REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 7208 of 2018

COMMISSIONER OF INCOME TAX .....APPELLANT(S)

VERSUS

M/S. CLASSIC BINDING INDUSTRIES .....RESPONDENT(S)

WITH

CIVIL APPEAL NO(S). 7223 of 2018

CIVIL APPEAL NO(S). 7220 of 2018

CIVIL APPEAL NO(S). 7215 of 2018

CIVIL APPEAL NO(S). 7230 of 2018

CIVIL APPEAL NO(S). 7216 of 2018

CIVIL APPEAL NO(S). 7232 of 2018

CIVIL APPEAL NO(S). 7233 of 2018

Civil Appeal No. 7208 OF 2018 & Ors. Page 1 of 17

CIVIL APPEAL NO(S). 7224 of 2018

CIVIL APPEAL NO(S). 7214 of 2018

CIVIL APPEAL NO(S). 7213 of 2018

CIVIL APPEAL NO(S). 7212 of 2018

CIVIL APPEAL NO(S). 7231 of 2018

CIVIL APPEAL NO(S). 7211 of 2018

CIVIL APPEAL NO(S). 7229 of 2018

CIVIL APPEAL NO(S). 7228 of 2018

CIVIL APPEAL NO(S). 7227 of 2018

CIVIL APPEAL NO(S). 7226 of 2018

CIVIL APPEAL NO(S). 7234 of 2018

CIVIL APPEAL NO(S). 7238 of 2018

CIVIL APPEAL NO(S). 7210 of 2018

CIVIL APPEAL NO(S). 7217 of 2018

Civil Appeal No. 7208 OF 2018 & Ors. Page 2 of 17

CIVIL APPEAL NO(S). 7218 of 2018

CIVIL APPEAL NO(S). 7219 of 2018

CIVIL APPEAL NO(S). 7239 of 2018

CIVIL APPEAL NO(S). 7221 of 2018

CIVIL APPEAL NO(S). 7222 of 2018

CIVIL APPEAL NO(S). 7209 of 2018

CIVIL APPEAL NO(S). 7236 of 2018

AND

CIVIL APPEAL NO(S). 7225 of 2018

J U D G M E N T

A.K.SIKRI, J.

A neat question of law which arises in these appeals revolve

around Section 80-IC of the Income Tax Act,  1961 (hereinafter

referred  to  as  the  ‘Act’).   The  High  Court  by  its  impugned

judgment  dated  28th November,  2017  has  discussed  various

aspects  and  nuances  of  the  aforesaid  provisions  which  had

Civil Appeal No. 7208 OF 2018 & Ors. Page 3 of 17

arisen  because of  varied  kinds  of  issues  raised  in  a  batch  of

appeals filed by the assessees before the High Court.  We are

not concerned with all  those issues.   The only question which

needs to be answered in these appeals is as follows:

“Whether an assessee who sets up a new industry of  a kind mentioned in sub-section (2) of Section 80-IC of the Act and starts availing exemption of 100 per cent tax under sub-section (3)  of  Section 80-IC (which is admissible for five years) can start claiming the exemption at the same rate of 100% beyond the period of five years on the ground that  the  assessee  has  now  carried  out  substantial expansion in its manufacturing unit?”    

2. To understand the aforesaid question of law in clear terms, it may

be mentioned at this stage itself that sub-section (2) of Section

80-IC applies to an undertaking or enterprise which has, inter alia,

begun or begins to manufacture or produce any article or thing by

setting  up  a  new  factory  in  the  area  specified  therein  which

includes State of Himachal Pradesh as well.  Sub-section (3) of

Section 80-IC is in two parts:  in certain cases, exemption from

income is provided at the rate of 100% of such profits and gains

earned  from  the  aforesaid  undertaking  or  enterprise  for  10

assessment years commencing with the initial assessment year.

The present appeals do not fall in that category.  Other clause

relates to another category of undertakings or enterprises (these

cases belong to that category) where the exemption is at the rate

Civil Appeal No. 7208 OF 2018 & Ors. Page 4 of 17

of  100%  of  profits  and  gains  for  five  assessment  years

commencing with the initial assessment year and, thereafter, 25%

of profits and gains.  Total exemption, thus, is for a period of 10

years,  namely,  @100%  for  1st five  years  and  @  25%  for

remaining five years.  In these cases, all the assessees started

claiming exemption @ 100% on profits and gains and availed it

for a period of five years.  During this period these assessees

carried out “substantial expansion” and they claimed that, on that

basis, they should be allowed exemption from profits and gains

for another five years @ 100% instead of 25% from 6th to 10th

year as well.  Interestingly, they admit that the total period during

which they are entitled to exemption would not exceed 10 years,

as  per  the  mandate  of  sub-section  (6).   In  this  backdrop,  the

question is as to whether the assessees can again start claiming

100% exemption for  the next  five years from profits and gains

after availing the same for first five years on the ground that they

have now carried out substantial expansion.  The High Court has

answered the question in affirmative and for this reason, it is the

department which has come up to this Court challenging the said

decision by filing these appeals.   

3. Though,  the  aforesaid  question  of  law  is  identical  in  all  the

aforesaid cases and arises in the same fact situation mentioned

Civil Appeal No. 7208 OF 2018 & Ors. Page 5 of 17

above, for the sake of convenience, we may record the facts of

Civil Appeal No. 16851 of 2018 (@ SLP(C) 16851 of 2018).

4. Section 80-IA was inserted by the Finance (No. 2) Act, 1991, with

effect from 1st April, 1991.  By virtue of said Section, the gross

total income (profits and gains) of an assessee derived from any

business of an industrial undertaking, so specified therein, was

entitled to certain deductions for a period commencing from 1st

April, 1993.  With effect from 1st April, 2000, the said provision

was bifurcated with the insertion of another Section, i.e., 80-IB,

dealing  with  “certain  industrial  undertakings  other  than

infrastructure  development  undertakings.”   Thereafter,  the

Legislator, in its wisdom, enacted a special provision, in respect

of “units” established in certain special category States.  Thus,

Section  80-IC came to  be  inserted  by  virtue  of   Finance  Act,

2003, applicable with effect from 1st April, 2004.  At this point., It

may only be noticed that  correspondingly certain provisions of

Section  80-IB  were  also  amended/repealed.  Deductions  under

the  said  Section  were  discontinued  for  the  Assessment  Years

commencing from 1st April, 2004  (Sub-section (4) of Section 80-

IB).

Civil Appeal No. 7208 OF 2018 & Ors. Page 6 of 17

5. The assessee firm derives income from manufacturing of printed

embossed book binding cover material  of  cotton in sheet from

and security fiber of dual coloured combination.  The assessee

firm comprised of nine partners during the relevant assessment

year.  The assessee started its business activity/operation on 11 th

July,  2005  and  initial  Assessment  Year  for  claim  of  deduction

under Section 80-IC of the Act was Assessment Year 2006-07.

The assessee had already claimed deduction under Section 80-

IC to the extent of the 100% eligible profit for five Assessment

Years 2006-07 to Assessment Year 2010-11.  However, it  was

noticed  that  the  assessee  firm  had  again  claimed  100%

deduction against eligible profits in the relevant Assessment Year

2012-13  which  is  seventh  year  of  production  for  the  firm  by

claiming substantial expansion in Financial Year 2010-11.  

6. Return  declaring  income  of  Rs.  27,93,410/-  after  claiming

deduction under Section 80-IC of Rs. 12,62,77,168/- was e-filed

by the assessee firm on 28th September, 2012.  The case was

selected  from scrutiny  through  CAS and  accordingly,  statutory

notices under Section 143(2)/142(1) were issued by Income Tax

Office (ITO) Ward-I, Solan.

Civil Appeal No. 7208 OF 2018 & Ors. Page 7 of 17

7. The assessee was asked to furnish the reasons and justification

for the said claim of 100% as against the eligible norm of 25%.

the assessee vide letter dated 12th January, 2015 submitted its

reasons  for  claim  stating  that  the  assessee  fulfills  all  the

conditions for the claim of 100% deduction.

8. The  Assessing  Officer  found  that  in  view  of  the  provisions  of

Section  80-IC  of  the  Act  assessee  firm  had  already  claimed

deduction under Section 80-IC of the Act at the rate of 100% for

five years from Assessment Year 2006-07 to Assessment Year

2010-11,  i.e.,  from  the  date  of  setting  up  of  the  industrial

undertaking and in view of the same, it would be eligible for claim

of  deduction  @  25%  of  its  eligible  business  profits  for  the

remaining five years,  i.e.,  from Assessment Year 2011-2012 to

Assessment Year 2015-2016.  The Assessing Officer denied the

claim  of  the  enhanced  deduction  in  view  of  the  substantial

expansion  was  claimed  by  the  assessee  and,  accordingly,

restricted  the  deduction  to  25%  of  eligible  profits  for  the

assessment year under Consideration.

9. Aggrieved  by  the  order  of  the  Assessing  Officer  dated  27th

February,  2015, the assessee preferred an appeal on 6th April,

2015.  

Civil Appeal No. 7208 OF 2018 & Ors. Page 8 of 17

10. CIT(A) following the decision of the jurisdictional tribunal in the

case  of  M/s.  Hycron  Electronics Vs.  ITO  and  other  related

cases, upheld the order of the Assessing Officer and dismissed

the  appeal  of  the  assessee  for  100%  deduction.  Feeling

aggrieved, the assessee filed further appeal before the ITAT.

11. While  observing  that  both  the  parties  agreed  that  the  issue

involved in appeals, was squarely covered against the assessee

in view of the decision of the coordinate bench of ITAT in the case

of  Hycron Electronics,  dismissed the appeals by a composite

order dated 11th August, 2016 for Assessment Year 2011-12 and

Assessment Year 2012-13 by holding that assessee is eligible for

deduction under Section 80 of the Act @ 25% of the profit derived

from industrial undertaking for these years and not @ 100% of

deduction claimed by the assessee.

12. Dissatisfied  with  the  aforesaid  order  dated  11th August,  2016,

assessee filed appeal under Section 260A of the Act, 1961 before

the  High  Court  of  Himachal  Pradesh,  Shimla  raising  therein

substantial questions  of law.  The result of other assessees was

also on almost same pattern, who filed their respective appeals

as well.  The High Court has decided the issue in a composite

judgment, in favour of all these assessees.  The High Court held

Civil Appeal No. 7208 OF 2018 & Ors. Page 9 of 17

that  there  is  no  restriction  that  undertaking  or  enterprise

established after 7th January, 2003 cannot carried out ‘Substantial

Expansion’ cannot  be  carried  out  more  than  once  as  long  as

period of eligibility for claiming deduction under Section 80-IC of

the Act.  The High Court further held that since the language of

Section is very clear, reliance cannot be placed on Circular No. 7

of 2003 issued by CBDT on this issue substantial questions of

law  were  answered  in  favour  of  assessee  and  appeals  were

allowed with direction that with respect to each of the assessees

the Assessing Officer  shall carry out fresh assessment and pass

appropriate orders.    

13. With  the  aforesaid  factual  background,  we  now  proceed  to

answer the question of law formulated above.

14. A gist of the legislative history and purpose behind the insertion of

Section  80-IA,  80-IB  and  80-IC  has  already  been  mentioned

above.  We have to keep in mind that these cases are confined to

Section  80-IC alone.   As  mentioned above,  sub-section  (2)  of

Section 80-IC provides for tax benefit  to those undertakings or

enterprises which had set up their manufacturing units in certain

specified areas including State of Himachal Pradesh to which this

case is belonged.

Civil Appeal No. 7208 OF 2018 & Ors. Page 10 of 17

15. It also gives benefit to these undertakings and enterprises which

have  undertaken  substantial  expansion  during  the  periods

mentioned  therein.   As  there  is  no  dispute  that  all  these

assessees are covered by the provisions of sub-section (2), that

aspect need not be stated in detail.  We, thus, reproduce those

portions of the provision which are relevant for our discussion:

“S.80-IC.   Special  Provisions  in  respect  of  certain undertakings or enterprises in certain special category States.—  (1)   Where  the  gross  total  income  of  an assessee  includes  any  profits  and  gains  derived  by  an undertaking or an enterprise from any business referred to in  sub-section  (2),  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, as specified in sub-section (3).

xxx xxx xxx

(3) The deduction referred to in sub-section (1) shall be-

(I) in the case of any undertaking or enterprise referred to in sub-clauses (I) and (iii) of clause (a) or sub-clauses (I) and (iii) or clause (b), of sub-section (2), one hundred per cent, of such profits and gains for ten assessment years commencing with the initial assessment years;

(ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent. (or thirty per cent where the assessee is a company) of the profits and gains.

(6) Notwithstanding  anything  contained  in  this  Act,  no deduction shall be allowed to any undertaking or enterprise under  this  section,  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-

Civil Appeal No. 7208 OF 2018 & Ors. Page 11 of 17

IB or under section 10C, as the case may be, exceeds ten assessment years………..”     

   16. The essence of Section 3 as well as Section 6 have already been

reproduced above.  Whereas the exemption is provided @ 100%

of such profits and gains for five assessment years commencing

with the initial  assessment years and, thereafter,  25% (or 30%

where the assessee is a company)  of the profits and gains for

next five years.  The deduction is limited to a period of 10 years.  

17. In this backdrop, the question is as to whether these assessees,

who had availed deductions @ 100% for first five years on the

ground that they had set up a manufacturing unit as prescribed

under sub-section (2) of the Act, can start claiming deductions @

100%  again  for  next  five  years  as  they  had  undertaking

“substantial  expansion”  during  the  period  mentioned  in  sub-

section  (2)?  The  answer  has  to  be  in  the  negative  for  the

following the reasons:

18. We are dealing with the deductions in respect of profits and gains

under Section 80-IC of the Act.  No other provision is involved.

This  section  makes  special  provisions  in  respect  of  certain

undertakings  or  enterprises  in  certain  special  category  States.

Section  80-IC  was  inserted  by  the  Finance  Act,  2003  w.e.f.

Civil Appeal No. 7208 OF 2018 & Ors. Page 12 of 17

April  1,  2004.   As  per  this  provision,  certain  undertakings  or

enterprises  in  certain  special  category  States  are  allowed

deduction from such profits and gains, as specified in sub-section

(3) of Section 80-IC.  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  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.  

19. In the instant case, we are concerned with the assessees who

had  established  their  undertakings  in  the  State  of  Himachal

Pradesh.  Sub-section (3), as noted above, mentions the period

of 10 years commencing with the initial Assessment Year.  Sub-

section (6) puts a cap of 10 years, which is the maximum period

for  which the deduction can be allowed to  any undertaking or

enterprise under this section, starting from the initial Assessment

Year.  Another significant feature under sub-section (3) is that the

Civil Appeal No. 7208 OF 2018 & Ors. Page 13 of 17

deduction allowable is 100% of such profits and gains from an

undertaking  or  an  enterprise  for  five  Assessment  Years

commencing with the initial Assessment Year and thereafter the

deduction is allowable at 25% (or 30% where the assessee is a

company) of the profits and gains.  Cumulative reading of these

provisions brings out the following aspects:

(a)   Those  undertakings  or  enterprises  fulfilling  the  conditions

mentioned in sub-section (2) of Section 80-IC become entitled to

deduction under this provision.

(b)  This deduction is allowable from the initial Assessment Year.

“Initial Assessment Year” is defined in Section 80-IB(14)(c) of the

Act.

(c)  The deduction is @ 100% of such profits and gains for first 5

Assessment Years and thereafter a deduction is permissible @

25% (or 30% where the assessee is a company).

(d)   Total  period of deduction is 10 years,  which means 100%

deduction for first 5 years from the initial Assessment Year and

25% (or 30% where the assessee is a company) for the next 5

years.

20. When we keep in mind the aforesaid scheme and spirit behind

this provision, such a situation cannot be countenanced where an

Civil Appeal No. 7208 OF 2018 & Ors. Page 14 of 17

assessee  is  able  to  secure  deduction  @ 100%  for  the  entire

period  of  10  years.   If  that  is  allowed it  will  amount  to  doing

violence to the provisions of sub-section (3) read with sub-section

(6) of Section 80-IC.  A pragmatic and reasonable interpretation of

Section 80-IC would be to hold that once the initial Assessment

Year  commences  and  an  assessee,  by  virtue  of  fulfilling  the

conditions laid down in sub-section (2)  of Section 80-IC, starts

enjoying deduction, there cannot be another “Initial Assessment

Year”  for  the  purposes  of  Section  80-IC  within  the  aforesaid

period of 10 years, on the basis that it  had carried substantial

expansion in its unit.

21. We are conscious of our recent judgment rendered by this very

Bench  in  Mahabir  Industries  v.  Principal  Commissioner  of

Income Tax  (Civil  Appeal Nos. 4765-4766 of 2018 decided on

May 18, 2018).   However, a fine distinction needs to be noted

between  the  two  sets  of  cases.   In  Mahabir  Industries,  the

assessees  had  availed  the  initial  deduction  under  a  different

provision,  namely,  Section 80-IA of  the Act,  i.e.  by fulfilling the

conditions mentioned in sub-section (4) of Section 80-IA.  Those

conditions are altogether different.  Deduction in respect of profits

and  gains  under  the  said  provision  is  admissible  when  these

Civil Appeal No. 7208 OF 2018 & Ors. Page 15 of 17

profits and gains are from industrial undertakings or enterprises

engaged in infrastructure development etc.  Even this availment

started at a time when Section 80-IC was not even on the statute

book.  As mentioned above, Section 80-IC was inserted by the

Finance Act, 2003 with effect from April 01, 2004.  The assessees

in those cases had started claiming and were allowed deductions

from  the  Assessment  Years  1998-99  and  1999-2000  under

Section  80-IA  and  from  the  Assessment  Year  2000-01  to

Assessment Year 2005-06 under Section 80-IB of the Act.  The

deduction was, thus, claimed by the assessees in those appeals

under the new provision i.e. Section 80-IC on fulfilling conditions

contained in sub-section (2) of Section 80-IC for the first time for

the Assessment Year 2006-07.  Thus, insofar as those cases are

concerned,  the  initial  Assessment  Year  under  Section  80-IC

started  only  from the  Assessment  Year  2006-07.   In  contrast,

position  here  is  altogether  different.   These  assessees  have

availed  deduction  under  Section  80-IC  alone.   Initially,  they

claimed the deduction on the ground that they had set up their

units  in  the  State  of  Himachal  Pradesh  and  after  availing  the

deduction @ 100% they want continuation of this rate of 100% for

the next 5 years also under the same provision on the ground that

they  have  made substantial  expansion.  As  pointed  out  above,

Civil Appeal No. 7208 OF 2018 & Ors. Page 16 of 17

once the assessees had started claiming deduction under Section

80-IC and the initial Assessment Year has commenced within  the

aforesaid  period  of  10  years,  there  cannot  be  another  initial

Assessment Year thereby allowing 100% deduction for the next 5

years also when sub-section (3), in no uncertain terms, provides

for  deduction  @  25%  only  for  the  next  5  years.   It  may  be

asserted again that the assessees accept the legal position that

they cannot claim deduction of more than 10 years in all under

Section 80-IC.

22. In view of  the aforesaid discussion,  we hold that  after  availing

deduction for a period of 5 years @ 100% of such profits and

gains  from  the  ‘units’,  the  assessees  would  be  entitled  to

deduction for  remaining 5  Assessment  Years  @ 25% (or  30%

where the assessee is a company), as the case may be, and not

@ 100%.  The question of law is, thus, answered in favour of the

Revenue thereby allowing all these appeals.

No order as to costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; AUGUST 20, 2018.

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