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2018 (6) TMI 89 - AT - Income TaxDeduction claimed u/s 80IA denied - meaning and scope of the term works contract - works contract or developer of infrastructure facilities - widening of existing roads by construction of additional lanes of a highway - whether the interest income was to be set off against the interest expenditure and the net income was to be excluded for the purpose of calculation of deduction u/s 80IA - apportionment of expense of the expenses of Head Office - Held that - The assessee had received payments from the Government in progress of its work has no bearing on eligibility of deduction u/s 80IA - contention of AO that the assessee had not undertaken any entrepreneurial and investment risk is an incorrect interpretation of the facts. The assessee deploying its resources i.e. finance technical expert human resources material machinery labour etc. in the construction work clearly exhibits the risks undertaken by the assessee. The assessee was to indemnify the employer of any losses/damage caused to any property/life in course of execution of works. Further it was responsible for the correction of defects arising in the works at its cost. Thus it cannot be said that the assessee had not undertaken any risk. It is clear that the assessee was not a works contractor simplicitor and was a developer and hence Explanation to section 80IA(13) of the Act does not apply to the assessee. In addition to developing the infrastructure facility the assessee was even operating and maintaining the same. Thus clearly the assessee is eligible for deduction u/s 80IA of the Act. Interest income - the same represents interest on fixed deposits - there is a direct nexus of the fixed deposit with the development activity of the assessee. AO in the assessment order has pointed out that there were interest expenses incurred by the assessee on cash credit equipment finance and unsecured loans. The total of the interest paid including bank charges (which are as per Section 2(28A) are also considered to be interest) for the BT Road project was Rs. 6, 56, 124. We find that the interest income and interest expenses are closely linked and hence we direct the ld AO to consider the net interest while determining the profit of the enterprise. In the instant case the net interest expense is more and hence it would not affect the computation of deduction u/s 80IA of the Act. Apportionment of expenses and depreciation apportionment - we find that we have directed to consider the interest and bank charges net of interest income. We find that the amount of Rs. 8, 84, 703/- includes the bank interest and bank charges of Rs. 6, 56, 124/-. Thus the balance amount of Rs. 2, 28, 579/- and the amount of depreciation of Rs. 1, 00, 505/- shall also be reduced from computation of deduction u/s 80IA of the Act. To this extent the order of the ld AO is upheld. Whether the CITA was justified in upholding the action of the ld AO in reducing the claim of depreciation from 30% to 15% on commercial vehicles? - Held that - Total contract value undertaken by the assessee includes a sum towards removal of earth from working site including loading unloading and carriage within a distance of 2 km over pacca road. For this purpose the commercial vehicles of the assessee had been used for execution of the development project undertaken by the assessee. Hence it could be safely concluded that the vehicles were used for the purpose of business for transportation of goods of running them on hire as admittedly the total contract value includes hire charges (in different nomenclature) and accordingly entitled for higher rate of depreciation @ 30%.- this depreciation is related to B.T.Road Project. Hence the disallowance of depreciation of 15% would only go to increase the profits of B.T.Road Project and consequentially the assessee would be entitled for higher claim of deduction u/s 80IA of the Act. We find that the CBDT in its Circular No. 37 of 2016 dated 2.11.2016 had also confirmed this aspect.
Issues Involved:
1. Denial of deduction claimed under Section 80IA of the Income Tax Act. 2. Treatment of interest income for the purpose of deduction under Section 80IA. 3. Apportionment of head office expenses and depreciation for the purpose of deduction under Section 80IA. 4. Reduction of depreciation rate on commercial vehicles from 30% to 15%. Issue-wise Detailed Analysis: 1. Denial of Deduction Claimed under Section 80IA: The primary issue is whether the deduction under Section 80IA was rightfully denied by the Commissioner of Income Tax (Appeals) [CITA]. The assessee, engaged in construction activities, claimed a deduction for widening and improving a road under a contract with the Public Works Department, Government of West Bengal. The Assessing Officer (AO) denied the deduction, arguing that the assessee was merely a contractor and not a developer, as the project was conceived and funded by the government, and the assessee did not take any financial risk. The AO also noted that the assessee used old machinery and did not prepare the project design. The CITA upheld this view, concluding that the assessee was a works contractor, not a developer. 2. Treatment of Interest Income for the Purpose of Deduction under Section 80IA: The AO observed that the interest income of Rs. 5,12,928 was not derived from the eligible undertaking and thus should not be included in the deduction calculation under Section 80IA. The AO argued that even if considered business income, it did not qualify as derived from the eligible business. 3. Apportionment of Head Office Expenses and Depreciation: The AO found that the head office expenses and depreciation were not appropriately apportioned among various projects. The AO apportioned expenses of Rs. 8,84,703 and depreciation of Rs. 1,00,505 to the B.T. Road Project, reducing the profits eligible for deduction under Section 80IA. 4. Reduction of Depreciation Rate on Commercial Vehicles: The AO reduced the depreciation rate on commercial vehicles from 30% to 15%, resulting in a disallowance of Rs. 10,22,504. The AO argued that the vehicles were not used for hiring purposes, but for the assessee's own business. The CITA upheld this decision. Judgment Analysis: 1. Deduction under Section 80IA: The Tribunal examined the provisions of Section 80IA, noting that it applies to enterprises engaged in developing, operating, and maintaining infrastructure facilities. The Tribunal referred to CBDT Circular No. 4/2010, which clarifies that widening of existing roads by constructing additional lanes qualifies as a new infrastructure facility. The Tribunal found that the assessee's work on the B.T. Road Project met this criterion and was thus eligible for the deduction. The Tribunal also cited various judicial precedents distinguishing between a developer and a contractor, concluding that the assessee undertook significant entrepreneurial and investment risks, thereby qualifying as a developer. 2. Interest Income Treatment: The Tribunal found that the interest income was closely linked to the development activity, as the fixed deposits were used to provide bank guarantees for the project. The Tribunal directed the AO to consider net interest (interest income minus interest expenses) while determining the profit, noting that the net interest expense was higher and would not affect the deduction calculation. 3. Apportionment of Expenses and Depreciation: The Tribunal upheld the AO's apportionment of head office expenses and depreciation, but with adjustments. The Tribunal directed that the net interest and bank charges should be considered, and the remaining expenses and depreciation should be apportioned accordingly. 4. Depreciation Rate on Commercial Vehicles: The Tribunal found that the commercial vehicles were used for transporting goods as part of the development project, qualifying them for higher depreciation at 30%. The Tribunal referred to a jurisdictional High Court decision supporting this view. Additionally, the Tribunal noted that any disallowance would increase the profits of the B.T. Road Project, thereby increasing the deduction under Section 80IA. Conclusion: The Tribunal partly allowed the appeal, granting the deduction under Section 80IA, directing the AO to consider net interest for deduction calculation, and allowing higher depreciation on commercial vehicles. The Tribunal upheld the apportionment of expenses and depreciation with adjustments.
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