Mandatory eligibility conditions for tax exemption must be satisfied at inception; later ownership cannot cure initial disqualification.

An exemption scheme for newly set up small-scale industries required hired, leased, rented or loaned plant and machinery to be procured only from the West Bengal Small Industries Corporation or the National Small Industries Corporation. That source restriction was treated as a mandatory eligibility condition, strictly construed at the threshold of entry into the tax-holiday scheme, and it was held not to be arbitrary. A unit that failed to satisfy the ownership or source requirement at the commencement of production could not cure the defect later by subsequently becoming owner of the machinery. Eligibility had to exist at inception, so later compliance did not create retrospective entitlement to an eligibility certificate.

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Issues: (i) Whether the condition in clause (v)(b) of the Explanation to rule 3(66a)(i) of the Bengal Sales Tax Rules, 1941, requiring procurement of plant and machinery on hire, lease, rent or loan only from the West Bengal Small Industries Corporation or the National Small Industries Corporation, was mandatory for grant of eligibility certificate; (ii) whether a unit that was ineligible at the commencement of production could obtain eligibility certificate from a subsequent date after becoming owner of the plant and machinery.

Issue (i): Whether the condition in clause (v)(b) of the Explanation to rule 3(66a)(i) of the Bengal Sales Tax Rules, 1941, requiring procurement of plant and machinery on hire, lease, rent or loan only from the West Bengal Small Industries Corporation or the National Small Industries Corporation, was mandatory for grant of eligibility certificate.

Analysis: The provision defined the class of units entitled to be treated as newly set up small-scale industries for the purpose of tax exemption. The language expressly confined the permissible source of hired, leased, rented or loaned machinery to the two named public corporations. The wording admitted of no ambiguity or scope for reading in other financial institutions. As an exemption condition, the stipulation had to be strictly construed at the stage of entry into the scheme, and the principle of liberal construction could not be used to dilute the express definition of eligibility. The classification was also held not to be arbitrary, since the two corporations were specially constituted for the development of small-scale industry.

Conclusion: The condition was mandatory and the challenge to its validity failed.

Issue (ii): Whether a unit that was ineligible at the commencement of production could obtain eligibility certificate from a subsequent date after becoming owner of the plant and machinery.

Analysis: Eligibility under the scheme had to exist at the initial stage when the unit first qualified as a newly set up small-scale industry. Non-fulfilment of a fundamental condition at the inception kept the unit outside the ambit of the exemption scheme, and later compliance could not retrospectively create initial eligibility. The later acquisition of ownership of the machinery did not remove the original disqualification, because the statutory requirement went to the establishment of the unit itself and was not a defect capable of subsequent cure.

Conclusion: Subsequent ownership did not entitle the unit to eligibility certificate for the period in question.

Final Conclusion: The applicant was not entitled to the claimed tax-holiday benefit, and the orders rejecting the eligibility certificate were upheld.

Ratio Decidendi: Where an exemption scheme defines eligibility by an express and exclusive source condition for plant and machinery, the condition is substantive and must be satisfied at the inception of the unit; failure at the threshold cannot be cured later by subsequent compliance.

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