2017 (7) TMI 498 - HC - Income Tax

High Court grants Section 80IB deduction for Units I & II, directs reassessment under Section 80IA. Revenue's appeals dismissed.

The High Court allowed the Assessee's appeals, granting the deduction under Section 80IB for both Unit-I and Unit-II. The Court directed the Assessing ... Deduction u/s 80IB - Held that:- The mere fact that nut blanks were purchased from Unit I cannot be a reason to deny deduction under Section 80IB, vis-a-vis Unit II. The deduction is made available to the Assessee, vis-a-vis Unit II, as it fits the attributes of an industrial undertaking and not to the Assessee per se. As long as the Assessee has invested a substantial amount in setting up an industrial undertaking, which is separate and distinct, it is entitled to claim the said deduction. The substantial expansion of Unit I or even, if, Unit II is concerned as an expanded form of Unit I, which, for the reasons given above, is clearly substantial, it cannot be denied deduction under Section 80IB of the 1961 Act. The fact that it has used raw material, i.e., nut blanks, which have been supplied by Unit I, cannot come in the way of one reaching a conclusion that it is a separate and independent unit. This proposition can be better explained by the following illustration. Say for example, the Assessee had established Unit II, in another company or entity, would the Revenue, then, be able to deprive such an entity of exemption under Section 80IB of the 1961 Act. The distinction, separateness and independence of an industrial undertaking cannot be made dependent only on the attribute of ownership. Therefore, for all these reasons, we are of the view that both CIT(A)s as well as the Tribunal were wrong in concluding that the Assessee could not claim deduction under Section 80IB of the 1961 Act vis-a-vis Unit II. Computation made by the Assessing Officer in respect of deduction claimed by the Assessee under Section 80IA - Held that:- Therefore, according to us, in computing the deduction claimed by the Assessee under Section 80 IA of the 1961 Act, the Assessing Officer ought to have treated the two power divisions as a separate undertakings and furthermore, desisted from setting off the losses of earlier years against the profits of the Assessment Years in issue, by bringing them forward notionally, despite the fact that they had already been set off, as claimed by the Assessee in the earlier years. Issues Involved:1. Claim of deduction under Section 80IB of the Income Tax Act, 1961.2. Computation of deduction under Section 80IA of the Income Tax Act, 1961.Issue 1: Claim of Deduction under Section 80IBThe appeals revolve around the claim of deduction under Section 80IB of the Income Tax Act, 1961, by the Assessee for two units, Unit-I and Unit-II. The Revenue contended that the units were formed by splitting and/or reconstruction of an existing undertaking, thus disqualifying them from the deduction. The Assessing Officers denied the relief for both units on these grounds. The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeals, granting a 25% deduction for Unit-I and scaling down the deduction for Unit-II from 100% to 25%, reasoning that Unit-II was not an independent unit. The Tribunal upheld the CIT(A)'s decisions.The High Court examined whether the Assessee's units were formed by splitting or reconstruction and whether they carried out manufacturing activities. The Court found that Unit-I was not formed by splitting or reconstruction and performed the vital function of nut tapping, thus qualifying for the deduction. For Unit-II, the Court noted substantial investments, separate labor, distinct premises, and separate licenses, indicating it was a separate and distinct industrial undertaking. The Court concluded that the mere fact that Unit-II purchased nut blanks from Unit-I did not disqualify it from the deduction, as long as it met the conditions of being a separate and distinct industrial undertaking.Issue 2: Computation of Deduction under Section 80IAThe second issue involved the computation of deduction under Section 80IA, where the Assessee was aggrieved by the Assessing Officer's method of squaring off losses of earlier years against the profits of the current years. The High Court referred to the Division Bench's judgment in Velayudhaswamy Spinning Mills Pvt. Ltd. v. Assistant Commissioner of Income Tax, which held that the Revenue cannot notionally bring forward losses of earlier years that have already been set off against other income. The Court applied this principle, directing the Assessing Officer to re-compute the deduction without bringing forward such losses.Conclusion:1. The High Court allowed the Assessee's appeals, granting the deduction under Section 80IB for both Unit-I and Unit-II, and directed the Assessing Officer to re-compute the deduction under Section 80IA in accordance with the principles laid down by the Division Bench.2. The Revenue's appeals were dismissed, and the questions of law were answered in favor of the Assessee and against the Revenue.