Whether an assessee who sets up a new industry of a kind mentioned in sub-section (2) of Section 80-IC of the Act and starts availing exemption of 100 per cent tax under sub-section (3) of Section 80-IC (which is admissible for five years) can start claiming the exemption at the same rate of 100% beyond the period of five years on the ground that the assessee has now carried out substantial expansion in its manufacturing unit?” = once the assessees had started claiming deduction under Section 80-IC and the initial Assessment Year has commenced within the aforesaid period of 10 years, there cannot be another initial Assessment Year thereby allowing 100% deduction for the next 5 years also when sub-section (3), in no uncertain terms, provides for deduction @ 25% only for the next 5 years. It may be asserted again that the assessees accept the legal position that they cannot claim deduction of more than 10 years in all under Section 80-IC. – we hold that after availing deduction for a period of 5 years @ 100% of such profits and gains from the ‘units’, the assessees would be entitled to deduction for remaining 5 Assessment Years @ 25% (or 30% where the assessee is a company), as the case may be, and not @ 100%. The question of law is, thus, answered in favour of the Revenue thereby allowing all these appeals.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO(S). 7208 of 2018
COMMISSIONER OF INCOME TAX …..APPELLANT(S)
VERSUS
M/S. CLASSIC BINDING INDUSTRIES …..RESPONDENT(S)
WITH
CIVIL APPEAL NO(S). 7223 of 2018
CIVIL APPEAL NO(S). 7220 of 2018
CIVIL APPEAL NO(S). 7215 of 2018
CIVIL APPEAL NO(S). 7230 of 2018
CIVIL APPEAL NO(S). 7216 of 2018
CIVIL APPEAL NO(S). 7232 of 2018
CIVIL APPEAL NO(S). 7233 of 2018
Civil Appeal No. 7208 OF 2018 & Ors. Page 1 of 17
CIVIL APPEAL NO(S). 7224 of 2018
CIVIL APPEAL NO(S). 7214 of 2018
CIVIL APPEAL NO(S). 7213 of 2018
CIVIL APPEAL NO(S). 7212 of 2018
CIVIL APPEAL NO(S). 7231 of 2018
CIVIL APPEAL NO(S). 7211 of 2018
CIVIL APPEAL NO(S). 7229 of 2018
CIVIL APPEAL NO(S). 7228 of 2018
CIVIL APPEAL NO(S). 7227 of 2018
CIVIL APPEAL NO(S). 7226 of 2018
CIVIL APPEAL NO(S). 7234 of 2018
CIVIL APPEAL NO(S). 7238 of 2018
CIVIL APPEAL NO(S). 7210 of 2018
CIVIL APPEAL NO(S). 7217 of 2018
Civil Appeal No. 7208 OF 2018 & Ors. Page 2 of 17
CIVIL APPEAL NO(S). 7218 of 2018
CIVIL APPEAL NO(S). 7219 of 2018
CIVIL APPEAL NO(S). 7239 of 2018
CIVIL APPEAL NO(S). 7221 of 2018
CIVIL APPEAL NO(S). 7222 of 2018
CIVIL APPEAL NO(S). 7209 of 2018
CIVIL APPEAL NO(S). 7236 of 2018
AND
CIVIL APPEAL NO(S). 7225 of 2018
J U D G M E N T
A.K.SIKRI, J.
A neat question of law which arises in these appeals revolve
around Section 80-IC of the Income Tax Act, 1961 (hereinafter
referred to as the ‘Act’). The High Court by its impugned
judgment dated 28th November, 2017 has discussed various
aspects and nuances of the aforesaid provisions which had
Civil Appeal No. 7208 OF 2018 & Ors. Page 3 of 17
arisen because of varied kinds of issues raised in a batch of
appeals filed by the assessees before the High Court. We are
not concerned with all those issues. The only question which
needs to be answered in these appeals is as follows:
“Whether an assessee who sets up a new industry of a
kind mentioned in sub-section (2) of Section 80-IC of the
Act and starts availing exemption of 100 per cent tax under
sub-section (3) of Section 80-IC (which is admissible for
five years) can start claiming the exemption at the same
rate of 100% beyond the period of five years on the ground
that the assessee has now carried out substantial
expansion in its manufacturing unit?”

2. To understand the aforesaid question of law in clear terms, it may
be mentioned at this stage itself that sub-section (2) of Section
80-IC applies to an undertaking or enterprise which has, inter alia,
begun or begins to manufacture or produce any article or thing by
setting up a new factory in the area specified therein which
includes State of Himachal Pradesh as well. Sub-section (3) of
Section 80-IC is in two parts: in certain cases, exemption from
income is provided at the rate of 100% of such profits and gains
earned from the aforesaid undertaking or enterprise for 10
assessment years commencing with the initial assessment year.
The present appeals do not fall in that category. Other clause
relates to another category of undertakings or enterprises (these
cases belong to that category) where the exemption is at the rate
Civil Appeal No. 7208 OF 2018 & Ors. Page 4 of 17
of 100% of profits and gains for five assessment years
commencing with the initial assessment year and, thereafter, 25%
of profits and gains. Total exemption, thus, is for a period of 10
years, namely, @100% for 1st five years and @ 25% for
remaining five years. In these cases, all the assessees started
claiming exemption @ 100% on profits and gains and availed it
for a period of five years. During this period these assessees
carried out “substantial expansion” and they claimed that, on that
basis, they should be allowed exemption from profits and gains
for another five years @ 100% instead of 25% from 6th to 10th
year as well. Interestingly, they admit that the total period during
which they are entitled to exemption would not exceed 10 years,
as per the mandate of sub-section (6). In this backdrop, the
question is as to whether the assessees can again start claiming
100% exemption for the next five years from profits and gains
after availing the same for first five years on the ground that they
have now carried out substantial expansion. The High Court has
answered the question in affirmative and for this reason, it is the
department which has come up to this Court challenging the said
decision by filing these appeals.
3. Though, the aforesaid question of law is identical in all the
aforesaid cases and arises in the same fact situation mentioned
Civil Appeal No. 7208 OF 2018 & Ors. Page 5 of 17
above, for the sake of convenience, we may record the facts of
Civil Appeal No. 16851 of 2018 (@ SLP(C) 16851 of 2018).
4. Section 80-IA was inserted by the Finance (No. 2) Act, 1991, with
effect from 1st April, 1991. By virtue of said Section, the gross
total income (profits and gains) of an assessee derived from any
business of an industrial undertaking, so specified therein, was
entitled to certain deductions for a period commencing from 1st
April, 1993. With effect from 1st April, 2000, the said provision
was bifurcated with the insertion of another Section, i.e., 80-IB,
dealing with “certain industrial undertakings other than
infrastructure development undertakings.” Thereafter, the
Legislator, in its wisdom, enacted a special provision, in respect
of “units” established in certain special category States. Thus,
Section 80-IC came to be inserted by virtue of Finance Act,
2003, applicable with effect from 1st April, 2004. At this point., It
may only be noticed that correspondingly certain provisions of
Section 80-IB were also amended/repealed. Deductions under
the said Section were discontinued for the Assessment Years
commencing from 1st April, 2004 (Sub-section (4) of Section 80-
IB).
Civil Appeal No. 7208 OF 2018 & Ors. Page 6 of 17
5. The assessee firm derives income from manufacturing of printed
embossed book binding cover material of cotton in sheet from
and security fiber of dual coloured combination. The assessee
firm comprised of nine partners during the relevant assessment
year. The assessee started its business activity/operation on 11th
July, 2005 and initial Assessment Year for claim of deduction
under Section 80-IC of the Act was Assessment Year 2006-07.
The assessee had already claimed deduction under Section 80-
IC to the extent of the 100% eligible profit for five Assessment
Years 2006-07 to Assessment Year 2010-11. However, it was
noticed that the assessee firm had again claimed 100%
deduction against eligible profits in the relevant Assessment Year
2012-13 which is seventh year of production for the firm by
claiming substantial expansion in Financial Year 2010-11.
6. Return declaring income of Rs. 27,93,410/- after claiming
deduction under Section 80-IC of Rs. 12,62,77,168/- was e-filed
by the assessee firm on 28th September, 2012. The case was
selected from scrutiny through CAS and accordingly, statutory
notices under Section 143(2)/142(1) were issued by Income Tax
Office (ITO) Ward-I, Solan.
Civil Appeal No. 7208 OF 2018 & Ors. Page 7 of 17
7. The assessee was asked to furnish the reasons and justification
for the said claim of 100% as against the eligible norm of 25%.
the assessee vide letter dated 12th January, 2015 submitted its
reasons for claim stating that the assessee fulfills all the
conditions for the claim of 100% deduction.
8. The Assessing Officer found that in view of the provisions of
Section 80-IC of the Act assessee firm had already claimed
deduction under Section 80-IC of the Act at the rate of 100% for
five years from Assessment Year 2006-07 to Assessment Year
2010-11, i.e., from the date of setting up of the industrial
undertaking and in view of the same, it would be eligible for claim
of deduction @ 25% of its eligible business profits for the
remaining five years, i.e., from Assessment Year 2011-2012 to
Assessment Year 2015-2016. The Assessing Officer denied the
claim of the enhanced deduction in view of the substantial
expansion was claimed by the assessee and, accordingly,
restricted the deduction to 25% of eligible profits for the
assessment year under Consideration.
9. Aggrieved by the order of the Assessing Officer dated 27th
February, 2015, the assessee preferred an appeal on 6th April,
2015.
Civil Appeal No. 7208 OF 2018 & Ors. Page 8 of 17
10. CIT(A) following the decision of the jurisdictional tribunal in the
case of M/s. Hycron Electronics Vs. ITO and other related
cases, upheld the order of the Assessing Officer and dismissed
the appeal of the assessee for 100% deduction. Feeling
aggrieved, the assessee filed further appeal before the ITAT.
11. While observing that both the parties agreed that the issue
involved in appeals, was squarely covered against the assessee
in view of the decision of the coordinate bench of ITAT in the case
of Hycron Electronics, dismissed the appeals by a composite
order dated 11th August, 2016 for Assessment Year 2011-12 and
Assessment Year 2012-13 by holding that assessee is eligible for
deduction under Section 80 of the Act @ 25% of the profit derived
from industrial undertaking for these years and not @ 100% of
deduction claimed by the assessee.
12. Dissatisfied with the aforesaid order dated 11th August, 2016,
assessee filed appeal under Section 260A of the Act, 1961 before
the High Court of Himachal Pradesh, Shimla raising therein
substantial questions of law. The result of other assessees was
also on almost same pattern, who filed their respective appeals
as well. The High Court has decided the issue in a composite
judgment, in favour of all these assessees. The High Court held
Civil Appeal No. 7208 OF 2018 & Ors. Page 9 of 17
that there is no restriction that undertaking or enterprise
established after 7th January, 2003 cannot carried out ‘Substantial
Expansion’ cannot be carried out more than once as long as
period of eligibility for claiming deduction under Section 80-IC of
the Act. The High Court further held that since the language of
Section is very clear, reliance cannot be placed on Circular No. 7
of 2003 issued by CBDT on this issue substantial questions of
law were answered in favour of assessee and appeals were
allowed with direction that with respect to each of the assessees
the Assessing Officer shall carry out fresh assessment and pass
appropriate orders.
13. With the aforesaid factual background, we now proceed to
answer the question of law formulated above.
14. A gist of the legislative history and purpose behind the insertion of
Section 80-IA, 80-IB and 80-IC has already been mentioned
above. We have to keep in mind that these cases are confined to
Section 80-IC alone. As mentioned above, sub-section (2) of
Section 80-IC provides for tax benefit to those undertakings or
enterprises which had set up their manufacturing units in certain
specified areas including State of Himachal Pradesh to which this
case is belonged.
Civil Appeal No. 7208 OF 2018 & Ors. Page 10 of 17
15. It also gives benefit to these undertakings and enterprises which
have undertaken substantial expansion during the periods
mentioned therein. As there is no dispute that all these
assessees are covered by the provisions of sub-section (2), that
aspect need not be stated in detail. We, thus, reproduce those
portions of the provision which are relevant for our discussion:
“S.80-IC. Special Provisions in respect of certain
undertakings or enterprises in certain special category
States.— (1) Where the gross total income of an
assessee includes any profits and gains derived by an
undertaking or an enterprise from any business referred to
in sub-section (2), 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, as specified in sub-section (3).
xxx xxx xxx
(3) The deduction referred to in sub-section (1) shall be-
(I) in the case of any undertaking or enterprise referred
to in sub-clauses (I) and (iii) of clause (a) or sub-clauses (I)
and (iii) or clause (b), of sub-section (2), one hundred per
cent, of such profits and gains for ten assessment years
commencing with the initial assessment years;
(ii) in the case of any undertaking or enterprise referred
to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause
(b), of sub-section (2), one hundred per cent of such profits
and gains for five assessment years commencing with the
initial assessment year and thereafter, twenty-five per cent.
(or thirty per cent where the assessee is a company) of the
profits and gains.
(6) Notwithstanding anything contained in this Act, no
deduction shall be allowed to any undertaking or enterprise
under this section, where the total period of deduction
inclusive of the period of deduction under this section, or
under the second proviso to sub-section (4) of section 80-
Civil Appeal No. 7208 OF 2018 & Ors. Page 11 of 17
IB or under section 10C, as the case may be, exceeds ten
assessment years………..”

16. The essence of Section 3 as well as Section 6 have already been
reproduced above. Whereas the exemption is provided @ 100%
of such profits and gains for five assessment years commencing
with the initial assessment years and, thereafter, 25% (or 30%
where the assessee is a company) of the profits and gains for
next five years. The deduction is limited to a period of 10 years.
17. In this backdrop, the question is as to whether these assessees,
who had availed deductions @ 100% for first five years on the
ground that they had set up a manufacturing unit as prescribed
under sub-section (2) of the Act, can start claiming deductions @
100% again for next five years as they had undertaking
“substantial expansion” during the period mentioned in subsection
(2)? The answer has to be in the negative for the
following the reasons:
18. We are dealing with the deductions in respect of profits and gains
under Section 80-IC of the Act. No other provision is involved.
This section makes special provisions in respect of certain
undertakings or enterprises in certain special category States.
Section 80-IC was inserted by the Finance Act, 2003 w.e.f.
Civil Appeal No. 7208 OF 2018 & Ors. Page 12 of 17
April 1, 2004. As per this provision, certain undertakings or
enterprises in certain special category States are allowed
deduction from such profits and gains, as specified in sub-section
(3) of Section 80-IC. The provisions of Section 80-IC provided
deduction to manufacturing units situated in the State of Sikkim,
Himachal Pradesh and Uttaranchal and North-Eastern States.
The deduction was provided to new units established in the
aforesaid States, and also to existing units in those States if
substantial expansion was carried out. The deduction was
available @ 100% for ten Assessment Years for the units located
in North-Eastern and in the State of Sikkim and for the units
located in Himachal Pradesh, the deduction was available @
100% for five years and @ 25% for next five years.
19. In the instant case, we are concerned with the assessees who
had established their undertakings in the State of Himachal
Pradesh. Sub-section (3), as noted above, mentions the period
of 10 years commencing with the initial Assessment Year. Subsection
(6) puts a cap of 10 years, which is the maximum period
for which the deduction can be allowed to any undertaking or
enterprise under this section, starting from the initial Assessment
Year. Another significant feature under sub-section (3) is that the
Civil Appeal No. 7208 OF 2018 & Ors. Page 13 of 17
deduction allowable is 100% of such profits and gains from an
undertaking or an enterprise for five Assessment Years
commencing with the initial Assessment Year and thereafter the
deduction is allowable at 25% (or 30% where the assessee is a
company) of the profits and gains. Cumulative reading of these
provisions brings out the following aspects:
(a) Those undertakings or enterprises fulfilling the conditions
mentioned in sub-section (2) of Section 80-IC become entitled to
deduction under this provision.
(b) This deduction is allowable from the initial Assessment Year.
“Initial Assessment Year” is defined in Section 80-IB(14)(c) of the
Act.
(c) The deduction is @ 100% of such profits and gains for first 5
Assessment Years and thereafter a deduction is permissible @
25% (or 30% where the assessee is a company).
(d) Total period of deduction is 10 years, which means 100%
deduction for first 5 years from the initial Assessment Year and
25% (or 30% where the assessee is a company) for the next 5
years.
20. When we keep in mind the aforesaid scheme and spirit behind
this provision, such a situation cannot be countenanced where an
Civil Appeal No. 7208 OF 2018 & Ors. Page 14 of 17
assessee is able to secure deduction @ 100% for the entire
period of 10 years. If that is allowed it will amount to doing
violence to the provisions of sub-section (3) read with sub-section
(6) of Section 80-IC. A pragmatic and reasonable interpretation of
Section 80-IC would be to hold that once the initial Assessment
Year commences and an assessee, by virtue of fulfilling the
conditions laid down in sub-section (2) of Section 80-IC, starts
enjoying deduction, there cannot be another “Initial Assessment
Year” for the purposes of Section 80-IC within the aforesaid
period of 10 years, on the basis that it had carried substantial
expansion in its unit.
21. We are conscious of our recent judgment rendered by this very
Bench in Mahabir Industries v. Principal Commissioner of
Income Tax (Civil Appeal Nos. 4765-4766 of 2018 decided on
May 18, 2018). However, a fine distinction needs to be noted
between the two sets of cases. In Mahabir Industries, the
assessees had availed the initial deduction under a different
provision, namely, Section 80-IA of the Act, i.e. by fulfilling the
conditions mentioned in sub-section (4) of Section 80-IA. Those
conditions are altogether different. Deduction in respect of profits
and gains under the said provision is admissible when these
Civil Appeal No. 7208 OF 2018 & Ors. Page 15 of 17
profits and gains are from industrial undertakings or enterprises
engaged in infrastructure development etc. Even this availment
started at a time when Section 80-IC was not even on the statute
book. As mentioned above, Section 80-IC was inserted by the
Finance Act, 2003 with effect from April 01, 2004. The assessees
in those cases had started claiming and were allowed deductions
from the Assessment Years 1998-99 and 1999-2000 under
Section 80-IA and from the Assessment Year 2000-01 to
Assessment Year 2005-06 under Section 80-IB of the Act. The
deduction was, thus, claimed by the assessees in those appeals
under the new provision i.e. Section 80-IC on fulfilling conditions
contained in sub-section (2) of Section 80-IC for the first time for
the Assessment Year 2006-07. Thus, insofar as those cases are
concerned, the initial Assessment Year under Section 80-IC
started only from the Assessment Year 2006-07. In contrast,
position here is altogether different. These assessees have
availed deduction under Section 80-IC alone. Initially, they
claimed the deduction on the ground that they had set up their
units in the State of Himachal Pradesh and after availing the
deduction @ 100% they want continuation of this rate of 100% for
the next 5 years also under the same provision on the ground that
they have made substantial expansion. As pointed out above,
Civil Appeal No. 7208 OF 2018 & Ors. Page 16 of 17
once the assessees had started claiming deduction under Section
80-IC and the initial Assessment Year has commenced within the
aforesaid period of 10 years, there cannot be another initial
Assessment Year thereby allowing 100% deduction for the next 5
years also when sub-section (3), in no uncertain terms, provides
for deduction @ 25% only for the next 5 years. It may be
asserted again that the assessees accept the legal position that
they cannot claim deduction of more than 10 years in all under
Section 80-IC.
22. In view of the aforesaid discussion, we hold that after availing
deduction for a period of 5 years @ 100% of such profits and
gains from the ‘units’, the assessees would be entitled to
deduction for remaining 5 Assessment Years @ 25% (or 30%
where the assessee is a company), as the case may be, and not
@ 100%. The question of law is, thus, answered in favour of the
Revenue thereby allowing all these appeals.
No order as to costs.
………………………………………J.
(A.K. SIKRI)
………………………………………J.
(ASHOK BHUSHAN)
NEW DELHI;
AUGUST 20, 2018.
Civil Appeal No. 7208 OF 2018 & Ors. Page 17 of 17