Tax Rules for Factories in Hilly Regions: CBDT Ends Long-Running Dispute
If your company owns a manufacturing unit in a hilly region, recent developments by the CBDT may finally bring clarity on an old tax headache. A dispute over whether deductions under Section 80-IC or 80-IE apply to factories operating in hilly terrains—especially where part of the factory lies outside the notified area—has now been resolved.
This blog simplifies the issue for professionals, tax consultants, and corporates operating in such zones.
The Background of the Tax Dispute
Several corporates had set up manufacturing units in special category states like Himachal Pradesh, Uttarakhand, and parts of the North-East to claim tax deductions under:
- Section 80-IC (for units in Himachal Pradesh and Uttarakhand)
- Section 80-IE (for North-Eastern states)
The Income Tax Act allowed 100% profit deduction for 5 years, and then 25–30% for the next 5 years.
But the dispute arose when:
- The entire land parcel of a factory was not entirely within the notified region.
- Or access roads, storage units, or boundary walls were technically outside the demarcated area.
This led to assessments denying deductions, triggering litigation and uncertainty.
CBDT Clarification: Relief for Mixed-Zone Factories
Based on representations from industry and legal advice, the CBDT has now allowed deduction in cases where:
- Substantial manufacturing activity is within the notified area.
- Peripheral infrastructure like roads or utilities lie outside.
- The factory premises are adjacent to the notified zone boundary.
✅ CBDT’s view: The “dominant purpose” test applies. If core manufacturing is in the notified region, minor overlaps won’t disqualify the unit from tax benefits.
🔗 [Reference: Official CBDT communication – to be updated once public circular is uploaded on incometaxindia.gov.in]
What Taxpayers Should Do Now
If you’ve faced denial or dispute over Section 80-IC or 80-IE claims, here’s your action plan:
For ongoing assessments:
- Cite this CBDT clarification and submit a site plan showing factory layout.
- Provide documents like:
- Local authority approval
- Electricity and water connections
- Location certificate
For past years under appeal:
- Use this clarification in your CIT(A) or ITAT appeals.
- Ask your counsel to refer to the “dominant use” principle used in GST and property law rulings.
Legal Angle: Similar to SC View on Mixed Use Zones
The CBDT stance aligns with the Supreme Court’s interpretation in zoning disputes, where the primary purpose of the premises determines its classification.
Case in point:
In K.R. Builders vs. State of Karnataka, SC upheld the view that auxiliary use outside the notified zone doesn’t alter the status of the primary activity if zoning compliance is largely met.
Expert Insight: Don’t Wait—File a Revised Return If Eligible
Tip from Efiletax: If your unit was denied a deduction in the past three years and assessment is not complete, file a revised or updated return under Section 139(5) or 139(8A), as applicable. Don’t wait for department notices.
Summary
CBDT has clarified that manufacturing units located mostly within notified hilly areas can claim tax deductions under Section 80-IC/80-IE, even if minor parts lie outside. This resolves long-standing disputes and helps eligible units revise past returns or strengthen appeals.
FAQs
Q1. What is the benefit under Section 80-IC or 80-IE?
100% tax deduction for the first 5 years and partial deduction for another 5 years for eligible manufacturing units in specified hilly or North-Eastern states.
Q2. Can a unit partially outside the notified region still claim the benefit?
Yes, if the core manufacturing activity is within the notified zone and peripheral parts lie outside.
Q3. Is a new CBDT circular available?
As of now, the clarification is part of official internal communication. A formal circular is expected soon.
Final Thoughts
The settlement between corporates and the tax department is a welcome move. It simplifies compliance and ends costly litigation for industries in hilly areas.