Principal Commissioner Of Income Tax-I, Chandigarh v. M/S Pacific India, Chandigarh

ITA-334-2018 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA-334-2018 (O&M)Date of Decision: 19.3.2019 Principal Commissioner of Income Tax-I, Chandigarh Versus ....Appellant. M/s Pacific India, Chandigarh ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MRS. JUSTICE MANJARI NEHRU KAUL. PRESENT: Ms. Urvashi Dhugga, Sr. Standing Counsel for the appellant.*** AJAY KUMAR MITTAL, J. 1.This order shall dispose of two appeals bearing ITA Nos.334and 347 of 2018 as according to learned counsel similar and identical issuesare involved therein. For brevity, the facts are being extracted from ITA-334-2018. 2.ITA-334-2018 has been preferred by the revenue under Section260A of the Income Tax Act, 1961 (in short “the Act”) against the orderdated 29.1.2018 (Annexure A-3) passed by the Income Tax AppellateTribunal, Chandigarh Bench 'B', Chandigarh (hereinafter referred to as “theTribunal”) in ITA No. 1123/Chd/2017, for the assessment year 2012-13,claiming the following substantial questions of law:- i)Whether on the facts and in the circumstances of the case, the Hon'ble ITAT has erred in deletingthe addition of ` 1,98,11,235/- (made on accountof restricting the claim of deduction u/s 80IC of theIncome Tax Act, 1961 @ 25%) without discussingthe merits of the issue involved and by relying onthe decision of Hon'ble Himachal Pradesh HighCourt in the case of M/s Stoverkraft India, whenthis judgment has not been accepted by thedepartment on merits? ii)Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT (by relying on thejudgments discussed above) has erred in holdingthat those undertakings or enterprises whichcommenced production after 07/01/2003 can carryout multiple 'substantial expansion' prior to01/04/2012 and there will be initial year for each'substantial expansion' as long as provision ofsection 80IC of the Income Tax Act and asexplained in CBDT Circular No. 7/2003, suchenterprise or undertaking cannot carry out any'substantial expansion'?iii)Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT (by relying on thejudgments discussed above) has erred in holdingthat those undertakings or enterprises whichcommenced production after 07/01/2003 can carry iv) v) out multiple 'substantial expansion' prior to01/04/2012 and there will be initial year for each'substantial expansion' as long as provision ofsection 80IC(8)(ix) are met without appreciatingthat as per provision of Section 80IC of the IncomeTax Act and as explained in CBDT Circular No.7/2003, such enterprise or undertaking cannotcarry out any 'substantial expansion' only once?Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT has erred in allowing80IC deduction on disallowance of ` 1,50,00,000/-u/s 37 of the Act, by relying on the Board's circularNo. 37/2016, even when the Ld. CIT(A) has heldthe expenditure claimed as not genuine?Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT has erred in allowing80IC deduction on addition of ` 13,01,872/- and` 38,800/- made u/s 36(1)(iii) even when the AOand CIT(A) in their orders have categoricallystated that the amount so advanced served nobusiness purpose, nor it was incurred on account ofany commercial expediency and in view of the factthat the Board's Circular No. 37/2016 specificallyallows the deduction only to disallowance 'relatedto the business activity against which the chapterVI-A deduction has been claimed'? ITA-334-2018 ITA-334-2018 vi)Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT has erred in holdingthat the additional grounds raised by the assesseeare legal grounds, requiring no furtherinvestigation of facts and arose from the order ofthe Ld. CIT(A)?the case, the Hon'ble ITAT has erred in holdingthat the additional grounds raised by the assesseeare legal grounds, requiring no furtherinvestigation of facts and arose from the order ofthe Ld. CIT(A)? 3.A few essential facts in ITA-334-2018 as narrated therein may be noticed. The assessee filed its return of income on 30.9.2012 for theassessment year 2012-13 at a total income of ` 22,10,510/-. Its case wasselected for scrutiny through CASS. The assessee was engaged in thebusiness of manufacturing and trading of pharma products. As per Form10CCB, the operation/ activity of the firm commenced from 5.8.2006. Theassessee claimed deduction @ 100% under Section 80IC of the Act from theassessment years 2007-08 to 2011-12. In the assessment year 2011-12, theassessee carried out substantial expansion and claimed deduction @ 100%under Section 80IC of the Act for the assessment year 2012-13. TheAssessing Officer allowed only 25% of deduction claimed under Section80IC of the Act being the sixth year as a firm and disallowed 75% of thededuction claimed under Section 80IC of the Act. The assessment wascompleted under Section 143(3) of the Act by the Assessing Officer videorder dated 30.9.2014 (Annexure A-1) at ` 1,98,11,235/-. The penaltyproceedings under Section 271(1)(c) of the Act were also initiatedseparately against the assessee. Feeling aggrieved by the order, AnnexureA-1, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) vide order dated 22.5.2017 (Annexure A-2) confirmed the disallowance of 75% of deduction claimed under Section ITA-334-2018 80IC of the Act. The disallowance of bad debt under Section 37 of the Acton 'loss of shares forfeited' was also upheld. However, the deductionclaimed under Section 36(1)(iii) of the Act, the Assessing Officer wasdirected to recompute the disallowance thereunder on the day to day basis atthe average cost of debt of whole funds and not the cost of borrowed fundsonly. Still dissatisfied, the assessee filed an appeal before the Tribunal.The Tribunal vide order dated 29.1.2018 (Annexure A-3) allowed theappeal and directed the Assessing Officer to grant deduction of 100% of itseligible profits to the assessee. Further, the assessee was also held entitledto deduction under Section 80IC of the Act for the increased profit due todisallowance made under Sections 36(1)(iii) and 37 of the Act. Hence, thepresent appeals by the revenue. 4.We have heard learned counsel for the revenue. 5.The primary issue herein concerns whether an assessee isentitled to deduction @ 100% of its profits or @ 25% only, where thesubstantial expansion is carried out by it after initial period of five yearsfrom the date of setting up of the industrial unit. 6.The matter is no longer res integra. The Apex Court has finally in Commissioner of Income Tax v. Aarham Softronics, Civil Appeal No. 1784 of 2019 decided on 20.2.2019 adjudicated the aforesaid issue in favourof the assessee. It has been concluded in para 24 thereof as under:- “24.The aforesaid discussion leads us to the followingconclusions: conclusions: (a) Judgment dated 20th August, 2018 in ClassicBinding Industries case omitted to take note of thedefinition ‘initial assessment year’ contained in Section -6- 5.The primary issue herein concerns whether an assessee isentitled to deduction @ 100% of its profits or @ 25% only, where thesubstantial expansion is carried out by it after initial period of five yearsfrom the date of setting up of the industrial unit. 6.The matter is no longer res integra. The Apex Court has finally in Commissioner of Income Tax v. Aarham Softronics, Civil Appeal No. 1784 of 2019 decided on 20.2.2019 adjudicated the aforesaid issue in favourof the assessee. It has been concluded in para 24 thereof as under:- “24.The aforesaid discussion leads us to the followingconclusions: conclusions: (a) Judgment dated 20th August, 2018 in ClassicBinding Industries case omitted to take note of thedefinition ‘initial assessment year’ contained in Section -6- 80-IC itself and instead based its conclusion on thedefinition contained in Section 80-IB, which does notapply in these cases. The definitions of ‘initialassessment year’ in the two sections, viz. Sections 80-IBand 80-IC are materially different. The definition of‘initial assessment year’ under Section 80-IC has madeall the difference. Therefore, we are of the opinion thatthe aforesaid judgment does not lay down the correctlaw. (b) An undertaking or an enterprise which had set up anew unit between 7th January, 2003 and 1st April, 2012in State of Himachal Pradesh of the nature mentioned inclause (ii) of sub-section (2) of Section 80-IC, would beentitled to deduction at the rate of 100% of the profitsand gains for five assessment years commencing with the‘initial assessment year’. For the next five years, theadmissible deduction would be 25% (or 30% where theassessee is a company) of the profits and gains. (c) However, in case substantial expansion is carriedout as defined in clause (ix) of sub-section (8) of Section80-IC by such an undertaking or enterprise, within theaforesaid period of 10 years, the said previous year inwhich the substantial expansion is undertaken wouldbecome ‘initial assessment year’, and from thatassessment year the assessee shall be entitled to 100%deductions of the profits and gains. -7- (d) Such deduction, however, would be for a totalperiod of 10 years, as provided in sub-section (6). Forexample, if the expansion is carried out immediately, onthe completion of first five years, the assessee would beentitled to 100% deduction again for the next five years.On the other hand, if substantial expansion is undertaken,say, in 8th year by an assessee such an assessee would beentitled to 100% deduction for the first five years,deduction @ 25% of the profits and gains for the nexttwo years and @ 100% again from 8th year as this yearbecomes ‘initial assessment year’ once again. However,this 100% deduction would be for remaining three years,i.e., 8th, 9th and 10th assessment years.” 7.Accordingly, the said issue is adjudicated in favour of theassessee and against the revenue. 8.Regarding the disallowances made under Section 37 of the Actamounting to ` 1,50,00,000/-; and ` 13,01,872/- and ` 38,800/- underSection 36(1)(iii) of the Act in ITA-334-2018 and that of ` 5,60,000/-underSection 36(1)(iii) of the Act in ITA-347-2018, the Tribunal had held that thedisallowances challenged in the additional grounds pertaining to interestand bad debts resulted in increasing the business profits of the assessee.Since the assessee was held entitled to claim deduction of its profits at therate of 100%, therefore, the additions so made were entitled to deductionunder Section 80IC of the Act as accepted by the Department also vide theCircular dated 2.11.2016 resulting in no addition to the taxable income ofthe assessee. The Tribunal had recorded as under:- ITA-334-2018 -8- 8.Regarding the disallowances made under Section 37 of the Actamounting to ` 1,50,00,000/-; and ` 13,01,872/- and ` 38,800/- underSection 36(1)(iii) of the Act in ITA-334-2018 and that of ` 5,60,000/-underSection 36(1)(iii) of the Act in ITA-347-2018, the Tribunal had held that thedisallowances challenged in the additional grounds pertaining to interestand bad debts resulted in increasing the business profits of the assessee.Since the assessee was held entitled to claim deduction of its profits at therate of 100%, therefore, the additions so made were entitled to deductionunder Section 80IC of the Act as accepted by the Department also vide theCircular dated 2.11.2016 resulting in no addition to the taxable income ofthe assessee. The Tribunal had recorded as under:- ITA-334-2018 -8- “9.We find merit in the contention of the Ld. Counselfor the assessee. Undoubtedly the disallowanceschallenged in the additional grounds, pertaining tointerest and bad debts, result in increasing the businessprofits of the assessee. Moreover, we have held in theearlier part of our order that the assessee is entitled toclaim deduction of its profits @ 100% in the impugnedorder. Consequently, the additions so made are entitledto deduction u/s 80IC of the Act, as accepted by theDepartment also vide the CBDT Circular reproducedabove, resulting in no addition to the taxable income ofthe assessee.”for the assessee. Undoubtedly the disallowanceschallenged in the additional grounds, pertaining tointerest and bad debts, result in increasing the businessprofits of the assessee. Moreover, we have held in theearlier part of our order that the assessee is entitled toclaim deduction of its profits @ 100% in the impugnedorder. Consequently, the additions so made are entitledto deduction u/s 80IC of the Act, as accepted by theDepartment also vide the CBDT Circular reproducedabove, resulting in no addition to the taxable income ofthe assessee.” 9.No illegality or perversity could be pointed out by the learnedcounsel for the revenue in the aforesaid findings recorded by the Tribunal inthe appeals which may warrant interference by this Court. No question oflaw, muchless a substantial question of law arises in these appeals.Consequently, finding no merit in the appeals, the same are herebydismissed. (AJAY KUMAR MITTAL) JUDGE March 19, 2019gbs (MANJARI NEHRU KAUL)JUDGE Whether Speaking/Reasoned Whether Reportable YesYes