COMMISSIONER OF INCOME TAXversusM/S. CLASSIC BINDING INDUSTRIES

                        [2018] 9 S.C.R. 949                             949


               COMMISSIONER OF INCOME TAX                               A
                                 v.
             M/S. CLASSIC BINDING INDUSTRIES
                  (Civil Appeal No. 7208 of 2018)
                         AUGUST 20, 2018                                B
         [A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
        Income Tax Act, 1961: s.80-IC – Whether an assessee who
sets up a new industry of a kind mentioned in sub-section (2) of
s.80-IC of the Act and starts availing exemption of 100% tax under
                                                                        C
sub-section (3) of s.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 – Held: A
pragmatic and reasonable interpretation of s.80-IC is that once the
initial Assessment Year commences and an assessee, by virtue of         D
fulfilling the conditions laid down in sub-section (2) of s.80-IC,
starts enjoying deduction, there cannot be another “Initial
Assessment Year” for the purposes of s.80-IC within the said period
of 10 years, on the basis that it had carried substantial expansion
in its unit – Thus, after availing deduction for a period of 5 years
                                                                        E
@ 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%.
      Income Tax Act, 1961: ss.80-IA, 80-IB and 80-IC – Gist of
                                                                        F
the legislative history and purpose behind the insertion of ss.80-IA,
80-IB and 80-IC – Discussed.
        Allowing the appeals, the Court
      HELD: 1.1 Sub-section (2) of Section 80-IC provides for
tax benefit to those undertakings or enterprises which had set          G
up their manufacturing units in certain specified areas including
State of Himachal Pradesh to which this case is pertaining. It also
gives benefit to these undertakings and enterprises which have
undertaken substantial expansion during the periods mentioned
therein. [Paras 14, 15] [955-B]
                                                                        H
                                949
950           SUPREME COURT REPORTS                      [2018] 9 S.C.R.


A            1.2 Section 80-IC of the Act 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. 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
B
      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
C     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. [Para 18] [956-E-G]
D           1.3 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%
E     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. Keeping in mind the said scheme and spirit behind this
      provision, such a situation cannot be countenanced where an
      assessee is able to secure deduction @ 100% for the entire period
F     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. 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%
G     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. [Paras 19, 20, 21] [957-C-F; 958-E-F]
            Mahabir Industries v. Principal Commissioner of
            Income Tax 2018 (7) SCALE 618 – distinguished.
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     COMMISSIONER OF INCOME TAX v. M/S. CLASSIC                              951
               BINDING INDUSTRIES

                        Case Law Reference                                   A
2018 (7) SCALE 618                distinguished            Para 21
      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7208
of 2018.
     From the Judgment and Order dated 28.11.2017 of the High Court          B
of Himachal Pradesh, Shimla in ITA No. 62 of 2016.
                                  WITH
      C.A. Nos. 7223, 7220, 7215, 7230, 7216, 7232, 7233, 7224, 7214,
7213, 7212, 7231, 7211, 7229, 7228, 7227, 7226, 7234, 7238, 7210, 7217,
7218, 7219, 7239, 7221, 7222, 7209, 7236, 7225 of 2018                       C
      A.N.S. Nadkarni, Sandeep Sethi, ASGs, Gaurav Banerjee, Ajay
Vohra, Sr. Advs., Ashok K. Srivastava, Arijit Prasad, Sanjai Kumar Pathak,
Ms. Shirin Khajuria, Ms. Sanskriti Bhardwaj, Mrs. Anil Katiyar, Abhinav
Mukerji, Ms. Bihu Sharma, Ms. Pratishtha Vij, Ms. Purnima Krishna,
Ms. Kavita Jha, Gaurav Jain, Jay Savla, Ms. Renuka Sahu, Jasdeep             D
Singh Dhillon, Prabhat Chaurasia, Advs. for the appearing parties.
      The Judgment of the Court was delivered by
      A. K. SIKRI, J. 1. 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       E
judgment dated 28th November, 2017 has discussed various aspects and
nuances of the aforesaid provisions which had 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:          F
        “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         G
        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   H
952             SUPREME COURT REPORTS                            [2018] 9 S.C.R.


A     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.
B
      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 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
C     for a period of 10 years, namely, @100% for 1st 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
D
      of 25% from 6th to 10th 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
E     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
F     aforesaid cases and arises in the same fact situation mentioned 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 1st April, 1991. By virtue of said Section, the gross
G     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 1st April, 1993. With effect
      from 1st 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
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     COMMISSIONER OF INCOME TAX v. M/S. CLASSIC                                 953
         BINDING INDUSTRIES [A. K. SIKRI, J.]

Legislator, in its wisdom, enacted a special provision, in respect of “units”   A
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
                                                                                B
Assessment Years commencing from 1st April, 2004 (Sub-section (4) of
Section 80-IB).
        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             C
assessee started its business activity/operation on 11th 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.            D
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             E
deduction under Section 80-IC of Rs. 12,62,77,168/- was e-filed by the
assessee firm on 28th 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.
       7. The assessee was asked to furnish the reasons and justification       F
for the said claim of 100% as against the eligible norm of 25%. the
assessee vide letter dated 12th 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         G
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-          H
954             SUPREME COURT REPORTS                           [2018] 9 S.C.R.


A     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 27th
B     February, 2015, the assessee preferred an appeal on 6th April, 2015.
             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
C     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 11th
D     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 11th August, 2016,
E     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 that there is no restriction that undertaking
F     or enterprise established after 7th 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
G     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.
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     COMMISSIONER OF INCOME TAX v. M/S. CLASSIC                                 955
         BINDING INDUSTRIES [A. K. SIKRI, J.]

       14. A gist of the legislative history and purpose behind the insertion   A
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
                                                                                B
Himachal Pradesh to which this case is belonged.
       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          C
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          D
        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).                                                            E
        xxx       xxx     xxx
        (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        F
        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
                                                                                G
        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
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956             SUPREME COURT REPORTS                           [2018] 9 S.C.R.


A             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-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
B     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.

C             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
D     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
E     inserted by the Finance Act, 2003 w.e.f. 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
F     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%
G     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
H     cap of 10 years, which is the maximum period for which the deduction
     COMMISSIONER OF INCOME TAX v. M/S. CLASSIC                                 957
         BINDING INDUSTRIES [A. K. SIKRI, J.]

can be allowed to any undertaking or enterprise under this section, starting    A
from the initial Assessment Year. Another significant feature under sub-
section (3) is that the 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
                                                                                B
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.
                                                                                C
        (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
        (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         E
this provision, such a situation cannot be countenanced where an 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           F
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.
                                                                                G
        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     H
958              SUPREME COURT REPORTS                           [2018] 9 S.C.R.


A     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
      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
B
      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
C     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
D
      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
E     substantial expansion. As pointed out above, 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
F
      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
G     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.
      Devika Gujral                                                  Appeals allowed.
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