In a recent judgment [Stovekraft India and Ors. vs. Commissioner of Income Tax (ITA No. 20/2015)] (Judgment), the Hon’ble Himachal Pradesh High Court (High Court) has, in a batch of over 40 cases, ruled in favour of the taxpayer and held that an undertaking/enterprise (Undertaking), established after 7 January 2003, carrying out “substantial expansion” within the specified window period, i.e. on or after 7 January 2003 but before 1 April 2012 (Time Window), would be entitled to 100% deduction on profits, under Section 80-IC of the Income-tax Act, 1961 (IT Act).


Section 80-IC of the IT Act provides profit-linked deduction to an Undertaking which is set up in certain states, viz. (i) Sikkim, (ii) Himachal Pradesh or Uttarakhand, and (iii) North‑Eastern states. The matters before the High Court were concerned with deduction in the state of Himachal Pradesh. The availability of this deduction is subject to the fulfilment of certain conditions – such as the nature of business undertaken by the taxpayer, period within which the Undertaking claiming such deduction is set up etc. In relation to Himachal Pradesh, this deduction is available in the following circumstances:

If the Undertaking sets up certain specified businesses within the Time Window (New Business Category) If the Undertaking undertakes ‘Substantial Expansion’ within the Time Window (Substantial Expansion Category)

(‘Substantial Expansion’ has been defined to mean increase in the investment in the plant and machinery by at least 50% of the book value of existing plant and machinery (before taking into consideration the depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken.)

The total period of deduction under section 80-IC of the IT Act is capped at 10 years. The quantum of deduction in both the above categories is 100% for the first five years (Initial Period) and 25% for the next five years (Later Period).

In the instant case, the taxpayer set up an Undertaking in the state of Himachal Pradesh during the Time Window and thus, claimed the deduction for 100% of profits derived from such Undertaking for the Initial Period on account of falling within the New Business Category. After the expiry of this Initial Period, the quantum of deduction available to the taxpayer would have been reduced to 25% of profits. However, in the last year of this Initial Period, the taxpayer undertook Substantial Expansion and thus, sought to claim the deduction in respect of 100% profits for another period of five years – this time, on account of falling within the Substantial Expansion Category.

Thus, in total, the taxpayer claimed the deduction in respect of 100% profits for 10 years (5 years under the New Business Category and 5 years under the Substantial Expansion Category). The assessing officer and the first appellate authority [Commissioner of Income-tax (Appeals), i.e. CIT(A)] as well as the second appellate authority [Income-tax Appellate Tribunal, i.e. ITAT] held that while the taxpayer can claim the deduction in respect of 100% profits under the New Business Category, the taxpayer was not entitled to claim the deduction under the Substantial Expansion Category. Their reason for denying this benefit was that this benefit is available only to an Undertaking which is set up prior to the Time Window (i.e. on or after 7 January 2003 but before 1 April 2012) and not to an Undertaking which is set up during this Time Window. Being aggrieved by this, the taxpayer filed an appeal before the High Court.


The High Court analyzed the relevant legislative provisions and noticed that section 80-IC of the IT Act does not create distinction between the old units, i.e. the units which stand established prior to 7 January 2003 (the cutoff date), and the new units established thereafter. In view of this, the High Court held that the artificial distinction (between units established prior to 7 January 2003 and units established thereafter) sought to be inserted by the income-tax authorities results in discrimination.

Basis this, the High Court reversed the ruling of the ITAT and held that even though the taxpayer was established after 7 January 2003 (the cutoff date), it was entitled to claim deduction in respect of its 100% profits for the second batch of five years even under the Substantial Expansion Category. This was in addition to the deduction in respect of its 100% profits already claimed for five years under the New Business Category. The argument of the income-tax authorities that this would amount to claiming deduction at the rate of 100% for ten years, and not just the first five years of being set up/Substantial Expansion, did not find merit with the High Court. In coming to its conclusion, the High Court also observed that the object, intent and purpose of section 80-IC of the IT Act is only to provide incentive for economic development, industrialisation and enhanced employment opportunities in these states.


This Judgment by the High Court is a welcome step and puts to rest the interpretational issue that had arisen in relation to the availability of profit-linked deduction for units [set up after 7 January 2003 (cut off date)] undertaking Substantial Expansion. The Judgment also re-affirms the fundamental principle in interpreting fiscal statutes that beneficial provisions should be construed liberally so as to advance the objective of the provision and not to frustrate it. One hopes that the principle laid down in this Judgment becomes final, but one may have to wait to see if it is challenged before the Supreme Court.