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 28

th

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 1

st

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 6

th

to 10

th

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. 7208 of 2018 (@ SLP(C) 16851 of 2018).

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

effect from 1

st

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 1

st

April, 1993. With effect from 1

st

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 1

st

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 1

st

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 28

th

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 12

th

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 27

th

February, 2015, the assessee preferred an appeal on 6

th

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 11

th

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 11

th

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 7

th

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 xxxxxx

(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.

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