S. 80IC: Despite substantial expansion there cannot be two initial A.Y.

Brief facts of the case are that the assessee is a proprietor of two concerns i.e. M/s Alpine Steels and M/s Virat Steels. Both the units were manufacturing interlinked chains and barbed wires and came into production with effect from 18-06-2004. The assessee had been claiming deduction u/s 801C of the Act since A.Y. 2005-06, and this was the sixth year of production of both the units.

During the impugned assessment year the assessee had undertaken substantial expansion in both the units by way of addition to plant and machinery and had again claimed deduction u/s 801C of the Act at the rate of 100% treating the impugned assessment year i.e. A.Y. 2010-11 as the “initial year” for the purpose of Section 801C. During assessment proceedings the assessee was asked to justify the claim u/s 801C © 100% instead of 25% since this was the sixth year of production.

After considering the assessee’s reply, the Ld. A.O. stated that the benefit of substantial expansion was available only to the existing units i.e; the units that existed and were operational as on 07/01/2003 in order to make them eligible for 100% deduction u/s 801C for first five years. Ld. AO therefore held that the Assessment year 2005-06 relating to the previous year in which the assessee firm commenced its business operations was the initial assessment year for claiming deduction u/s 801C © 100% and that for Assessment year 2010-11, being the sixth assessment year, the assessee was eligible for deduction © 25% only as against 100% claimed by it.

He therefore, disallowed the excess claim of Rs. 53,93,100/- vide his order dated 31-01-2013. Aggrieved by the same the assessee filed appeal to the Ld. CIT(A) who vide his order dated 29-11-2013 upheld the order of the Ld. A.O. Aggrieved by the same the assessee filed the present appeal before us taking the following grounds:-

1. The Assessment has been framed by not relying on the Income Tax Act, 1961, but on the basis of the notification issued by the Government of India or the Central Excise Act. These are not relevant in this context.

2. The Central Excise notification leaves no doubt about the applicability of the exemption. It clearly states that the exemption is available to the units which are either new industrial units, which have commenced production on or after the ^7th Day of January, 2003, or the Industrial unit existing before the ^7th Day of January, 2003, but which have undertaken substantial expansion by way of increase in installed capacity by not less than 25%, on or after the ^7th Day of January, 2003.

(a) Whereas the Section 80IC(2) (a) (ii) of the Income Tax Act, 1961, states that exemption is available to the units undergoing substantial expansion during the period beginning;

(ii) on the ^7th Day of January, 2003 and ending before the ^7th Day of April, 2012, Thus there is ample clarity for the entitlement of the deduction.

(3) Clause 8(v) of section 80IC says that “initial assessment year means assessment year relevant to the previous year in which the undertaking or enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion.”

During the course of hearing before us it was brought to the notice of the Bench that the case is covered by the decision of Chandigarh Bench in the case of M/s Hycron Electronics vs. ITO in ITA No. 798/ CHD/2012, dated 27-05-

We have heard the representatives of both the parties and perused the order of the authorities below and the documents before us.

The undisputed facts in the present case are that the assessee is eligible for claiming deduction u/s 801C since Assessment year 2005-06, when it commenced its business, and has claimed 100% deduction of its profits for five assessment years i.e; till Assessment year 2009-10. The impugned Assessment year is the sixth Assessment year and in this year the assessee has undertaken substantial expansion in its eligible undertakings.

The dispute in the present case is regarding the rate at which deduction u/s 801C is to be allowed in the impugned Assessment year, which the assessee claims to be 100%, on the basis that the impugned Assessment year is to be treated as the initial year as per section 80IC on account of substantial expansion undertaken while the AO denies the same and claims that deduction for the sixth year can be claimed only at the rate of 25% of the profits. Thus the only issue to be adjudicated upon is whether after having claimed 100% deduction of profits u/s 80IC in the first year of commencement of business, the assessee is entitled to again claim the same rate of deduction from the assessment year in which substantial expansion is undertaken. In other words, whether there can be more than one initial year as per the provision of section 80IC of the Act.

We find that this issue has already been decided against the assessee by the Chandigarh Bench of the ITAT in the case of M/s Hycron Electronics Vs. ITO in ITA No. 798/Chd/2012 dt. 27/05/2015, wherein it was held that there can be only one “initial year” for the purpose of claiming deduction u/s 80IC and that in the State of Himachal Pradesh deduction © 100% is to be allowed only for the first five years and thereafter the deduction has to be restricted to 25%. The Hon’ble ITAT has held at para 33, 35 and 39 of its order as follows:

33. Even if the above controversy is ignored regarding existing unit, the intention of the Legislature become absolutely clear when sub section (2) is read alongwith sub-section (3) of section 80IC. As noted earlier, sub section (2) is enabling provision which provides for deduction in certain kind of undertakings, i.e. new unit set up or the existing units which carries out substantial expansion during the particular window period which are given in clauses (i), (ii) & (iii) of sub section (2). The sub section (3) provides for rates of deduction. It is useful to note that clause (i) of sub section (3) provides for 100% deduction for a period of 10 assessment years in cases covered by sub clause (i) & (iii) of clause (a) and sub clause (i) & (iii) of clause (b). Now sub clause (i ) and (iii) of clause (a) of sub section (2) refers to the window period in case of State of Sikkim, North-Eastern States whereas sub clause (ii) refers to the window period in case of State of Himachal Pradesh and State of Uttaranchal. Similarly, sub clause (i) & (iii) of clause (b) refers to window period in case of State of Sikkim and North-Easter States whereas sub clause (ii) refers to the window period in case of State of Himachal Pradesh and Uttaranchal. Now clause (ii) of sub section (3) provides for 100% deduction on such profits for five assessment years commencing with initial assessment year and thereafter 25% (or 30% where the assessee is a company) of the profits and gains. Therefore, it is absolutely clear that in case of state of Sikkim and North-Eastern states, Leqislature was very clear that in case of new undertaking or in case of substantial expanded undertaking deduction is to be allowed @ 700% for whole of the ten years whereas in case of State of Himachal Pradesh and Uttaranchal the deduction was to be allowed @ 700% only for first five years and thereafter it was only 25%. If the Legislature wanted to extend the benefit in the case of substantial expansion separately then the rate of deduction in the clause (i) & (ii) of sub section (3) would not have been different i.e. 100% for whole of the 10 years in case of State of Sikkim & North-Eastern states under sub clause (i) and for the state of Himachal Pradesh & Uttaranchal under sub clause (ii) 100% for first five years and thereafter 25% for next five years. The concept of substantial expansion remains same under sub section (2) for both types of states i.e state of Sikkim and North-Eastern states and State of Himachal Pradesh and Uttranchal. If the extended benefit of substantial expansion was to be separately allowed in case of State of Himachal Pradesh and State of Uttaranchal, then meaning of substantial expansion as given under sub section (2) which is same for the state of Sikkim and North-Eastern states become redundant. As noted earlier, the provision cannot be interpreted in such a way that part of the section becomes redundant or otiose. Therefore, whatever doubts may be there in sub section (2) when it is read with sub section (3), those doubts are totally removed and it become absolutely clear that rate of deduction has to be 100% for first 5 years and 25% thereafter.

35. Further, sub section (6) provides that in no case the total period of deduction could exceed the period of 10 years including deduction availed under sub section (4) of section 80IB and section 10A and 10B. It was contended before us that since there is no restriction in carryina out of substantial expansion in the new units and as such substantial expansion can be carried out any number of times. If this interpretation is accepted then sub section (6) would be rendered otiose or meaninaless because if a unit was set up on the commencement of this section and the same claims deduction @ 700% and later on every five years a substantial expansion is carried out then accordina to the interpretation canvassed on behalf of the assessee, such unit would aqain become entitled to 100% deduction for another five years and further block of five years every time substantial expansion is carried out. If this interpretation is adopted then deduction would become almost perceptual as lona as the assessee has carried out substantial expansion but in that case sub section (6) would loose its meanina. Such an unlimited period of deduction would not be in consonance of law. At the cost of repetition, we would like to emphasize that no principle of interpretation can be adopted which leads to a situation where a particular part of the section becomes totally redundant. In fact though it was contended that in the present case (i.e. in case of Hycron Electronics) deduction has been claimed only of 10 years but on the date of hearing some other appeals were also listed wherein the deduction was claimed for more than 10 years adopting the same contention which has been made before us. In case of M/s Mahavir Industries (ITA No. 127/Chd/201 1 and ITA No. 791/Chd/2012) though those cases were adjourned because some other issues were also there but in those two cases assessee had commenced the operation on 8.5. 1997 and claimed deduction u/s 80I8 from assessment years 1998-99 to 2005-06. Later on, substantial expansion was carried out in assessment year 2005-06 and on the basis of the contention that assessee is allowed to carry out any number of expansions, deduction was claimed for the 12^th year for assessment year 2009-10 (We may clarify that reference to these cases is made because of particular contention and we are not expressing any opinion on the merits of these appeals here). Therefore, the contention of the assessee that any number of expansions are allowed is not possible in view of the restriction given in section 80IC(6).

39. Lastly, it was contended that initial assessment year as defined in clause (v) of sub section (8) of section 80IC uses the expression or’ therefore, it can be construed that it relates to both situations separately i.e. for new unit and substantial expanded unit. We find no force in this contention. The initial assessment year has been defined and the expression or’ has been used in respect of new units by stating commences operation’ or complete substantial expansion’. Here the expression or’ is to be read as a mutually exclusive expression which refers to a particular situation by excluding the other situation. Therefore, initial assessment year would clearly commence either on commencement of operation or at completion of substantial expansion of existing unit. In any case the word ‘initial’ cannot be used twice by referring to series of events. This can be understood with a very simple example. Let us say a person A’ passes out his examination of LLB and get employed as Legal Officer in an organization. Later on, he quits the job and starts the practice in legal profession and ultimately he is elevated as a Judge. Then in such a situation it cannot be said that initially A’ was working in a organization and then initially he was in the profession and then elevated as a Judge. Initially can be used only once as a matter of usage of English language. Therefore, readina of the above provision clearly shows that intention of the legislature was very clear to allow 700% for first five years in case of units situated in the State of Himachal Pradesh (since all the cases before us are situated in the State of Himachal Pradesh) and thereafter 25% deduction for another five years on the new units or the existina units where substantial expansion was carried out.

In view of the above we find no merit in the appeal of the assessee. Consequently ,the deduction claimed by the assessee u/s 80IC for the impugned AY is restricted to 25% of the profits and the disallowance of deduction u/s 80 IC of Rs. 53,93,100/- is hereby upheld.