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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 1784 OF 2019 (ARISING OUT OF SLP (C) NO. 23172 OF 2018)

PR.  COMMISSIONER  OF  INCOME  TAX SHIMLA

.....APPELLANT(S)

VERSUS

M/S. AARHAM SOFTRONICS .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO(S). 1785 OF 2019 (ARISING OUT OF SLP (C) NO. 23176 OF 2018)

CIVIL APPEAL NO(S). 1786 OF 2019 (ARISING OUT OF SLP (C) NO. 23179 OF 2018)

CIVIL APPEAL NO(S). 1788 OF 2019 (ARISING OUT OF SLP (C) NO. 24678 OF 2018)

CIVIL APPEAL NO(S). 1787 OF 2019 (ARISING OUT OF SLP (C) NO. 23414 OF 2018)

CIVIL APPEAL NO(S).1789  OF 2019 (ARISING OUT OF SLP (C) NO. 24679 OF 2018)

MISC. APPLICATION NO. 2880 OF 2018 IN

CIVIL APPEAL NO. 7218 OF 2018

CIVIL APPEAL NO(S). 1790 OF 2019 (ARISING OUT OF SLP (C) NO. 5486 OF 2019) (ARISING OUT OF DIARY NO. 34756 OF 2018)

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MISC. APPLICATION NO. 2879 OF 2018 IN

CIVIL APPEAL NO. 7222 OF 2018

MISC. APPLICATION NO. 2852 OF 2018 IN

CIVIL APPEAL NO. 7236 OF 2018

MISC. APPLICATION NO. 2850 OF 2018 IN

CIVIL APPEAL NO. 7215 OF 2018

MISC. APPLICATION NO. 2841 OF 2018 IN

CIVIL APPEAL NO. 7221 OF 2018

MISC. APPLICATION NO. 2840 OF 2018 IN

CIVIL APPEAL NO. 7217 OF 2018

MISC. APPLICATION NO. 2976 OF 2018 IN

CIVIL APPEAL NO. 7223 OF 2018

CIVIL APPEAL NO(S). 1795 OF 2019 (ARISING OUT OF SLP (C) NO. 2296 OF 2019)

CIVIL APPEAL NO(S).1796 OF 2019 (ARISING OUT OF SLP (C) NO. 1983 OF 2019)

CIVIL APPEAL NO(S). 1797 OF 2019 (ARISING OUT OF SLP (C) NO. 3278 OF 2019)

AND

CIVIL APPEAL NO(S). 1798 OF 2019 (ARISING OUT OF SLP (C) NO. 4483 OF 2019)

J U D G M E N T

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A.K.SIKRI, J.

SLP(C) Nos. 23172 of 2018, 23176 of 2018, 23179 of 2018, 24678 of 2018, 23414 of 2018, 24679 of 2018, 2296 of 2019, 1983 of 2019, 3278 of 2019 and 4483 of 2019 :

Leave granted.

2. Origin  of  these  appeals  can  be  traced  to  the  judgment  dated  28 th

November,  2017  rendered  by  High  Court  of  Himachal  Pradesh  in  a

batch of appeals.  Vide the said judgment, the High Court decided many

issues.  However, in these proceedings we are concerned with only one

question of law which is formulated in the following terms:  

"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?”

3. The High Court has answered the aforesaid question in the affirmative

thereby holding that when the assessees started availing exemption of

100% tax on the setting up of a new industry of the kind mentioned in

sub-section (2) of Section 80IC, which is admissible for 5 years, and

either on the expiry of 5 years or thereafter (but within 10 years) from the

date when these assessees started availing exemption, they carried out

substantial  expansion  of  its  industry,  from  that  year  the  assessees

become entitled to claim exemption @ 100% again.

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4. The Income Tax Department (hereinafter referred to as the ‘Revenue’)

had challenged the judgment of the High Court on the aforesaid issue by

filing  number  of  special  leave  petitions  which  were  converted  into

appeals  after  leave  was  granted  in  those  special  leave  petitions.

Thereafter, these appeals were heard and decided by a Division Bench

of this Court, which comprised one of us (A.K. Sikri, J.).  By its judgment

dated August 20, 2018.  The judgment of the High Court was reversed

on the aforesaid issue.

5. It  so  happened  that  in  some  of  the  appeals,  assessees  who  were

respondents,  were  not  served  with  the  notice  and  they  remained

unrepresented.  Since the appeals in respect of these assessees were

decided in their absence, they filed miscellaneous applications for recall

of the order, with prayer to decide the appeals afresh after giving hearing

to them.  Since, these assessees remained unrepresented, as even the

notice was not served upon them, by a separate order passed in their

cases, those applications have been allowed and their  appeals being

C.A. No. 7218, 7882, 7236, 7215, 7221, 7217 and 7223 of 2018 have

been  restored.   Even  the  Revenue  has  filed  few  SLPs  against  the

common judgment of the High Court as these SLPs were not filed earlier

when batch of appeals was decided on 20th August, 2018 by this Court.

Appeals  arising out  of  these SLPs have also been heard along with

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other appeals in which the earlier judgment rendered has been recalled.

All these appeals have been heard afresh and are being disposed of by

the present judgment.

6. We  have  already  taken  note  of  the  question  of  law  that  arises  for

determination.  Factual background in which this question of law arises

for  consideration has been taken note  of  in  the judgment  dated 20 th

August, 2018 which may again be reiterated, in order to understand the

niceties of this issue:

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

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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.  

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

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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).

7. At this juncture, we would like to take note of the relevant provisions of

Section  80-IC  of  the  Act.   Therefore,  we  extract  below  the  relevant

portion of this provision:

"[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).

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(2) This section applies to any undertaking or enterprise,—

(a) which has begun or  begins to manufacture or produce any article  or  thing,  not  being  any  article  or  thing  specified  in  the Thirteenth  Schedule,  or  which  manufactures  or  produces  any article  or  thing,  not  being  any  article  or  thing  specified  in  the Thirteenth Schedule and undertakes substantial expansion during the period beginning—

(i) on the 23rd day of December, 2002 and ending before the 2 [1st day of April, 2007], in any Export Processing Zone or Integrated  Infrastructure  Development  Centre  or  Industrial Growth  Centre  or  Industrial  Estate  or  Industrial  Park  or Software Technology Park or Industrial Area or Theme Park, as  notified  by  the  Board  in  accordance  with  the  scheme framed  and  notified  by  the  Central  Government  in  this regard, in the State of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1st  day of  April,  2012,  in  any Export  Processing Zone or Integrated  Infrastructure  Development  Centre  or  Industrial Growth  Centre  or  Industrial  Estate  or  Industrial  Park  or Software Technology Park or Industrial Area or Theme Park, as  notified  by  the  Board  in  accordance  with  the  scheme framed  and  notified  by  the  Central  Government  in  this regard,  in  the State  of  Himachal  Pradesh or  the State  of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated  Infrastructure  Development  Centre  or  Industrial Growth  Centre  or  Industrial  Estate  or  Industrial  Park  or Software Technology Park or Industrial Area or Theme Park, as  notified  by  the  Board  in  accordance  with  the  scheme framed  and  notified  by  the  Central  Government  in  this regard, in any of the North-Eastern States;

(b)  which has begun or  begins to manufacture or produce any article  or  thing,  specified  in  the  Fourteenth  Schedule  or commences any operation specified in that Schedule,  or which manufactures or  produces any article  or  thing,  specified in the Fourteenth Schedule or  commences any operation specified in that  Schedule and undertakes substantial  expansion during the period beginning—

(i) on the 23rd day of December, 2002 and ending before the 2 [1st day of April, 2007], in the State of Sikkim; or

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(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States.

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

xxx xxx xxx

(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.

xxx  xxx xxx

(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.

(8) For the purposes of this section,—

xxx xxx xxx

(v) ”Initial assessment year” means the assessment year relevant to the previous year in which the undertaking or the enterprise begins  to  manufacture  or  produce  articles  or  things,  or commences operation or completes substantial expansion;

xxx xxx xxx

(ix) “Substantial expansion” means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken.

8. This section makes special provisions in respect of certain undertakings

or  enterprises  in  certain  special  category  States.  Section  80-IC  was

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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.  

9. In  all  these  cases  assessees  had  started  availing  exemption  under

Section  80-IC  on  the  setting  up  of  new  industrial  units.   All  these

assessees have availed 100% deduction for a period of 5 years.  As

noticed above, from sixth year, in normal course, deduction is admissible

@ 25% of the profits and gains, for next five years (or 30% where the

assessee is a company.  However, all these assessees, after the expiry

of five years, carried out substantial  expansion of their  existing units.

This  substantial  expansion  is  in  accordance  with  the  provisions  of

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Section 80-IC and there is no dispute about the same.  From the year

such substantial  explanations were carried out by the assessees, the

assessees demanded deduction @ 100%, instead of 25%/30% for the

remaining period of 10 years which is the maximum period for which

deduction is admissible.   

10.Sub-section  (3),  as  noted  above,  mentions  the  period  of  10  years

commencing with the initial Assessment Year. Subsection (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 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. It 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.

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(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.

11.In the judgment dated 20th August, 2018, while holding that deduction @

100%  cannot  be  allowed  for  more  than  5  years  from  the  ’initial

assessment  year’,  the  reasoning  that  was  given  is  contained  in

paragraph 20 of the judgment. Which reads as under:

"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.”

12.As can be seen from the aforesaid passage, this Court took the view

that once ‘initial assessment year’ starts on fulfilling the conditions laid

down in sub-section (2) of Section 80-IC, there cannot be another ‘initial

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assessment year’ for the purposes of Section 80-IC within the aforesaid

period  of  10  years.   While  doing  so,  the  Court  referred  to  Section

80-IB(14)(c) of the Act, on the basis of which an opinion was formed that

there  cannot  be  another  ‘initial  assessment  year’  for  the  purpose  of

Section 80-IC within the aforesaid period of 10 years.  As pointed out in

the  later  part  of  the  judgment,  this  is  the  apparent  error  which  was

committed.  Section 80-IB(14) starts with the words ‘for the purpose of

this section’.  Thus, ‘initial assessment year’ defined therein is relatable

only to the deductions that are provided under the provisions of Section

80-IB,  namely, in  respect  of  profits  and  gains  from certain  industrial

undertakings  other  than  infrastructure  development  undertakings.

Section  80-IB  is  materially  different  from  Section  80-IC  of  the  Act.

Inasmuch as Section 80-IC is a special provision in respect of certain

undertakings, all enterprises mentioned in Section 80-IC are limited in

contrast with Section 80-IB, the deduction under this Section is available

only when such undertakings or enterprises are established in particular

States,  Sikkim,  Himachal  Pradesh,  Uttaranchal  or  any  of  the

North-Eastern States.  Therefore, definition of ‘initial assessment year’

mentioned in Section 80-IB could not have been the basis of finding out

the  definition  of  ‘initial  assessment  year’  which  is  different  from  the

definition contained in Section 80-IB. Further, Sub-section (3) of Section

80-IC mentions about the deduction that is permissible, namely, 100%

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deduction of the profits and gains for first five years and 25% (or 30%

where  the  assessee  is  a  company)  for  the  next  five  years.   This

sub-section,  in  any  case,  does  not  deal  with  the  ‘initial  assessment

year’.

13.Learned counsel appearing for the assessees pointed out before us that

clause (v) of sub-section (8) of Section 80-IC is the concerned provision

which provides definition of ‘initial assessment year’, for the purpose of

this  very  Section,  i.e.,  Section  80-IC,  which  was  not  noticed  while

pronouncing the judgment in  Commissioner of Income Tax vs.  M/s.

Classic  Binding  Industries  case.   We  find  substance  in  this

submission of  the assessees.   We have no hesitation to  accept  this

mistake  which  occurred  in  the  aforesaid  judgment.   The  Court

specifically dealt with ‘initial assessment year’ and came into conclusion

that there cannot be two initial assessment years within a span of 10

years  which  is  the  maximum  period  for  allowing  deduction  as  per

sub-section (6) of Section 80-IC. As the issue directly concerned with

initial assessment year, its definition contained in that very Section was

missed out.  To that extent, there is an error in the judgment dated 20 th

August, 2018 in Classic Binding Industries  case.

14.In the aforesaid conspectus, the focus has to be on the question as to

whether definition of ‘initial assessment year’ contained in clause (v) of

sub-section (8) of Section 80-IC makes any difference? We would like to

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reproduce the said definition once again, hereunder, for the purpose of

continuity of thought process.

"S. 80-IC : xxx xxx xxx (8) xxx xxx xxx (v)  ―Initial  assessment  year  means  the  assessment  year‖ relevant  to  the  previous  year  in  which  the  undertaking  or  the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion”

15.On the basis of this definition, counsel for the assessees before us have

argued that there can be more than one ‘initial assessment year’ which

can be triggered by the contingency provided therein.   

16.As per this definition, there can be ‘initial assessment year’, relevant to

previous year, in any of the following contingencies:

(i) The  previous  year  in  which  the  undertaking  or  the  enterprise

begins to manufacture or produce article or things; or

(ii) Commences operation; or

(iii) Completes substantial expansion  

First two events are relatable to new units whereas third incident

would occur in respect of existing units.  The benefit of Seciton 80-IC is,

thus, admissible not only when an undertaking or enterprise sets up new

unit  and  starts  manufacturing  or  producing  article  or  things.   The

advantage of this provisions is also accrued to those existing units, if

they carry out “substantial expansion” of their units by investing required

capital,  in  the  assessment  year  relevant  to  the  previous  year.

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“Substantial  expansion”  is  defined in  clause (ix)  of  sub-section (8)  of

Section 80-IC and it reads as under:

"(ix) “Substantial expansion” means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;

17.As per  the  aforesaid  definition,  an  existing  unit  would  be  treated  as

having carried out substantial expansion when there is increase in the

investment in the plant and machinery by at least 50% of the book value

of the plant and machinery (before taking depreciation in any year).  As

already noted above,  in  all  these cases at  hand,  the assessees had

initially  set  up new industry in  the State of  Himachal  Pradesh of  the

nature  specified  under  Section  80-IC  of  the  Act.   As  a  result,  they

became entitled to avail the concession provided in the said provision.  It

is also an admitted fact that after five years and before the expiry of 10

years, the assessees had carried substantial expansion of their units in

terms of  the  aforesaid  definition.  When we consider  the definition  of

‘initial  assessment  year’,  keeping  in  view  these  factors,  we  find

substance  in  the  submissions  made  by  the  learned  counsel  for  the

assessees and are inclined to accept that there can be another ‘initial

assessment  year’  on the fulfillment of  the condition mentioned in  the

said  definition,  namely,  completion  of  substantial  expansion  of  the

existing unit.   

18.The Court is supposed to give effect to the provisions of Section 80-IC

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by  reading  various  provisions  conjointly.   For  the  purpose  of  these

cases,  relevant  provisions  are  sub-section  (2)(a)(ii),  sub-section  3(ii),

sub-section (6) and sub-section (8)(v) and (ix). Clause (ii) of sub-section

(2) provides that in case an undertaking or enterprise sets up a unit of

the nature specified therein in  the State of  Himachal  Pradesh or the

State of Uttaranchal between the 7th January, 2003 and 1st April, 2015,

such  an  undertaking  or  enterprise  shall  become  eligible  for  the

deductions from such profits and gains, as specified in sub-section (3).

In  respect  of  State  of  Himachal  Pradesh  (in  respect  of  which  these

cases pertain to) sub-section (3) enumerates the extent of deduction.  It

is  100%  of  profits  and  gains  for  first  five  initial  assessment  years

commencing with  the initial  assessment  year  and thereafter  25% (or

30% where the assessee is a company) of the profits and gains.  The

deduction @ 25% for the neat five years in on the assumption that the

new  unit  remains  static  insofar  as  expansion  thereof  is  concerned.

However, the moment substantial expansion takes place, another ‘initial

assessment year’  gets triggered.  This new event entitles that unit  to

start getting deduction @ 100% of the profits and gains.  At the same

time, new period of 10 years does not start.  It is because of the reason

that total period for which deduction can be allowed is capped at  10

years, inasmuch as sub-section (6) in no uncertain terms stipulates that

deduction shall be not allowed for a period exceeding 10 assessment

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years.   In  fact,  this  period of  10 years relates not  only in respect  of

deduction  under  Section  80-IC  but  under  the  second  proviso  to

sub-section  (4)  of  Section  80-IB  as  well.   It  would  mean  that  total

deduction under Section 80-IB as well  as 80-IC is for a period of 10

years.  

19.Having examined the scheme in the aforesaid manner, we arrive at the

conclusion that  the definition of  ‘initial  assessment  year’  contained in

clause (v)  of sub-section (8)  of  Section 80-IC can lead to a situation

where there can be more than one “initial assessment year” within the

said  period  of  10  years.   As  per  sub-section  (6),  cap  is  on  the  10

assessment years. It is not on quantum.  We have also to keep in mind

the purpose for which Section 80-IC was enacted.  The purpose was to

establish the business of the nature specified in the said provision in the

specified States.  This provision was, thus, aimed at encouraging the

undertakings or  enterprises to establish and set  up such units in the

aforesaid  States  to  make them industrially  advanced States  as  well.

Undoubtedly, these are difficult States as most of these States fall in hilly

areas.  Therefore, cost of production and transportation may also go up.

20.When we keep in mind these objectives for which Section 80-IC was

enacted, an irresistible conclusion would be to grant 100% deduction of

the  profits  and  gains  even  from  the  year  when  there  is  substantial

expansion  in  the  existing  unit.   After  all,  this  substantial  expansion

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involves great deal of investment which has to be, at least 50% in the

plant  and  machinery,  of  the  book  value  thereof  before  taking

depreciation in any year.  With an expansion of such a nature not only

there  would  be  increase  in  production   but  generation  of  more

employment as well, which would benefit the local populace. It is for this

reason, carrying out substantial expansion by itself is treated as ‘initial

assessment year’.  It would mean that even when an old unit completes

substantial  expansion,  such a unit  also becomes entitled to avail  the

benefit of Section 80-IC.   If that is the purpose of the legislature, we see

no reason as to why 100% deduction of the profits and gains be not

allowed to even those units who had availed this deduction on setting up

of  a  new unit  and  have  now invested  huge  amount  with  substantial

expansion  of  those  units.  We  would  like  to  reproduce  following

discussions from the Constitution Bench judgment in Commissioner of

Customs  (Import),  Mumbai  vs.  Dilip  Kumar  and  Company  and

Others1  :

"20. It is well accepted that a statute must be construed according to the intention of the legislature and the courts should act upon the true intention of the legislation while applying law and while interpreting law. If a statutory provision is open to more than one meaning,  the  Court  has  to  choose  the  interpretation  which represents the intention of the legislature. In this connection, the following  observations  made  by  this  Court  in District  Mining Officer v. TISCO [District  Mining  Officer v. TISCO,  (2001)  7  SCC 358] , may be noticed: (SCC pp. 382-83, para 18)

1 (2018) 9 SCC 1

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“18.  …  A  statute  is  an  edict  of  the  legislature  and  in construing a statute, it is necessary, to seek the intention of its maker. A statute has to be construed according to the intent of them that make it and the duty of the court is to act upon  the  true  intention  of  the  legislature.  If  a  statutory provision is open to more than one interpretation the court has to choose that interpretation which represents the true intention  of  the  legislature.  This  task  very  often  raises difficulties  because  of  various  reasons,  inasmuch  as  the words  used  may  not  be  scientific  symbols  having  any precise or  definite meaning and the language may be an imperfect  medium  to  convey  one's  thought  or  that  the assembly  of  legislatures  consisting  of  persons  of  various shades of opinion purport to convey a meaning which may be obscure. It  is impossible even for the most imaginative legislature  to  forestall  exhaustively  situations  and circumstances  that  may  emerge  after  enacting  a  statute where  its  application  may  be  called  for. Nonetheless,  the function of the courts is only to expound and not to legislate. Legislation in a modern State is actuated with some policy to curb some public evil  or to effectuate some public benefit. The legislation is primarily directed to the problems before the legislature based on information derived from past and present  experience.  It  may  also  be  designed  by  use  of general  words  to  cover  similar  problems arising in  future. But,  from  the  very  nature  of  things,  it  is  impossible  to anticipate fully the varied situations arising in future in which the application of the legislation in hand may be called for, and, words chosen to communicate such indefinite referents are  bound  to  be  in  many  cases  lacking  in  clarity  and precision and thus giving rise to controversial questions of construction.  The  process  of  construction  combines  both literal  and  purposive  approaches.  In  other  words,  the legislative  intention  i.e.  the  true  or  legal  meaning  of  an enactment  is  derived  by  considering  the  meaning  of  the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed.”

"28. The decision of this Court in Punjab Land Development and Reclamation  Corpn.  Ltd. v. Labour  Court  [Punjab  Land Development and Reclamation Corpn. Ltd.v. Labour Court, (1990) 3 SCC 682 : 1991 SCC (L&S) 71] , made the said distinction, and explained the literal rule: (SCC p. 715, para 67)

“67. The literal rules of construction require the wording of the  Act  to  be  construed  according  to  its  literal  and grammatical meaning, whatever the result  may be. Unless

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otherwise  provided,  the  same  word  must  normally  be construed throughout the Act in the same sense, and in the case of old statutes regard must be had to its contemporary meaning if there has been no change with the passage of time.”

That strict interpretation does not encompass strict literalism into its fold. It may be relevant to note that simply juxtaposing “strict interpretation”  with  “literal  rule”  would  result  in  ignoring  an important aspect that is “apparent legislative intent”. We are alive to the fact that there may be overlapping in some cases between the aforesaid two rules. With certainty, we can observe that, “strict interpretation” does not encompass such literalism, which lead to absurdity and go against the legislative intent. As noted above, if literalism is at the far end of the spectrum, wherein it accepts no implications  or  inferences,  then  “strict  interpretation”  can  be implied to accept some form of essential inferences which literal rule may not accept.

29. We  are  not  suggesting  that  literal  rule dehors the  strict interpretation  nor  one  should  ignore  to  ascertain  the  interplay between “strict interpretation” and “literal interpretation”. We may reiterate  at  the  cost  of  repetition  that  strict  interpretation  of  a statute certainly involves literal or plain meaning test. The other tools  of  interpretation,  namely,  contextual  or  purposive interpretation cannot be applied nor any resort be made to look to other supporting material, especially in taxation statutes. Indeed, it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words  and  that  the  matter  should  be  governed  wholly  by  the language of the notification. Equity has no place in interpretation of a tax statute.  Strictly one has to look to the language used; there  is  no  room  for  searching  intendment  nor  drawing  any presumption. Furthermore, nothing has to be read into nor should anything  be  implied  other  than  essential  inferences  while considering a taxation statute.

30. Justice  G.P.  Singh,  in  his  treatise Principles  of  Statutory Interpretation (14th  Edn.  2016  p.  879)  after  referring to Micklethwait, In re [Micklethwait, In re, (1855) LR 11 Ex 452 : 156  ER  908]  ; Partington v. Attorney General [Partington v. Attorney  General,  (1869)  LR  4  HL 100] , Rajasthan Rajya Sahakari Spg. & Ginning Mills Federation Ltd. v. CIT [Rajasthan  Rajya  Sahakari  Spg.  &  Ginning  Mills Federation  Ltd. v. CIT,  (2014)  11  SCC  672]  , State  Bank  of Travancore v. CIT [State Bank of Travancore v. CIT, (1986) 2 SCC 11  :  1986  SCC  (Tax)  289]  and Cape  Brandy

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Syndicate v. IRC [Cape  Brandy  Syndicate v. IRC,  (1921)  1  KB 64] , summed up the law in the following manner:

“A  taxing  statute  is  to  be  strictly  construed.  The well-established  rule  in  the  familiar  words  of  Lord Wensleydale,  reaffirmed  by  Lord  Halsbury [Ed.: Tennant v. Smith,  1892  AC 150  at  p.  154]  and  Lord Simonds [Ed.: St Aubyn v. Attorney General, 1952 AC 15 at p. 32 (HL)] , means:

‘“The subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words.”’

In a classic passage Lord Cairns stated the principle thus:

‘If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within  the  letter  of  the  law,  the  subject  is  free,  however apparently within the spirit of law the case might otherwise appear to be. In other words, if there be admissible in any statute,  what  is called an equitable construction,  certainly, such  a  construction  is  not  admissible  in  a  taxing  statute where you can simply adhere to the words of the statute.’

Viscount  Simon  quoted  [Ed.: Canadian  Eagle  Oil  Co. Ltd. v. Selection  Trust  Ltd.,  1946  AC  119  at  p.  140  (HL)]  with approval a passage [Cape Brandy Syndicate v. IRC, (1921) 1 KB 64]  from  Rowlatt,  J.  expressing  the  principle  in  the  following words: (Cape Brandy case [Cape Brandy Syndicate v. IRC, (1921) 1 KB 64] , KB p. 71)

‘… in a taxing Act one has to look merely at what is clearly said.  There  is  no  room  for  any  intendment.  There  is  no equity  about  a  tax.  There  is  no  presumption as  to  a  tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.’”

21.The High Court has interpreted these provisions in the following manner:

"80-IC(3)(ii) [for Himachal Pradesh] stipulates that deduction shall be @ 100% for five years commencing with “initial assessment year”  and thereafter  @ 25%.  “Initial  assessment  year”,  as  per

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Section  80-IC  (8)(v)  means,  year  in  which  the  unit begins/commences  to  manufacture/produce  or  completes “substantial expansion” [As per Section 80-IC(8)(ix)].

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  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).”

We are inclined to agree with the aforesaid interpretation.   

22.It  would be pertinent to point  out  that  in Para 20 of  the judgment in

Classic Binding Industries,  this Court  observed that  if  deduction @

100% for the entire period of 10 years, it would be doing violence to the

language of sub-section (6) of Section 80-IC. However, this observation

came without noticing the definition of ‘initial assessment year’ contained

in the same very provision.

23.Having examined the matter in the aforesaid perspective, judgment in

the case of Mahabir Industries v. Principal Commissioner of Income

Tax2 would, in fact, help the assessee.  The fine distinction pointed out

in  Classic  Binding  Industries  elopes  thereby.   To  recapitulate,  in

Mahabir  Industries,  it  was  held  that  if  an  assessee  get  100%

2 Civil Appeal Nos. 4765-4766 of 2018 decided on May 18, 2018

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exemption under Section 80-IB of the Act for five years and thereafter

carries out the substantial expansion because of which said assessee

becomes  entitled  to  exemption  under  the  new provision  i.e.  Section

80-IC of the Act, the assessee would be entitled to deduction @ 100%

even after five years.    This ruling was predicated on the ground that

there  can  be  two  initial  assessment  years,  one  for  the  purpose  of

Section 80-IB and other for the purposes of Section 80-IC of the Act.

Once we find that there can be two initial assessment years, even as per

the definition thereof in Section 80-IC itself, the legal position comes at

par with the one which was discussed in Mahabir Industries.  

24.The aforesaid discussion leads us to the following conclusions:

(a) Judgment  dated  20th August,  2018  in  Classic  Binding

Industries  case  omitted  to  take  note  of  the  definition  ‘initial

assessment year’ contained in Section 80-IC itself and instead based

its conclusion on the definition contained in Section 80-IB, which does

not apply in these cases.  The definitions of ‘initial assessment year’

in  the  two  sections,  viz.  Sections  80-IB  and  80-IC  are  materially

different.   The definition  of  ‘initial  assessment  year’  under  Section

80-IC has made all the difference.  Therefore, we are of the opinion

that the aforesaid judgment does not lay down the correct law.

(b) An undertaking or an enterprise which had set up a new unit

between 7th January, 2003 and 1st April, 2012  in State of Himachal

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Pradesh of the nature mentioned in clause (ii) of sub-section (2) of

Section 80-IC, would be entitled to deduction at the rate of 100% of

the profits and gains for five assessment years commencing with the

‘initial  assessment  year’.   For  the  next  five  years,  the  admissible

deduction would be 25% (or 30% where the assessee is a company)

of the profits and gains.

(c) However,  in  case  substantial  expansion  is  carried  out  as

defined in clause (ix) of sub-section (8) of Section 80-IC by such an

undertaking or enterprise, within the aforesaid period of 10 years, the

said previous year in which the substantial expansion is undertaken

would become ‘initial  assessment year’,  and from that assessment

year  the  assessee  shall  been  entitled  to  100% deductions  of  the

profits and gains.

(d) Such deduction, however, would be for a total period of 10

years, as provided in sub-section (6).  For example, if the expansion

is carried out immediately, on the completion of first five years, the

assessee would be entitled to 100% deduction again for the next five

years.   On the other hand, if  substantial  expansion is undertaken,

say, in 8th year by an assessee such an assessee would be entitled to

100% deduction  for  the  first  five  years,  deduction  @ 25% of  the

profits and gains for the next two years and @ 100% again from 8 th

year  as  this  year  becomes  ‘initial  assessment  year’  once  again.

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However, this 100% deduction would be for remaining three years,

i.e., 8th, 9th and 10th assessment years.

25.In view of the aforesaid, we affirm the judgment of the High Court on this

issue and dismiss all these appeals of the Revenue.  Likewise, appeals

filed by the assessees are hereby allowed.

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

.............................................J. (A. ABDUL NAZEER)

.............................................J. (M. R. SHAH)

NEW DELHI; February 20, 2019.