Himachal Pradesh HC Allows Benefit u/s 80-IC of Income Tax Act @ 100% of profit relying on Supreme Court Judgement [Read Order]

J.C. International, the appellant is engaged in the business of manufacturing of fans and geysers and commenced its activities w.e.f. 28.01.2004. Having been established in the A.Y 2005-06, post announcement of fiscal incentives by the Union Cabinet for the State of Himachal Pradesh started w.e.f. 07.01.2003.

The appellant for the year A.Y. 2005-06 (being the first year of establishment of the unit) to A.Y. 2009-10 (fift year) claimed deduction under Section 80-IC of the Act at th rate of 100% of the profit derived by the said unit. However during the assessment year 2010-11 (i.e. sixth year), the the unit by eligible for various fiscal and non-fiscal benefits/incentives/exemptions offered by the Central and State Governments under different enactments, including benefit of deduction of profit under Section 80-IC of the Income Tax Act, 1961 ( 'the Act') and, therefore, return of income was filed declaring Nil income after claiming deduction under Section 80-IC of the Act of Rs. 1,56,17,200/- being 100% of the profit derived by appellant.

The Assessing Officer vide order dated 29.01.2016, held that the condition of substantial expansion under Section 80-IC was applicable only for those units that existed and were operational as on 07.01.2003 (being the first date of window period specified in Section 80-IC as also the first date of incentives granted under other schemes/statutes), but not for the units that came into existence after the said date.

Accordingly, the Assessing Officer denied deduction under Section 80-IC of the Act @ 100% of profit derived from the newly expanded unit, but allowed the same @ 25% of profit, by taking the relevant Assessment year (i.e. A.Y. 2013-14) as the "9th Assessment year" instead of "4th Assessment year" for the existing unit set-up in the previous year relevant to A.Y. 2005-06, thereby the Assessing Officer made disallowance of deduction under Section 80-IC for an amount of Rs.01,17,12,900/-.

Being aggrieved by the assessment order, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals), who vide its order dated 28.11.2017 had allowed the appeal and held the appellant to be eligible to claim deduction of 100% of its profit under Section 80-IC of the Act.Being aggrieved by the assessment order, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals), who vide its order dated 28.11.2017 had allowed the appeal and held the appellant to be eligible to claim deduction of 100% of its profit under Section 80-IC of the Act.

However, this order of the Commissioner of Income Tax (Appeals) was assailed by the revenue before the ITAT, Chandigarh. According to the appellant, it was never served with the notice of the appeal and an ex-parte order dated 16.01.2019 came to be passed against the appellant, upholding the order of the assessing authority and thereby holding the appellant to be entitled to only 25% of the deduction during the year in question because the appellant had already availed the period of full deduction of 100% in the earlier five years.

It is vehemently argued that the order passed by the ITAT is not sustainable in the eyes of law, as it is solely based upon the judgment rendered by two Judge Bench of the Supreme Court in CIT vs. M/s Classic Binding Industries (2018) which judgment, admittedly, has been over-ruled by a Bench of five Judges of the Supreme Court in Principal Commissioner of Income Tax, Shimla vs. Aarham Softronics (2019).

In this case, the Supreme Court has clearly held that “An undertaking or an enterprise which had set up a new unit between 7th January, 2003 and 1st April, 2012 in State of Himachal 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.”

It was held that an assessee who sets up a new industry of a kind mentioned in Section 80-IC(2) and starts availing exemption of 100% tax under Section 80-IC(3) (which is admissible for five years) can start claiming exemption at same rate of 100% beyond the period of five years on the ground that the assessee now carried out substantial expansion in terms of Section 80-IC(8) (ix) within aforesaid period of ten years in its manufacturing unit.

A division bench of Justice Tarlok Singh Chauhan and Justice Sushil Kukreja viewed that the judgment of the Constitution Bench of the Supreme Court is binding and, therefore, in terms thereof, the appellant is held entitled to the benefit under Section 80-IC @ 100% of its profit and findings to the contrary cannot be sustained and are accordingly set aside.

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