Kerala High Court
Commissioner Of Income-Tax vs Seeyan Plywoods on 5 February, 1991
Equivalent citations: [1991]190ITR564(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal (in short, "the Tribunal") has referred the following question of law for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to the exemptions under Sections 80J and 80HH for the subsequent years even though it is not entitled to the exemption in the earlier years ?"
2. The respondent, an unregistered firm, is an assessee under the Income-tax Act. We are concerned with the assessment year 1977-78 for which the accounting period ended on March 31, 1977. The assessee deals in manufacture and sale of plywoods, veneers, etc. During the assessment year, it claimed deduction under section 80HH and Section 80J amounting to Rs. 23,251 and Rs. 10,617, respectively. The Income-tax Officer, by his order dated January 30, 1980, held that the assessee is not entitled to the deductions claimed under Sections 80HH and 80J of the Act, The Commissioner of Income-tax (Appeals), by order dated September 30, 1983, affirmed the said disallowance ; but, in second appeal, the Tribunal held that the assessee is entitled to claim relief under Sections 80HH and 80J of the Income-tax Act for the relevant assessment year. It is thereafter at the instance of the Revenue that the question of law, formulated hereinabove, has been referred by the Tribunal for the decision of this court.
3. We heard counsel for the Revenue, Mr. P. K. R. Menon, and also counsel for the respondent-assessee, Mr. S. A. Nagendran and Mr. Premjit. The respondent-assessee started an industrial undertaking in 1974. The claim of deduction under Section 80J of the Income-tax Act was allowed in respect of the undertaking for the assessment years 1975-76 and 1976-77. Subsequently, the Income-tax Officer initiated proceedings under Section 147 of the Act and held that the assessee was not entitled to the deductions on the ground that the cost of old machinery used in the undertaking exceeded 20% of the total cost of machinery and plant and the undertaking was formed by the transfer of such machinery. The said decision was affirmed in appeal by the Appellate Assistant Commissioner.
4. For the assessment year 1977-78, the assessing authority took the view that the assessee is not entitled to the relief under Sections 80HH and 80J of the Income-tax Act. The new industrial undertaking of the assessee was started in 1974. The initial assessment year is 1974-75. In that year, the cost of machinery was in excess of 20% of the total value of machinery. The assessee was purchasing new machinery as also old machinery every year. The old machinery purchased was of vital importance to the formation of the undertaking. It was held by the assessing authority that since, in the initial assessment year, when the undertaking was started, i.e., 1974-75, and also in the subsequent years, 1975-76 and 1976-77, the value of old machinery transferred was in excess of 20% of the total value of the machinery, even if during the relevant assessment year in question, 1977-78, the total cost of the machinery was less than 20% of the total value of the machinery and plant used in the business, the assessee will not be entitled to the relief under Sections 80HH and 80J of the Act.
5. For the purpose of deciding the controversy in this case, we may state that the language and import of Sections 80HH and Section 80J of the Income-tax Act are substantially similar. The decisions brought to our notice were based on Section 80J of the Act and the precursor to the said provision. We shall extract the statutory provision in so far as it is relevant for the purpose of this reference.
"80 J. Deduction in respect of profits and gains from newly established industrial undetakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with the subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) :
Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning, after that date, the provisions of this sub-section shall have effect as if for the words 'six per cent.' the words 'seven and a half per cent. had been substituted.
(2) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year :...
(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;...
Explanation 2.--Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking."
6. Section 80HH and Section 80J of the Act afford relief to the assessees in the form of a deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas (80HH) or ships or hotel business in certain areas (80J). Such type of relief was available even under the Indian Income-tax Act of 1922 as per Section 15C of the Act of 1922. Section 84 of the Income-tax Act, 1961, replaced Section 15C of the earlier Act. Still later, Sections 80HH and 80J replaced Section 84 of the Act. Section 15C(2) of the Indian Income-tax Act, 1922, came for interpretation before the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 196. In CIT v. Suessin Textile Bearing Ltd. [1982] 135 ITR 443, 448, the Gujarat High Court in interpreting the earlier statutory provision, Section 84(4) of the Act, stated thus :
"Section 15C of the Act of 1922, Section 84 of the Act of 1961 and Section 80J, which has now replaced Section 84, were all parts of the scheme of tax holiday to new industrial undertakings, and, in our opinion, unless this object of encouraging the setting up of new industrial undertakings by giving tax relief with reference to the investment of capital in the new business is borne in mind, it is not possible to interpret the conditions which have been laid down in Section 15C and which were subsequently laid down by Section 84, Sub-section (4)."
7. The plea of the Revenue, put forward before us, is that, if the assessee was not entitled to deduction under Sections 80HH and 80J of the Act in the year in which the industrial undertaking was started, the assessee will not be eligible for the deduction in the subsequent years, even if the value of the old machinery in the subsequent years does not exceed 20% of the total value of the machinery. In other words, the test or qualification as to whether the assessee is entitled to deduction under Sections 80HH or 80J of the Act should be fixed with reference to the initial year of the new industrial undertaking and, in the subsequent years, the quantifying base alone is changed. It was argued that Section 80J(1) and Sub-section (4), Clause (ii) read with the Explanation refers to the "formation" of the business and if in the year of formation of the business that is in the year in which the industrial undertaking was started, the deduction is not available, in the subsequent years, the above provisions will not apply. This plea was upheld by the Income-tax Officer and also by the Commissioner of Income-tax (Appeals). The Income-tax Officer, after referring to Sections 80HH, 80J and 80J(4)(ii) and Explanation 2, stated thus :
"If the total value of old machinery used by the undertaking in the initial year exceeds 20 per cent. of the total value of machinery, the undertaking will not be entitled for deduction under Sections SOHH and 80J, as the undertaking will not be a newly constituted undertaking under the provisions of Sections 8HH and 80J. ... In the present case, the 'initial year' is the assessment year 1974-75 and the cost of old machinery during this year is in excess of 20 per cent. of the total value of machinery. As the firm is not, therefore, entitled for the deductions contemplated under Sections 80HH and 80J for the initial assessment year, on a proper construction of the language used in the relevant sections, the firm will not be eligible for these deductions in the subsequent years even if the value of old machinery in the subsequent years does not exceed 20 per cent. of the total value of machinery."
8. The Commissioner of Income-tax (Appeals) affirmed the said decision and stated thus :
"The very scheme of Section 80J is such that the qualifying standards are fixed with reference to the first year and only the quantifying base is changed from year to year. This is particularly so in the case of application of the 20% rule. Since Clause (ii) of Sub-section (4) of Section 80J refers to the formation of the business, the exemption given in Explanation 2 in regard to the proportion of old and new machinery should also be with reference to the state of affairs as at the time of formation. In this view, I would reject the appellant's contention for considering the relative position as in the relevant accounting year. The deduction under Section SOHH is also to be held to have been properly rejected in view of my decision about the deduction under Section 80J because these two sections are identical about the qualifications prescribed for being considered as a new industrial undertaking."
9. In further appeal, the Appellate Tribunal noticed the contention of the assessee in the following words :
"Yet another contention that has been advanced was that although at the time of formation the value of old machinery and plant exceeded 20%, the value of such machinery and plant did not exceed 20% for the year under consideration. The assessee has been purchasing new machinery year after year. The assessee has also purchased a small quantity of old machinery in these years. The position as in 1977-78 assessment year was that the value of the old machinery and plant came to less than 20% of the total value of the machinery and plant purchased until that year. Counsel, therefore, contended that this position should be taken into account in granting relief under Sections 80-J and 80HH."
10. The above plea was disposed of in paragraph 4 of the order dated July 25, 1986, as follows :
"There is nothing in the language of the relevant provisions of Section 80J which impose a further limitation, namely, that if the conditions so laid down are not satisfied in the very year of commencement of production, manufacture, etc., the benefit of tax holiday will not be available, even if such conditions are satisfied in the course of any of the subsequent years, forming part of the tax holiday period. This view is supported by the decision of the Gujarat High Court in the case of CIT v. Suessin Textile Bearing Ltd. [1982] 135 ITR 443. Since it is an admitted fact that the value of old machinery did not exceed 20% of the total value of the machinery for the assessment year in question, the assessee is entitled to claim relief under Sections 80HH and 80J during this assessment year."
11. Counsel for the Revenue submitted that the decision of the Gujarat High Court, relied on, has failed to give due effect to the crucial words occurring in Section 80J(4)(ii) of the Act, in that the "formation" or starting of the industrial undertaking can be only in the initial year which, in this case, is 1974-75 and since, in the instant case, it cannot be said that the industrial undertaking was formed or "started or came into existence" during the accounting year relevant to the assessment year 1977-78, the condition envisaged by Section 80J(4)(ii) read with the Explanation 2 is not satisfied. Reliance was placed on a Bench decision of the Karnataka High Court in CIT v. Nippon Electronics (India) Pvt. Ltd. [1990] 181 ITR 518. In the said decision, a Bench of the Karnataka High Court has held that, since the assessee did not fulfil the conditions stipulated under Section 80J(4)(ii) in the initial year of undertaking, it was not entitled to the relief in a subsequent year. The Bench also disagreed with the Bench decision of the Gujarat High Court in CIT v. Satellite Engineering Ltd. [1978] 113 ITR 208, where a contrary view has been taken. On the other hand, counsel for the assessee submitted that the interpretation placed on Section 80J(4) of the Income-tax Act by the Karnataka High Court does not accord with the legislative intention and unduly restricts the scope of Section 80J of the Act. It was further argued that the profits and gains of a business are computed every year distinctly and separately and it is the income of each year that is relevant for the purpose of computation and, in the said computation, the assessee is also entitled to an appropriate deduction relating to the income of that year. In income-tax law, the basic principle is that it is the income of a particular year that is determined after giving effect to the deductions and other allowances the assessee is entitled to on the basis of facts and circumstances existing in that particular year. This annual feature as also the basic objective in providing the tax holiday have been totally ignored in placing an unduly narrow interpretation on Section 80J(4)(ii) of the Income-tax Act Counsel for the assessee submitted that the decision of the Gujarat High Court in Satellite Engineering Ltd.'s case [1978] 113 ITR 208, as also the later decision of the Gujarat High Court in Suessin Textile Bearing Ltd.'s case [1982] 135 ITR 443 may commend itself to us and the decision of the Tribunal is in accord with the Gujarat decisions aforesaid.
12. We considered the above rival pleas urged before us. We should state that Section 15C of the Indian Income-tax Act, 1922, and Section 84, Explanation to Sub-section (3) thereto, and Section 80J of the Income-tax Act are substantially similar. In Satellite Engineering Ltd.'s case [1978] 113 ITR 208, 215 (Guj), the legislative intent behind the enactment of the said provisions is stated thus :
"... the legislative intent behind the enactment of this provision was to provide what is conveniently and aptly called a 'tax holiday' to a newly established industrial undertaking. The section is an exemption section and it grants certain partial benefit so far as the profits of a new industrial undertaking are concerned for a limited period. The principal object of the provision, as observed in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC), is to encourage setting up of new industrial undertakings, by offering tax incentives. After the country gained independence in 1947, it was most essential to give a fillip to trade and industry from all quarters and this seems to be the background for the enactment of the old Section 15C and its continuance in the statute book in one form or the other thereafter till this date with progressive amendments made from time to time with a view to extending its benefit for a longer period. Be it noted, in this connection, that not only has the Legislature extended the time limit from time to time, but it has also made at least two further concessions in favour of new industrial undertakings since its initial enactment : first, from Clause (ii) of Sub-section (4) of Section 80J, which as initially enacted was in pari materia with Clause (ii) of Sub-section (2) of Section 84, the words 'a building (not being a building taken on rent or lease)', have been omitted by the Finance Act, 1975, with effect from April 1, 1976, and, secondly, a provision for carrying forward has been made in Sub-section (3) of Section 80J. It would thus appear that the Legislature has been progressively relaxing the provisions relating to earning of tax benefits by new industrial undertakings, the end in view being to encourage the setting up of new industries by substantial investment of new capital. Any interpretation of such provision must therefore, be in consonance with this avowed aim and object of the Legislature and not such as would defeat the same."
13. Construing Section 84(2)(ii) of the Income-tax Act, read with the Explanation (corresponding to Section 80J(4)(ii) and Explanation'), the court held at pages 221 and 222 as follows :
"We find nothing in the language of the relevant statutory provisions which, however, imposes a further limitation, namely, that if the condition laid down in Section 84(2)(ii) is not satisfied in the very year of commencement of manufacture or production, the benefit of tax holiday will not be available, even if such condition is satisfied in the course of any of the subsequent four years. It cannot be overlooked in this connection that the profits and gains derived from business are assessable in each assessment year. Therefore, in each assessment year falling within the five-year period, the question will arise whether the new industrial undertaking, which claims the benefit of tax holiday, satisfies the conditions laid down in Clause (ii) of Sub-section (2). In other words, according to the legislative scheme, it is apparent that in each assessment year commencing from the assessment year relevant to the previous year in which such new industrial undertaking begins manufacture or production the taxing authority will have to consider whether the industrial undertaking was formed by the transfer to its new business of building, machinery or plant previously used for any purpose, and, if so, whether the total value of such transferred asset exceeded 20% of the total value of the building, machinery or plant used in the business of such undertaking during the relevant year. If the new industrial undertaking, which has not satisfied such test in any one of the earlier assessment years comprised in the five-year period, acquires new building, machinery or plant during any one of the succeeding assessment years and as a result of such acquisition the condition prescribed in Clause (ii) of Sub-section (2) is fulfilled, then, as from the assessment year in which such condition is satisfied, the benefit of tax holiday will be available to it for the remaining period of the five-year term. This appears to us to be the only reasonable construction possible having regard to the plain words of the statutory enactment."
14. The above decision was followed by a later Bench of the same court in Suessin Textile Bearing Ltd.'s case [1982] 135 ITR 443 at p. 455 and the court stated thus at p. 455 : , "In Satellite Engineering Ltd.'s case [1978] 113 ITR 208 (Guj), it was pointed out by a Division Bench of this High Court that even if in an earlier year the Income-tax Officer has not granted relief under Section 84 or Section 15C of the Act of 1922, in the subsequent years that relief can be granted and can be claimed and in each year it has to be computed once again ... it must be held that in the subsequent years, that is in assessment year 1962-63 and in subsequent assessment years, relief under Section 84 can be claimed and should be granted if the claim of the asses-see to that relief is found to be justified."
15. We perused the decisions of the Gujarat High Court as also the decision of the Karnataka High Court with great care. We are of the view that the decision of the Karnataka High Court is not logically in accord with the legislative intent behind Sections 80HH and 80J which can be conveniently called a tax holiday, to the newly established industrial undertakings. It is a benefit given to the assessee for a limited period. The said benefit accrues from year to year as and when the income of each year is to be assessed. The interpretation placed by the Karnataka High Court on Section 80J(4)(ii) of the Act places an undue restriction on the language of the relevant statutory provision. On the other hand, the view taken by the Gujarat High Court in the two Bench decisions is fully in accord with the legislative intent and also the scheme of the Act that it is the income of each year that falls to be determined when the matter comes up for consideration. It should also be noticed that the deduction under Section 80J(1) is to be allowed in computing the total income in respect of the assessment year relevant to the previous year, etc., and each of the four assessment years immediately succeeding the initial assessment year (80J(2)). Each one of the five assessment years is considered as a separate unit for the purpose of affording the benefit of deduction to the assessee.
16. In the above perspective, we concur with the decisions of the Gujarat High Court in Satellite Engineering Ltd.'s case [1978] 113 ITR 208 and Suessin Textile Bearing Ltd.'s case [1982] 135 ITR 443. We respectfully disagree with the-decision of the Karnataka High Court to the contrary in Nippon Electronics (India) Pvt. Ltd.'s case [1990] 181 ITR 518.
17. In the light of our above discussion, we are of the view that the Appellate Tribunal was justified in holding that the respondent-assessee is entitled to claim relief under Sections 80HH and 80J of the Income-tax Act for the assessment year 1977-78.
18. We answer the question referred to this court in the affirmative, against the Revenue and in favour of the assessee.
19. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.