CIT Vs Sociedade De Fomento Industrial Pvt. Ltd. (Supreme Court of India)
Background and High Court Proceedings
The dispute concerned the assessee’s entitlement to deduction under Section 10B of the Income Tax Act, 1961 in respect of a new 100% Export Oriented Unit (EOU). The assessee was engaged in extraction, processing and sale of iron ore and had an existing EOU established in 1985-86. Subsequently, because the quality of ore had deteriorated and the assessee sought to produce ore with higher ferrous content, it established a new unit adjacent to the existing unit.
For AY 2006-07, the Assessing Officer disallowed the assessee’s Section 10B deduction of ₹90,75,14,396/-, treating the new plant and machinery as an expansion of the existing undertaking. The Commissioner (Appeals) agreed with the Assessing Officer. The Income Tax Appellate Tribunal, however, held that the assessee had established a new unit and had secured the necessary approvals, and consequently allowed the Section 10B benefit.
The Bombay High Court at Goa considered the Revenue’s challenge in Tax Appeal No.25 of 2012 and the connected appeals. The principal questions were whether the assessee had merely expanded its existing processing capacity or had established a separate new undertaking, and whether approval granted by the Development Commissioner was sufficient where the Board of Approval had delegated its powers to that authority.
The High Court applied the tests laid down by the Supreme Court in Textile Machinery Corporation Ltd. v. CIT and reiterated in CIT v. Indian Aluminium. The relevant consideration was not simply whether the assessee’s business had expanded, but whether the new undertaking was a new, identifiable and separate unit. The Tribunal had found that the new unit was established at a cost exceeding ₹30 crore, had a capacity of 15 lakh tonnes per annum compared with 2 lakh tonnes for the old unit, was situated on a separate plot adjacent to the old unit and was independently capable of producing the required ore.
The High Court accepted those findings and concluded that the old unit had not merely been expanded. A separate and new undertaking had been established.
Approval by the Development Commissioner
The Revenue also contended that the assessee had not obtained approval from the Board appointed by the Central Government under Section 14 of the Industries (Development and Regulation) Act, 1951. The approvals had instead been granted by the Development Commissioner.
The High Court noted that the Board of Approval had delegated its powers to the Development Commissioner. Relying on the principle stated in Roop Chand v. State of Punjab, it held that an officer exercising delegated authority exercises the powers of the principal. Accordingly, the Development Commissioner’s approval was treated as an approval issued pursuant to the Board’s delegated authority.
The High Court therefore found no reason to interfere with the Tribunal’s conclusions that the unit was new, the requisite permission had been granted and the period for claiming the Section 10B benefit continued to subsist. The Revenue’s appeals were dismissed.
The connected appeals concerned other assessment years. In Tax Appeal No.23 of 2012, relating to AYs 2003-04 to 2005-06, the Revenue had also challenged the Tribunal’s decision concerning revision under Section 263. The High Court considered that issue academic after deciding the underlying Section 10B entitlement in favour of the assessee. Another connected controversy concerned disallowance under Section 14A read with Rule 8D, which the High Court also decided in favour of the assessee.
Revenue’s Supreme Court Challenge
The Revenue challenged the Bombay High Court’s judgment dated 22 October 2020 before the Supreme Court by Special Leave Petition (Civil) No.6730 of 2021.
Before the Supreme Court, the central issue was whether the Tribunal and the High Court were correct in treating the undertaking as a new unit eligible for Section 10B relief. The Supreme Court considered the tests formulated in Textile Machinery Corporation Ltd. v. CIT, including whether the new undertaking constituted a separate and identifiable unit, whether it was physically separate and capable of functioning as a viable unit, whether new plant and machinery had been erected, and whether the undertaking had been formed by reconstruction of the existing business.
Supreme Court’s Reasoning
The Supreme Court noted that the Tribunal had recorded specific findings of fact. The old unit, established in 1985, had a production capacity of 2 lakh tonnes per annum. The new unit was established in 1998-99 at a cost exceeding ₹30 crore and had a production capacity of 15 lakh tonnes per annum. It was located on a separate plot adjacent to the old unit and was independently capable of producing ore with the required ferrous content.
The Supreme Court also observed that the reasons relied upon by the Commissioner of Income Tax for treating the new undertaking as merely an expansion were not compliant with the tests laid down in the earlier Supreme Court decisions.
It therefore found no reason to interfere with the Tribunal’s factual conclusions. The Court held that the judgment of the Division Bench of the Bombay High Court at Goa dated 22 October 2020, affirming the Tribunal’s decision, did not suffer from any error.
Final Ruling and Effect
The Supreme Court dismissed SLP (Civil) No.6730 of 2021. It also dismissed the connected Special Leave Petitions—SLP(C) Nos.5940/2021, 6201-6202/2021, 8001-8002/2021 and 6854-6855/2021—in view of its order in SLP(C) No.6730 of 2021.
Thus, the Supreme Court left undisturbed the Bombay High Court’s judgment dated 22 October 2020. The finding that the assessee had established a separate and identifiable new undertaking, rather than merely expanding the existing unit, remained intact. The Supreme Court expressly found that the Tribunal had correctly applied the tests from Textile Machinery Corporation and that the High Court’s affirmation of those findings disclosed no error.
The result was that the Revenue’s challenge to the assessee’s Section 10B entitlement failed, and the High Court’s decision in favour of the assessee stood undisturbed.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. In arriving at the conclusion that the respondent-assessee was entitled to the benefit of the provisions of Section 10B of the Income Tax Act 1961, the Income Tax Appellate Tribunal1, by its decision dated 24 March 2011, applied the tests which have been formulated in the decision of this Court in Textile Machinery Corporation Ltd v CIT2. These tests which have been formulated in the decision of this Court are reproduced below:
“i. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter.
ii. The fact that an assessee by establishment of a new industrial undertaking expands his existing business which he certainly does would not on that score, deprive him of the benefit. Every new creation in business is some kind of expansion and advancement.
iii. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business,
iv. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit.
v. The new unit may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business.
vi. The products produced by the new unit may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced.
vii. The industrial unit set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities.
viii. In order to deny the benefit the new undertaking must be formed by reconstruction of the old unit which can take place only when the assets of more than 20% value of new unit are transferred to the new unit from the old unit.”
2. These tests have been reiterated in the decision in CIT v Indian Aluminium3.
3. In coming to the conclusion that the tests which have been formulated in the decision of this Court in Textile Machinery Corporation Ltd (supra) and reiterated in Indian Aluminium (supra) have been duly fulfilled, the Tribunal has entered specific findings of fact which are contained in paragraph 19 of the judgment which is extracted below:
“19. It is thus submitted that the following facts will go to establish the assessee’s claim that the unit formed in 1998 is a new undertaking:
i. the old unit approved under license No.CIL/420 (1985) dt.26-12-1985 started producing Iron ore in the year 1986 and was setup at a total cost of Rs.3 crores having a capacity of producing 2 lac tons of beneficiated Ore per year;
ii. in these circumstances it was considered imperative to install a new and more sophisticated beneficiation plant whose operations would result in production of higher ferrous content of about 63% plus;
iii. accordingly the appellant applied for allowing it to import plant and machinery, pursuant to the approval from the Ministry of Industry, an agreement came to be entered into between the appellant and the Government which recognized the setting up of the new unit and required that the unit should comply with fresh net foreign exchange earnings from the date of commencement of production of newly set up unit;
iv. pursuant to the approval the appellant set up and installed primary beneficiation section (PBS-II) and other related plant and machineries along with a slime treatment plant from a Swedish company, this plant is independently capable of producing ore of higher ferrous content, i.e. up to 63% to 65% with lower content of alumina and silica as required in the international market from the low-grade ore which is mined;
v. the new unit was formed in the financial year 1998-99 at a cost of over Rs.30 crores and the capacity of this unit is 15 lakhs tons compared to the earlier capacity of 2 lakhs tons per annum in old unit;
vi. a photograph taken of the new unit established in 1998-99 (copy enclosed at pg.37 of paper book) clearly shows that the new unit is a completely different and independent unit which is located at a separate plot adjacent to the old unit;
vii. a certificate given by the Engineer of the appellant, one Mr. Y.S. Reddy establishes that the Greater Ferro-met Unit is capable of independently producing ore on its own of the desired ferrous” content.”
4. The Tribunal has noted that the new unit was fully a independent unit with a production capacity of 15 lakh tons per annum as compared to the earlier production capacity of 2 lakh tons per annum of the old unit. The Tribunal has also dealt with the reasons which were furnished by the CIT in coming to the conclusion that what was set up was only an expansion of the old unit and not a new unit. Ex facie, the reasons which weighed with the CIT were not compliant with the tests which have been formulated in the judgments of this Court.
5. In this backdrop, the judgment of the Division Bench of the High Court of Bombay at Goa dated 22 October 2020 affirming the judgment of the Tribunal does not suffer from any error. The Special Leave Petition is accordingly dismissed.
6. Pending application, if any, stands disposed of.
SLP(C) Nos 5940/2021, 6201-6202/2021. 8001-8002/2021 and 6854-6855/2021
1 In view of the order passed in SLP(C) No 6730/2021, we are not inclined to entertain the Special Leave Petitions. The Special Leave Petitions are accordingly dismissed.
2 Pending application, if any, stands disposed of.
Notes:
1“Tribunal”
2107 ITR 195 (SC)
3108 ITR 367 (SC)
