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Ace Multi Axes Systems Ltd vs. DCIT (Karnataka High Court)
August, 13th 2014

S. 80-IB: If the undertaking satisfies the conditions for eligibility in the initial year, it must get deduction for 10 years & non-compliance in a subsequent year is irrelevant

The assessee was initially set up as a small scale (SSI) undertaking and was eligible for deduction u/s 80-IB. In the ninth year, the assessee ceased to be a SSI undertaking as its investment in plant & machinery exceeded Rs. 1 crore. The AO, CIT(A) and Tribunal (order attached) held that as each AY was separate and independent, the assessee was not eligible to claim deduction u/s 80-IB in the ninth year. On appeal by the assessee to the High Court HELD allowing the appeal:

There is no indication in s. 80-IB that the conditions stipulated therein has to be fulfilled by the assessee in all the 10 years. When once the benefit of 10 years, commencing from the initial year, is granted, if the undertaking satisfy 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, 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 u/s 80IB cannot be denied. If such a literal interpretation is placed on the said provion, 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 u/s 80IB for 10 consecutive years, from the initial assessment year.

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