Liberal construction of industrial deduction rules preserved section 80-I relief despite later increase in used machinery value.

Deduction under section 80-I could not be denied merely because the value of previously used machinery later exceeded 20% of the total machinery, where the undertaking had already been accepted as a new industrial unit in earlier years. The relevant test under section 80-I(2)(ii) and Explanation (2) is whether the business was formed by transfer of previously used machinery beyond the prescribed limit. Earlier allowance of the deduction showed that the unit was not so formed, and a later increase in old machinery did not alter that character. The provision was construed liberally and purposively, and the deduction remained available for both assessment years.

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Issues: Whether deduction under section 80-I of the Income-tax Act, 1961 could be denied for the assessment years 1996-97 and 1997-98 merely because the value of previously used machinery exceeded 20% of the total machinery in those years, despite the undertaking having been a new industrial undertaking and having qualified in earlier years.

Analysis: The condition in section 80-I(2)(ii) read with Explanation (2) concerns whether the industrial undertaking was formed by transfer to a new business of previously used machinery beyond the prescribed limit. The earlier allowance of deduction showed that the undertaking was a new unit and was not formed by such transfer. A later increase in the value of old machinery did not mean that the undertaking was newly formed in those years by transfer of old machinery. The language of section 80-I was treated as materially similar to section 15C of the Indian Income-tax Act, 1922, and the incentive provision was applied on a liberal and purposive construction.

Conclusion: The assessee was entitled to deduction under section 80-I for both assessment years 1996-97 and 1997-98, and the Revenue's objection based on the 20% machinery condition was rejected.

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