2025 (5) TMI 1651 - AT - Income Tax

Eligibility for deduction u/s 80IA(4) - mandate under the provisions of the Act to develop operate and maintain the infrastructure to avail the benefit - assessee claims to be a developer of infrastructure facilities but the Revenue contends it is merely a works contractor - HELD THAT - There is no prerequisite to satisfy all the conditions cumulatively to be eligible for deduction u/s.80IA. Hence the argument of the revenue that the assessee should have earned income by operating an infrastructural facility by concluding that the conditions are to cumulatively satisfied deserves to be rejected. As a consequence we are inclined to agree with the argument of the assessee and hence the grounds raised by the Revenue in this regard are dismissed. As examined the reporting made by the assessee and it is important to note that the deduction u/s. 80IA is granted to the taxpayers with respect to income generated from the specified activity. The method of recognising income based on the generally accepted accounting principles / accounting standards would not alter the nature of contract entered into by the assessee. Deduction claimed u/s.80IA relates to the extent of amount recognised as income during the assessment years under consideration and hence the deduction cannot be denied on this count. In view of the above findings the grounds raised by the revenue in this regard are dismissed. From the perusal of nature of contracts / projects carried out by the assessee involves execution of extensive developmental works including canal excavation bridge construction storm water drainage systems and tank formation projects across Tamil Nadu which establishes the fact that the assessee had undertaken full-fledged development responsibilities and hence the projects carried out cannot be equated to a mere works contract assignments. We are of the considered opinion that the projects carried out by the assessee was only as a developer and not as a contractor. Hence we dismiss the grounds raised by the Revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the assessee is eligible to claim deduction under section 80IA(4) of the Income-tax Act, 1961, given the nature of its activities in developing infrastructure projects.

(b) Whether the assessee qualifies as a "developer" or is merely a "works contractor" within the meaning of section 80IA(4) and the Explanation thereto, especially in light of amendments introduced by the Finance Acts of 2007 and 2009.

(c) Whether the deduction under section 80IA(4) requires the assessee to have commenced operation and maintenance of the infrastructure facility or if development alone suffices.

(d) Whether the income recognized on the percentage completion method affects the eligibility for deduction under section 80IA(4).

(e) Whether the CIT(A) had the power to remit the matter back to the Assessing Officer for fresh adjudication in the assessment year 2016-17, given the withdrawal of such power under Section 250(1) by the Finance Act 2001.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Eligibility for Deduction under Section 80IA(4) and Nature of Assessee's Activity (Developer vs. Contractor)

Relevant Legal Framework and Precedents: Section 80IA(4) provides deduction to an enterprise engaged in developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. The Explanation inserted by Finance Acts 2007 and 2009 (retrospective from 1.4.2000) restricts the benefit to exclude mere "works contractors." The legislative intent, as explained in the Finance Bill 2001 memorandum and CBDT circulars, is to promote investment in infrastructure by entities undertaking entrepreneurial and investment risks, not mere contractors executing civil works.

Judicial precedents relied upon include decisions of various High Courts and ITATs, notably the Madras High Court in PCIT Vs VA Tech Wabag P. Ltd. and CIT Vs Chettinad Lignite Transport Services P. Ltd., Bombay High Court in CIT Vs ABG Heavy Industries Ltd., and ITAT Mumbai in Bhinmal Contractors Property & Land Developers P. Ltd.

Court's Interpretation and Reasoning: The Tribunal examined the scope of section 80IA(4) and concluded that the use of the conjunction "or" in the section means that satisfying all three conditions (developing, operating, and maintaining) cumulatively is not mandatory. The legislative intent is to benefit entities engaged in any one of these activities.

The Tribunal analyzed the agreements, scope of work, and conduct of the assessee and found that the assessee undertook substantial entrepreneurial, financial, technical, and managerial risks. These included mobilization of funds through borrowings, procurement of materials, deployment of skilled personnel, responsibility for design modifications, furnishing bank guarantees, and liability for liquidated damages and quality defects. The assessee's role was thus akin to that of a developer acting on a principal-to-principal basis rather than a mere works contractor acting as an agent.

The Tribunal rejected the Revenue's contention that the assessee was only a contractor, emphasizing that the Explanation to section 80IA(13) excludes only those undertaking mere works contracts without entrepreneurial risk. The assessee's activities involved investment and risk-taking consistent with a developer's role.

Key Evidence and Findings: The Tribunal relied on detailed examination of the contracts executed by the assessee with various government departments, the nature of work (including canal excavation, bridge construction, storm water drainage, tank formation), the requirement to provide bank guarantees and bear liquidated damages, and the mobilization of financial resources. The Tribunal also noted the maintenance of separate accounts and certification by a Chartered Accountant for each project.

Application of Law to Facts: Applying the legal framework to the facts, the Tribunal held that the assessee qualifies as a developer and is eligible for deduction under section 80IA(4). The contracts were not mere works contracts but development contracts involving risk and responsibility.

Treatment of Competing Arguments: The Revenue's argument that the assessee did not operate or maintain the infrastructure and that the deduction is available only under BOT/BOOT models was rejected. The Tribunal held that the legislative intent and judicial precedents support eligibility for deduction to a developer even if operation and maintenance are not undertaken. The Revenue's reliance on the percentage completion method to deny deduction was also dismissed, as the method of income recognition does not affect the nature of the contract or eligibility.

Conclusions: The Tribunal concluded that the assessee is a developer eligible for deduction under section 80IA(4), and the disallowance by the Assessing Officer was untenable.

(b) Requirement of Operation and Maintenance or BOT/BOOT Model

Relevant Legal Framework: Section 80IA(4) initially envisaged deduction for enterprises developing or operating and maintaining infrastructure facilities. The Finance Bill 2001 and CBDT Circular No. 14/2001 clarified that deduction is available after the infrastructure facility begins operation, especially under BOT/BOOT schemes. However, the legislative amendments and judicial interpretations have recognized deduction for developers simpliciter without mandating operation and maintenance.

Court's Interpretation and Reasoning: The Tribunal relied on the language of the statute, the use of "or" in section 80IA(4), and judicial precedents to hold that operation and maintenance are not mandatory preconditions for deduction. The Tribunal also noted that the CBDT Circular relied upon by the Revenue does not support the contention that handing over infrastructure to the Government disqualifies the deduction.

Key Evidence and Findings: The Tribunal observed that the assessee had developed infrastructure projects and handed them over to the Government, and that the income was from development activities. The legislative intent is to encourage private investment in infrastructure development, not restrict benefits only to those operating and maintaining the facility.

Application of Law to Facts: The Tribunal applied the above principles to hold that the assessee's claim for deduction is valid despite not operating or maintaining the infrastructure or undertaking BOT/BOOT schemes.

Conclusions: The Tribunal dismissed the Revenue's argument that operation and maintenance or BOT/BOOT models are necessary conditions for deduction under section 80IA(4).

(c) Impact of Percentage Completion Method of Income Recognition on Deduction

Relevant Legal Framework: Income recognition methods under accounting standards do not alter the legal nature of the contract or eligibility for deductions under tax law. Section 80IA(4) allows deduction on profits derived from eligible infrastructure activities.

Court's Interpretation and Reasoning: The Tribunal held that the Assessing Officer's denial of deduction based on the percentage completion method was untenable. The method was followed regularly and consistently, and the income recognized corresponds to the proportionate revenue from project execution.

Key Evidence and Findings: The assessee maintained separate accounts for each project and recognized income on a percentage completion basis for both eligible and non-eligible projects.

Application of Law to Facts: The Tribunal held that the deduction under section 80IA(4) relates to income recognized and cannot be denied merely because income is recognized before project completion.

Conclusions: The Tribunal dismissed the Revenue's contention that income recognition on percentage completion method disqualifies deduction under section 80IA(4).

(d) Power of CIT(A) to Set Aside Assessment in AY 2016-17

Relevant Legal Framework: Section 250(1) of the Income-tax Act, as amended by the Finance Act 2001, withdrew the power of the Commissioner of Income Tax (Appeals) to set aside assessments and remit the matter back to the Assessing Officer.

Court's Interpretation and Reasoning: The Tribunal concurred with the CIT(A)'s observation that the adjustment made in the intimation order under section 143(1) falls outside the scope of section 143(1) and that the CIT(A) did not have jurisdiction to set aside the assessment. The Tribunal upheld the CIT(A)'s order dismissing the Revenue's grounds on this issue.

Conclusions: The Tribunal dismissed the Revenue's appeal on this ground, upholding the CIT(A)'s order.

3. SIGNIFICANT HOLDINGS

"A person is referred as 'developer' who undertakes a project with a view to developing/constructing on its own responsibility and takes the attendant risks associated with the execution and development of the project... A developer acts as a principal whereas a contractor acts as an agent in performing the functions as required by the developer."

"The conjunction used in the section is 'or' and not 'and' and there is merit in the argument of the appellant that cumulative satisfaction of the conditions is not mandated by the provisions of law... The intent of the legislature is to benefit those companies that are involved in creating the prescribed infrastructure facilities and hence if a restricted interpretation is drawn by the AO, it would make the beneficial provision otiose and ineffective."

"The assessee has undertaken significant financial, entrepreneurial, technical and managerial risks and qualifies for the impugned deduction by raising funds, undertakes work from inception to commissioning and beyond in the form of maintenance responsibility, risk of buying all the materials, technical expertise, technical know-how, deployment of technical personnel, mobilizing the laborers, plant and machinery, supervision and coordination and control to complete the projects."

"The deduction under section 80IA(4) of the Act is available to developers who undertake entrepreneurial and investment risk and not for contractors who undertake only business risk."

"The method of recognizing income based on the generally accepted accounting principles/accounting standards would not alter the nature of contract entered into by the assessee."

"The Explanation inserted by the Finance Acts 2007 and 2009 excludes mere works contractors from claiming deduction under section 80IA(4), but does not exclude developers who undertake development contracts and entrepreneurial risks."

"The CIT(A) did not have jurisdiction to set aside the assessment and remit the matter back to the Assessing Officer under section 250(1) as the power was withdrawn by the Finance Act 2001."

Final determinations:

- The assessee is a developer and not a mere works contractor.

- Deduction under section 80IA(4) is available even if the assessee does not operate or maintain the infrastructure facility.

- Income recognized on percentage completion method does not disqualify deduction.

- CIT(A) lacks power to set aside assessment under section 250(1) post Finance Act 2001 amendments.

- The appeals filed by the Revenue are dismissed and the orders of the CIT(A) are upheld.