2025 (4) TMI 1661 - AT - Income Tax

Deduction u/s 80IA - AO denied the deduction stating that the assessee had failed to satisfy the condition laid down in sub-clause (i)(b) of explanation to section 80IA(4) according to which the deduction is available to an enterprise carrying on the business of developing or operating or operating and maintaining a new infrastructure facility - Scope of Explanation inserted to section 80IA by Finance Act 2009 w.r.e.f. 1.4.2000 - HELD THAT - It is the appellant who carried out the scope of work assigned and transferred to it duly so approved by NHAI and not by the Main Contractor/Longjian. It is relevant to note that Main Contractor did not develop the same stretch of road. Further the signing of Running Account bills by the Main Contractor was a legal procedure and its not determinative of true nature of works done by the appellant they are also signed by the appellant and endorsed by NHAI while making direct payment to the appellant. Thus the appellant became assignee of the work which makes it eligible as a developer and not as a sub-contractor and hence entitled for deduction u/s.80IA 4 and relied upon case laws Chettinad Lignite Transport Service P Ltd. 2019 (4) TMI 683 - MADRAS HIGH COURT Bothra Shipping Services P. Ltd . 2024 (10) TMI 36 - CALCUTTA HIGH COURT Regarding Revenue s argument that it was an existing road not a new road and Not eligible for deduction. The appellant contented that widening of existing road is made eligible for deduction by CBDT Circular No.4/2010 as new facility. Even strengthening of existing road is held to be eligible for deduction u/s. 80IA 4 by the following judgements Montecarlo Construction Ltd. 2024 (1) TMI 383 - GUJARAT HIGH COURT and Simplex Infrastructure Ltd. 2017 (3) TMI 1050 - ITAT KOLKATA The case laws relied by the appellant are clearly distinguishable. The agreement entered by the appellant itself described the assessee as Sub-Contractor. In the above circumstances and facts of the case this Tribunal directed the Department to verify from the Jurisdictional Assessing Officer whether the payments were made by NHAI directly to the appellant herein or to the main Contractor Longjian. Thus the reply received from the Assessing Officer does not make it clear whether NHAI made payment only to the assessee or to the Main Contractor. Therefore the AO is directed to verify from NHAI the payments made by it to the appellant towards the project though the appellant is described as Sub-Contractor and also any payment made to the Main Contractor so that there is no double claim by the parties. The Jurisdictional Assessing Officer to make necessary enquiry and pass order in accordance with law by giving proper opportunity of hearing to the assessee Disallowance u/s. 40(a)(ia) - Non deduction of TDS on financial charges - CIT A held that the appellant obtained finance from SREI Pv t. Ltd. to purchase the machinery and paid installments to SREI Pvt. Ltd. which consisted of both the principal and interest (financial charges) in such circumstances the appellant should have deducted TDS on the interest/financial charges part of the repayment and therefore confirmed the addition made by the AO - HELD THAT - Second ground namely disallowance u/s. 40(a)(ia) is also set aside to the file of JAO and pass order in accordance with the provisions of law by giving proper opportunity of hearing to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

(a) Whether the appellant, a Joint Venture undertaking engaged as a sub-contractor for rehabilitation and upgrading of a National Highway road section, is eligible to claim deduction under section 80IA(4) of the Income Tax Act, 1961, despite the retrospective insertion of an Explanation by Finance Act, 2009, which disallows deduction to enterprises executing works contracts awarded by any person including government authorities.

(b) Whether the retrospective amendment to section 80IA(4) is valid or whether it violates principles of natural justice and fundamental rights by unduly prejudicing the appellant.

(c) Whether the appellant should be treated as a developer or operator of infrastructure facilities entitled to deduction under section 80IA(4), or merely as a sub-contractor excluded by the Explanation.

(d) Whether the disallowance made under section 40(a)(ia) for non-deduction of tax at source (TDS) on financial charges paid to SREI Pvt. Ltd. is justified, considering the appellant's contention of double taxation and prior tax payment by the recipient.

(e) Whether interest and penalty proceedings under sections 234B/C/D and 271(1)(c) of the Act are sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Eligibility for deduction under section 80IA(4) and validity of retrospective amendment

Legal framework and precedents: Section 80IA(4) provides deduction to enterprises engaged in developing, operating, or maintaining infrastructure facilities. The Explanation inserted by Finance Act, 2009 retrospectively from 1.4.2000, clarifies that the section does not apply to businesses that are in the nature of works contracts awarded by any person including government authorities.

Precedents cited by the appellant include Panbari Tea Co. Ltd., Rajiv Kalia, Mangal Keshav Securities, Harmuny Entertainment, Kanhaiya Lal Moti Lal, Maharaja Shri Umed Mills, and Motors & General Stores, emphasizing substance over form and that the nature of work and payment receipt from the government may qualify an entity as a developer rather than a sub-contractor.

CBDT Circular No.4/2010 and judgments such as Montecarlo Construction Ltd and Simplex Infrastructure Ltd were relied upon to argue that widening or strengthening existing roads qualifies as 'new infrastructure facility' eligible for deduction.

Court's interpretation and reasoning: The Tribunal examined the Joint Venture Agreement, NHAI letters, and Running Account Bills, which uniformly describe the appellant as a sub-contractor to the main contractor Longjian Road & Bridge Ltd., who was awarded the contract by NHAI. The bills were presented under the signature of Longjian as contractor and the appellant as sub-contractor. The Tribunal noted the Explanation to section 80IA(4) explicitly excludes works contracts awarded by any person including government entities from the ambit of deduction.

Despite the appellant's contention that payments were made directly by NHAI and that the appellant effectively performed the development work, the Tribunal observed that the nomenclature and contractual framework designate the appellant as a sub-contractor. The Tribunal directed the Assessing Officer to verify from NHAI whether payments were made directly to the appellant or only to the main contractor to avoid double claims.

The Tribunal held that the retrospective amendment is valid and applicable, and the appellant's claim for deduction under section 80IA(4) is not sustainable in light of the Explanation.

Key evidence and findings: The Joint Venture Agreement clauses, NHAI's approval letter for sub-contract, Running Account Bills signed by Longjian as contractor and the appellant as sub-contractor, and the absence of clear evidence that NHAI paid the appellant directly.

Application of law to facts: The Explanation to section 80IA(4) applies retrospectively from 1.4.2000 and excludes works contracts from deduction. The appellant's status as sub-contractor executing a works contract awarded to Longjian excludes it from deduction.

Treatment of competing arguments: The appellant's reliance on substance over form and case laws supporting eligibility despite sub-contractor nomenclature was considered but found unpersuasive given the contractual documentation and statutory Explanation. The Tribunal emphasized the contractual reality over the appellant's characterization.

Conclusion: The appellant is not entitled to deduction under section 80IA(4) for the relevant assessment years as it is a sub-contractor executing a works contract, excluded by the Explanation inserted retrospectively.

Issue (c): Treatment of appellant as developer vs. sub-contractor

The appellant argued that despite being labeled a sub-contractor, it effectively undertook development and received payments directly from NHAI, qualifying it as a developer entitled to deduction.

The Tribunal examined the Joint Venture Agreement, NHAI letters, and RA bills, which consistently show the appellant as sub-contractor to Longjian, the main contractor. The Tribunal found no conclusive evidence that NHAI paid the appellant directly and directed further verification by the Assessing Officer.

Thus, the Tribunal did not accept the appellant's contention that it was a developer by substance, holding that the contractual and documentary evidence indicates a sub-contracting relationship.

Issue (d): Disallowance under section 40(a)(ia) for non-deduction of TDS on financial charges

Legal framework: Section 40(a)(ia) disallows expenses if tax is not deducted at source as required under the Act.

The appellant contended that it was not liable to deduct TDS on financial charges paid to SREI Pvt. Ltd. and that the recipient had already paid tax on the income, so double taxation should be avoided.

The Tribunal noted that the appellant obtained finance from SREI Pvt. Ltd. to purchase machinery and paid installments comprising principal and interest (financial charges). Interest payments attract TDS obligations.

The Tribunal upheld the disallowance under section 40(a)(ia) as the appellant failed to deduct TDS on the interest portion of payments made to SREI Pvt. Ltd.

The issue was set aside to the Assessing Officer for fresh verification and order after giving opportunity to the appellant, in line with the order on section 80IA(4) claim.

Issue (e): Interest and penalty proceedings under sections 234B/C/D and 271(1)(c)

The Tribunal noted the appellant's challenge to interest and penalty levied but did not adjudicate these issues independently. Since the assessment was set aside for fresh adjudication on primary issues, these consequential matters were also remanded to the Assessing Officer for consideration in accordance with law.

3. SIGNIFICANT HOLDINGS

"According to this Explanation a person awarded a works contract by anybody including the Central or State Government is not eligible for deduction 80IA(4), therefore the disallowance made by the AO of Rs.2,42,98,174 is upheld."

"The appellant was indeed given a works contract by Longjian Road & Bridge Ltd. Company and is thus covered by the Explanation inserted vide Finance (No.2) Act, 2009 to the provisions of section 80IA (with retrospective effect from 1.4.2000)."

"The signing of Running Account bills by the Main Contractor was a legal procedure and is not determinative of the true nature of works done by the appellant."

"The Tribunal directed the Department to verify from the Jurisdictional Assessing Officer whether the payments were made by NHAI directly to the appellant herein or to the main Contractor Longjian, so that there is no double claim by the parties."

"The appellant should have deducted TDS on the interest/financial charges part of the repayment and therefore the addition made by the AO under section 40(a)(ia) is confirmed."

"The assessment is set aside to the file of Jurisdictional Assessing Officer to make necessary enquiry and pass order in accordance with law by giving proper opportunity of hearing to the assessee."

Core principles established include the retrospective application of the Explanation to section 80IA(4) excluding works contracts from deduction, the primacy of contractual documentation in determining eligibility for deduction, and the obligation to deduct TDS on interest payments under section 40(a)(ia).

Final determinations on each issue are that the appellant is not entitled to deduction under section 80IA(4) as a sub-contractor executing a works contract, the disallowance under section 40(a)(ia) is justified subject to further verification, and the assessment is remanded for fresh adjudication consistent with these findings.