Year-wise tax-holiday deduction for new industrial undertakings survives an initial failure once statutory conditions are later met.

Tax-holiday relief for a newly established industrial undertaking under sections 80HH and 80J is to be examined separately for each assessment year, because each year is a distinct unit for computing profits and allowing the deduction. The statutory machinery-percentage condition in section 80J(4)(ii) must therefore be tested with reference to the relevant year, not only the initial year of commencement. Failure to satisfy that condition in the first year does not permanently bar the deduction in a later year if the condition is then met. On that construction, deduction was available for the later assessment year and the Revenue's contrary view was rejected.

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Issues: Whether an assessee that failed to satisfy the machinery-percentage condition in the initial year of commencement of a new industrial undertaking could nevertheless claim deduction under sections 80HH and 80J of the Income-tax Act in a later assessment year when the condition stood satisfied.

Analysis: The relief under sections 80HH and 80J was treated as a tax-holiday benefit meant to operate year by year during the relevant period. The Court compared the language and scheme of section 80J with the earlier provisions in section 15C of the Indian Income-tax Act, 1922 and section 84 of the Income-tax Act, 1961, and held that each assessment year is a separate unit for computing profits and allowing the deduction. It rejected the view that failure in the initial year permanently bars relief in later years, and preferred the construction that the statutory condition in clause (ii) of sub-section (4) must be examined with reference to the relevant assessment year.

Conclusion: The assessee was entitled to deduction under sections 80HH and 80J for the assessment year 1977-78, despite the earlier failure in the initial year.

Final Conclusion: The reference was answered on the basis that the statutory deduction could be claimed in a later year once the relevant conditions were satisfied for that year, and the Revenue's contention was rejected.

Ratio Decidendi: A tax-holiday deduction for a newly established industrial undertaking is to be determined separately for each assessment year, and failure to satisfy the qualifying condition in the initial year does not by itself extinguish entitlement in a subsequent year when the condition is met.

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