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Commissioner Of Income-Tax v. Natraj Stationery Products P. Ltd.
Factual and Procedural Background
The Revenue filed two appeals under section 260A of the Income-tax Act, 1961, against a common judgment dated January 5, 2007, of the Income-tax Appellate Tribunal (Tribunal) in ITA No. 313.Del/2006 and ITA No. 3509.Del/2003 concerning assessment years 2000-01 and 2001-02. The core dispute was whether the respondent/assessee was entitled to a deduction in respect of profits from an industrial undertaking established in the previous year 1993-94 and commencing manufacture on March 24, 1994.
Relevant factual chronology (as stated in the opinion): the assessee set up a manufacturing unit for photo albums, registered as a small scale industrial undertaking (SSI), and incurred losses through assessment year 1997-98. In assessment years 1998-99 and 1999-2000 the assessee earned profits and filed returns claiming deduction (processed under section 143(1)(a)). For assessment year 2001-02 the assessee initially claimed deduction under section 80-IA but then informed the Assessing Officer that the claim was intended under section 80-IB and that the earlier reference to 80-IA was a typographical error. The Assessing Officer disallowed deductions under both sections 80-IA and 80-IB and added Rs. 8,46,602 to income.
The assessee appealed to the Commissioner of Income-tax (Appeals) who dismissed the appeal. The assessee then appealed to the Tribunal which allowed the claim and directed the Assessing Officer to verify eligibility under the earlier applicable statutory conditions (relating to articles not in the Eleventh Schedule and employment thresholds) and grant deduction under section 80-IB if those conditions were satisfied. The Revenue appealed to this court; the court dismissed the appeals and upheld the Tribunal's decision.
Legal Issues Presented
- Whether the respondent/assessee was entitled to claim deduction in respect of profits derived from an industrial undertaking set up in the assessment year 1994-95 (initial assessment year) under the relevant provisions—specifically whether deduction was available under section 80-IB (as pari materia with earlier section 80-IA/80-LA provisions) for the assessment years in dispute.
Arguments of the Parties
Revenue / Assessing Officer's Position
- The Assessing Officer held that the assessee's assertion that the earlier reference to section 80-IA was a mere typographical error could not be accepted because the assessee had consistently claimed under section 80-IA in a variety of filed documents (including a letter dated October 7, 2002, the acknowledgment sheet, computation of income, audit report Form 3CD, and earlier returns for assessment years 1998-99 and 1999-2000).
- The Assessing Officer viewed section 80-IA as a deduction intended for industrial undertakings engaged in infrastructural development and therefore not available to the assessee whose business was manufacturing photo albums.
- Assuming (for argument) the typographical error was bona fide, the Assessing Officer considered the claim under section 80-IB(3)(ii). He concluded the assessee was ineligible under that provision because an SSI undertaking had to commence production between April 1, 1995 and March 31, 2000, whereas the assessee commenced production on March 24, 1994 (per government certificate dated May 11, 1994).
- The Commissioner of Income-tax (Appeals) sustained the Assessing Officer's conclusions and additionally rejected the assessee's plea that an SSI could avail itself of a general clause—holding that where there was a specific clause for an SSI unit, strict compliance with that specific provision was required.
Respondent / Assessee's Position
- The assessee asserted that the industrial undertaking commenced production on March 24, 1994 and that in the initial year (assessment year 1994-95) the law (as it then stood) did not distinguish between small scale undertakings and other industrial undertakings for the purposes of deduction; thus the assessee was entitled to claim deduction in respect of the initial year and for the ten consecutive assessment years commencing with that initial year.
- The assessee maintained that the earlier references to section 80-IA were typographical and that it was entitled to claim under section 80-IB (specifically 80-IB(3)(i)) in consequence of the way the law evolved (including the bifurcation of section 80-IA into sections 80-IA and 80-IB by the Finance Act, 1999, effective April 1, 2000) and the retention of the relevant original entitlement in section 80-IB.
- The assessee contended it had not made a “claim” that required filing a revised return; therefore the ratio of Goetz (India) Ltd. v. CIT (2006) 284 ITR 323 was not applicable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Goetz (India) Ltd. v. CIT, [2006] 284 ITR 323 (Supreme Court) | The opinion references the ratio of Goetz in relation to whether a taxpayer who has made a claim must file a revised return; the Tribunal held that the Goetz ratio was not applicable because the assessee had not made any "claim" requiring a revised return. | The court agreed with the Tribunal that the ratio in Goetz did not apply to the facts of this case and therefore the assessee was not required to file a revised return; accordingly Goetz did not defeat the assessee's entitlement to deductions under section 80-IB(3)(i) as explained in the judgment. |
Court's Reasoning and Analysis
The court reviewed statutory history and the parties' positions, then applied legal principles as follows:
- Statutory context and legislative history: The court traced the origin and amendments of the relevant deduction provisions—beginning with insertion of section 80-LA by the Finance (No. 2) Act, 1991, subsequent amendments up to the Finance Act, 1999 which bifurcated section 80-IA into sections 80-IA and 80-IB with effect from April 1, 2000. The court identified that deductions available under the earlier section 80-IA(2)(iv)(a) were preserved in section 80-IB(3)(i) after bifurcation.
- Analysis of the initial year: The court emphasized that for the initial year (assessment year 1994-95) the law did not distinguish between an SSI unit and other industrial undertakings for entitlement to deduction under the then-applicable provision (section 80-IA(2)(iv)(a)). Because the assessee commenced production on March 24, 1994, it satisfied the temporal requirement of the initial-year provision.
- Assessment of Assessing Officer's and CIT(A)'s approach: The court found error in the Assessing Officer's and CIT(A)'s conclusion that the assessee was ineligible. The AO had (a) rejected the typographical error explanation on the basis of consistency of documents, and (b) treated the matter under section 80-IB(3)(ii) applicable to SSI undertakings which required commencement between April 1, 1995 and March 31, 2000. The court observed that this approach overlooked the relevant state of law as it stood in the initial year (1994-95) and failed to account for the legislative continuity of the original entitlement through the bifurcation enacted in 1999.
- Tribunal's conclusion upheld: The Tribunal correctly identified that the entitlement under the earlier provision (as applicable in the initial year) had been retained by the legislature under section 80-IB(3)(i). Consequently, the Tribunal allowed the assessee's claim (subject to verification of other substantive statutory conditions such as whether the articles produced were not specified in the Eleventh Schedule and whether required employment thresholds were met) and directed the Assessing Officer to verify those conditions.
- Application of Goetz: The court agreed with the Tribunal that Goetz did not apply because the assessee had not made a "claim" necessitating a revised return; hence no requirement to file a revised return arose under the facts of the case.
- Conclusion on questions of law: The court found no substantial question of law arose for consideration and thus declined to interfere with the Tribunal's decision.
Holding and Implications
Holding: The appeals filed by the Revenue are dismissed.
Implications and consequences:
- The Tribunal's judgment allowing the assessee's entitlement to deduction under section 80-IB(3)(i) (as pari materia with the earlier provision applicable in the initial year) is upheld.
- The Assessing Officer's and the Commissioner of Income-tax (Appeals)'s disallowance of deductions under sections 80-IA and 80-IB(3)(ii) for the assessment years in question is set aside; the Assessing Officer is directed (as the Tribunal had ordered) to verify whether the assessee fulfills the conditions applicable in the initial year (such as manufacture of articles not specified in the Eleventh Schedule and compliance with employment requirements) and, if so, to allow the deductions for the ten-year period commencing with the assessment year 1994-95.
- The court expressly found that the ratio of Goetz (India) Ltd. v. CIT was not applicable to these facts and therefore the assessee was not required to file a revised return in the circumstances of this case.
- No new precedent was stated to arise from this decision: the court noted that no question of law, let alone a substantial question of law, had arisen for consideration.
Rajiv Shakdher, J.:— These appeals under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), are preferred by the Revenue against a common judgment dated January 5, 2007, passed by the Income-tax Appellate Tribunal (hereinafter referred as “the Tribunal”) in ITA No. 313.Del/2006 and ITA No. 3509.Del/2003, in respect of the assessment years 2000-01 and 2001-02, respectively. These two appeals are being disposed of by this common judgment.
2. The short issue which arose for consideration before the Tribunal was whether the respondent/assessee was entitled to deduction as claimed, in respect of the profits derived from an industrial undertaking set up in the assessment year 1994-95. The Tribunal came to the conclusion that the respondent/assessee was entitled to the claim made by it for the reasons given in the impugned judgment. We are of the view that the impugned judgment of the Tribunal deserves to be sustained for the reasons given hereinafter. Before we elucidate the reasons for arriving at such a conclusion, the following undisputed brief facts require to be noted:
The respondent/assessee in the previous year 1993-94 had set up an industrial undertaking for the purpose of manufacture of photo albums. The respondent/assessee commenced manufacture on March 24, 1994. The respondent/assessee also got itself registered as a small scale industrial undertaking.
3. In the assessment year 1994-95, which was the first and the initial year, the assessee suffered a loss. The respondent/assessee continued to suffer losses till the assessment year 1997-98. Consequently, the assessee did not claim any deduction, in particular under section 80-IA of the Act, as it appeared on the statute book at the relevant point in time, till the assess ment year 1997-98. In the assessment years 1998-99 and 1999-2000, the respondent/assessee having earned profits, filed a return claiming a deduc tion under the relevant provision as it then stood, by filing a return of income. The return was processed by the Revenue under section 143(1)(a) of the Act. Similarly, in the assessment year 2001-02, the assessee claimed deduction in the first instance under section 80-IA of the Act. It was when the Assessing Officer required the respondent/assessee to give a detailed note with respect to its claim for deduction under section 80-IA of the Act, that the respondent/assessee, vide a response dated December 19, 2002, informed the Assessing Officer that it had wrongly claimed deduction under section 80-IA, even though, it was entitled to deduction under section 80-IB. The assessee stated that this mistake had occurred due to a typographical error.
4. The Assessing Officer, vide an order dated December 30, 2002, disallowed the claim of the assessee for deduction both under section 80-IA and section 80-IB of the Act. The Assessing Officer was of the view that the stand of the respondent/assessee that it had claimed a deduction under section 80-IA of the Act on account of a typographical error could not be accepted on the ground that it had consistently in the documents filed with the Revenue; which included, a letter dated October 7, 2002, acknowledgment sheet of the return of income for the assessment year 2001-02; computation of income filed along with the return; audit report (Form 3CD) and, in returns for the assessment years 1998-99 and 1999-00, claimed deductions under section 80-IA. The Assessing Officer came to the conclusion that a deduction under section 80-IA was granted to an industrial undertaking which was engaged in the business of infrastructural development and since, the assessee was in the business of manufacturing of photo albums, the same deduction was not available to it.
5. The Assessing Officer thereafter proceeded to examine the respondent/assessee's claim under section 80-IB on an assumption that the respondent/assessee's claim of typographical error was bona fide. In examining the claim under the provisions of section 80-IB (3) (ii), the Assessing Officer noted that in order to be eligible for deduction, an undertaking which was a small scale industrial undertaking had to commence the production at any time during the period beginning on April 1, 1995, and ending on March 31, 2000. The Assessing Officer having noted the fact, based on certificate dated May 11, 1994, granted by the Government of Haryana, that the assessee commenced the production on March 24, 1994, came to the conclusion that it was not entitled to the deduction as it had commenced production outside the defined statutory period. Consequently, the respondent/assessee's claim for deductions both under sections 80-IA and 80-IB was disallowed and a sum of Rs. 8,46,602 was added back to the income.
6. Aggrieved by the order of the Assessing Officer, the respondent/assessee preferred an appeal to the Commissioner of Income-tax (Appeals)-XVI, New Delhi (hereinafter referred to as “the CIT(A)”). The Commissioner of Income-tax (Appeals) dismissed the appeal of the respondent/assessee and, in particular, rejected the plea of the respondent/assessee that it was entitled to a deduction under sub-section 3(i) of section 80-IB on the ground that when there was a specific clause and provision for a small scale industrial (in short SSI) unit, the assessee could not take benefit of the general clause and this being a beneficial clause, strict compliance will have to be made for being accorded benefit under the Act. The Commissioner of Income-tax (Appeals) sustained the order and reasoning of the Assessing Officer in respect of the respondent/assessee's claim under sub-section (3)(ii) of section 80-IB, as well as section 80-IA.
7. The respondent/assessee being aggrieved, preferred an appeal to the Tribunal. The Tribunal after noting the submissions of the respondent/assessee, in paragraph No. 4 of the impugned judgment, arrived at a conclusion that the respondent/assessee was entitled to deduction under section 80-IB(3)(i) as it was in pari materia with the provisions contained in section 80-LA(2)(iv), as it stood in the initial year, i.e, the assessment year 1994-95. The Tribunal noted that the respondent/assessee had forgone its claim of extra benefit granted to a SSI unit. The Tribunal further observed that in these circumstances, if the condition as mentioned in section 80-IA(2)(iii) of the Act, as applicable in the initial year, which is, that it produces or manufactures any article or thing not being an article or thing specified in the list in the Eleventh Schedule, is satisfied, then the assessee will be entitled to deduction for a period of ten years starting from the assessment year 1994-95 provided the other condition regarding the employment of requisite number of persons is also satisfied. The Tribunal, thus, directed the Assessing Officer to verify the respondent/assessee's eligibility for deduction in the year under consideration in terms of articles or things produced and the number of persons employed in the process of manufacture, and if the said conditions were satisfied, the Assessing Officer was directed to grant deductions to the assessee under section 80-IB of the Act.
8. Having heard learned counsel both for the Revenue as well as the assessee and perused the record, our reasons for arriving at the conclusion, which we have, are as follows.
9. The deduction with respect to the profits and gains from industrial undertaking in certain stated cases as enumerated in the section was brought on the statute book by virtue of the Finance (No. 2) Act, 1991, by insertion of section 80-LA with effect from April 1, 1991. This provision has undergone amendment several times. For the purpose of the disposal of the present appeal, it would be sufficient, if a note is made of the fact that the section was amended by the Finance Act, 1992, with effect from April 1, 1993, thereafter by the Finance Act, 1993, with effect from April 1, 1994, then the Finance Act, 1994, with retrospective effect from April 1, 1994, and with effect from April 1, 1995, then by the Finance Act, 1995, with effect from April 1, 1996, then by the Finance (No. 2) Act, 1996, with effect from April 1, 1997, by the Finance Act, 1997, with retrospective effect from April 1, 1996, and with effect from April 1, 1998, and then the Income-tax (Amendment) Act, 1998, with retrospective effect from April 1, 1995, and with effect from April 1, 1998, and the Finance (No. 2) Act, 1998, with retrospective effect from April 1, 1998, and with effect from April 1, 1999, etc.
10. In the present case, even though it is an admitted fact that the respon-dent/assessee commenced production on March 24, 1994, it did not claim deduction in the initial year relevant to the assessment year 1994-95, and thereafter, till the assessment year 1997-98 in view of the fact that both in the initial year and the three succeeding years, it had not earned any profit. In the fifth and sixth year relevant for the assessment years 1998-99 and 1999-2000, the respondent/assessee had claimed deductions under section 80-LA and the Assessing Officer accepted the return under section 143(1)(a) of the Act. The Assessing Officer, however, disallowed the deductions as claimed by the respondent/assessee for the assessment year 2001-02.
11. In these circumstances, it would be relevant to note the provision for deduction as it stood from April 1, 1991, till its amendment by the Finance Act, 1993, with effect from April 1, 1994. The same reads as follows:
“80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship (such business being hereinafter referred to as the eligible business), to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6).
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:—
(iv) it begins to manufacture or produce articles or things or to operate such plant or plants, at any time during the period beginning on the 1st day of April, 1991, and ending on the 31st day of March, 1995, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking.”
12. The following clause (iv)(a) was substituted for the existing clause (iv) by the Finance Act, 1993, with effect from April 1, 1994:
“(iv)(a) in the case of an industrial undertaking not specified in sub-clause (b), it begins to manufacture or produce articles or things or to operate such plant and plants, at any time during the period beginning on the 1st day of April, 1991, and ending on the 31st day of March, 1995, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking.”
13. It would be relevant for the purpose of the present appeals to note that by virtue of the Finance Act, 1999, with effect from April 1, 2000, section 80-IA of the Act was bifurcated into two sections, namely, 80-IA and 80-IB. The deductions which were available under section 80-IA(2)(iv)(a) were made available under section 80-IB(3)(i). The relevant extract of section 80-IB(3)(i) and (ii) are reproduced hereinbelow:
“80-IB.(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of years as specified in this section…
(3) The amount of deduction in the case of an industrial undertaking shall be twenty-five per cent. (or thirty per cent. where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year subject to the fulfillment of the following conditions, namely:—
(i) it begins to manufacture or produce articles or things or to operate such plant or plants, at any time during the period beginning from the 1st day of April, 1991, and ending on the 31st day of March, 1995, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;
(ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant not specified in sub-section (4) or sub-section (5) at any time during the period beginning on the 1st day of April, 1995, and ending on the 31st day of March, 2000.”
14. It is not disputed that the relevant provisions of section 80-IB (3) (i) and (ii) have not undergone any change in the assessment year 2001-02.
15. In view of the aforesaid state of the provisions at the relevant points in time, both in the initial year relevant to the assessment year 1994-95 and the years under consideration in the present appeals, it is clear that in the initial year there was no distinction drawn between a small scale undertaking and any other industrial undertaking. In the assessment year 1994-95, relevant to the initial year, the assessee would have been entitled to a deduction, subject to his fulfilling other conditions as prescribed under section 80-IA, if it had commenced the production of an article or thing which was not an article or thing specified in the Eleventh Schedule to the Act at any time during the period beginning from the 1st day of April 1991, and ending on 31st March, 1995. The respondent/assessee had admittedly commenced the production on March 24, 1994, and was thus eligible for deductions under section 80-IA of the Act, subject to as stated above, fulfillment of other conditions under the provisions of section 80-IA of the Act. The fact that the respondent/assessee had not earned profit till the assessment year 1997-98 resulted in a situation when the respondent/assessee did not claim a deduction with respect to the industrial undertaking set up by it on March 24, 1994. The first year in which the assessee earned profit was the assessment year 1998-99.
16. The respondent/assessee claimed deduction in the said assessment year. Similarly, in the assessment year 1999-2000, the assessee once again claimed deduction as it had earned profits. In both these years, the Assessing Officer, as noted hereinabove, accepted the return under section 143(1)(a) of the Act.
17. The respondent/assessee continued as evident from the narration hereinabove, to claim deduction in the assessment years 2000-01 and 2001-02. The rationale advanced by the Assessing Officer that the assessee was not entitled to deductions either under section 80-IA or 80-IB(3)(ii) was erro-neous for the reason that the Assessing Officer overlooked the fact that in the initial year relevant to the assessment year 1994-95, the deduction to the assessee would have been available under section 80-IA(2)(iv)(a) of the Act as it then obtained in the assessment year 1994-95. There was no dis-tinction between a small scale undertaking and any other undertaking. The Assessing Officer, in our view, wrongly rejected the claim of the respon-dent/assessee for the assessment years under consideration, i.e, assessment years 2000-01 and 2001-02 under the provision of section 80-IB (3) (ii). The Assessing Officer failed to note that by virtue of the Finance Act, 1999, with effect from April 1, 2000, section 80-IA had been bifurcated, and consequently, substituted by sections 80-IA and 80-IB. In these circumstances, the respondent/assessee was entitled to deduction as the Legislature in its wisdom continued that original deduction available to art assessee under section 80-IA(2)(iv)(a) by retaining the provision under section 80-IB (3) (i) of the Act. Unfortunately, for the assessee, a specific plea to the effect made before the Commissioner of Income-tax (Appeals) that, it was entitled to claim under section 80-IB(3)(i), was rejected on a specious ground that the SSI unit could not take benefit under a general clause forgetting thereby, that the initial year for claim Of deduction in respect of the assessee was the assessment year 1994-95 and, hence, the state of the law was required to be traced from that year as, the deduction was thereafter available for ten consecutive years ending with the assessment year 2003-04. In our view, the Tribunal correctly appreciated the respondent/assessee's contention with respect to the state of the law relevant to the initial year of its pro-duction, i.e, the assessment year 1994-95 and the changes that were brought about with the enactment of the Finance Act, 1999, with effect from April 1, 2000. Considered in the background of these facts and cir-cumstances, the Tribunal has rightly held that the respondent/assessee was not required to file a revised return since it had not made any “claim” and hence, the ratio of the judgment of the Supreme Court in Goetz (India) Ltd. v. CIT, [2006] 284 ITR 323 was not applicable.
18. In these circumstances, the Tribunal, in our view, has correctly held that the assessee is entitled to deduction under section 80-IB(3)(i), in regard to other industrial undertakings, the provision of which are in pari materia with the provisions of section 80-IA(2)(iv) as obtaining in the initial year. The Tribunal's direction to the Assessing Officer to ascertain as to whether the respondent/assessee had fulfilled the conditions set out in section 80-IA(2)(iii) of the Act as applicable in the initial year, that is, whether the respondent/assessee produced or manufactured any article or thing not being an article or thing specified in the Eleventh Schedule to the Act, in order to be eligible for deduction under section 80-IB for a period of ten years commencing from the assessment year 1994-95, provided the other condition, such as, employment of requisite number of persons is also satisfied by the respondent/assessee cannot be faulted with. In the aforesaid circumstances, we are of the view that both the Assessing Officer as well as the Commissioner of Income-tax (Appeals) had failed to appreciate the facts and circumstances obtaining in the present case as well as the state of the law. The Tribunal's judgment overturning the said view of the authorities below cannot be faulted and, hence, does not require any interference. No question of law, much less a substantial question of law has arisen for our consideration.
19. In the result, the appeals are dismissed.
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