ORDER
M.A. Bakshi, V.P.
These two appeals-one filed by the assessee for the assessment year 1996-97 and the other filed by the revenue for the assessment year 1997-98, involving common issue, are being disposed of by this consolidated order for the sake of convenience.
2. The common issue involved in these appeals is as to whether assessee is entitled to deduction in respect of profits and gains derived from industrial undertaking under section 80-I.
The relevant facts briefly stated are that the assessee-company was incorporated in the previous year relevant to assessment year 1990-91 and started its manufacturing operations in the previous year relevant to assessment year 1991-92. The company claimed deduction under section 80-I for the first time in assessment year 1991-92 and the same was allowed. The deduction was claimed in the subsequent assessment years also and up to assessment year 1995-96, the same stands allowed. In assessment year 1996-97, the assessing officer observed that assessee had purchased sonic old machinery which was added to the existing machinery and the total value of the old machinery with the addition of purchases in the previous year relevant to assessment year 1996-97 exceeded 20% of the total value of the machinery. The assessing officer was of the view that one of conditions for grant of deduction under section 80-I is that the value of the old machinery should not excecd 20 per cent of the total value of the machinery. Since that condition is not satisfied in assessment year 1996-97, deduction under section 80-I was denied to the assessee. In assessment vear 1997-98 also, the assessing officer followed his decision for the assessment year 1996-97 and disallowed the claim of the assessee.
3. The CIT (A) decided the issue in favour of the revenue vide order dated 25-3-1999 relying upon the decisions of Delhi High Court Safdarjung Enclave Educational Sociely v. Municipal Corpn. of Delhi (1990) 181 ITR 154 (Del) and. Kerala High Court CIT v. Seevan Plywoods(1991) 190 ITR 564 (Ker). The assessee is in appeal against the decision of the CIT (A).
4. For the assessment year 1997-98, when the CIT (A) took up the appeal of the assessee, the decision of the Supreme Court in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC), was brought to his notice. It was pleaded before him that the issue was covered in favour of the assessee by the said decision of the Supreme Court. The CIT (A) found that the said decision of the Supreme Court was in regard to section 15C of the Indian Income Tax Act, 1922 but the provisions of section 80IA(2) were also the same as section 15C of the 1922 Act. He accordingly, held that since the industrial undertaking was not formed by transfer to the new business of machinery and plant previously used for any purpose value whereof exceeded 20 per cent, the assessee was entitled to deduction Under section 80-I (wrongly mentioned as 80-IA). He accordingly directed the assessing officer to allow the claim of the assessee. Revenue has filed an appeal against the decision of the CIT (A) for the assessment year 1997-98.
5. Whereas, the learned counsel for the assessee supported the order of the CIT (A) for the assessment year 1997-98, the learned Departmental Representative relied upon the decision of the CIT (A) for the assessment year 1996-97.
6. The learned counsel for the assessee further contended that conditions specified in section 80-I are required to be satisfied in the initial year and once all the conditions are satisfied, assessee is entitled to deduction in the subsequent assessment years specified under the said section. In this connection, he relied upon the decision of the Supreme Court in the case of Bajaj Tempo Ltd.s case (supra). Reliance was also placed on the following decisions in support of the aforesaid contentions :
(i) CIT v. Nippon Electronics (India) P Ltd. (1990) 181 ITR 518 (Karn);
(ii) Saurashtra Cement & Chemical Industries Ltd v. CIT (1980) 123 ITR 669 (Guj.).
It was pointed out that Gujarat High Court has laid down that once deduction is allowed in the first year, revenue has no power to deny the deduction in subsequent assessment years as provided under the Act. The learned counsel further pointed out that whereas there are several decisiops to the effect that if the conditions specified under section 80-I are satisfied in any year subsequent to the year of commencement of business, the assessee would be entitled to deduction in respect of the profits and gains of that year in which such conditions are satisfied. However, according to the learned counsel, the reverse is not true. It was further contended that in any case, it is an admitted fact that assessee had set up a new industrial undertaking and it had not been formed by transfer of old m achin cry the value of which exceeded 20% of the total value of the machinery. It was accordingly pleaded that the decision of the CIT (A) for the assessment year 1997-98 may be upheld and for the assessment year 1996-97 the decision of the CIT (A) may be reversed and deduction allowed to the assessee.
7. The learned Departmental Representative, on the other hand, contended that the Karnataka High Court in the case in 159 ITR 563 (sic) has laid down that the condition for grant of deduction under section 80 are to be satisfied for all the assessment years and in case the condition is not satisfied in any of the years, deduction under section 80-I will not be permissible in that year. In regard to the contentions advanced on behalf of the assessee that industrial undertaking was not formed by transfer of old machinery, the learned Departmental Representative contended that formation of industrial undertaking is a continuous process and since in assessment years 1996-97 and 1997-98 the old machinery transferred to the industrial undertaking exceeded 20 per cent of the total value of the machinery, the assessee was not entitled to deduction under section 80-IA. He accordingly pleaded that the appeal of the assessee for the assessment year 1996-97 may be dismissed and the appeal of the revenue for the assessment year 1997-98 be allowed.
8. We have given our careful consideration to the rival contentions. The facts are not in dispute. As already pointed out the company was formed in 1990 and for the assessment years 1991-92 to 1995-96, the assessee was held to be eligible to deduction under section 80-I. In other words, it is not disputed that the assessee satisfied all the conditions laid down under section 80-I for being eligible to deduction under the said section in respect of the said assessment years. It is also not disputed that in assessment years 1996-97 and 1997-98, with the purchase of old machinery, which had earlier been used by the assessee as lessee, the value of the old machinery marginally exceeded 20 per cent of the total value of the machinery of the industrial undertaking. The issue before us is as to whether the conditions laid down under section 80-I are satisfied for the assessment years 1996-97 and 1997-98. In fact there is no dispute about the various conditions required to be satisfied under section 80-I for grant of deduction except the condition provided under sub-section (2)(ii). The section 80-I(2)(ii) reads as under 80-I(2)-This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i)** ** ** (ii) it is not formed by the transfer to a new business of rnachinerv or plant previously used for any purpose; Explanation (2) is also relevant for the purpose of present controversy which is reproduced hereunder :
“Explanation (2)-Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinerv or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for thepurposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.”
9. The dispute, as already pointed out, is relating to the condition under sub-section (2)(ii) of section 80-I. A plain reading of the aforesaid provisions of the Act reveals that one ofthe conditions to be satisfied for grant of deduction under section 80-I is that industrial undertaking is not formed by the transfer to a new business of machinery or plant previously used for any purpose. However, as per Explanation 2, when the old machinery does not exceed 20 per cent of the total value of the machinery or plant used in business, the condition specified above is deemed to have been complied with. In other words, if the industrial undertaking is formed by the transfer to a new business of machinery or plant previously used for any purpose, the value of which does not exceed 20 per cent of the total value of the machinery, the condition specified under subsection (2)(ii) of section 80-I would stand satisfied. As already pointed out, for. the assessment years 1991-92 to 1995-96, the aforementioned condition was satisfied insofar as the assessee was held to be entitled to deduction and it is not even disputed that all the conditions laid down under section 80-I were satisfied. Thus, it is evident that the industrial undertaking was not formed by the transfer to a new business of machinery or plant previously used for any purpose the value of which exceeded 20 per cent of the total value of the machinery. The question that remains to be considered is as to whether for the assessment years 1996-97 and 1997-98, when the value of the old machinery exceeded 20 per cent of the total value of machinery, it can be said that the industrial undertaking was formed by transfer to a new business of machinery or plant previously used for any purpose the value of which exceeded 20 per cent of the total value of the machinery. Their Lordships of the Supreme Court in the case of Bajaj Tempo Ltd.s case (supra) with reference to section 15C of 1922 Act held as under :
“Section 15C of the Indian Income Tax Act, 1922, read as a whole, is a provision directed towards encouraging industrialization by permitting an assessee setting up a new industrial undertaking to claim relief from tax to the extent of tax on six per cent of the capital employed every year. But the legislature took care to restrict such benefit only to those undertaking which were new in form and substance, by providing that the undertaking should not be formed in any manner provided in clause (1) of section 15C(2). By that clause, the legislature intended to control any attempt or effort to abuse the benefit intended for new undertakings by changing of label. The intention was not to deny the benefit to genuine new industrial undertakings but to control the mischief which might have otherwise taken place. Adopting a literal construction would result in defeating the very purpose of section 15C. Therefore, it becomes necessary to resort to contruction which is reason able and purposive to make the provision meaningful. The initial exercise, therefore, should be to find out whether the undertaking was new. Once this test is satisfied, then clause (i) should be applied reasonably and liberally keeping in view the spirit of section 15C(1).”
Their Lordships further held :
“The restriction or denial under clause (i) of section 15C(2) arises not by transfer of building or material to the new undertaking but when it is formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. Therefore, it is not every transferof building or material but one which can be field to have resulted in the formation of the new undertaking that results in the denial of the relief tinder section 15C(1). Therefore, even if the new undertaking is established by transfer of building, plant or machinery but it is not formed as a result of such transfer, the assessee cannot be denied the benefit. The transfer, to take the new undertaking out of the purview of section 15C(1), must be such that, but for the transfer, the new undertaking would not have come into being.”
A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.”
As per the above decision of the Supreme Court, the initial exercises should be to find out whether the undertaking was new. Once this test is satisfied, then clause should be applied reasonably and liberally keeping in view the spirit of 15C(i) of 1922 Act (corresponding to section 80-I of 1961 Act). In this case, assessee had established a new industrial undertaking in the year 1990. The said industrial undertaking had worked for more than 5 years as a new industrial undertaking. In the sixth year, the assessee purchased some more machinery, which had earlier. been used by the assessee as leased machinery. The value of the old machinery in aggregate exceeded 20 per cent of the total value of the machinery. Since the transfer of machinery to the undertaking was in the sixth year of its business, it cannot be said that the company was formed by transfer of old machinery the value of which exceeded 20 per cent of the total value of the machinery. In the present case, the industrial undertaking was not formed by the transfer of the old machinery. The allowance of the claim under section 80-I for first five years is the testimony to such a finding. The only question that remains to be considered is as to whether the aforementioned decision of the Honble Supreme Court in regard to interpretation of section 15C of the Indian Income Tax Act, 1922 would be applicable in interpreting the provisions of section 80-I. The CIT (A) in assessment year 1997-98 has reproduced section 15C of the Indian Income Tax Act, 1922 and section 80-IA(ii). However, it is noted that the assessee had claimed deduction under section 80-I and not under section 80-IA. Therefore, the comparison shall have to be made between section 15C of the Indian Income Tax Act, 1922 with section 80-I of the 1961 Act. Section 15C in this regard may be reproduced as under :
“Section 15C of the Indian Income Tax Act, 1922.
15C. (1) Save as otherwise hereinafter provided the tax shall not be payable by an assessee on so much of the profits orgains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking computed in accordance with such rule as may be made in this behalf by the Central Board of revenue.
(2) This section applies to any industrial undertaking which-
(i) is not formed by, the splitting up, or the reconstruction, of business already inexistence orby the transfer to anew business ofbuilding, machinery or plant previously used in any other business …….
Section 80-I of the Income Tax Act, 1961 :
“80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, 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 twenty per cent thereof :
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(iii) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(v)** ** **
“Explanalion (2)–Where in the case of an industrial undertaking, any machinery or plant orany part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this stib-sectioil, the condition specified therein shall be deemed to have been complied with”.
On comparison of section 15C of the 1922 Act and section 80-I of the 1961 Act, reproduced above, it is observed that the language used in these sections is the same. The condition under section 15C of the 1922 Act was also the same in regard to formation of the new industrial undertaking of the old machinery as under section 80-I of the 1961 Act. In this case, it is evident from the facts stated above that the company had been formed in the year 1990 and the condition that it was not formed by the transfer of old machinery the value of which exceeded 20% was also satisfied. That means even in the year under appeal, the condition that the company had not been formed by the transfer of old machinery the value of which exceeded 20% is also satisfied for both the assessment years 1996-97 and 1997-98. The mere fact that the value of the old machinery exceeds 20% of the total value of the machinery in 1996-97 and 1997-98 that is in sixth and seventh year of commencement of business does not in so far to mean that the company was formed by the transfer of old machinery the value of which exceeded 20% of the total value of the machinery. The formation of the industrial undertaking, as already, pointed out, was in assessment year 1990-91. It was a new unit and had not been formed by, the transfer of the old machinery as such. The controversy as to whether the conditions laid down under section 80-I are to be satisfied in all the assessment years in which the assessee is eligible to deduction or only in the initial year, therefore in this case is of only academic interest in so far as the condition of formation of industrial undertaking by not transferring old machinery the value of which does not exceed 20% of the total value of the machinery is with reference to the initial formation of the unit. In our considered view, it cannot be said that the new industrial undertaking is formed every year. Moreover, the decision of the Honble Supreme Court in the case of Bajaj Tempo Ltd. (supra) supports the view that mere transfer of old machinery is not enough for attracting the condition under section 15C (corresponding to section 80-I) of formation of the undertaking. The transfer of old machinery must be such that but for the transfer the new undertaking would not have come into being. The very fact that new unit existed for five years without the old machinery establishes the fact that the new undertakim, was not formed by the transfer of old machinery. The contention advanced on behalf of the revenue that formation in every case is a continuous process is not well founded.
10. In the final analysis, we, on the facts and in the circumstances of this case are of the view that the company had not been formed by the transfer of old machinery, the value of which exceeded 20% of the total value of the machinery and accordingly, the assessee was not disqualified from deduction under section 80-I merely because assessment years 1996-97 and 1997-98 with the purchase of more machinery the value of the old machinery had exceeded the 20% limit. We reiterate for the sake of charitv that the condition under section 80-I(2)(i) applies to the formation of the industrial undertaking and the mere transfer of old machinery not having effected formation of the industrial undertaking is satisfied in this case. As held by their Lordships of the Supreme Court, mere transfer of old machinery is not for disqualification from deduction under section 15C of the 1922 Act (corresponding section 80-I). We, therefore, uphold the order of the CIT (A) for the assessment year 1997-98. The order of the CIT (A) as well as that of assessing officer for assessment year 1996-97 are set aside and we direct the assessing officer to grant deduction to the assessee under section 80-I for the assessment year 1996-97 as well as for the assessment year 1997-98.
11. In the result, whereas the appeal of the assessee for the assessment year 1996-97 is allowed, the appeal of the revenue for the assessment year 1997-98 is dismissed.