (supra) was applied.

18. In  State  of  Haryana  versus  Bharti  Teletech  Ltd.3,

eligibility of an assessee to get benefit of exemption from tax was

an issue.  It  was observed that while the exemption notification

should be liberally construed, the beneficiary must fall within the

ambit of the exemption and fulfill the conditions thereof.  In case

such conditions  are  not  fulfilled,  the  issue  of  application  of  the

notification does not arise.  The principle of interpretation in the

judgment in Bajaj Tempo (supra)  and other judgments was dealt

with as follows :

“22. We  will  be  failing  in  our  duty  if  we  do  not address a submission, albeit the last straw, of Mr. Jain that any provision relating to grant of exemption, be it under a rule or notification, should be considered liberally. In this regard, we may profitably refer to the decision in  Hansraj Gordhandas v.  CCE and Customs [AIR  1970  SC  755] wherein  it  has  been  held  as follows: (AIR p. 759, para 5)

“5. … It is well established that in a taxing statute  there  is  no  room  for  any intendment but regard must be had to the clear  meaning  of  the  words.  The  entire matter is governed wholly by the language of  the  notification.  If  the  tax-payer  is within the plain terms of the exemption it cannot be denied its benefit by calling in aid  any  supposed  intention  of  the exempting authority. If such intention can

3  (2014) 3 SCC 556

22

be gathered from the construction of the words of the notification or by necessary implication  therefrom,  the  matter  is different.”

23. In  CST v.  Industrial  Coal  Enterprises  [(1999)  2 SCC 605], after referring to  CIT v.  Straw Board Mfg. Co. Ltd.  [(1989 (Supp.) 2 SCC 529] and Bajaj Tempo Ltd. v.  CIT,  the  Court  ruled  that  an  exemption notification,  as  is  well  known,  should  be  construed liberally once it is found that the entrepreneur fulfils all  the  eligibility  criteria.  In  reading  an  exemption notification, no condition should be read into it when there  is  none.  If  an entrepreneur  is  entitled  to  the benefit thereof, the same should not be denied.

24. In this context, reference to T.N. Electricity Board v.  Status Spg. Mills Ltd.[(2008) 7 SCC 353] would be fruitful. It has been held therein: (SCC p. 367, para 32)

“32. It may be true that the exemption notification  should  receive  a  strict construction  as  has  been  held  by  this Court in  Novopan India Ltd. v.  CCE and Customs[ 1994 (Supp) 3 SCC 606], but it is also true that once it is found that the industry  is  entitled  to  the  benefit  of exemption notification, it would received a broad construction. (See  TISCO Ltd. v. State  of  Jharkhand[(2005)  4  SCC  272] and A.P. Steel Re-Rolling Mill Ltd. v. State of  Kerala[(2007)  2  SCC  725].)  A notification  granting  exemption  can  be withdrawn in public interest. What would be  the  public  interest  would,  however, depend upon the facts of each case.”

25. From  the  aforesaid  authorities,  it  is  clear  as crystal  that  a  statutory  rule  or  an  exemption notification which confers benefit on the assessee on certain conditions  should  be liberally  construed but the beneficiary should fall within the ambit of the rule or notification and further if there are conditions and violation  thereof  are  provided,  then the  concept  of

23

liberal construction would not arise. Exemption being an exception has to be respected regard being had to its  nature  and purpose.  There  can be cases  where liberal  interpretation  or  understanding  would  be permissible, but in the present case, the rule position being clear, the same does not arise.”

19. Same view was taken in Commissioner of Customs versus

M. Ambalal & Co.4 as follows :

“16. It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. The rule regarding exemptions  is  that  exemptions  should  generally  be strictly interpreted but beneficial exemptions having their  purpose  as  encouragement  or  promotion  of certain activities should be liberally interpreted. This composite  rule  is  not  stated  in  any  particular judgment  in  so  many  words.  In  fact,  majority  of judgments  emphasise  that  exemptions  are  to  be strictly  interpreted  while  some  of  them  insist  that exemptions  in  fiscal  statutes  are  to  be  liberally interpreted giving an apparent impression that they are  contradictory  to  each  other.  But  this  is  only apparent. A close scrutiny will reveal that there is no real contradiction amongst the judgments at all. The synthesis of the views is quite clearly that the general rule is  strict  interpretation while special  rule  in  the case  of  beneficial  and  promotional  exemption  is liberal interpretation. The two go very well with each other  because  they  relate  to  two  different  sets  of circumstances.”

20. In  State  of  Jharkhand  versus  Ambay  Cements5,  the

question was whether exemption for newly set up industrial units

was applicable to the assessee therein.   The High Court  having

4   (2011) 2 SCC 74 5  (2005) 1 SCC 368

24

allowed the benefit even though the assessee did not qualify for

the same, this Court reversed the view of the High Court and held

that the conditions for grant of exemption from tax are mandatory

and  in  absence  thereof  exemption  could  not  be  granted.

Distinguishing  the  judgments  of  this  Court  in  Bajaj  Tempo

(supra), it was observed :

“23. Mr  Bharuka  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 [(1992) 3 SCC 78] and in the case of  Bajaj  Tempo Ltd. v.  CIT. We are unable to countenance the above submission. In our view, the provisions of  exemption clause should be strictly construed and if the condition under which the exemption was granted stood changed on account of any  subsequent  event  the  exemption  would  not operate.

24. In  our  view,  an  exception  or  an  exempting provision  in  a  taxing  statute  should  be  construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications.

25. In  our  view,  the  failure  to  comply  with  the requirements  renders  the  writ  petition  filed  by  the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule.

26. Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads  to  severe  consequences,  such  requirement would  be  mandatory.  It  is  the  cardinal  rule  of interpretation  that  where  a  statute  provides  that  a

25

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, non-compliance  with  the  same  must  result  in cancelling  the  concession  made  in  favour  of  the grantee, the respondent herein.”

21. In view of the above judgments, we do not see any difference

in  the  situation  where  the  assessee,  is  not  initially  eligible,  or

where the assessee though initially eligible loses the qualification

of  eligibililty  in  subsequent  assessment  years.   In  both  such

situations, principle of interpretation remains the same.

22. Thus,  while  there  is  no  conflict  with  the  principle  that

interpretation has to be given to advance the object of law, in the

present case, the assessee having not retained the character of

‘small scale industrial undertaking’, is not eligible to the incentive

meant for that category.  Permitting incentive in such case will be

against the object of law.

23. For  the  above  reasons,  we  hold  that  the  assessee  is  not

entitled to benefit of exemption if it loses its eligibility as a small

scale industrial undertaking in a particular assessment year even if

in initial year eligibility was satisfied.  

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The appeal is accordingly disposed of in the above terms.

Civil Appeal No. 20856    of 2017 (@ Special Leave Petition(Civil) No.8331 of 2016)

Civil Appeal No. 20857    of 2017 (@ Special Leave Petition(Civil) No.3323 of 2016)

Civil Appeal No. 20855   of 2017 (@ Special Leave Petition(Civil) No.148 of 2016)

24. Leave granted.  In view of the judgment in the main matter,

these appeals are disposed of in the same terms.   

25. The assessing authority may pass an order of compliance by

applying the above principle to the facts of individual cases.

…………………………………..J.        [RANJAN GOGOI]

…………………………………..J.                           [ADARSH KUMAR GOEL]

…………………………………..J.        [NAVIN SINHA]

NEW DELHI; 5TH DECEMBER, 2017.