M/S MICRO TURNERS,CHANDIGARH vs. ACIT, CHANDIGARH

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ITA 445/CHANDI/2017Status: DisposedITAT Chandigarh16 July 2019AY 2013-1410 pages
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What did the Tribunal hold?

The Tribunal held that the Supreme Court's decision in Pr.CIT, Shimla Vs. M/s Aarham Softronics settles the issue regarding substantial expansion and the eligibility for deduction under Section 80IC. However, it upheld the disallowance of brought forward losses as per Section 80IA(5) and 80IC(7).

What were the facts?

The assessee claimed deduction under Section 80IC for its TPD unit. The CIT(A) upheld the disallowance of this deduction, citing substantial expansion and the adjustment of brought forward losses. The assessee appealed this decision.

What were the issues?

Whether deduction under Section 80IC is allowable on substantial expansion, and whether brought forward losses from prior to the initial assessment year can be set off against profits of the eligible unit.

Which sections of the Income-tax Act were involved?

Section 80IC,Section 80IA(5),Section 80IC(7)

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आदेश/Order

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 23.01.2017 of the Commissioner of Income Tax (Appeals)-1, Chandigarh [hereinafter referred to as CIT(A)].

2.

The assessee in this appeal has taken following grounds of appeal:-

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 2 1. That the order of Learned Commissioner of Income Tax (A) is bad, against facts & Law.

2.

That the Learned Commissioner of Income Tax (A) has wrongly upheld the disallowance of deduction u/s 80IC amounting to Rs 1,18,91,248/- for TPD unit without appreciating the fact that the appellant has undertaken substantial expansion during FY 12-13.

3.

That the Learned Commissioner of Income Tax (A) has wrongly upheld the disallowance of deduction of Rs.30,20,840/- u/s 80IC of the Income Tax Act.

4.

That the Learned Commissioner of Income Tax (A) has wrongly upheld the adjustment of Brought forward losses of earlier years against our claim of deduction u/s 80IC, which was already set off during the earlier year.

5.

That the appellant craves leave to add, alter, amend or withdraw any grounds of appeal before the final hearing.

3.

Ground No.1: Ground No.1 is general in nature and does not

require any specific adjudication.

4.

Ground No.2: Vide ground No.2, the assessee has agitated the

action of the CIT(A) in confirming the disallowance u/s 80IC of the

Income Tax Act, 1961 (in short 'the Act') @ 100% on account of

substantial explanation carried out during the financial year 2011-12.

5.

During the course of hearing before us, the Ld. Counsel for the

assessee, at the outset itself, pointed out that the Hon'ble Apex Court

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 3 has decided this issue in favour of the assessee in bunch of cases with

the lead case being Pr.CIT, Shimla Vs. M/s Aarham Softronics in

Civil No.1784 of 2019 dated 20.2.2019.

6.

Ld. DR fairly conceded that the issue was settled in favour of

the assessee by the above decision of the Apex court.

7.

We have gone through the order of the Hon'ble Apex Court in

the case of M/s Aarham Softronics (supra) and find that the Hon'ble

Apex Court dealt with the entire scheme of the Act relating to the

relevant section i.e. section 80IC of the Act, and arrived at the

conclusion that the definition of the initial assessment year contained

in clause (v) of sub-section(8) of section 80IC of the Act can lead to a

situation where there can be more than one initial assessment year

within the said period of ten years. The relevant finding of the

Hon'ble Apex Court at para 19 of its order is as under:

“19. Having examined the scheme in the aforesaid manner, we arrive at the conclusion that the definition of ‘initial assessment year’ contained in clause (v) of sub-section (8) of Section 80-IC can lead to a situation where there can be more than one “initial assessment year” within the said period of 10 years. As per sub- section (6), cap is on the 10 assessment years. It is not on quantum. We have also to keep in mind the purpose for which Section 80-IC was enacted. The purpose was to establish the business of the nature specified in the said provision in the specified States. This provision was, thus, aimed at encouraging the undertakings or enterprises to establish and set up such units in the aforesaid States to make them industrially advanced States as well. Undoubtedly, these are difficult States as most of these States fall in hilly areas. Therefore, cost of production and transportation may also go up.

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 4 20. When we keep in mind these objectives for which Section 80-IC was enacted, an irresistible conclusion would be to grant 100% deduction of the profits and gains even from the year when there is substantial expansion in the existing unit. After all, this substantial expansion involves great deal of investment which has to be, at least 50% in the plant and machinery, of the book value thereof before taking depreciation in any year. With an expansion of such a nature not only there would be increase in production but generation of more employment as well, which would benefit the local populace. It is for this reason, carrying out substantial expansion by itself is treated as ‘initial assessment year’. It would mean that even when an old unit completes substantial expansion, such a unit also becomes entitled to avail the benefit of Section 80-IC. If that is the purpose of the legislature, we see no reason as to why 100% deduction of the profits and gains be not allowed to even those units who had availed this deduction on setting up of a new unit and have now invested huge amount with substantial expansion of those units.” 7. The Hon'ble Apex Court thereafter concluded that a newly set

up undertaking or enterprise in the State of Himachal Pradesh would

be entitled to deduction @ 100% of the Act its profits for the first

five years and even thereafter in the case of substantial expansion is

carried out by it, then the assessment year relevant to the previous

year in which substantial expansion is undertaken becoming the initial

assessment year. That in any case, the period of deduction u/s 80IC of

the Act would not exceed 10 years. The conclusion of the Hon'ble

Apex Court at para 24 of its order is as under:

“24. The aforesaid discussion leads us to the following conclusions: (a) Judgment dated 20th August, 2018 in Classic Binding Industries case omitted to take note of the definition ‘initial assessment year’ contained in Section 80-IC itself and instead based its conclusion on the definition contained in Section 80-IB, which does not apply in these cases. The definitions of ‘initial assessment year’ in the two sections, viz. Sections 80-IB and 80-

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 5 IC are materially different. The definition of ‘initial assessment year’ under Section 80-IC has made all the difference. Therefore, we are of the opinion that the aforesaid judgment does not lay down the correct law. (b) 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. (c) However, in case substantial expansion is carried out as defined in clause (ix) of sub-section (8) of Section 80-IC by such an undertaking or enterprise, within the aforesaid period of 10 years, the said previous year in which the substantial expansion is undertaken would become ‘initial assessment year’, and from that assessment year the assessee shall been entitled to 100% deductions of the profits and gains. (d) Such deduction, however, would be for a total period of 10 years, as provided in sub-section (6). For example, if the expansion is carried out immediately, on the completion of first five years, the assessee would be entitled to 100% deduction again for the next five years. On the other hand, if substantial expansion is undertaken, say, in 8th year by an assessee such an assessee would be entitled to 100% deduction for the first five years, deduction @ 25% of the profits and gains for the next two years and @ 100% again from 8th year as this year becomes ‘initial assessment year’ once again However, this 100% deduction would be for remaining three years, i.e., 8th, 9th and 10th assessment years. 25. In view of the aforesaid, we affirm the judgment of the High Court on this issue and dismiss all these appeals of the Revenue. Likewise, appeals filed by the assessees are hereby allowed.”

8.

In view of the above, it is now settled law that even a new

undertaking, which has claimed deduction of its eligible profits @

100% thereof for the first five years, is entitled to claim deduction @

100% of its profits thereafter on account of substantial expansion

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 6 undertaken by it. However, such deduction would be for a total period

of 10 years as provided in sub-section (6) to section 80IC of the Act.

9.

Since in the present case the fact that the assessee had

undertaken substantial expansion in the impugned year is not

disputed, the assessee, we hold, is entitled to claim deduction @

100% of its eligible profits even if it has already claimed deduction

of its profits at the said rate for first five years, in view of the law

laid down by the Apex court in this regard in its decision in the case

of M/s Aarham Softronics(supra). Thus, this issue is decided in

favour of the assessee.

Ground Nos 3 & 4: Vide these grounds, the assessee has 10.

agitated the action of the CIT(A) in upholding the addition made by

the Assessing Officer of Rs. 30,20,840/- on account of adjustment of

Brought forward losses of earlier years against the profits of the unit

for which the deduction u/s 80IC of the Act has been claimed.

11.

The plea of the Ld. Counsel for the assessee has been that since

the losses of the earlier years have already been set off / adjusted

against the income of the assessee of that year, hence, the lower

authorities were not justified in notionally carrying forward the losses

and setting off against the profits of 80IC eligible unit for computation

of deduction u/s 80IC of the Act for the assessment year under

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 7 consideration. The Ld. Counsel in this respect has relied upon the

following case law:- i) CIT-10 vs Hercules Hoists Ltd, ITA No. 707 of2014 order dated 14.7.2017 (Bombay High Court)

ii) ITO vs M/s Parry Engineering & Electronics in ITA No. 1148/Ahd/2017 order dated 13.5.2019 of ITAT Ahmedabad

iii) ACIT vs M/s Leo Fasteners, Pondicherry; Tax Case (Appeal) No.533 to 538 of 2010, 1217 to 1220 of 2010 and 787 and 788 of 2014 order dated 10.7.2017 (Madras High Court )

iv) CIT vs Poppy’s Knitwear (P) Limited [2015] 92 CCH 005 Chen HC / [2015] 373 ITR 0455

v) Velayudhaswamy Spinning Mills (P) Ltd vs ACIT [2010] 78 CCH 0265 Chen High Court / (2012) 340 ITR 0477

12.

We have heard the rival contentions of the parties and have also

gone through the case laws relied upon by the Ld. Counsel for the

assessee. In the aforesaid case laws, the issue before the Hon'ble

Courts was that for computation of deduction u/s 80IA/ 80IB, whether

the loss prior to initial assessment year choosen by the assessee for

claim of deduction for 10 consecutive years can be brought forward or

set off against the deduction claimed from the eligible business. The

proposition of law laid down in the aforesaid case laws is that when

the assessee exercises the option to claiming deduction u/s 80IA / 80IB,

the only losses of the years beginning from initial assessment year

alone are to be brought forward. That losses of the earlier years i.e.

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 8 prior to the initial assessment year, which were already set off against

the income of the assessee cannot be brought forward to adjust / set off

against the profits of eligible business to compute deduction from

eligible business.

13.

As per the provisions of section 80IA(5) of the Act, the profit and

gains of an eligible business for the purpose of determining the

quantum of deduction u/s 80IA for the assessment year immediately

succeeding the initial assessment year or any subsequent assessment

year, are to be computed as if as the eligible business were the only

source of income of the assessee during the previous year relevant to

the initial assessment year and to every subsequent assessment year

upto the assessment year for which the deduction is allowable. As per

sub section (7) of section 80IC, the provisions of section 80IA(5) being

also made applicable to the eligible undertaking for claim of deduction

u/s 80IC. Hence, as per the aforesaid provisions, the losses of the

eligible undertaking prior to the start of the initial assessment year for

claim of deduction u/s 80IC of the Act cannot be brought forward and

set off against the profits of the eligible undertaking for the purpose of

computation of deduction u/s 80IC of the Act. However, once the initial

assessment year has already began, the losses of the eligible

undertaking of earlier years, not before the start of the initial

assessment year, are to be taken into consideration / set off for

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 9 computation of deduction u/s 80IC of the Act of that assessment year.

It is pertinent to mention here that for the computation of total income

of the assessee, the losses of the eligible undertaking are set off against

the profits / income of the assessee, however, the computation of

deduction u/s 80IC of the Act is to be done separately treating the

eligible unit as it is only the business / source of income of the

assessee during the relevant assessment year. It is, thus, held by the

various Courts that for computation of deduction u/s 80IA/80IB of the

Income Tax Act, the losses of the earlier assessment years, when the

business of the assessee was not eligible for deduction u/s 80IA/ 80IB

of the Act are not to be set off after the commencement of initial

assessment year for claim of deduction. However, the losses of the

initial assessment year and subsequent assessment years are to be

taken into consideration for computation of deduction u/s 80IA / 80IB

of the Act till the last year of the claim of deduction u/s 80IA/ 80IB of

the Act. Applying the same proposition, the assessment year under consideration in the case of the assessee is 7th assessment year from the

initial assessment year for the purpose of claim of deduction u/s 80IC

of the Act. In view of this, the losses from the previous year after start

of the initial assessment year are to be notionally brought forward for

the purpose of computation of deduction u/s 80IC of the Act for the

assessment year under consideration.

In view of this, we do not find any merit in the ground Nos. 3 & 4

ITA No. 445-Chd/2017 M/s Micro Turners, Chandigarh 10 of the appeal and the same are accordingly dismissed.

14.

Ground No.5: Ground No.5 is general in nature and does not

require any adjudication.

In the result, the appeal of the assessee is treated as partly allowed.

Order pronounced in the Open Court on 24.07.2019.

Sd/- Sd/- (संजय गग� / SANJAY GARG) (एन. के. सैनी / N.K. SAINI) उपा�य� /Vice President �या�यकसद�य/ Judicial Member Dated : 24.07.2019 “आर.के.”

आदेशक���त�ल�पअ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु�त/ CIT 4. आयकरआयु�त (अपील)/ The CIT(A) 5. �वभागीय��त�न�ध, आयकरअपील�यआ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड�फाईल/ Guard File

आदेशानुसार/ By order, सहायकपंजीकार/ Assistant Registrar

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