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Commissioner Of Income-Tax v. M/S. Nippon Electronics (India) Pvt. Ltd.
Structured Summary of the Provided Legal Opinion
Factual and Procedural Background
For the accounting year ending 30th June 1972, the assessee was initially allowed a deduction under Section 80J of the Income Tax Act, 1961. The assessment was later re-opened under Section 148 and the relief granted under Section 80J was cancelled by the Income-Tax Officer (I.T.O). The I.T.O.'s view was that the assessee was not entitled to relief in the initial year (1971–1972) because the value of old assets transferred exceeded 20% as stipulated in Section 80J(4)(ii) and Explanation 2. The I.T.O. also rejected the contention that the 20% calculation should be re-worked for later years rather than being fixed by reference to the initial assessment year.
The assessee appealed to the Appellate Assistant Commissioner (AAC), who held that eligibility under Section 80J had to be considered year-by-year on the basis of the prevailing circumstances and found the assessee eligible for the benefit. The Revenue appealed unsuccessfully to the Tribunal. At the instance of the Revenue, the Tribunal made a reference to the higher court under Section 256(1) of the Act, posing the following question of law:
“Whether on the facts and in the circumstances of the case the ITAT is right in law in holding that the assessee is entitled to get the relief u/Section 80J notwithstanding the fact that the conditions stipulated u/Section 80J(4)(ii) were not fulfilled in the initial year?”
Sri K.R. Prasad was invited to assist the Court because the assessee remained unrepresented.
Legal Issues Presented
- Whether an industrial undertaking that did not satisfy the prescribed conditions for relief under Section 80J(4)(ii) in the initial year of manufacture or production can claim Section 80J relief in subsequent years if the conditions are satisfied later.
- Whether the test specified in Explanation 2 to Section 80J(4)(ii) (the arithmetic 20% rule for transferred old machinery or plant) must be applied with reference to the initial assessment year (the year of formation/commencement) or can be re-assessed year-by-year.
Arguments of the Parties
Revenue's Arguments
- Section 80J(1) confers the tax concession subject to the conditions in sub-sections (2) and (4); eligibility is tied to the initial assessment year (the year in which manufacture/production commences) and the immediately succeeding four assessment years.
- Section 80J(4)(ii) and Explanation 2 require that an undertaking must not be formed by transfer to a new business of previously used machinery or plant in excess of 20% of total machinery value. That arithmetic test fixes eligibility at the initial year: if the condition is not satisfied in the first year, subsequent fresh investment that reduces the proportion of old assets is of no consequence.
- Accordingly, the Revenue argued the assessee was not entitled to relief because the proportion of old assets exceeded 20% in the initial year.
Assessee / Appellate Authorities' Arguments (AAC, Tribunal and supporting counsel)
- The AAC and the Tribunal took the view that eligibility should be considered each year on the basis of then prevalent circumstances; if the proportion of old assets fell below 20% in a subsequent year (within the permissible period), the relief should be available for that year.
- The Tribunal followed the Gujarat High Court decision in CIT v. Satellite Engineering Ltd. (113 ITR 208), which treated the five-year tax benefit period as permitting eligibility to arise if the statutory condition was satisfied in any of the five years, not strictly only in the very first year of commencement.
- Sri K.R. Prasad (assisting the Court) supported the Gujarat High Court view, arguing that each assessment year is a separate unit for assessment and that the 6% (or 7½%) deduction is calculated on capital employed in each assessment year; therefore deductions should be given in each year independently rather than being fixed only by reference to initial-year parameters.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Satellite Engineering Ltd. (113 ITR 208) | Interpreted Section 80J to allow that, although the five-year concession period starts in the year of manufacture/production, the statutory condition (as to transfer of old machinery not exceeding 20%) need not be satisfied strictly in the very first year if it is satisfied during the subsequent four years. | The Tribunal followed this decision in supporting the view that eligibility could arise in years after the initial year; the Court reviewed that approach and explicitly disagreed with it in the present opinion. |
| Textile Machinery Corporation Ltd. v. C.I.T. (107 ITR 195) | Explains the object of Section 80J(1) as encouraging new industrial undertakings through tax incentives; explains that relief is calculated as a percentage (6% or 7½%) per annum on capital employed and describes the temporal and computational aspects of the relief. | The Court relied on this explanation to clarify the nature of the relief under Section 80J, the manner of calculation (time basis and capital employed), and to frame the interpretive context for deciding whether eligibility should be tested at formation or annually. |
Court's Reasoning and Analysis
The Court undertook a textual and purposive analysis of Section 80J(1), Section 80J(4)(ii) and Explanation 2 to Section 80J(4). The key points of the Court's step-by-step reasoning, as set out in the opinion, are:
- The object of Section 80J(1) is to encourage the setting up of new industrial undertakings by offering tax incentives; the relief is a percentage (6% generally, 7½% for certain companies after specified dates) calculated on capital employed in the undertaking.
- Two technical aspects are emphasized: (a) the percentage relief is to be worked out on a time basis depending on the period during which items of capital are employed in the undertaking in a given previous year, and (b) capital employed for each previous year must be computed by the method prescribed in the provision or rules.
- Section 80J(4)(ii) conditions the availability of the relief on the undertaking not being "formed" by transfer to a new business of previously used machinery or plant. Explanation 2 provides an arithmetic test: if the total value of previously used machinery or plant transferred does not exceed 20% of total machinery/plant value, the condition is deemed complied with and that transferred value is excluded when computing capital employed.
- The Court interpreted the term "formed" in clause (ii) as indicating a transfer that is relevant at the time of formation or commencement of the new undertaking. Accordingly, the 20% arithmetic test in Explanation 2 is to be applied with reference to the initial assessment year (the year of commencement/formation).
- From this linguistic and contextual reading, the Court concluded that eligibility for the exemption must be tested in the initial assessment year. If the proportion of old machinery or plant transferred to the new undertaking exceeds 20% in that initial year, the exemption is not available for that undertaking—even if fresh investment in subsequent years (within the five-year window) later reduces the proportion of old assets below 20%.
- Consequently, the Court found that the approach of the AAC, the Tribunal and the Gujarat High Court in CIT v. Satellite Engineering Ltd. (which permitted eligibility to be satisfied in subsequent years) was incorrect.
Holding and Implications
Holding: The Court answered the referred question in the negative and in favour of the Revenue: an industrial undertaking that did not satisfy the prescribed conditions of Section 80J(4)(ii) in the initial assessment year cannot claim the relief under Section 80J in subsequent years merely because the conditions are satisfied later.
Implications:
- Direct effect on the parties: The assessee, being not eligible in the initial year (as the proportion of previously used machinery or plant exceeded 20%), cannot be granted the Section 80J exemption in subsequent years; the Revenue's position succeeds in this case.
- The Court expressly disagreed with the Gujarat High Court decision relied upon by the Tribunal and AAC. The opinion makes clear that eligibility under Section 80J(4)(ii) is to be tested with reference to the formation/initial assessment year.
- No broader implications beyond the scope of the case are discussed in the provided opinion text; the opinion confines itself to the direct legal consequence that eligibility is determined by reference to the initial year and that subsequent investments cannot cure an initial-year disqualification under the 20% Explanation 2 rule.
1. For the accounting year ending with 30th June, 1972 deduction under Section 80J of the Income Tax Act, 1961, (hereinafter called the Act) was allowed to the assessee. The assessment was reopened under Section 148 of the Act and relief granted under Section 80J of the Act was cancelled. The Income-Tax Officer (I.T.O) took the view that in the initial year 1971-1972 assessee is not entitled to the relief under Section 80J of the Act as the value of old assets exceeded limit of 20% as stipulated in Section 80J(4)(ii) of the Act and negatived the contention that the percentage should be re-workedout for the year in question and not as in the initial assessment year. Against that order the assessee filed an appeal to the Appellate Assistant Commissioner (AAC) who having held that eligibility had to be considered each year on the basis of the then prevalent circumstances found that the assessee was eligible to the benefit under Section 80J of the Act. The Revenue being aggrieved by that order filed unsuccessfully second appeal before the Tribunal. At the instance of the Revenue, the Tribunal has made this reference for our opinion under Section 256(1) of the Act on the following question of law:
“Whether on the facts and in the circumstances of the case the ITAT is right in law in holding that the assessee is entitled to get the relief u/Section 80J notwithstanding the fact that the conditions stipulated u/Section 80J(4)(ii) were not fulfilled in the initial year?”
2. The contention raised on behalf of the Revenue is that under Section 80J(1) of the Act the benefit of tax concession is given subject to the conditions mentioned in sub-sections (2) and (4) thereof. Sub-section (2) fixed the parameter of a block period of five years for which the benefit is available as the commencement of the benefit will be from the year relevant to the previous year in which the industrial undertaking begins to manufacture, which is referred to as initial assessment year, and each of the four assessment years immediately succeeding the initial assessment year.
3. The condition under Section 80J(4)(ii) of the Act is that it is not formed by transfer to a new business of machinery or plant previously used for any purpose. This clause has been further elaborated in Explanation (2) thereof to mean that the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business in which event it is taken that the condition has been complied with in that the new industrial undertaking must have been formed by transfer to a new business of such machinery. It is, therefore, contended that for the purposes of deductions under Section 80J the only thing relevant is the year in which the manufacture commenced and if the undertaking fulfils the conditions mentioned in sub-section (4) the undertaking becomes eligible and if that requirement is not fulfilled in the first year, even if in any subsequent year the proportion of the value of old assets is made to fall below 20% by making fresh investment so as to fulfil the requirement mentioned in Explanation-2, the same is of no consequence. The Tribunal rejected this contention following a decision of the Gujarat High Court in CIT v. Satellite Engineering Ltd., (113 ITR 208). The Gujarat High Court proceeded, in that case, on the basis that the benefit under Section 80J will be available for a period of five consecutive years and the starting point of such period will be the year of manufacture or production of the undertaking and if that condition laid down in the section is not satisfied in the very year of commencement of manufacture or production the benefit of tax holiday will be available provided that the condition is satisfied in the course of the subsequent four years.
4. Sri K.R Prasad, learned counsel, whom we requested to assist the Court, as the assessee remained unrepresented, submitted that the said decision of the Gujarat High Court stands to reason and the finding of the Tribunal must be affirmed. We are grateful to him for the assistance rendered by him. His contention is that each assessment year being a separate unit for the purpose of assessment deductions will have to be given in the same manner as provided in Section 80J(1) of the Act and 6 per cent deduction is granted on the capital employed in the industrial undertaking. Therefore, he submitted, the contrary view that the parameters are fixed by Explanation (2) and the benefit is limited only to the initial year of commencement of the manufacture or production and extending the benefit to a further period of four years will not be correct.
5. The controversy with which we are concerned in this reference is whether an industrial undertaking which did not satisfy the prescribed conditions to get the relief under Section 80J of the Act in the initial year of its manufacture or production can claim such relief if those conditions are satisfied in the subsequent years. The object of Section 80J(1) of the Act has been explained by the Supreme Court in Textile Machinery Corporation Ltd. v. C.I.T, (107 ITR 195) as encouraging the setting up of new industrial undertakings by offering tax incentives. The relief that is granted under Section 80J(1) of the Act is in respect of profits and gains of an undertaking to the extent it does not exceed the amount calculated at the rate of 6 per cent per annum on the capital employed in such industrial undertaking. The percentage of relief is at the rate of 7 ½ per cent per annum in the case of companies the undertaking which start functioning on or after 31st March, 1976 and at the rate of 6 per cent per annum in the case of other companies. There are two aspects to be noticed in this connection. First, the percentage is to be worked out on a time basis depending on the whole or part of the previous year in which any item of capital is employed in the undertaking at the rate of 6 per cent. The second is that the capital employed in the undertaking during the previous year relevant to the assessment year has to be computed in the manner specified in the provision or under the Rules, as the case may be. After the capital is so computed tax relief to the extent of 6 per cent or 7 ½ per cent thereof is to be allowed. The expression ‘per annum’ cannot be understood in contrast with any broken period, that is, relief cannot be restricted during the period for which assets were actually in use. The expression ‘aforesaid’ has been added only to ensure that the assessee gets the relief for each of the five years as available under the section. Deduction under Section 80J(1) of the Act for the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture articles and for the next four assessment years (or six years in the case of a co-operative society). Section 80J(4) of the Act provides for certain conditions on the fulfillment of which the industrial undertaking becomes entitled for the benefit available under Section 80J(1) of the Act. One of the conditions is that an undertaking, to be eligible for the benefit of the relief under Section 80J(1), is not formed by transfer to a new business of machinery or plant previously used for any purpose. Explanation 2 of sub-section (4) of Section 80J(1) provides that where in the case of an industrial undertaking any machinery or plant or any part thereof previously used for any purpose was transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.
6. The eligibility for earning the benefit under Section 80J(1) of the Act is provided in Section 80J(4)(ii) of the Act. The condition is that the undertaking must not have been formed by transfer to the new business of machinery or plant previously used for any purpose. The expression ‘formed’ in clause (ii) of sub-section (4) is concluded by Explanation 2 which substitutes an arithmetical formula of under-standing whether this condition has been satisfied or broken in a given case. The formula is, where the value of the old machinery or plant that has been transferred is 20 per cent or less than 20 per cent of the total value of the machinery or plant used in the business, then this condition is deemed to have been complied with. But the value of the assets in question transferred shall not be taken into account in computing the capital employed in the undertaking. If such value exceeds 20 per cent the relief would not be available and if, on the other hand, such value is within 20% or less the relief is available. Reading clause (ii) with Explanation-2 makes it clear that the assessee can be denied of the exemption only where the assets transferred to the new undertaking constitute more than 20% of the total value of the assets used in the new business.
7. The word ‘formed’ also suggests that the transfer contemplated is one at the time of formation of the new undertaking. The eligibility for exemption has to be tested in the initial assessment year. Therefore, the exemption would not be available if in the initial assessment year the proportion of old assets transferred or utilised for the new business is above 20% of the total investment though in any subsequent year even if it be within five years, new investment is made so as to reduce the proportion of the value of old assets below 20%. Therefore, the eligibility stands determined in the initial assessment year and once an industrial undertaking is found eligible in the initial year of manufacture, such benefit could be availed of in any succeeding four years. In the present case admittedly the assessee, being not eligible in the initial year, the question of granting exemption in subsequent years does not arise. We, therefore, respectfully disagree with the decision of the Gujarath High Court and answer the question in the negative and in favour of the revenue.
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