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Rockweld Electrodes India Ltd. v. Commissioner Of Income-Tax.

Madras High Court

Mar 14, 1990

Judgment

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Summary of Judgment — Tax Case No. 533 of 1979 (Reference No. 296 of 1979)

Factual and Procedural Background

The assessee is a company that claimed a deduction under section 80J of the Income-tax Act, 1961, of Rs. 1,88,794 for the assessment year (AY) 1973-74. The Income-tax Officer (ITO) denied the deduction on the ground that the tax holiday period, beginning with the initial assessment year 1968-69, had expired with AY 1972-73 and thus AY 1973-74 fell outside the four assessment years immediately succeeding the initial year.

The assessee appealed to the Appellate Assistant Commissioner, who upheld the ITO's decision. The assessee then appealed to the Income-tax Appellate Tribunal (Tribunal), which also held that the assessee was not entitled to relief under section 80J for AY 1973-74 and confirmed the orders below.

Under section 256(1) of the Income-tax Act, the Tribunal referred the following question to the High Court for opinion: whether AY 1973-74 fell outside the four assessment years immediately succeeding the initial assessment year 1968-69 as envisaged under section 80J(2).

Relevant factual detail: the assessee had previously changed its accounting (previous) year by permission of the ITO (order dated May 28, 1970, under section 3(4)), adopting May 31, 1970 as its new year end so that the period January 1, 1969 to May 31, 1970 was assessed in AY 1971-72. As a result of that change, no assessment was made for AY 1970-71.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment year 1973-74 fell outside the limit of the four assessment years immediately succeeding the initial assessment year 1968-69 as envisaged under the provisions of section 80J(2) of the Income-tax Act, 1961?

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee's counsel submitted that there was no assessment for AY 1970-71 because of the permitted change in the previous year (from December 31, 1969 to May 31, 1970), so the income for January 1, 1969 to May 31, 1970 was assessed in AY 1971-72.
Accordingly, the assessee contended that AY 1971-72 should be treated as the assessment year immediately succeeding the initial AY 1968-69 for the purposes of section 80J(2). If so construed, AY 1973-74 would be the fourth immediately succeeding assessment year and thus within the relief period under section 80J(2).
The assessee's position was that an assessment year in which no assessment is made should not be regarded as an "assessment year" for the purpose of counting the four immediately succeeding years under section 80J(2).

Respondent's (Revenue's) Arguments

The standing counsel for the Revenue contended that "assessment year" is a statutory term defined in section 2(9) and the four assessment years immediately succeeding the initial assessment year 1968-69 are the fixed years 1969-70, 1970-71, 1971-72 and 1972-73.
The Revenue argued that whether an assessment was actually made in any particular assessment year does not alter the fact that the year is an "assessment year" as defined and therefore the tax relief under section 80J(2) was exhausted with AY 1972-73.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Simpson and Co., [1980] 122 ITR 283 at p. 287	Principle that expressions like "per annum" cannot be broken into parts; and a well‑settled rule that exemptions or reliefs should be liberally construed.	The court observed that Simpson's principle of liberal construction of reliefs does not assist the assessee because there was no ambiguity in the wording of section 80J(2); the provision admits a plain reading.
Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras, [1961] 41 ITR 397, 404 (Mad)	Exemption must be confined to profits or gains derived from the undertaking; cannot extend to other businesses contrary to clear intent of the statute.	The court regarded this decision as supportive of the Revenue's submission that statutory language must be given its clear scope and not extended beyond its intendment.
CIT v. Satellite Engineering Ltd., [1978] 113 ITR 208 at p. 215 (Gujarat High Court)	Statutory expressions should be understood in a sense that harmonises with the object of the statute and effectuates the Legislature's intent.	The court invoked this rule to support interpreting the statutory term "assessment year" as prescribed by the Act (i.e., calendar assessment years in sequence) rather than with reference to the particular circumstances of an assessee.
Capsulation Services Pvt. Ltd. v. CIT, [1973] 91 ITR 566 at p. 570 (Bombay High Court)	While exemptions must be construed reasonably and, if possible, liberally in favour of the assessee, the assessee must strictly come within the terms of the provision under which exemption is claimed; construction must not violate language used.	The court noted this canon but applied it consistently with the plain language of section 80J(2), concluding that the statutory sequence of assessment years governs eligibility.
Hurling v. Celynen Collieries Workmen's Institute, [1940] 23 TC 558 (CA)	The phrase "the six following years of assessment" (in that statute) means the six years immediately following the year in which the loss is sustained—i.e., consecutive natural sequence of assessment years.	The court relied on this decision to underline the established approach that reliefs limited to a specified number of consecutive assessment years are to be taken in natural chronological sequence, irrespective of whether a particular assessee had taxable income or an assessment in any given year.

Court's Reasoning and Analysis

The court proceeded by construing the statutory language and applying the relevant statutory definitions and provisions stated in the record:

The court noted the statutory definition of "assessment year" in section 2(9) of the Act: it means the period of twelve months commencing on the first day of April every year.
Section 4 (the charging section) was cited to explain that income-tax is charged in respect of the total income of the previous year(s) for any assessment year; the court observed that the mechanism for charging tax is founded on the statutory assessment year construct.
Factual chronology was accepted from the record: the initial assessment year under section 80J(2) was AY 1968-69. The assessee changed its previous year by order under section 3(4) to May 31, 1970, so the period January 1, 1969 to May 31, 1970 was assessed in AY 1971-72. Consequently, no assessment was made for AY 1970-71 because the changed previous year did not fall within the financial year preceding AY 1970-71.
The court emphasized that the phrase "four assessment years immediately succeeding the initial assessment year" in section 80J(2) must be understood in accordance with the Act's definition of assessment year and in natural chronological sequence—i.e., the calendar assessment years immediately following AY 1968-69 are AY 1969-70, AY 1970-71, AY 1971-72 and AY 1972-73.
The court considered the assessee's contention that a year in which no assessment is made should not be counted, but concluded that the statutory concept of "assessment year" is not to be individualized according to whether an assessment actually takes place in that year for a particular assessee.
The court reviewed authorities cited by the parties. It found that principles cited (including that reliefs are to be construed liberally) did not create ambiguity in section 80J(2) and thus did not assist the assessee. Other authorities were used to support the proposition that where relief is confined to a specified number of consecutive assessment years, the years are to be taken in their natural sequence.
On that basis, the court concluded that the relief under section 80J(2) was available only up to AY 1972-73 and AY 1973-74 falls outside the four immediately succeeding years; therefore, the assessee was not entitled to the claimed deduction for AY 1973-74.

Holding and Implications

Holding:

The question referred under section 256(1) is answered in the affirmative and against the assessee. The court held that AY 1973-74 falls outside the four assessment years immediately succeeding the initial assessment year 1968-69, and the assessee is not entitled to the deduction under section 80J(2) for AY 1973-74.

Direct consequences and implications:

The relief under section 80J(2) was exhausted with AY 1972-73; AY 1973-74 is not covered by the four immediately succeeding assessment years and the assessee's claim for that year fails.
The court directed the assessee to pay costs to the Revenue, fixing counsel's fee at Rs. 500.
The decision applies the established rule that when relief is limited to a specified number of consecutive assessment years, those years are to be counted in natural chronological sequence as defined by the Act. The court did not purport to create a novel precedent but applied existing interpretative principles to the plain language of section 80J(2).

Show all summary ...

Tax Case No. 533 of 1979 (Reference No. 296 of 1979)

Decided on March 14, 1990

The Judgment of the Court was delivered by

Thanikkachalam, J.:— At the instance of the assessee, the Tribunal, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), referred the following question to this court for our opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment year 1973-74 fell outside the limit of the four assessment years immediately succeeding the initial assessment year 1968-69 as envisaged under the provisions of section 80J(2) of the Income-tax Act, 1961?”

2. The assessee is a company. In the assessment year 1973-74, the assessee claimed relief under section 80J of the Income-tax Act, 1961, of Rs. 1,88,794. The Income-tax Officer held that the assessee is not entitled to relief under section 80J of the Act for the assessment year 1973-74 and his reasoning is as under:

“The assessee has claimed relief under section 80J of Rs. 1,88,794. The tax holiday period expired with the assessment year 1972-73, the first year being 1968-69. The assessee was allowed to change its accounting year from December 31, 1969, to May 31, 1970, with the result there was no taxable income for assessment for the assessment year 1970-71. However, for the purpose of calculation of four immediately succeeding assessment years to the initial year of 1968-69, the assessment year 1970-71 is also reckoned.”

3. Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner contending that actually there was no assessment for the assessment year 1970-71 and hence the Income-tax Officer was not justified in including the assessment year 1970-71 also for the purpose of calculating the number of years during which the assessee was entitled to deduction under section 80J. However, the Appellate Assistant Commissioner rejected the contentions put forward by the assessee and confirmed the order passed by the Income-tax Officer. As against the order passed by the Appellate Assistant Commissioner the assessee filed an appeal before the Tribunal. The Tribunal, after considering the various provisions relevant for deciding this issue, ultimately came to the conclusion that the assessee is not entitled to the relief under section 80J for the assessment year 1973-74. Accordingly, it confirmed the order passed by the authorities below on this point. Before us learned counsel appearing for the assessee submitted that the assessment year 1968-69 was the initial assessment year in which the relief was allowed and thereafter relief was allowed for the assessment year 1969-70. But as there was a change in the previous year from calendar year to the year ended on May 31, 1970, there was no assessment in relation to the previous year ended December 31, 1969, and the income for the period January 1, 1969, to May 31, 1970, was assessed for the assessment year 1971-72. Since there was no assessment for the assessment year 1970-71, the assessee's counsel submitted that the assessment year 1971-72 has to be construed as the assessment year immediately succeeding year in relation to the initial assessment year 1968-69. If that is so, the assessment year 1972-73 would be the third year and the assessment year 1973-74 now under consideration would be the fourth immediately succeeding assessment year. According to learned counsel for the assessee, if, in any one of the particular assessment years there is no assessment, that particular assessment year is not an assessment year as contemplated under section 80J of the Act.

4. On the other hand, learned standing counsel for the Revenue contended that the term “assessment year” is a well-defined term and the four (assessment years immediately succeeding the initial assessment year 1968-69 would be assessment years 1969-70, 1970-71, 1971-72 and 1972-73 and hence the relief obtained by the assessee got exhausted in the assessment year 1972-73 itself and, consequently, the assessee is not entitled to the relief under section 80J(2) of the Act for the assessment year 1973-74. Learned standing counsel further contended that the fact that in the case of the assessee, for the assessment year 1970-71, no assessment was made, would not make the assessment year 1970-71 as not an assessment year.

5. We have heard the rival submissions, The assessee claimed the relief under section 80J(2) of the Act for the assessment year 1973-74 which reads as under:

“(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year.”

6. What is meant by assessment year is defined under section 2(9) of the Act as under:

“‘assessment year’ means the period of twelve months commencing on the first day of April every year.”

7. In this case, it is not disputed that the initial assessment year as referred to in section 80J(2) was the assessment year 1968-69 consisting of a period of twelve months commencing from April 1, 1968. Section 4 of the Act is the charging section, which reads as under:

“4.(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.”

8. Section 4, which is the charging section, provides that income-tax shall be charged for any assessment year in respect of the total income of the previous year or previous years, as the case may be of a person.

9. So far as the assessee is concerned, the previous year for the assessment year 1968-69 ended on November 30, 1967. There was a change allowed in the previous year for the next assessment year 1969-70 and the previous year ended on December 31, 1968 in relation to the assessment year 1969-70. The assessee should have closed the accounts normally on December 31, 1969, in which case the assessment would have been made for the assessment year 1970-71. But the assessee sought permission to close the accounts on May 31, 1970, for the period of January 1, 1969, to May 31, 1970. the Income-tax Officer permitted the assessee to follow the above-said course by passing an order dated May 28, 1970, under section 3(4) of the Act. The order of the Income-tax Officer in this respect reads as under:

“M/s. Rockweld Electrodes India Limited, 2.C, Moores Road, Madras-6, is permitted to adopt 31st May, 1970, as the previous year in respect of the assessment year 1071-72, and, thereafter, 31st May subject to the condition that the company shall offer income for the period of 17 months ending on 31st May, 197 ((from January 1, 1969, to May 31, 1970), for the assessment year 1971-72.

Depreciation will be allowed in accordance with the proviso to rule 5 of the Income-tax Rules, 1962.”

10. The facts, therefore, remain that for the assessment year 1971-72 income for the period January 1, 1969, to May 31, 1970, was assessed, for the, assessment year 1972-73 income from June 1, 1970, to May 31, 1971 was assessed and for the year 1973-74 the income which was brought to tax was of the previous year starting from June 1, 1971, and ending with May 31, 1972. Therefore, no assessment was made for the year 1970-71 due to change allowed in the previous year. That is because the last date of the changed previous year did not fall within the financial year preceding the assessment year 1970-71. So far as the present case is concerned, the initial assessment year is 1968-69 and the four assessment years immediately succeeding the initial assessment years are 1969-70, 1970-71, 1971-72 and 1972-73. The relief contemplated under section 80J(2) came to an end with the assessment year 1972-73. Therefore, the assessment year 1973-74 falls outside the scope of section 80J(2) of the Act. Hence, the; assessee is not entitled to the relief asked for under section 80J(2) in the assessment year 1973-74. The words “immediately succeeding assessment years” appear in several other provisions such as section 72(3), etc. Under such circumstances, the Tribunal rightly pointed out that the concept of “assessment year” has got to be understood in the manner prescribed under the provisions of the Act and not with reference to a particular assessee as canvassed for by learned counsel appearing for the assessee.

11. Our attention was drawn to a decision of this court rendered in the case of CIT v. Simpson and Co., [1980] 122 ITR 283 at p. 287. In this case, this court while considering the meaning of the words “6% per annum” occurring in section 84 of the Act held as under:

“The words ‘per annum’ cannot be understood as contrasted with any broken period. It is also a well-settled principle of construction that in construing a provision for exemption or relief, it should be liberally construed. The reason behind this rule of interpretation is that the administrative authorities or the courts should not whittle down the plenitude of the exemption or relief granted by Parliament, by laying stress on any ambiguity here or there.”

12. In the present case, in the matter of understanding the words occurring in section 80J(2) of the Act, there is no room for any ambiguity. The Tribunal came to the abovesaid conclusion only on a plain reading of the provisions contained in section 80J(2) of the Act. Therefore, there is no scope for two interpretations arising in understanding the provisions contained in section 80J(2) of the Act. Therefore, this decision will not render any assistance to the assessee.

13. Another decision brought to our notice was that reported in the case of Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras., [1961] 41 ITR 397, 404 (Mad). This decision is concerned with the relief claimed under section 15C of the 1922 Act. In this case, this court held:

“We have already stated that upon the clear language of the section, the exemption must be confined to the profits or gains derived from the undertaking. To hold otherwise and to agree with the assessee that where an assessee who has commenced an industrial undertaking and also engages in other kinds of business yielding income, section 15C of the Act extends to granting exemption in respect of profits or gains derived from sources other than the industrial undertaking, would not only be against the clear intendment of the section but would also be opposed to any principle that we can conceive of.”

14. This decision in fact in a way supports the submissions made by learned standing counsel for the Department. In this context, there is also another decision of the Gujarat High Court reported in CIT v. Satellite Engineering Ltd., [1978] 113 ITR 208 at page 215, wherein the Gujarat High Court held as under:

“It hardly needs to be stated that it is a recognised rule of interpretation of statutes that the expressions used therein should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the Legislature. In interpreting a statute, the court cannot ignore the aim and object.”

15. So also while interpreting the provisions contained in section 15C(2)(i) of the Indian Income-tax Act, 1922, the Bombay High Court in the case of Capsulation Services Pvt. Ltd. v. CIT, [1973] 91 ITR 566 at page 570 held as under:

“The scheme of the section is to encourage new industrial undertakings provided they fulfil the conditions mentioned in the various clauses of the sub-section. In order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed, but in construing the provisions of this section, one must construe the said section reasonably in the context of the purpose for which the section has been introduced. It is a well-settled canon of construction that the provision relating to exemption must as far as possible be liberally construed and in favour of the assessee provided in doing so no violence was being done to the language used.”

16. Yet another decision relied upon by the Revenue was that reported in the case of Hurling v. Celynen Collieries Workmen's Institute, [1940] 23 TC 558 (CA). According to the facts appearing in that case:

“The respondents, who ran a cinema and dance hall, made up their accounts to 31st December, in each year. They were assessed to income-tax under Schedule D for the year 1937-38 on the profits shown in the accounts for the year 31st December, 1936 (£451) less a loss of £28, incurred in the year to 31st December, 1933, and carried forward under section 33, Finance Act, 1926. The respondents claimed that they were also entitled to set off against the profits assessable in 1937-38, the unexhausted balance, amounting to £426, of a loss of £1,639 incurred in the year to 31st December, 1930. They argued that as there was not and could not be any assessment on profits for the year 1931-32 the ‘six following years of assessment’ against the assessed profits of which the loss might be allowed must run from 1932-33 to 1937-38. The Inspector was not prepared to agree to the deduction claimed, contending that section 33 referred to the actual loss sustained in any year and that relief was allowable ‘as far as may be’ against the assessments for the six years immediately following the year of loss but no further, 1931-32 was the first year subsequent to the year in which the loss was sustained, and it followed that 1936-37 was the sixth and final year for which any relief in respect of the loss of £1,639 could be given.”

17. In these facts, it was held as under:

“‘the six following years of assessment’ referred to in section 33, subsection (i), Finance Act, 1926, are the six years immediately following the year in which the loss is sustained.”

18. Thus it emerges that whenever the assessee is permitted to get relief for a specified number of consecutive assessment years, the courts have consistently held that the assessment years should be taken in natural sequence. In the present case, the assessee got relief under section 80J(2) of the Act for the assessment year 1968-69 and, therefore, the subsequent four assessment years are naturally 1969-70, 1970-71, 1971-72 and 1972-73. Thus, the last assessment year for which the assessee can get deduction under section 80J(2) of the Act would be only the assessment year 1972-73; In the instant case, the assessee changed its accounting year from December 31, 1969, to May 31, 1970, with the result there was no taxable income for the assessment year 1970-71. But it is not necessary for us to consider in this case whether in any of the four subsequent assessment years the assessee had taxable income or he was assessed to tax or not. Hence, the Tribunal was correct in upholding the order passed by the authorities below on this point. In that view of the matter, we answer the question referred to us in the affirmative and against the asses-. see. The assessee is directed to pay the costs to the Revenue. Counsel's fee is fixed at Rs. 500.