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Commissioner of Income Tax v. M/s Classic Binding Industries

Civil Appeal · 2018 INSC 725Decided 20 Aug 2018
Civil Appeal No. 7208 of 2018
Justice A.K. Sikri · Justice Ashok Bhushan

Background

The assessee firm ran a manufacturing unit in Himachal Pradesh and had already claimed a 100% profit deduction under Section 80-IC of the Income Tax Act for the first five years permitted under the law. After carrying out a "substantial expansion" of its factory in the sixth year, it claimed it was entitled to restart the 100% deduction for another five years, instead of dropping to the 25% rate the law prescribes for years six through ten. The High Court had sided with the assessee, prompting the tax department to appeal to the Supreme Court. This judgment also covered several other similarly placed appeals raising the identical legal question.

Decision Breakdown

The Supreme Court held that Section 80-IC allows a total deduction period of only ten years, 100% for the first five years and 25% (or 30% for companies) for the remaining five, regardless of whether the unit later undergoes substantial expansion. The Court reasoned that "substantial expansion" cannot create a fresh "initial assessment year" once a unit has already begun claiming deductions under the same provision, since the statute's own cap on the total exemption period would otherwise be defeated. It distinguished this situation from cases where units had claimed deductions under the predecessor provisions (Sections 80-IA/80-IB) before Section 80-IC's initial assessment year began. The Court therefore ruled in favour of the tax department and allowed all the appeals, with no order as to costs.

Lesson Learnt

A business that has already started claiming a tax deduction for a fixed statutory period cannot use a subsequent factory expansion to "reset the clock" and claim the highest deduction rate all over again: the overall ten-year cap under Section 80-IC applies regardless of later expansion.

Official source (sci.gov.in)View Judgment (PDF)

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