Court rules full relief under section 80J applies regardless of operational period

The Court, aligning with the interpretations of the Madras and Karnataka High Courts, held that the deduction under section 80J cannot be reduced proportionately based on the period of operation. The relief at 6% per annum on the capital employed is available for each year of operation, and once the capital is determined, the exemption must be extended regardless of the duration of operation during the relevant year. The Court answered the reference question affirmatively and in favor of the assessee, emphasizing entitlement to full relief under section 80J without restriction to the operational period.

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Issues:
Interpretation of Section 80J of the Income-tax Act, 1961 regarding deduction for new industrial undertakings.

Detailed Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the entitlement of the assessee to full relief under section 80J without restricting it to the period during which the industrial unit had worked. The Assessing Officer (AO) rejected the claim for relief under section 80J as the new industrial unit had operated for only one month during the relevant accounting year. The Appellate Assistant Commissioner (AAC) directed full relief under section 80J, but the Income Tax Officer (ITO) restricted it to 1/12th of the total relief. The Tribunal held that the relief under section 80J should be allowed on a full-year basis at the rate of 6% on the capital employed, irrespective of the period the industrial unit had worked during the year.

The main issue revolved around the interpretation of the term "per annum" in section 80J(1) of the Act. The Tribunal interpreted "per annum" to mean "yearly" and held that the relief should not be reduced proportionately based on the period of operation of the industrial unit. The purpose of section 80J is to encourage the establishment of new industrial undertakings by providing tax exemption for the first five years of operation. The relief of 6% per annum on the capital employed is intended to be available annually for each year of operation, without prorating based on the actual working period.

Various High Courts have provided interpretations on this issue. The Madras High Court held that "per annum" ensures the assessee receives 6% on the capital employed for each of the five years. The Madhya Pradesh High Court observed that section 80J does not provide for reduction of deduction based on the working period. The Karnataka High Court also emphasized that "per annum" indicates the yearly rate without implying pro-rating. However, the Delhi High Court's observation on proportionate reduction was considered obiter and not directly related to the issue at hand.

The Court, in line with the interpretations of the Madras and Karnataka High Courts, held that the deduction under section 80J cannot be reduced proportionately based on the period of operation. The relief at 6% per annum on the capital employed is available for each year of operation, and once the capital is determined, the exemption must be extended regardless of the duration of operation during the relevant year.

The Central Board of Direct Taxes' circular also supported the interpretation that "per annum" in section 80J means the relief should be available annually without prorating based on the period of operation. The Court answered the reference question in the affirmative and in favor of the assessee, emphasizing the entitlement to full relief under section 80J without restriction to the operational period.

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