1989 (9) TMI 90 - HC - Income Tax

Deduction Under s.80J(1) Depends Only on Initial Assessment Year; Later Machinery Additions Cannot Cure Ineligibility

HC held that eligibility for deduction under s.80J(1) must be determined exclusively with reference to the initial assessment year, by applying the ... Deduction u/s 80J - New Industrial Undertaking - non- fulfilment of the prescribed conditions to get the relief u/s 80J of the Act in the initial year of its manufacture or production - Whether, the Appellate Tribunal is right in law in holding that the assessee is entitled to get the relief under section 80J notwithstanding the fact that the conditions stipulated under section 80J(4)(ii) were not fulfilled in the initial year ? - HELD THAT:- The eligibility for earning the benefit under section 80J(1) of the Act is provided in section 80J(4)(ii) of the Act. The condition is that the undertaking must not have been formed by the transfer to the new business of machinery or plant previously used for any purpose. The expression 'formed' in clause (ii) of sub-section (4) is concluded by Explanation 2 which substitutes an arithmetical formula for understanding whether this condition has been satisfied or broken in a given case. The formula is, where the value of the old machinery or plant that has been transferred is 20 per cent., or less than 20 per cent., of the total value of the machinery or plant used in the business, then this condition is deemed to have been complied with. But the value of the assets in question transferred shall not be taken into account in computing the capital employed in the undertaking. If such value exceeds 20 per cent., the relief would not be available and if, on the other hand, such value is within 20 per cent. or less, the relief is available. Reading clause (ii) with Explanation 2 makes it clear that the assessee can be denied the exemption only where the assets transferred to the new undertaking constitute more than 20 per cent. of the total value of the assets used in the new business. The word 'formed' also suggests that the transfer contemplated is one at the time of formation of the new undertaking. The eligibility for exemption has to be tested in the initial assessment year. Therefore, the exemption would not be available if, in the initial assessment year, the proportion of old assets transferred or utilised for the new business is above 20 per cent. of the total investment, though in any subsequent year, even if it be within five years, new investment is made so as to reduce the proportion of the value of the old assets below 20 per cent. Therefore, the eligibility stands determined in the initial assessment year and once an industrial undertaking is found eligible in the initial year of manufacture, such benefit could be availed of in any of the succeeding four years. In the present case, admittedly, the assessee being not eligible in the initial year, the question of granting exemption in subsequent years does not arise. We, therefore, respectfully disagree with the decision of the Gujarat High Court [1977 (7) TMI 27 - GUJARAT HIGH COURT] and answer the question in the negative and in favour of the Revenue. Issues Involved: The judgment deals with the eligibility criteria for claiming relief under section 80J of the Income-tax Act, 1961, specifically focusing on whether an industrial undertaking that did not meet the prescribed conditions in the initial year of manufacture can claim the relief if the conditions are fulfilled in subsequent years.Details of the Judgment:Issue 1: Eligibility Criteria for Relief under Section 80J The judgment addresses the contention raised by the Revenue that the benefit of tax concession under section 80J is subject to conditions outlined in sub-sections (2) and (4) of the Act. Sub-section (4)(ii) specifies that the new industrial undertaking must not be formed by the transfer of machinery or plant exceeding 20% of the total value of assets used in the business. The Tribunal, following a decision of the Gujarat High Court, held that the relief can be available for five consecutive years, even if the conditions are not met in the initial year, provided they are fulfilled in subsequent years. However, the Court disagreed with this interpretation, emphasizing that eligibility is determined in the initial assessment year, and if the conditions are not met then, the exemption cannot be granted in subsequent years.Issue 2: Interpretation of 'Formed' in Section 80J(4)(ii) The judgment delves into the interpretation of the term 'formed' in section 80J(4)(ii) and Explanation 2, which provides an arithmetical formula to ascertain compliance with the condition regarding the transfer of old assets to the new business. It clarifies that if the value of transferred assets exceeds 20%, the relief would not be available, but if it is within or less than 20%, the relief can be claimed. The Court emphasizes that the eligibility for exemption must be assessed in the initial assessment year, and subsequent investments to reduce the proportion of old assets below 20% do not impact the initial determination of eligibility.Conclusion: The Court, disagreeing with the Gujarat High Court's decision, ruled that once an industrial undertaking is found ineligible in the initial year, the exemption cannot be availed of in subsequent years. Therefore, the judgment answers the question in the negative and in favor of the Revenue.