REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 4765-4766 OF 2018

MAHABIR INDUSTRIES .....APPELLANT(S)

VERSUS

PRINCIPAL  COMMISSIONER  OF INCOME TAX .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 4767 OF 2018

J U D G M E N T

A.K.SIKRI, J.

A short  question  of  law arises  for  consideration  in  these

appeals.   All  the appeals are filed by the same party,  namely,

Mahabir Industries (hereinafter referred to as the ‘assessee’) in

which common respondent is Principal Commissioner of Income

Tax (hereinafter referred to as the ‘Department’).  Before stating

the question of law, it may be necessary to mention in brief the

background  under  which  the  said  question  of  law  has  arisen

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inasmuch  as  this  background  would  be  an  enabling  factor  in

understanding the true ambit and scope of the question of law.

The assessee manufactures polythene for which it is having

its factory in Shimla, Himachal Pradesh.  The activity undertaken

by  the  assessee,  an  industrial  undertaking,  qualified  for

exemption from income tax under Section 80-IA of the Income

Tax Act (hereinafter referred to as the ‘Act’).  Section 80-IA of the

Act provides for deductions in respect of profits and gains from

industrial  undertakings or  enterprises engaged in  infrastructure

development  etc.  if  it  fulfills  the  conditions  mentioned  in  sub-

section (4) thereof.  Such a deduction is of an amount equal to

hundred  per  cent  of  the  profits  and  gains  derived  from  such

business  for  ten  consecutive  Assessment  Years.   In  nutshell,

those  undertakings  or  enterprises,  which  fulfill  the  conditions

mentioned  in  sub-section  (4)  of  Section  80-IA of  the  Act,  are

entitled to total deductions of their profits, which means, no tax is

payable  and  the  period  for  which  such  undertakings  or

enterprises are exempted from payment of tax is ten consecutive

Assessment  Years.   The assessee admittedly 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.

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2. Section 80-IA of the Act was originally introduced in the year 1991

by the Finance (No.2) Act, 1991 w.e.f. April 1, 1991.  There were

amendments in the Section from time to time.  This Section was

amended by the Finance Act, 1999 w.e.f. April  1, 2000.  Along

with this provision, Section 80-IB was also introduced for the first

time  by  the  same  Finance  Act,  1999.   This  provision  allows

deduction in respect of profits and gains from certain industrial

undertakings other than infrastructure development undertakings.

Deduction from such profits and gains is of an amount equal to

such percentage and for such number of Assessment Years as

specified  in  Section  80-IB.   Sub-section  (4)  of  Section  80-IB

provides for hundred per cent deduction for a period of five years

and thereafter twenty-five per cent.  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 to which we shall advert to

at  the  appropriate  stage.   Sub-section  (2)  enumerates  the

conditions which are to be fulfilled by such industrial undertakings

in order to qualify for deductions from profits and gains under that

provision.   

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3. As  mentioned  above,  for  the  Assessment  Years  1998-99  and

1999-2000  (i.e.  two  Assessment  Years),  the  assessee  was

allowed deduction under Section 80-IA.  From the Assessment

Year  2000-01  to  Assessment  Year  2005-06,  the  assessee

claimed deduction under Section 80-IB.   

4. Interestingly, 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  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.  The assessee completed substantial expansion

(by investing in new plant and machinery of value more than 50%

of the value of plant and machinery already installed as on 1 April, Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 4 of 15

2005)  to  the  manufacturing  unit  situated  at  Baddi,  Himachal

Pradesh  in  the  Assessment  Year  2006-07.   In  view  of  the

substantial  expansion,  the  accused  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.   

5. Sub-section  (3),  as  noted  above,  mentions  the  period  of  ten

Assessment Years commencing with the initial Assessment Year.

Sub-section (6)  may also be taken note of  at this stage which

reads as under:

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

 6. As  noted  above,  the  assessee  had  carried  out  substantial

expansion  in  the  Assessment  Year  2006-07  and,  therefore,

claimed exemption under Section 80-IC of the Act for Assessment

Year  2006-07 onwards.   Deductions for  the year  2006-07 and

2007-08 were allowed.  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 11 th and 12th year

of deduction and as per Section 80-IC(6), total deductions under

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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 took up the appeals of the assessee along with

other similar enterprises who had claimed the benefits.  It framed

the following question in those appeals:

“The moot issue involved in these appeals, inter alia, is as to whether an “undertaking or an enterprise” (hereinafter referred to as the Unit), established after 7th January, 2003, carrying  out  “substantial  expansion”  within  the  specified window period, i.e. between 7.1.2003 and 1.4.2012, would be entitled to deduction on profits @100%, under Section 80-IC of  the Income Tax Act.   Also,  if  so,  then for  what period.”  

7. This question has been decided in favour of all the assessees.

However, insofar as the assessee herein is concerned, keeping in

view  that  there  is  a  ceiling  of  ten  years  as  stipulated  under

Section 80-IC(6), the High Court has 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.  This is clear from the

following discussion in the High Court judgment:

“46. The moment “substantial expansion” is completed as per Section 80-IC (8)(ix), the statutory definition of “initial assessment  year”  [Section  80-IC(8)(v)]  comes  into  play. And consequently,  Section 80-IC(3)(ii)  entitles the unit  to 100% deduction for five years commencing with completion

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of  “substantial  expansion”,  subject  to  maximum  of  ten years as per Section 80-IC(6).

47.  A unit  that  started  operating/existed  before  7.1.2003 was entitled to 100% deduction for first  five years under Section  80-IB(4).  If  this  unit  completes  substantial expansion  during  the  window  period  (7.1.2003  to 31.3.2012), it would be eligible for 100% deduction again for another five years under Section 80-IC(3)(ii), subject to ceiling of ten years as stipulated under Section 80-IC(6).

48. Applying the aforesaid interpretation, we find there can be different fact situations, some of which, we have tried to illustrate; (i) a “Unit” established prior to 7.1.2003, claiming deduction  under  Section 80-IB,  post  insertion  of  Section 80-IC carries out substantial expansion, would be entitled to deduction only under Section 80-IC, at the admissible percentage,  for  the remaining period,  which in any case when combined, cannot exceed ten years, (ii) just as in the case  of  the  present  assessee,  a  unit  established  after 7.1.2003, carries out substantial expansion only in the 8th year of its establishment, for the first five years would have already claimed deduction @ 100%; for  the 6th and 7th years  @ 25%,  and  then  for  the  period  post  substantial expansion,  in  our  considered  view,  the  initial  year  of assessment  being  in  the  8th  year,  would  be  entitled  for deduction @ 100%, subject to the cap of ten assessment years,  (iii)  the assessee establishes a unit  after  January 2003, say in the year 2005-06 and claims deduction under Section  80-IC  for  the  first  time  in  the  assessment  year 2006-2007 @ 100% of its profits. Thereafter, substantially expands  the  Unit  in  the  year  2009-10,  relevant  to Assessment Year 2010-11 can claim deduction @ 100% for next five years subject  to the cap of  ten assessment years, (iv) an existing unit not claiming any deduction under Section 80-IA, 80-IB or 80-IC substantially expands in the year 2003 and claims deduction under Section 80-IC first time in Assessment Year 2004-2005 and then substantially expands in  the year  2007-2008,  can claim deduction @ 100%  w.e.f.  Assessment  Year  2008-2009  for  next  five years, (v) the assessee sets up its unit in the year 2000- 2001,  claiming  deduction  under  Section  80-IB  till  the Assessment Year 2003-2004 and thereafter under Section 80-IC as per law. Carrying out Substantial expansion in the Assessment  Year  2004-2005,  now  claims  deduction  @ 100% w.e.f. Assessment Year 2004-05 again substantially expands  in  the  Assessment  Year  2008-2009  can  claim

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100% deduction w.e.f.  2008-2009, (vi) the assessee sets up a  unit  in  the  year  2005-2006 and does  not  undergo substantial  expansion  at  all  can  claim  deduction  under Section 80-IC.”  

8. As can be discerned, all other aspects are decided in favour of

the assessees except what is illustrated at (i) and (iv).  However,

the  effect  thereof  is  that  insofar  as  appeals  of  the  assessee

herein are concerned, they are dismissed on the ground that it

cannot claim deduction under Sections 80-IC, 80-IB or 10C for a

period exceeding ten years.   

9. In this backdrop, the questions of law which have been framed by

the assessee in these appeals are the following:

“(a) Whether the Hon’ble High Court was justified in holding that  the  petitioner  was  not  entitled  to  deduction  under Section 80-IC of the Act by virtue of provision sub-section (6),  when  the  same  was  not  even  applicable  to  the petitioner?

(b)  Whether the Hon’ble High Court was justified in holding that the provisions of Section 80-IC(6) of the Act apply to all the undertaking claiming deduction under Section 80-IB(4) of the Act when 80-IC(6) refers to only those undertakings which are covered by second proviso to Section 80-IB(4)?

(c) Whether the Hon’ble High Court was justified in holding that  the  petitioner  is  not  eligible  for  deduction  under Section 80-IC for a period of 10 assessment years when substantial expansion was carried out by the Petitioner and a  substantially  new  unit  was  claiming  deduction  under Section 80-IC of the Act?

(d)  Whether the Hon’ble High Court was justified in holding that  the  petitioner  was  not  entitled  to  deduction  under Section 80-IC of the Act for assessment year 2008-09 and

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2009-10 when the total  period of  deduction of  ten years was expiring after assessment year 2009-10?”

10. As can be seen from the reading of paras 46 and 47 of the High

Court judgment, it has taken a categorical view that the moment

‘substantial expansion’ is completed as per Section 80-IC(8)(ix),

the statutory definition of  ‘initial  assessment  year’ {Section 80-

IC(8)(v)} comes into play.  As a consequence, Section 80-IC(3)(ii)

would entitle the unit to hundred per cent deduction for five years

commencing with completion of ‘substantial expansion’ followed

by twenty-five per cent deduction for next five years i.e. subject to

maximum of ten years.  Thus, the High Court accepts that when

the substantial expansion is done in a particular Assessment Year

and that is made during the period mentioned in sub-section (2)

of Section 80-IC, not only benefit admissible under Section 80-IC

shall get triggered, the year in which such substantial expansion

is completed is to be treated as ‘initial assessment year’.  Having

said so, it has put a cap of ten years by invoking the provision of

Section 80-IC(6).  We have already reproduced the provisions of

sub-section  (6)  of  Section  80-IC.   As  per  this  provision,  no

deduction is 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

Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 9 of 15

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 sub-

section (4) of Section 80-IB.  The said second proviso reads as

under:

“Provided further than in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent. of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years.”

 This provision pertains to those industries which are in the

North-Eastern Region.

(c) When the deduction is  claimed under  Section 10C.  It  is

again  a  special  provision  in  respect  of  certain  industrial

undertakings in North-Eastern Region.   

11. The assessee in the instant case has 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

Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 10 of 15

assessee  as  it’s  undertaking/enterprise  is  not  established  in

North-Eastern Region.  It is, thus, clear that the High Court has

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.   

12. The matter can 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 purport behind the three types of deductions

specified in Section 80-IA, Section 80-IB and Section 80-IC is,

thus,  different.   Section  80-IC  stipulates  the  period  for  which Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 11 of 15

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  term  ‘initial  year’  is

referable to  the year  in  which substantial  expansion has been

completed, which legal position is stated by the High Court itself

and even accepted by the Department as it has 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.

Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 12 of 15

13. Learned  counsel  for  the  Revenue  could  not  dispute  that  sub-

section (6) of Section 80-IC would get attracted when the industry

is located in the North-Eastern Region.  Having faced with this

situation,  he  raised  an  altogether  different  argument  for

consideration by referring to Section 15C of the Income Tax Act,

1922 (hereinafter referred to as the ‘1922 Act’), which was also a

provision  which  granted  exemption  from  income  in  respect  of

newly established industrial undertaking.  He submitted that this

Court  in  Textile  Machinery  Corporation  Limited,  Calcutta  v.

The Commissioner  of  Income Tax,  West  Bengal,  Calcutta1

has  held  that  the  true  test  for  ascertaining  whether  industrial

undertaking is ‘formed by reconstruction of business already in

existence’  (which  was  the  expression  used  in  Section  15C of

1922 Act), is not whether the new industrial undertaking connotes

expansion of the existing business of the assessee but whether it

is a new and identifiable undertaking separate and distinct from

existing  business.   In  fine,  the  endeavour  of  learned  senior

counsel was that the assessee cannot be treated as an industrial

undertaking  which  has  reconstructed  the  business  i.e.  made

substantial expansion.  This argument has to be rejected for at

least two reasons:

1 (1977) 2 SCC 368 Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 13 of 15

(i) Section 15C of the 1922 Act provided exemption from tax to

newly established industrial undertaking if they are not ‘formed by

reconstruction of business already in existence’.  Thus, under the

said  provision,  if  it  was found that  an industrial  undertaking is

formed by reconstruction of business already in existence, then it

was entitled to any exemption under Section 15C.  It is in that

context the Court was considering the meaning of reconstruction

of business.  On the other hand, the words under Section 80-IC

are ‘substantial  expansion’.   Thus,  discussion contained in  the

said judgment would have no application to the instant case.   

(ii) Insofar  as  the  factum  of  substantial  expansion  of  the

assessee’s unit  in the Assessment Year 2006-07 is concerned,

the same is not subject matter of any controversy in the instant

case.  It has been accepted by the Department that assessee had

carried out substantial expansion.  Precisely, for this reason, the

AO had allowed deduction for  Assessment Years 2006-07 and

2007-08.   Therefore,  issue  is  not  as  to  whether  there  is  a

substantial  expansion  or  not.   The  issue  is  only  as  to  how a

period of  ten years is to be calculated,  namely,  whether those

Assessment Years in respect of which deduction under Section

80-IA and Section 80-IB was allowed are to be counted for the

purpose of giving deduction under Section 80-IC.   

Civil Appeal No(s). 4765-4766 of 2018 & Anr. Page 14 of 15

14. 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.  As a result,

the judgment of the High Court on this aspect is set aside and the

appeals are accordingly allowed.   

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

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

NEW DELHI; MAY 18, 2018.

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