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Commissioner Of Income Tax Vs. International Tractors Ltd.
July, 26th 2017
$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+                            ITA 1082/2005

                                                   Reserved on: 4th May, 2017
                                                   Decision on: July 20, 2017

COMMISSIONER OF INCOME TAX                      .....Appellant
            Through: Mr. Ashok Manchanda, Senior Standing
            Counsel and Mr. Raghvendra Singh, Junior Standing
            Counsel

                                     versus

INTERNATIONAL TRACTORS LTD.                  .....Respondent
            Through: Mr. Ajay Vohra, Senior Advocate with
            Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms.
            Bhavita Kumar, Advocates.

+                            ITA 690/2008

COMMISSIONER OF INCOME TAX                   .....Appellant
            Through: Mr. Dileep Shivpuri, Senior Standing
            Counsel and Mr. Sanjay Kumar, Junior Standing
            Counsel

                                     versus

INTERNATIONAL TRACTORS LTD.                  .....Respondent
            Through: Mr. Ajay Vohra, Senior Advocate with
            Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms.
            Bhavita Kumar, Advocates

+                            ITA 225/2009

COMMISSIONER OF INCOME TAX                                         .....Appellant



________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 1 of 45
                      Through: Mr. Ashok Manchanda, Senior Standing
                      Counsel and Mr. Raghvendra Singh, Junior Standing
                      Counsel

                                     versus

INTERNATIONAL TRACTORS LTD.                   .....Respondent
            Through:Mr. Ajay Vohra, Senior Advocate with Mr.
            Dushyant Monocha, Mr. Ashish Gupta and Ms.
            Bhavita Kumar, Advocates.

+                            ITA 1189/2009

COMMISSIONER OF INCOME TAX                      .....Appellant
            Through: Mr. Ashok Manchanda, Senior Standing
            Counsel and Mr. Raghvendra Singh, Junior Standing
            Counsel

                                     versus

INTERNATIONAL TRACTORS LTD.                  .....Respondent
            Through: Mr. Ajay Vohra, Senior Advocate with
            Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms.
            Bhavita Kumar, Advocates.

+                            ITA 251/2010

COMMISSIONER OF INCOME TAX                      .....Appellant
            Through: Mr. Ashok Manchanda, Senior Standing
            Counsel and Mr. Raghvendra Singh, Junior Standing
            Counsel

                                     versus

INTERNATIONAL TRACTORS LTD.                  .....Respondent
            Through: Mr. Ajay Vohra, Senior Advocate with
            Mr. Dushyant Monocha, Mr. Ashish Gupta and Ms.
            Bhavita Kumar, Advocates.


________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 2 of 45
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE CHANDER SHEKHAR

                                   JUDGMENT
%                                   20.07.2017
Dr. S.Muralidhar, J.
1. These are appeals by the Revenue under Section 260A of the Income
Tax Act, 1961 (`Act') directed against the various orders of the Income
Tax Appellate Tribunal (`ITAT').

Questions of law

2. The questions framed for consideration in each of the appeals (with
the corresponding appeal number in the ITAT) read thus:
  High
         Assess
 Court                   Date of      ITAT
         ment                                           Questions of law
 Appeal                  Order       Number
          Year
Number
ITA No. 1998-99             20th       ITA       1. Whether the ITAT was
1189/200                   June,       No.       correct in law in holding that
   9                       2008      4571/D      there was no failure on the
                                     el/2005     part of the Assessee to
                                                 disclose truly and fully all
                                                 material facts and in thereby
                                                 concluding that the re-
                                                 opening of the assessment
                                                 was not justified in view of
                                                 the proviso to Section 147 of
                                                 the Act?


                                                 2. Whether the ITAT was
                                                 correct in law in holding that

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 3 of 45
                                                 for the purpose of deduction
                                                 under Section 80-IA of the
                                                 Act, the Assessee should be
                                                 a small scale undertaking on
                                                 the last date of the previous
                                                 year       relating   to    the
                                                 initial/first assessment year
                                                 and that the said requirement
                                                 need not be satisfied in
                                                 subsequent years?
ITA No. 2000-01             20th       ITA       Whether the ITAT was
225/2009                   June,       No.       correct in holding that for the
                           2008      4572/D      purpose of deduction under
                                     el/2005     Section 80-IA of the Act the
                                                 Assessee should be a small
                                                 scale undertaking on the last
                                                 day of the previous year
                                                 relevant to the initial or first
                                                 Assessment Year and that
                                                 the said requirement need
                                                 not be satisfied in the
                                                 subsequent          Assessment
                                                 Years?
ITA No. 2001-02  17th                  ITA       Whether the ITAT was
690/2008        August,                No.       correct in holding that for the
                 2007                2668/D      purposes of deduction under
                                     el/2005     Section 80-IA of the Act the
                                                 Assessee should be a small
                                                 scale undertaking on the last
                                                 day of the previous year
                                                 relevant to the initial or the
                                                 first Assessment Year and
                                                 that the said requirement
                                                 need not be satisfied in the
                                                 subsequent          Assessment
                                                 Years?
ITA No. 2001-02            28th        ITA       1. Whether ITAT was correct
1082/200                  March,       No.       in law in holding that the
   5                      2005       469/Del     CIT was not justified in

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 4 of 45
                                      /2004      invoking the provisions of
                                                 Section 263 of the Act as the
                                                 order    passed     by     the
                                                 Assessing      Officer    was
                                                 neither     erroneous      nor
                                                 prejudicial to the interest of
                                                 the Revenue?

                                                 2. Whether the ITAT was
                                                 correct in holding that for
                                                 purposes of deduction under
                                                 Section 80-IA of the Act the
                                                 Assessee should be the small
                                                 scale undertaking on the last
                                                 day of the previous year
                                                 relevant to the initial/first
                                                 assessment year and that the
                                                 said requirement need not be
                                                 satisfied in the subsequent
                                                 assessment.

                                                 3. Whether the ITAT was
                                                 correct in law in holding that
                                                 the CIT was not correct in
                                                 directing    the    Assessing
                                                 Officer to make addition on
                                                 account of differences in
                                                 valuation of closing stock
                                                 despite the fact that the
                                                 selling and administrative
                                                 expenses of Rs.6,00,222
                                                 were neither taxed in the
                                                 earlier year nor added in the
                                                 present     year    by     the
                                                 Assessee?

                                                 4. Whether ITAT was correct
                                                 in law in deleting the
                                                 addition of Rs.70,00,000

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 5 of 45
                                 proposed by CIT being
                                 interest receivable on the
                                 outstanding despite the fact
                                 that the Assessee was
                                 adopting mercantile system
                                 of accounting?
                     th
ITA No. 2002-03    5      ITA    1. Whether the ITAT was
251/2010        Septemb    No.   correct in law in holding that
                er, 2008 89/Del/ for the purpose of deduction
                          2006 under Section 80-IA of the
                                 Act, the Assessee should be
                                 a small scale undertaking on
                                 the last date of the previous
                                 year       relating  to    the
                                 initial/first assessment year
                                 and that the said requirement
                                 need not be satisfied in
                                 subsequent years?

                                                 2. Whether ITAT was correct
                                                 in law in deleting the
                                                 addition made by the
                                                 Assessing Officer invoking
                                                 provisions of Section 40(a)(i)
                                                 of the Act?

Background facts
3. The background facts are that the Respondent/Assessee was
incorporated in 1995 and is engaged in the business of manufacturing
and trading agricultural tractors/tractor parts and components. The
Assessee commenced its production in the Financial Year (`FY') 1997-
98 and treated it as the `initial assessment year' for the purposes of
claiming the benefit of Section 80-IA of the Act. In terms of
Notification No. SO 232(E) dated 2nd April, 1991, an industrial


________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 6 of 45
undertaking could be treated as a small scale undertaking under Section
11B of the Industries (Development and Regulation) Act, 1951 (`IDR
Act') if its total investment in fixed assets i.e., Plant & Machinery
(`P&M') did not exceed Rs. 60 lakhs. The notification was operative up
to 9th December, 1997.

4. During the AY 1997-98, the total investment in fixed assets worked
out to Rs. 1.07 crores. The stand of the Revenue was, therefore, that in
the initial year the Assessee was not a small scale industrial undertaking
and was not entitled to the deduction under Section 80-IA of the Act.
While the Assessee claimed this deduction in the original return filed
for AY 1997-98, it did not make any such claim in its revised return.
Further, no such deduction was allowed by the AO for the AY 1997-98.

5. A fresh notification dated 9th December, 1997 was issued by the
Central Government under Section 11B of the IDR Act. The limit of
investment by a Small Scale Industry (`SSI') in fixed assets in the form
of P&M was raised from Rs. 60 lakhs to Rs. 3 crores. This notification
became operative from 10th December, 1997. In terms of Schedule 4 to
the Audit Report, the total investment made by the Assessee as on 31 st
March, 1998 in fixed assets i.e., in P&M (including cost of material
handling equipment, electric fittings, generators and computers etc.)
worked out to Rs. 3.37 crores. The Assessee also applied to the
Ministry of Industries for being registered as a Medium Scale Unit and
it, in fact, got registered as a Medium Scale Industry (`MSI').




________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 7 of 45
6. By a subsequent notification dated 24th December, 1999 issued by
the Central Government, the limit of investment in fixed assets in P&M
by an SSI got reduced from Rs. 3 crores to Rs. 1 crore. This became
effective from 25th December, 1999. The case of the Revenue is that
this notification also applied to the Assessee since it never obtained a
permanent registration as an SSI unit. Further, as on 31 st March, 1999,
the Assessee's total investment in P&M worked out to more than Rs.
6.42 crores. This increased to Rs. 19.82 crores as on 31st March, 2000
and approximately Rs. 23 crores as on 31st March, 2001. The case of
the Revenue, therefore, is that the Assessee was never an SSI.

7. The case of the Assessee, on the other hand, was that it was an SSI in
the initial year i.e., AY 1997-98 as was evident from the SSI
registration certificate issued in its favour. Its investment in P&M in
terms of notification dated 1st January, 1993 under the IDR Act was
well below the stipulated limit of Rs. 60 lakhs. It was after going
through all the details that the Assessing Officer (`AO') dealt with the
issue of deduction under Section 80-IA of the Act. A total deduction of
Rs. 1,01,50,131 was claimed by the Assessee but the AO allowed only
an amount of Rs. 95,59,064.

Facts relevant for AYs 1998-99 to 2000-2001
8. It transpires that for the AY 1999-00, after the AO allowed the
deduction under Section 80-IA of the Act, the Commissioner of Income
Tax [`CIT'] exercised jurisdiction under Section 263 of the Act. It was
held by the CIT by an order dated 11th July, 2003 that the deduction
under Section 80-IA of the Act ought not to have been granted to the

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 8 of 45
Assessee as it was, in fact, a medium scale or large scale industrial
undertaking during the AY in question. The CIT opined that the
allowing of the deduction would go against the legislative intent. The
CIT observed that: "Obviously, the legislature did not intend to give the
benefit of deduction under Section 80-IA to these units continuously for
10 years as that would adversely affect the interests of SSIs in the
competitive market." The CIT, accordingly, directed the AO to
withdraw the deduction allowed under Section 80-IA of the Act and
enhance the taxable income of the Assessee for AY 1999-00 by Rs.
3.61 crores.

9. Within three days thereafter, on 14th July, 2003, the AO issued a
notice to the Assessee under Section 148 of the Act seeking to re-open
the assessment for the AY 1998-99. This has given rise to the first
question framed in the appeal relevant to this AY.

10. The facts relevant to the AY 2000-01 (ITA No. 225/2009) are that
the return was filed by the Assessee for this AY on 30 th November,
2000. Initially, no deduction under Section 80-IA of the Act was
claimed. A revised return was filed on 12th October, 2001 claiming
deduction of Rs. 6.40 crores under Section 80-IA of the Act. The case
was taken up for scrutiny and the assessment was completed by the AO
on 29th January, 2001 by restricting the deduction under Section 80-IA
of the Act at Rs. 95,59,064. The Assessee challenged the assessment
order before the CIT (A) who partly allowed the appeal by the order
dated 4th March, 2002. The deduction under Section 80-IA of the Act
was allowed to the extent of Rs. 1,03,31,268.

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010        Page 9 of 45
11. On the basis of the order passed by the CIT under Section 263 of
the Act for the AY 1999-00 on 11th July, 2003, the AO issued a notice
under Section 148 of the Act seeking to re-open the assessment on the
ground of wrongful claim of deduction by the Assessee under Section
80-IA of the Act. This notice was issued on 14th July, 2003. In response
thereto, the Assessee filed a return on 13th August, 2003 declaring the
same income as per the revised return. A notice was issued to the
Assessee on 13th May, 2004 under Section 142 (1) of the Act requiring
it to submit the details of P&M in terms of Section 11B of the IDR Act.
The AO held that the total investment as per these details worked out to
Rs. 9,27,11,983 whereas the ceiling as per the notification dated 24 th
December, 1999 for an SSI was Rs. 1 crore only. By the assessment
order dated 28th February, 2005, the above deduction was disallowed
and added to the taxable income of the Assessee.






12. By the re-assessment order dated 14th July, 2003 for AY 1998-99,
the AO re-calculated the opening value of P&M for the preceding year
as Rs. 75,24,787/- and after adding it to the investments in P&M during
the AY, calculated the total value of P&M as Rs. 3,03,07,705/-. It was
held that since on the last date of the previous financial year i.e., as on
31st March, 2000, the investment in P&M was more than the limit
prescribed for SSIs, the deductions under Section 80-IA of the Act were
not allowable. The taxable income from the business was computed at
Rs. 3,44,40,345/-, income from other sources at Rs. 42,87,350/- and the
total taxable income at Rs. 3,87,27,695/-. It must be recalled that this
re-assessment order was under Section 148/143(3) of the Act.

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 10 of 45
13. Feeling aggrieved, the Assessee went in appeal before the CIT(A)
which by the order dated 9th September, 2005 held that the action under
Section 263 of the Act was not warranted. The order passed thereunder
was quashed. Further, since the ITAT had for the subsequent AY i.e.,
1999-00 held that the Assessee was entitled to deduction under Section
80-IA of the Act, it was held that the Assessee was entitled to the said
deduction for the AY in question i.e., 1998-99. The proceeding initiated
under Section 147 of the Act was held to be void ab initio.

14. Meanwhile, as already noticed, for AY 1999-00, the ITAT allowed
the Assessee's appeal by order dated 1st March, 2004. Incidentally, that
order is also under challenge by the Revenue in this Court by way of
ITA No. 497/2004. Since that appeal involved an additional point
regarding the impugned order not having been signed by both the
members of the ITAT before one of them retired, it has been kept for
hearing on a separate date.

15. As far as AY 2000-01 is concerned, an assessment order was passed
on 28th February, 2005 under Section 143(3)/263 of the Act disallowing
the deduction under Section 80-IA on the ground that the investment
made in P&M up to 31st March, 2000 was more than the prescribed
limit. By the order dated 1st September 2005, the CIT(A) allowed the
Assessee's appeal thereby allowing the deduction.

16. Against the orders of the CIT(A) dated 9th September, 2005 for AY
1998-99 and 1st September, 2005 for AY 2000-01, the Revenue filed
ITA Nos. 4571/De1./2005 and ITA No. 4572/De1/2005 respectively.
________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 11 of 45
By a common order dated 20th June, 2008, the ITAT dismissed both the
appeals of the Revenue and held that the Assessee was entitled to
deduction under Section 80-IA of the Act.

Facts relevant for AY 2001-02
17. Turning now to AY 2001-02, by the assessment order dated 7th
May, 2004 under Section 143 (3) read with Section 263 of the Act, the
AO disallowed the deductions under Section 80-IA of the Act. The
appeal filed by the Assessee against the said order was allowed by the
CIT (A) by an order dated 24th March, 2005. Against the said order,
ITA No. 2668/Del/2005 was filed by the Revenue before the ITAT. In
the said appeal for AY 2001-02, the Assessee also filed cross objections
which the Assessee subsequently withdrew as dismissed. The ITAT by
the order dated 17th August, 2007 dismissed the Revenue's appeal and
held that the Assessee was entitled to the deduction under Section 80-
IA of the Act.

18. Against the said order, the appeal filed by the Revenue in this Court
is ITA No. 690/2008. The Revenue filed a separate ITA No. 1082/2005
against the same order. By order dated 28th March, 2005, the ITAT
allowed the Assessee's appeal being ITA No. 469/Del/2004 challenging
the order passed by the CIT on 5th December, 2003 under Section 263
of the Act. The ITAT agreed with the Assessee that the CIT was not
justified in invoking Section 263 of the Act.


19. Consequently, ITA Nos. 690/2008 and 1082/2005 were filed by the
Revenue in this Court pertaining to the same AY i.e., 2001-02. While

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 12 of 45
the question of law pertaining to ITA No. 690/2008 concerns Section
80-IA of the Act, the question of law in ITA No. 1082/2005 pertains
essentially to Section 263 of the Act. They are also concerned with the
directions given by the CIT to the AO to make additions on account of
the difference in valuation of the closing stocks and interest receivable
on outstanding balance.

Facts relevant for AY 2002-03
20. Turning now to AY 2002-03, the AO by an order dated 28th March,
2005 declined to allow deductions under Section 80-IA of the Act after
noticing that under Notification dated 24th December, 1999, the ceiling
for investment in SSIs was Rs. 1 crore whereas on the last date of the
previous year i.e., 31st March, 2002, the investment for P&M was to the
tune of Rs. 24.02 crores. Additionally, the AO also made additions
under Section 40(a)(i) of the Act for failure by the Assessee to deduct
tax at source in regard to the payments made to a French company as
miscellaneous expenses and salary to foreign personnel under a
Technical Collaboration Agreement.

21. The Assessee's appeal was allowed by the CIT(A) by an order
dated 25th October, 2005. Relying upon the orders passed by the ITAT
for AYs 1999-00 and 2001-02, the deduction under Section 80-IA of
the Act was allowed. Further, as regards Section 40(a)(i) of the Act, the
CIT(A) observed that the payment was only a re-imbursement of the
expenditure and not payment of royalty and, therefore, the said
provision was not applicable. Hence, the said addition was deleted.



________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 13 of 45
22. The Revenue's appeal (ITA No. 89/Del/2006) was dismissed by the
ITAT by order dated 5th September, 2008 following its orders dated 20th
June, 2008 for AYs 1998-99 and 2000-01.

Submissions of counsel for the Revenue
23. Mr Ashok Manchanda, learned Senior Standing counsel appearing
for the Revenue, submitted as under:
(i)    The Assessee was not a small scale industry in the `initial
       assessment year' i.e., AY 1997-98 as the investment in P&M was
       above Rs. 60 lacs, which was beyond the permissible limit. Even
       for the AY 1999-00, the investment in P&M was Rs. 6.42 crores
       which was more than double the specified limit of Rs. 3 crores.
       In the first/initial year i.e., 1997-98, the deduction under Section
       80-IA was neither claimed by the Assessee nor allowed.
       Therefore, there was no occasion for the AO to examine if the
       Assessee fulfilled the requisite pre-conditions for claiming
       deduction under Section 80-IA of the Act for AY 1997-98. Even
       for AYs 1999-00, 2000-01, 2001-02, 2002-03, the Assessee had
       not claimed deduction under Section 80-IA of the Act in its
       returns initially. The deductions were claimed only in the revised
       returns. In none of the abovementioned AYs or statutory Tax
       Audits Reports furnished by the Assessee along with the Returns
       of Incomes was it specified or certified that that Assessee was
       eligible for deduction under Section 80-IA. This was the same
       even as per the Assessee's own auditor.




________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 14 of 45
(ii)    The certificate issued to the Assessee on 24th February, 1997 by
        Project Manager of the District Industries Centre, Hoshiarpur
        under which the Assessee was registered as an SSI for
        'Assembling of Tractors' provided that an Undertaking would
        stop enjoying the status of an SSI as and when the total
        machinery exceeded the prescribed limit. In each year, the claim
        was always being made by attaching only an Income Calculation
        Sheet signed by a representative of the Assessee and being
        submitted along with the revised returns.

(iii)   Section 80-IA (12) (f) uses the term 'previous year' and not
        `initial investment year'. The Assessee claimed deduction for AY
        1999-00 under Section 80-IA despite the fact that the investment
        in P&M in the previous year was Rs. 6.75 crores which exceeded
        the prescribed limit. Relying on the decision of this Court in CIT
        v. Natraj Stationery Products Pvt. Ltd. (2009) 312 ITR 22 (Del)
        and Praveen Soni v. CIT (2011) 241 CTR 542 (Del), it is
        submitted that the correct interpretation of Section 80-IA(12)(f)
        was to examine if, on the last date of the previous year relating to
        the concerned AY in which the claim under Section 80-IA was
        being made, the investment by the Assessee in the P&M was
        within the prescribed limit for being recognized as an SSI unit.
        Though the words `previous year' had been used in Sections 3, 4
        and 5 of the Act, they were hardly used in the whole of Sections
        80-IA and 80-IB of the Act. However, in Section 80-IA(12)(f)
        there was a specific reference to the `previous year' in the
        context of the definition of an SSI. Therefore, the SSI status of an
________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 15 of 45
       industrial unit had to be necessarily determined on the last date of
       each previous year and not just the one relevant to the initial
       investment year. An industry started in the latter part of a year
       could be so managed and arranged to qualify the criteria for an
       SSI unit even if it was a mega industry. If the interpretation
       adopted by the CIT(A) and the ITAT were to be accepted, then
       even big industrial houses would become eligible for deductions
       and that would defeat the very objective of providing the
       deduction.

(iv)   As far as Section 263 of the Act is concerned, although this was
       not a question framed for AYs 1999-00, 2002-03 or even 1998-
       99 and 2000-01, the Court should, in the interests of justice,
       permit the Revenue to urge that question as it had been
       inadvertently omitted to be framed for the said years. It is
       submitted that the wrong claim made by the Assessee justified
       the re-opening ordered by the CIT under Section 263 of the Act.
       Revenue was placed reliance on the decisions in CIT v. Delhi
       Press Patra Prakashan Ltd. (2013) 355 ITR 14 (Del);
       Saurashtra Cement & Chemical Industries Limited v. CIT
       (1994) 122 CTR 329 (Guj); CIT v. Paul Brothers (1995) 216
       ITR 548 (Bom); CIT v. Tata Communications Internet Services
       Ltd. (2012) 251 CTR 290 (Del); Ace Multi Axes Systems Ltd. v.
       Deputy CIT (2014) 367 ITR 266 (Kar) and CIT v. Sunder
       Forging (decision of the Punjab and Haryana High Court in ITA
       Nos. 242&243/2012 & 92/2014).


________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 16 of 45
(v)    It is further submitted that the Circulars issued by the Ministry
       under the IDR Act are not relevant and binding and, in any event,
       not applicable to the Assessee. What had to be seen is whether as
       per the Circulars issued by the CBDT, there were five conditions
       required to be fulfilled cumulatively if an Assessee was to claim
       deduction u/s 80-IA(l) of the Act. The first two conditions related
       to the year of formation of the industrial undertaking. These,
       therefore, pertained to the initial AY. However, for the other
       three conditions, they would have to be complied with and
       fulfilled year after year i.e., in every previous year. All these
       three conditions had to be fulfilled cumulatively. It was
       impermissible that out of the three conditions, one or two
       conditions were fulfilled in a year while the others remained
       unfulfilled.

24. In addition to the oral submissions, there were three written
submissions filed by Mr. Manchanda. The first written submission was
dated 10th April, 2017 running into 13 pages. In this written submission,
Mr. Manchanda also submitted that in Form No. 10 CCB of the Income
Tax Rules, 1962 (`Rules'), the Assessee had failed to disclose the
relevant facts fully and truly. In para 18(e) of the said form, information
had to be given in terms of `Yes' or `No' if the unit was an SSI on the
last day of the previous year. Due to the failure on the part of the
Assessee to do so for AY 1998-99, the AO was justified in re-opening
the assessment under Section 148 of the Act. Likewise, re-opening for
AY 2000-01 was also, therefore, justified. Mere furnishing of an SSI
certificate was insufficient. It was important that for the purposes of
________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 17 of 45
claiming deductions under Section 80-IA of the Act, the investments
made by the Assessee for P&M did not exceed the limit on the last date
of previous year.

25. Mr. Manchanda defended the orders passed by the CIT under
Section 263 of the Act. He relied on the decision dated 29th November
2011 of this Court in ITA No. 973/2011 (CIT v. DLF Power Ltd.);
Thomson Press (India) Ltd. v. CIT (2015) 379 ITR 222 (Del);
Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC); CIT v.
Electro House (1971) 82 ITR 824 (SC); CIT v. Infosys Technologies
Limited (2012) 214 ITR 293 (Kar.); CIT v. Abhishek Industries
Limited (2006) 286 ITR 1 (P&H).

26. Mr. Manchanda gave a second set of written submissions on 1 st
May, 2017, this time running into 9 pages. Apart from repeating many
of the arguments already made earlier, he also referred to a host of
decisions of ITAT directly on the point favouring the Revenue. The
Court declines to name all of them since in any event such decisions of
the ITAT are not binding on it. Mr. Manchanda added one more
decision of the Karnataka High Court to this list i.e., Sami Labs Ltd. v.
ACIT (2011) 239 CTR 510 (Kar.). A third set of written submissions
by way of rejoinder was filed by Mr. Manchanda on 11 th May, 2017
where all of the above submissions were reiterated.

Submissions on behalf of the Assessee
27. Mr. Ajay Vohra, learned Senior Counsel appearing for the
Respondent/Assessee, took the Court through the Scheme of Section

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80-IA and, in particular, Section 80-IA(7) which categorically stated
that the benefit of deduction would be available for every subsequent
AY after the `initial assessment year' although a report had to be filed
in the prescribed format in terms of Section 80-IA(8) for each AY. He
submitted that once the eligibility condition was satisfied in the `initial
assessment year', then the benefit of deductions would continue for ten
successive years. He submitted that the decisions in Praveen Soni v.
CIT (supra) and CIT v. Natraj Stationery Products Pvt. Ltd. (supra)
in fact supported the Assessee's case.

28. As regards Form 10-CCB, Mr Vohra pointed out that this came
about with the bifurcation of Section 80-IA and 80-IB with effect from
1st April, 2000. Correspondingly, Form 10-CCB did not come into force
till AY 2003-04. He further submitted that the said form was a
composite form for different businesses. Mr. Vohra pointed out that the
eligibility limit for being recognized as an SSI in terms of investments
made in P&M could vary from year to year. It stood raised from Rs. 60
lacs to Rs. 3 crores for AY 1997-98 and reverted to Rs. 1 crore by
notification dated 24th December, 1999. If the interpretation sought to
be advanced by the Revenue were to be adopted, then the entire Section
would become non-workable. The idea was to ensure that there are
incentives for SSIs and to assure them of continuous deductions for at
least ten years after the initial assessment year notwithstanding that in
the later AYs they may seize to comply with the conditions for
recognition as an SSI.




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29. As far as the invocation of Section 263 of the Act is concerned, Mr.
Vohra submitted that there were two conditions to be fulfilled ­ one
that the order of the AO should have been erroneous, and the second
that it should have been prejudicial to the Revenue. Except for these
debatable issues, there was no justification for re-opening the
assessment. Reliance was placed on Commissioner of Income-Tax v.
Max India Ltd. (2007) 295 ITR 282 (SC). Mr Vohra also relied on the
decisions in Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC); CIT v.
Tata Communications Internet Services Ltd. (supra); Saurashtra
Cement & Chemical Industries v. CIT (supra); CIT v. Delhi Press
Patra Prakashan Ltd (supra) and CIT v. Sunder Forging (supra) to
urge that the interpretation placed on Section 80-IA by the Revenue
was untenable and that if in the previous year relating to the initial
assessment year, the conditions for eligibility were satisfied, then
notwithstanding that the Assessee may not have complied with those
conditions of eligibility in the subsequent AYs, the deductions
nevertheless should be allowed.

30. Pressing for a liberal construction of a beneficial provision, reliance
was placed by Mr Vohra on the decision of P.R. Prabhakar v. CIT
(2006) 284 ITR 548 (SC). He also relied on the principle of consistency
and referred to the decision in Shasun Chemicals & Drugs Ltd. v. CIT
(2016) 388 ITR 1 (SC) and the decision of this Court dated 11 th
January, 2011 in ITA No. 889/2009 (CIT v. Rajasthan Breweries
Limited) which was upheld by the Supreme Court by dismissal of the
Revenue's Special Leave Petition [CC No. 1379/ 2014 (SC)] on 7th
February, 2014.
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31. On the question of change in the method of valuation of inventory,
reliance was placed on the decision of Madras High Court in CIT v.
Carborundum Universal Ltd. (1984) 149 ITR 759 (Mad.) which was
upheld by the Supreme Court by the dismissal of the Revenue's SLP in
CIT v. Carborundum Universal Ltd. (2004) 187 ITR 38 (SC). Reliance
was also placed on the decision of this Court in CIT v. Indo Rama
Synthetics Ltd. (2009) 180 Taxman 35 (Del) and in CIT v. Modi
Rubbers Ltd. (No. 2) (1998) 230 ITR 820 (Del). On the issue of
reimbursement of expenses not being subjected to TDS, reliance was
placed on the decision of the Supreme Court in DIT v. A.P. Moller
Moersk (2017) 392 ITR 186 (SC).

32. On the issue of exercise of jurisdictional powers under Section 263
of the Act, reliance was placed on the decision in Malabar Industrial
Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) and the decision of Punjab and
Haryana High Court in CIT v. Max India Limited (2004) 268 ITR 128
(P&H) which was upheld by the Supreme Court in CIT v. Max India
Limited (2007) 295 ITR 282 (SC).

Interpretation of Section 80 IA
33.The Court first takes up for consideration the question of
interpretation of Section 80-IA of the Act. The said section, provided
for "Deductions in respect of profits and gains from industrial
undertakings, etc. in certain cases." Sub-section (1) stated that where
the gross total income of an assessee includes any profits and gains
derived from any business of an industrial undertaking on or after the

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1st day of April, 1997 (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 the percentage specified in sub-
section (5) and for such number of assessment years as is specified in
sub-section (6)." Sub-section (2) set out the conditions which must be
fulfilled by an undertaking to be eligible for the deduction.

34. With effect from 1st April, 2000, Section 80-IA has been split into
Section 80-IA pertaining to "deductions in respect of profits and gains
from industrial undertakings or enterprises engaged in infrastructure
development, etc." and Section 80-IB pertaining to "deduction in
respect of profits and gains from certain industrial undertakings other
than infrastructure development undertakings." In the present case, we
are only concerned with Section 80-IA as it stood prior to the above
amendment particularly with reference to AY 1998-99, which,
according to the Assessee, was the initial year whereas according to the
Revenue the initial year should be taken to be AY 1997-98.

35. An examination of Section 80-IA reveals that the following
conditions are required to be fulfilled in terms of Section 80-IA. These
conditions are that first an industrial undertaking in question:
(i)    does not form by splitting up, or the reconstruction, of a business
       already in existence;
(ii)   does not form by the transfer to a new business of machinery or
       plant previously used for any purpose;



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(iii)   manufactures or produces any article or thing, not being any
        article or thing specified in the list in the Eleventh Schedule, or
        operates one or more cold storage plant or plants, in any part of
        India.

36. Clause (a) of Sub-Clause (iv) of Sub-Section (2) of Section 80-IA
states that in the case of an industrial undertaking not specified in sub-
section (b) or sub-section (c), it begins to manufacture or produce
articles or things or operate such plant or plants at any time between 1 st
April, 1991 and 31st March, 1995; Clause (b) of Sub-Clause (iv) of Sub-
Section (2) of Section 80-IA states that in the case of an industrial
undertaking located in an industrially backward State specified in the
Eighth Schedule or set up in any part of India for the generation, or
generation and distribution, of power, it begins to manufacture or
produce articles or things or operate its cold storage plant or plants to
generate power at any time between 1st April, 1993 and 31st March,
2000; Clause (c) of Sub-Clause (iv) of Sub-Section (2) of Section 80-IA
states that in the case of an industrial undertaking located in such
industrially backward district as the Central Government may specify
as an industrially backward district of Category A or an industrially
backward district of Category B, and it begins to manufacture or
produce articles or things or to operate its cold storage plant or plants at
any time between 1st April, 1995 and 31st May, 2000; Clause (d) of
Sub-Clause (iv) of Sub-Section (2) of Section 80-IA states that in the
case of an industrial undertaking being an SSI where it begins to
manufacture or produce articles or things at any time during the period
beginning on the 1st April, 1995 and ending on 31st March, 2000.
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37. A further condition to be satisfied is that the undertaking
manufactures or produces articles or things, employs ten or more
workers in a manufacturing process carried on with the aid of power, or
employs twenty or more workers if it is carried on without the aid of
power.

38. Section 80-IA specifies what the extent of deduction available
would be. In the context that an undertaking is an SSI, then 25% of the
profits and gains derived from such industrial undertaking would be
allowed as a deduction. The extent of which deductions would be
allowed is specified in Section 80-IA(6)(ii) where the undertaking is not
a cooperative society but an SSI unit. The benefit is allowed for ten
AYs. This has to be read together with Section 80-IA(1) where it says
that "... 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)." Therefore, the
numbers of AYs for which the benefit is allowed is specified as ten
where it is an SSI unit.

39. There is no specific provision which states that the eligibility for
availing the deduction should be shown to be fulfilled at the end of each
and every previous year relevant to the AY relevant to the ten
successive AYs for which the benefit is granted. The context of
definition of `initial assessment year' as contained in Section 80 -

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IA(12)(c) is relevant. This refers to the AY relevant to the previous year
"in which the industrial undertaking begins to manufacture or produce
articles or things..." Under Sub-Clause 12(f) of Section 80-IA, an SSI is
defined to mean an industrial undertaking which is "as on the last day
of the previous year, regarded as a small-scale industrial undertaking
under Section 11B of the IDR Act.

40. While Section 80-IA(12)(f) defines an SSI to mean an industrial
undertaking that has the status of an SSI on the last day of the previous
year (which expression `previous year' is referable to the previous year
relevant to the `initial assessment year'), it is not meant to refe r to a
previous year relevant to each of the ten AYs for which benefit under
Section 80-IA is availed. The very use of the word `initial' preceding in
the word `assessment year' and a separate definition for that expression
given under Section 80-IA(12)(c) is not without significance. It is only
in relation to the `initial' assessment year in which an undertaking
begins to manufacture or produce articles or things that the following
nine years are determined.

The ITAT orders
41. There is little dispute on the essential fact that in the present cases.
The year in which the undertaking began manufacturing or producing
articles and things was during the previous year relevant to AY 1998-
99. In the order of the matters decided by the ITAT, the earliest was the
order passed on 1st March, 2004 in ITA No. 497/Del/2004. The next in
chronological order is the order dated 28th March, 2005 passed by the



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ITAT in ITA No. 469/Del/2004 where it followed the previous order
dated 1st March, 2004.

42. As already noted hereinbefore, the appeal filed in this Court by the
Revenue against the order dated 1st March, 2004 for AY 1999-00 (ITA
No. 497/2004) has been kept for hearing on a different date because one
question involved in that appeal is that the Vice-President of the ITAT
who presided over the Bench which passed that order ceased to be as
such by the time the second member signed the order dated 1 st March,
2004. Whether such an order could be held to be valid is a question that
has been considered in that appeal by this Court. Nevertheless, the said
order has been followed in the subsequent orders dated 28 th March,
2005 of the ITAT for AY 2001-02, and order dated 17th August, 2007
passed by the ITAT in ITA No. 2668/Del./2005 for same AY i.e., AY
2001-02. These were followed by the orders of the ITAT dated 20th
June, 2008 for AYs 1998-99 and 2000-01 in ITA Nos. 4571/Del./2005
and 4572/Del./2005, respectively, and 5th September, 2008 for AY
2002-03 in ITAT No. 89/Del./2006.

43. The ITAT in the said order agreed with the Assessee that Section
80-IA did not contemplate the carrying out of a yearly review to ensure
that on the last date of other previous year, of the ten AYs for which the
deduction was allowed, the eligibility condition stood fulfilled. As
rightly pointed out by Mr. Vohra in the initial AY 1997-98, the
Assessee was facing a loss and, therefore, did not make a claim.
Nevertheless that continued to remain the initial AY. The Assessee
claimed deduction only in regard to the remaining years. The ten years

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would begin to be counted from the AY 1997-98 itself although the
deduction was not claimed for that AY. It could not have been claimed
for AY 1997-98 because under Section 80-IA, the aggregate deduction
claimed of the Assessee could not have exceeded its gross total income.

Assessee eligible to claim deduction
44. The question is whether on the last day of the previous relevant to
AY 1997-98 the Assessee fulfilled the eligibility condition? It was
repeatedly urged by Mr. Manchanda that the investment in P&M on the
last date of previous year was above Rs. 60 lacs. He referred to an order
dated 11th July, 2003 passed by the CIT under Section 263 of the Act
for AY 1999-00. However, relevant to AY 1998-99, the factual
determination by the CIT(A) and the ITAT is that the Assessee did
fulfil the eligibility condition. The total investment in P&M was
worked out to be Rs. 41.19 lacs. This fact has not been controverted by
the Revenue.

45. The Auditor's report ended on 31st March, 1997 and was in fact
enclosed with the order dated 5th December, 2003 passed by the CIT
under Section 263 of the Act for AY 2001-02. This showed the total
value of P&M as per Section 11B of IDR Act as Rs. 41,19,373/-. It was
explained how certain items had to be excluded as per the notification
dated 1st January, 1993 issued under the Act, which included cost of
equipments, cost of installation of P&M, cost of research and
development, cost of procurement and installation of wires, electrical
control panels etc., cost of gas producer plant, transportation charges
for indigenous machinery from the place of manufacturing to the

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factory site, charges paid for technical know-how for erection of P&M,
cost of fire-fighting equipment etc.

46. Clearly, therefore, the CIT was in error in proceeding on the basis
that the investment in P&M as on 31st March, 1997 was about Rs. 60
lacs. In any event, this determination of the CIT by the order dated 5 th
December, 2003 has already been set aside by the ITAT in its order
dated 28th March, 2005 in ITA No. 469/Del/2004. There is, therefore,
no justification for the Court to proceed on that basis even for the initial
year i.e., AY 1997-98.

47. At this stage, it requires to be noted that the purpose of introducing
provisions like Section 80-IA, which incidentally is not restricted to
providing relief to SSI units but to all kinds of industrial undertakings,
was to encourage industrial expansion. The idea was to incentivise
investment in industries. Further, the legislative intent was to give, even
in the beginning, the benefit for a period of ten years irrespective of
whether after the initial year there was an expansion of industrial
undertaking by increased investment in P&M that may have taken it
outside the ambit and scope of that provision. In other words, it is not
expected that the investment for P&M in the initial AYs would remain
static for the next ten years. It cannot be expected that if an industry is
successful it would not expand. If the idea was to have a yearly review,
then the provision would have been very differently worded. For
instance, Section 80-HHA(3) which specifically states that "deduction
shall not be allowed in computing the total income of any of the ten
previous years aforesaid in respect of which the industrial undertaking

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ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 28 of 45
is not a small-scale industrial undertaking". In other words, if the
legislative intent was that the eligibility condition had to be fulfilled on
the last day of the previous year of each of the ten AYs during which
the benefit was available, then that provision ought to expressly state to
that effect.

48. It is not possible to accept the submission made on behalf of the
Revenue that the words `previous year' occurring in Section 80 -
IA(12)(f) in the definition of `small-scale industrial undertaking' refers
to the previous year of each of the AYs spoken of in Section 80-IA(6)
of the Act. The words, `previous year' is not prefixed with the word
`relevant'. In that context, therefore, the words `previous year'
occurring in Section 80-IA(12)(f) have to be read as the previous year
relevant to the `initial assessment year' as defined in Section 80 -
IA(12)(c) and not for any other purpose. This explains why this
expression `previous year' is not used anywhere else in Section 80 -IA
of the Act. In fact, when the entire section is read as a whole, it
becomes very clear that the benefit is to be for ten continuous AYs after
the initial AY.

49. It is also in consonance with the changing criteria for recognition of
an SSI under the IDR Act. If the eligibility for deduction under Section
80-IA were to be linked to such changing criteria beyond the initial AY,
then the section itself would become non-workable. It would simply not
be possible under Section 80-IA for the benefit to be extended to `ten
consecutive assessment years' under Section 80-IA(6)(ii) specific to an
SSI if these ten years would include the initial assessment year. Even if

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these need to be `consecutive', the benefit must be extended
irrespective of whether in the AYs following the initial assessment year
an SSI unit seizes to be as such either because of increased investment
in P&M or because of the change in eligibility limit in terms of the
notification in the IDR Act. Therefore, even from this point of view, the
interpretation advanced by the Revenue in this case cannot be accepted.

Discussion of case law
50. Now turning to the case law, in Bajaj Tempo Ltd. v. CIT (supra),
the question that arose was whether the Assessee was entitled to claim
partial exemption from payment of tax under Section 15C of the Indian
Income Tax Act, 1922 on the profits and gains derived from an
industrial undertaking established "in a building taken on lease used
previously for another business". The Income Tax Officer rejected the
claim since the new business was formed by splitting of business
already in existence and it was also formed by transfer to the new
building and machinery previously used in another business. While
interpreting Section 15C of the 1922 Act, the purpose of which was
more or less similar to Section 80-IA of the Act i.e., "granting
incentives for promoting growth and development", the Supreme Court
observed that the provision required to be liberally construed. It was
pointed out that adopting a liberal construction in such cases would
result in defeating the very purpose of Section 15C. It was observed as
under:
         "A provision in a taxing statute granting incentives for promoting
         growth and development should be construed liberally
         interpreted liberally, and since a provision for promoting
         economic growth has to be interpreted liberally, the restriction on
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       it too has to be construed so as to advance the objective of the
       provision and not to frustrate it."

51. Turning to the decisions of the High Courts, in Saurashtra Cement
& Chemical Industries v. CIT (supra), the question before the Gujarat
High Court was whether the Assessee's claim under Section 80J of the
Act (corresponding to Section 15C of the 1922 Act) can be
discontinued without disturbing the relief granted in the initial year.
The Gujarat High Court upheld the view of the ITAT in that case that
the relief of tax holiday under Section 80J of the Act having been
granted to the Assessee in the initial AY, the Assessee was entitled to
continuance of that relief for the subsequent four years notwithstanding
that the Assessee did not continue to satisfy the eligibility relief for the
years following the initial AYs concerned.

52. In CIT v. Paul Brothers (supra) the question before the Bombay
High Court was whether the benefit given to an Assessee under Section
80HH or 80J which was granted for the initial year could be withdrawn
for the subsequent years for breach of service conditions. The Court
answered the question in the negative following the decision of the
Gujarat High Court in Saurashtra Cement & Chemical Industries v.
CIT (supra).

53.1 As far as this Court is concerned, the question that arose in
Praveen Soni v. CIT (supra) was whether an Assessee which failed to
claim the deduction under Section 80-IB of the Act in the initial AY
i.e., 1998-99 was disentitled to claim such deductions in the subsequent
AY 2004-05 despite the fact that the undertaking fulfilled the

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conditions for claiming deductions under Section 80-IB of the Act. The
facts were that in the first year of manufacture, the Assessee did not
claim the deduction i.e., in AY 1998-99. Therefore, in that AY it could
not be examined whether the Assessee fulfilled the conditions
prescribed in Section 80-IB of the Act. It also did not claim this benefit
in the succeeding years.

53.2 Like Section 80-IA of the Act, even Section 80-IB of the Act
provides that the benefit is available for ten successive AYs. Though
for the first time, the Assessee claimed benefit for AY 2004-05, it was
pointed out that it could claim the benefit up to AY 2007-08. While
claiming the benefit, the Assessee filed the requisite documents
including Form 10CCB. While the AO agreed with the Assessee that
the condition stood fulfilled, he denied it only on the ground that it was
not claimed in the initial AY. It was also found that the unit had not
been registered as an SSI under the IDR Act.

53.3 Accordingly, two substantial questions of law were framed in the
matter by this Court ­ One was whether the rejection of the claim for
deduction under Section 80-IB was valid, and second, whether the
Assessee was disentitled to claim deduction on the ground that it had
not claimed deduction in the initial AY. The Court answered both the
questions in favour of the Assessee by holding that there was no dispute
that the Assessee fulfilled the eligibility conditions prescribed under
Section 80-IB and was to be regarded as an SSI. The AO was directed
to given the benefit of deduction for the AY in question i.e., AY 2004-
05.

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54. Mr. Manchanda was asked by the Court as to how the above
decision was helpful to the case of the Revenue since it, in fact, rather
helps the case of the Assessee in the present scenario. Mr. Manchanda
submitted that in Praveen Soni v. CIT (supra) this Court had endorsed
the Revenue's view point that the Assessee n eeded to fulfil the SSI
conditions "in the year of claim". The Court does not find any such
specific finding in the decision in Praveen Soni v. CIT (supra). On the
contrary, since it was not in dispute that the Assessee there fulfilled the
eligibility condition in the initial AY, the Court held that it could not be
denied the benefit for the ten consecutive AYs thereafter i.e., till AY
2007-08. The clear findings in this regard read as under:

       "6. If the assessee fulfils the requirement of small scale ind ustrial
       undertaking (which aspect shall he dealt while answering other
       question of law), it is not in dispute that the assessee would have
       qualified for this deduction from the assessment year 1998-99.
       Had the assessee claimed this benefit in that year, he would have
       been allowed this benefit for 10 consecutive years i.e. till
       assessment year 2007-08. The assessee, thus, becomes entitled to
       claim the benefit in the assessment year 1998-99. However,
       merely because of the reason that though the assessee was
       eligible to claim this benefit, but did not claim in that year would
       not mean that he would be deprived from claiming this benefit
       till the assessment year 2007-08, which is the period for which
       his entitlement would accrue. The provisions contained in section
       80-IB of the Income Tax Act, nowhere stipulates any condition
       that such a claim has to be made in the first year failing which
       there would be forfeiture of such claim in the remaining years. It
       is not the case of the assessee that he should be allowed to avail
       this claim for 10 years from the assessment year 2004-05. The
       assessee has realized his mistake in not claiming the benefit from
       the first assessment year 1998-99. At the same time, the assessee
       foregoes the claim up to the assessment year 2003-04 and is
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       making the same only for the remaining period. There is no
       reason not to give the benefit of this claim to the assessee if the
       conditions stipulated under section 80- IB of the Income-tax Act
       are fulfilled."

55. The above observations squarely cover the case in favour of the
Assessee in the present case. The Assessee in the present case was
entitled to the benefit from the initial AY i.e., AY 1997-98. It,
therefore, could not have been denied this benefit for the next ten AYs.
In the considered view of the Court, therefore, the decision in Praveen
Soni v. CIT (supra) in fact is in favour of the Assessee.

56. The other decision relied upon by the Revenue is CIT v. Natraj
Stationery Products Pvt. Ltd. (supra). The initial AY, as far this
decision was concerned was AY 1994-95. The Court was interpreting
Section 80-IA. The question was whether the Assessee "was entitled to
deduction in respect of the profits derived from an industrial
undertaking" set up in AY 1994-95. Therefore, the question involved
was not that which arises in the present case, viz., whether the Assessee
is required to fulfil the eligibility condition in each of the AYs for
which benefit under Section 80-IA is claimed. Here, again, the ITAT
gave a direction to the AO to ascertain whether the Assessee had
fulfilled the condition set out in Section 80-IA(2)(iii) of the Act as
applicable for the initial year i.e. AY 1994-95.


57. Mr. Manchanda referred to an observation in paragraph 9 of CIT v.
Natraj Stationery Products Pvt. Ltd. (supra) where it was noted that
the ITAT directed the AO to verify the Assessee's eligibility for

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deduction "in the year under consideration" and, therefore, this meant
that the ITAT had talked of the Assessee's eligibility for deduction not
only in the initial AY but also in the subsequent years. The Court is
unable to agree with this reading of the said decision. If one reads the
whole of paragraph 9, it in fact indicates to the contrary. The immediate
previous line states that:

       "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."

58. This has to be read along with the following observations in
paragraph 20 of the decision which reads as under:
       "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 thins 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."
________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 35 of 45
59. This Court in CIT v. Natraj Stationery Products Pvt. Ltd. (supra)
upheld the order of the ITAT and dismissed the appeals meaning
thereby that the above decision of the ITAT interpreting Section 80-IA
was in fact upheld by this Court, the net result being that the Assessee
in that case could not be denied the benefit under Section 80-IA(2) as
long as it satisfied the eligibility condition in the initial AY. This was
notwithstanding any change that may have happened even in the
provision itself as it in fact did, as already noticed, with effect from 1 st
April, 2000 when Section 80-IA as it then stood was bifurcated into 80-
IA and 80-IB. Therefore, even this decision of this Court is of no help
to the Revenue as claimed by it.

60.1 In CIT v. Delhi Press Patra Prakashan Ltd. (supra), this Court
had to interpret the deduction available under Section 80-I (2) (i) of the
Act. The question was whether the fact that more than 10 workers were
permanently involved in carrying out the activities in the second and
third unit of the Assessee would disentitle it from deduction under
Section 80-I (2) (iv).

60.2 Here, the Assessee was engaged in printing and publishing
newspapers and periodicals. It was set up in 1973 with the head office
in New Delhi. It had established a unit in Sahibabad, namely, Unit No.
2 for carrying on the work of high speed printing during the period
ending 30th September, 1985 relevant to AY 1986-87. Since in the first
year there was a loss, no deduction under Section 80-IA was allowed to
the Assessee in respect of Unit No. 2.

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ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 36 of 45
60.3 In the subsequent AY 1988-89, the Assessee claimed a deduction
under Section 80-I of the Act. This was restricted by the AO to Rs.
12,80,044/- as against Rs. 13,50,000/- as claimed. For AY 1989-90, the
Assessee claimed a deduction of Rs. 18,45,800/- in respect of Unit No.
2 as well as Unit No. 3 which were established in 1987 in the building
adjacent to Unit No. 2. This was allowed by the AO. In AY 1990-91,
the Assessee claimed deduction of Rs. 38,02,747/- under Section 80-I
of the Act for Unit Nos. 2 and 3, and for AY 1991-92, it claimed a
deduction of Rs. 44,58,681 being 25% profit from Unit Nos. 2 and 3.
The AO observed that the persons engaged in the printing presses
therein were not employees in Units No. 2 and 3 but one other
company; they were not manufacturing any article or thing as printing
on paper was not manufacturing and so on.

60.4 It was held by this Court while upholding the order of the ITAT
which restored the deductions that it was not open to the AO to deny
benefit under Section 80-I of the Act to an Assessee once benefit has
been allowed in the earlier 3 years. It was held as follows:

       "By virtue of section 80-I (5) of the Act deduction under section
       80-I of the Act was available to an assessee in the assessment
       year relevant to the previous year in which the industrial
       undertaking begins to manufacture or produce articles or things
       (such assessment year being the initial assessment year) "and
       each of the seven assessment years immediately succeeding the
       initial assessment year. This necessarily implied once the issue as
       to eligibility under section 80-1 of the Act was examined and
       allowed in the initial assessment, the same was allowable in the
       subsequent years also unless there was any material change in the
       succeeding years."
________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 37 of 45
61. In CIT v. Tata Communications Internet Services Ltd. (supra), it
was clarified by the Court with specific reference to Section 80-IA that
"the bar as provided under section 80-IA(3) is to be considered only for
the first year of claim for deduction under section 80-IA":

       "20. ...The bar as provided under section 80-IA(3) is to be
       considered only for the first year of claim for deduction under
       section 80-IA. Once the assessee is able to show that it has-used
       new plants and machinery which has not been 'previously used
       for any purpose and the new-undertaking is not formed by
       splitting up or reconstruction of business already in existence, it
       is entitled to the deduction under section 80-IA for subsequent
       years. Since the assessee had been granted claim of deduction
       right from the assessment year 2004-05 under section 80-IA,
       consequently it cannot be denied deduction for the subsequent
       years inasmuch as restraint of section 80-IA(3) cannot be
       considered for every year of claim of deduction, but can be
       considered only in the year of formation of the business."

62. In Ace Multi Axes Systems Ltd. v. Deputy CIT (supra), the
Karnataka High Court was considering whether the condition under
Section 80-IB had to be fulfilled by the Assessee in all the ten years.
This was answered in the negative and it was held as under:

       "5. In the entire provision, there is no indication that these
       conditions had to be fulfilled by the assessee all the 10 years.
       When once the benefit of 10 years, commencing from the initial
       year, is granted, if the undertaking satisfies all these conditions
       initially, the undertaking is entitled to the benefit of 10
       consecutive years. The argument that, in the course of 10 years, if
       the growth of the industry is fast and it acquires machinery and
       the total value of the machinery exceeds Rs. 1 crore, it ceases to
       have the said benefit, do not follow from any of the provisions. It
       is true that there is no express provision indicating either way,

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 38 of 45
       what would be the position if the small scale industry ceases to
       be a small scale industry during the said period of 10 years.
       Because of that ambiguity, a need for interpretation arises. If we
       keep in mind the object of the Legislature providing for these
       incentives and when a period of 10 years is prescribed, that is the
       period, probably, which is required for any industry to stabilize
       itself. During that period the industry not only manufactures
       products, it generates employment and it adds to the wealth of the
       country. Merely because an industry stabilizes early, makes
       profits, makes future investment in the said business, and it goes
       out of the definition of the small scale industry, the benefit under
       Sec.80IB cannot be denied. If such a literal interpretation is
       placed on the said provision, it would run counter to the very
       object of granting incentives. It would kill the industry.
       Therefore, keeping in mind the object with which these
       provisions are enacted, keeping in mind the industrial growth
       which is required to be achieved, if two interpretations are
       possible, the courts have to lean in favour of extending the
       benefit of deduction to an assessee who has availed the
       opportunity given to him under law and has grown in his
       business. Therefore, we are of the view, if a small-scale industry,
       in the course of 10 years, stabilizes early, makes further
       investments in the business and it results in it's going outside the
       purview of the definition of a small scale industry, that should
       not come in the way of its claiming benefit under Sec.80IB for 10
       consecutive years, from the initial assessment year. Therefore,
       the approach of the authorities runs counter to the scheme and the
       intent of the Legislature..."

Conclusion on Section 80 IA
63. In view of the authoritative pronouncements of the Courts as
discussed hereinbefore, the Court is unable to accept the plea of the
Revenue in the present case that:
(i)    The Assessee here did not fulfil the eligibility condition for the
       initial AY i.e., 1997-98; and



________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 39 of 45
(ii)   That notwithstanding that it may have fulfilled the eligibility
       conditions in the initial AY, it nevertheless had to fulfil the such
       eligibility condition for every one of the ten consecutive AYs
       inclusive of the initial AY in order to be eligible for the
       deduction.

Section 263
64. The Court now turns to the question of the invocation of Section
263 of the Act by the CIT(A) to revise the orders of the AO. This
question has been raised for AY 2001-02. It has not been framed as a
question in other AYs. Nevertheless, the Court has examined the
question even for the other AYs.

65. The two requisite conditions that are required to be met to justify
the invocation of Section 263 of the Act are:

(i)    That the order of the AO must be erroneous; and

(ii)   It must be prejudicial to the interest of the Revenue.

66. In Malabar Industrial Co. Ltd. v. CIT (supra), the Supreme Court
explained it as under:
       "There can be no doubt that the provision cannot be invoked to
       correct each and every type of mistake or error committed by the
       Assessing Officer, it is only when an order is erroneous that the
       section will be attracted. An incorrect assumption of facts or an
       incorrect application of law will satisfy the requirement of the
       order being erroneous. In the same category fall orders passed
       without applying the principles of natural justice or without
       application of mind."



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ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 40 of 45
67. As far as the phrase `prejudicial to the interests of the revenue' is
concerned, the Court explained as under:

       "The phrase 'prejudicial to the interests of the Revenue' has to be
       read in conjunction with an erroneous order passed by the
       Assessing Officer. Every loss of revenue as a consequence of an
       order of the Assessing Officer cannot be treated as prejudicial to
       the interests of the Revenue. For example, when an Income-tax
       Officer adopted one of the courses permissible in law and it has
       resulted in loss of revenue; or where two views are possible and
       the Income-tax Officer has taken one view with which the
       Commissioner does not agree, it cannot be treated as-an
       erroneous order prejudicial to the interests of the Revenue."

68. In the present case, the assessment was completed under Section
143(3) of the Act for AY 1998-99 onwards. There was no error as such
committed by the AO in allowing the deductions under Section 80-IA
since the correct interpretation of the said provision was open to debate.
The twin conditions of (i) the order having to be erroneous and (ii)
prejudicial to the interest of the Revenue cannot be said to have been be
cumulatively satisfied in the present case. That the power under Section
263 cannot be exercised to revisit debatable issues is well settled.

69. Illustratively, reference may be made to the decision in
Commissioner of Income-Tax v. Max India Ltd. (supra) where the
Punjab and Haryana High Court reiterated the well-settled proposition
following the aforementioned decisions of the Supreme Court in
Malabar Industrial Co. Ltd. v. CIT (supra).

70. Even on merits, the order under Section 263 was not warranted. It is
contrary to the principle of consistency. The deductions allowed in the

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ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 41 of 45
earlier AYs should not be withdrawn unless the circumstances have
changed. Reference may be made to the decisions in Shasun
Chemicals & Drugs Ltd. v. CIT (supra) and Rajasthan Breweries
Limited v. CIT (supra).

Valuation of inventory
71. On the question of change in the method of valuation of inventory,
it has been explained by the Madras High Court in CIT v.
Carborundum Universal Ltd. (supra) that if an Assessee is called upon
to apply a new method of valuation to the opening stock of the
accounting year, then in consequence the value of closing stock of the
year will also get altered and this would result in the modification of the
assessment in the previous year. Therefore, the change in the method of
valuation of closing of stocks was not a justification for the exercise of
power under Section 263. Consequently, as far as AY 2001-02 is
concerned, this could not have been a ground for invoking Section 263
of the Act. Again, the mere change in the method of accounting would
ipso facto not make a difference to the Revenue and cannot be said to
be prejudicial to the interest of the Revenue.






Reopening of assessment under Section 147
72. The re-opening of assessment under Section 147 of the Act was
only on account of the orders passed by the CIT under Section 263 of
the Act and for no other reason. This Court having held that there is no
justification for the CIT to have invoked Section 263 of the Act, the re-
opening of the assessments under Section 147 of the Act in AY 1998-



________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 42 of 45
99, which is the only year for which the question was framed, was not
justified.

Answers to the questions
73. The Court answers the questions that arise in each of the appeals as
under:
Assessment              ITA No.               Question              Answers
   Year                                        framed
 1998-99              1189/2009           Whether      the            In the
                                          ITAT         was         affirmative
                                          justified      in
                                          invalidating the
                                          re-opening of
                                          the assessment
                                          under Section
                                          147 of the Act?
                                          Whether      the            In the
                                          ITAT         was         affirmative
                                          correct        in
                                          upholding the
                                          deductions
                                          claimed by the
                                          Assessee under
                                          Section 80-IA of
                                          the Act?
  2000-01              225/2009           Whether      the           In the
                                          ITAT         was        affirmative
                                          correct        in
                                          upholding the
                                          deductions
                                          claimed by the
                                          Assessee under
                                          Section 80-IA.




________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 43 of 45
  2001-02              690/2008           Whether      the       In the
                                          ITAT         was    affirmative
                                          correct        in
                                          upholding the
                                          deductions
                                          claimed by the
                                          Assessee under
                                          Section 80-IA of
                                          the Act.
  2001-02             1082/2005           Whether      the     In the
                                          ITAT         was affirmative
                                          correct        in
                                          holding that the
                                          CIT(A) was not
                                          justified      in
                                          invoking Section
                                          263 of the Act?

                                          Whether      the
                                          ITAT        was
                                          correct       in
                                          upholding the
                                          deductions       In the
                                          claimed by the affirmative
                                          Assessee under
                                          Section 80-IA of
                                          the Act.

                                          Whether      the In the
                                          ITAT        was affirmative
                                          correct       in
                                          holding that the
                                          CIT(A) was in
                                          error         in
                                          directing    the
                                          AO to make an
                                          addition      on
                                          account of the
                                          difference    in

________________________________________________________________________________
ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 44 of 45
                                          valuation      of
                                          closing stock?

                                          Whether      the
                                          ITAT        was In the
                                          correct       in affirmative
                                          allowing
                                          deletion      of
                                          Rs.70       lacs
                                          proposed by the
                                          CIT(A) on the
                                          interests
                                          receivables on
                                          outstanding?
   2002-03             251/2010           Whether      the       In the
                                          ITAT        was     affirmative
                                          correct       in
                                          upholding the
                                          deductions
                                          claimed by the
                                          Assessee under
                                          Section 80-IA of
                                          the Act?

74. The appeals filed by the Revenue are dismissed with costs of Rs.
10,000/- in each of the appeals which shall be paid to the Assessee
within four weeks from today.



                                                       S. MURALIDHAR, J.



                                                 CHANDER SHEKHAR, J.
JULY 20, 2017
b'nesh/rd




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ITA Nos.1082/2005; 690/2008; ITA 225/2009; 1189/2009 & 251/2010       Page 45 of 45

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