The initial assessment year for the purpose of claiming benefit under section 80-IA of the Act, is the year of commercial production not the year of trail production

Recently, the Delhi High Court in the case of ACIT Vs. Nestor Pharmaceuticals Limited [2010-TIOL-124-HC-DEL-IT] on the issue of whether the year in which trial production starts can be considered as initial Assessment Year (AY) for claiming benefit under section 80-IA of the Income Tax Act, 1961 (the Act) after relying on various judicial precedents held that the initial year is the year in which the commercial production starts and not trial production.

Facts and background of the case

• As per Section 80-IA of the Act, profits and gains derived by an eligible industrial undertaking will be entitled to a deduction, beginning from the year in which the undertaking begins manufacture of produce articles or things.
• The taxpayer, a company eligible to benefit under section 80-IA of the Act, was engaged in the business of manufacturing of pharmaceuticals formulations in bulk drugs. The taxpayer carried out trial production from 20 March 1998 (i.e. AY 1998-99), however, its commercial production starts from (AY 1999-00). Accordingly, the taxpayer after considering AY 1999-2000 as initial assessment year, claimed benefit from AY 1999-2000 to 2003- 04
• However, the Assessing Officer (AO) treated the year of trial production i.e. AY 1998-99 as initial assessment year and held that the taxpayer was eligible for the benefit from AY 1998- 99 to 2002- 03. Accordingly, the benefit was not allowed for the AY 2003- 04.
• The Commissioner of Income Tax (Appeals) [CIT (A)] confirmed the order of the AO. However, the Income Tax Appellate Tribunal (the Tribunal) held that since on 20 March 1998 only trial production started which is different from commercial production; the benefit should be allowed in the year in which commercial production started i.e. AY 1999- 2000.

Taxpayer’s contentions