Tribunal upholds deduction under Section 80IC, clarifies 80:20 ratio requirement

The tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision, allowing the deduction under Section 80IC of the Income Tax Act. It was ruled that the 80:20 ratio requirement for new versus used machinery applies only in the year of formation of the unit and not in subsequent years. The decision emphasized that subsequent years should focus on yearly compliance conditions, and unless prior years' deductions are disturbed, subsequent deductions should not be disallowed. The judgment was issued on January 3, 2019.

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Issues Involved:
1. Deduction under Section 80IC of the Income Tax Act, 1961.
2. Compliance with conditions specified in Section 80IC(4) of the Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IC of the Income Tax Act, 1961:
The primary issue in this case revolves around the entitlement of the assessee-company to claim a deduction of Rs. 5,71,71,244 under Section 80IC of the Income Tax Act, 1961. The assessee, engaged in manufacturing M.S. Steel press parts for automobiles, filed a return for the assessment year 2012-13, declaring a total income of Rs. 6,42,54,360 after claiming the aforementioned deduction. The case was selected for scrutiny, and the assessment was completed with an addition of Rs. 5,71,71,244, disallowing the deduction under Section 80IC.

The Revenue's grievance pertains to the allowance of this deduction by the Ld. CIT(Appeals), who upheld the assessee's claim. The CIT(A) noted that the assessee had been claiming this deduction since AY 2009-10 and that the bonafides of the Rudrapur unit were not challenged in previous years. The CIT(A) concluded that the condition of the 80:20 ratio regarding new versus used machinery should only be satisfied in the first year of formation of the undertaking and not in subsequent years.

2. Compliance with Conditions Specified in Section 80IC(4) of the Act:
The Revenue contended that the assessee failed to fulfill the conditions laid down in Section 80IC(4), which necessitates maintaining the 80:20 ratio of new machinery to used machinery. The Assessing Officer (AO) argued that this condition should be met every year, not just in the initial year of formation.

However, the CIT(A) and the appellate tribunal found that the conditions related to the formation of the unit, including the 80:20 ratio, should only be tested in the first year. Subsequent years should focus on yearly compliance conditions such as audit reports and profit tests. The CIT(A) referenced several case laws and judicial decisions, including the Hon'ble Bombay High Court's ruling in CIT v. Western Outdoor Interactive P Ltd, which supports the view that unless prior years' deductions are disturbed, subsequent years' deductions should not be disallowed.

The tribunal upheld the CIT(A)'s decision, emphasizing that the test of new machinery vis-à-vis old machinery applies only in the year of formation and not in subsequent years. Consequently, the assessee's claim for deduction under Section 80IC for the year under consideration was deemed justified.

Conclusion:
The appeal by the Revenue was dismissed, and the order of the CIT(A) allowing the deduction under Section 80IC was upheld. The tribunal confirmed that the conditions related to the formation of the unit need to be satisfied only in the first year, and subsequent years should focus on compliance conditions. The decision was pronounced on January 3, 2019.

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