1986 (7) TMI 57 - HC - Income Tax

High Court affirms 6% deduction for soft drink company, encouraging new enterprises.

The High Court upheld the decision to allow a deduction under section 80J of the Income-tax Act at the rate of 6% per annum for the entire accounting year ... Deduction U/S 80J, New Industrial Undertaking Issues:Interpretation of deduction under section 80J of the Income-tax Act for a private limited company engaged in bottling and selling soft drinks during the assessment year 1976-77.Analysis:The High Court of Madhya Pradesh was presented with a reference under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, Indore Bench, regarding the justification of allowing a deduction under section 80J of the Act to the assessee at the rate of 6% per annum for the entire accounting year. The assessee, a private limited company involved in the business of bottling and selling soft drinks, had claimed this deduction for the assessment year 1976-77, specifically related to the accounting year ending on March 31, 1976. The Income-tax Officer initially allowed the claim for only three days, rejecting the claim for the entire accounting year. However, on appeal, the claim was allowed by the Commissioner of Income-tax (Appeals), leading the Revenue to file a second appeal before the Tribunal, which upheld the decision of the Commissioner of Income-tax (Appeals) and dismissed the appeal.The key issue revolved around the interpretation of section 80J of the Income-tax Act, which provides for a deduction from profits and gains derived from an industrial undertaking at the rate of 6% per annum on the capital employed in the industrial undertaking. The High Court referred to a previous decision in CIT v. Sanghi Beverages (Pvt.) Ltd., where it was held that the deduction under section 80J should be allowed to the full extent even if the industrial undertaking operated for less than twelve months in the accounting year. The court emphasized that the provisions of section 80J are meant to encourage the establishment of new industrial enterprises and should be construed liberally. Therefore, the deduction at 6% per annum was deemed admissible for the full year, regardless of the duration of operation during that year.Based on the precedent set by the earlier decision and the liberal interpretation of section 80J, the High Court concluded that the Tribunal was justified in upholding the decision of the Commissioner of Income-tax (Appeals) to allow the deduction at the rate of 6% per annum for the entire accounting year. Consequently, the reference was answered in the affirmative and against the Revenue, with each party bearing their own costs in this matter.