TMI Blog2012 (7) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... having developed land of one lakh sq. mtrs. thus fails. Income declared by the assessee company has not been derived from the business of developing SEZ - Held that:- The assessee is a company engaged in the business of developing sector specific SEZ for IT and IT Enabled Services been granted approval by Government of India. By virtue of overriding effect of the SEZ Act, 2005, it is an established fact that the company is a Developer who is engaged in the business of developing SEZ - assessee is the developer and it need not do any other business to claim the benefit of deduction under sec.80-IAB - Assessee's SEZ is sector specific and is not required to run operating units - the only income derived in the hands of the assessee developer will be the lease rent and other service charges if any - the profits and gains of business of a developer contemplated in sec.80-IAB for the purpose of deduction thereunder, is nothing but lease/rental income. Therefore, it made it clear that the lease rental income generated in the hands of a Developer engaged in setting up of the SEZ, is the profits and gains derived from the business of developing a SEZ. Land given on a perennial lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEZ set up by the assessee company has been notified by the concerned authority in Official Gazette as required under the SEZ Act, 2005. In short, the assessee company is fully approved to develop SEZ under the SEZ Act, 2005. 4. In view of the approval granted by the competent authority, the assessee company carried out its activities to set up the SEZ. As per the SEZ Act, 2005, the assessee is in the status of a Developer, who shall develop, operate and maintain the SEZ in terms of the SEZ Act, 2005 and the Rules made thereunder. A Developer for the purpose of the SEZ Act, 2005 also includes a Co-Developer. After having developed SEZ as per the conditions laid down in the approval granted by the competent authority, the assessee has let out the developed lands to three parties in the previous year relevant to the assessment year under appeal. The three parties are M/s. Robert Bosch India Ltd., M/s. Cognizant Technology Solutions India (P) Ltd. and M/s. KGISL IT Parks (P) Ltd. The assessee has leased out 21.88 acres, 23.68 acres and 11.74 acres respectively. 5. The developed lands have been leased out to the above three parties on the strength of lease agreements. The lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a SEZ for which the assessee has been granted approval by the competent authority as a developer and, therefore, the assessee is a SEZ under sec.80-IAB of the Income-tax Act, 1961. 9. The Assessing Officer, in the course of assessment proceedings examined the case in detail. He found that the assessee has developed a SEZ as provided under the SEZ Act, 2005 in the specific sector of Information Technology and Information Technology Enabled Services. He examined the conditions laid down in the approval given by the competent authority. One of the conditions is that the assessee shall develop a minimum area of one lakh square meters. The Assessing Officer found that the assessee has not completed that minimum built up area by the end of the previous year relevant to the assessment year under appeal. The Assessing Officer accordingly, pointed out a case of breach of one condition stipulated in the approval granted to the assessee as a SEZ. The assessing authority has observed in page 10 of his order that "It is apparent from the details filed that this condition has not been fulfilled by the assessee in order to qualify for the deduction". 10. The Assessing Officer further obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - in the hands of the assessee company. 12. The assessment was taken in first appeal. The Commissioner of Income-tax (Appeals) examined the case in detail. On going through the lease agreements entered into between the assessee company and the three lessees, the Commissioner of Income-tax (Appeals) found that the lease agreements were executed and lease rentals were received by the assessee company even before starting the business of developing a sector specific SEZ. Otherwise, it is the case of the Commissioner of Income-tax (Appeals) that the assessee has not started the business of developing a SEZ before entering into lease agreements. The reason for the Commissioner of Income-tax (Appeals) to come to the above finding is that the assessee company had entered into lease agreement with M/s. Robert Bosch India Ltd. even before completing the development of SEZ as required under the Rules and also M/s. Cognizant Technology Solutions India (P) Ltd. and M/s. KGISL IT Parks (P) Ltd. had entered into lease agreements even before those companies getting approval from the competent authority to occupy specific areas in the SEZ. Therefore, the Commissioner of Income-tax (Appeals) he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is eligible to claim deduction under section 80-IAB while issuing certificate under section 197, it is impermissible to take a contrary view subsequently. 2.6 The learned CIT(A) and the learned Assessing Officer has erred in not appreciating that having accepted that the appellant is not liable to pay tax under section 115O, it is impermissible to take a contrary view subsequently. 2.7 The various conclusions, findings and the averments of the learned Commissioner of Income-tax (Appeals)-I, Coimbatore in denying the deduction claimed under section 80-IAB are incorrect, contrary to facts and law, bad in law and liable to be quashed. 2.8 On facts and in the circumstances of the case and law applicable, the appellant is eligible for deduction under section 80IAB and the same is to be allowed as claimed by the appellant. 2.9 Assuming without admitting that the appellant is not eligible to claim deduction under section 80-IAB, the income authorities have erred in assessing the entire lease premium without allowing deduction towards expenditure incurred and expenditure to be incurred by the appellant. 2.10 Without prejudice, the learned Commissioner of Income-tax (Appeals)-I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of law other than this Act. 16. The learned counsel further explained that the assessee company has obtained the approval of the competent authority to engage in the business of developing SEZ as required under the provisions of the SEZ Act, 2005. Necessary notifications have been made in the Official Gazette by the competent authority. It is on the basis of the approval granted by the competent authority that the assessee has been declared as a Developer of SEZ. The approval has been granted on the ground that the assessee company has satisfied the necessary conditions. The assessee company has complied with the conditions laid down in the Rules and in the letter of approval. The assessee has to develop and operate processing areas fit for instant accommodation of the entrepreneurs occupying SEZ. The conditions to be satisfied are that the assessee should provide infrastructure facilities like roads with street lighting, providing office spaces, food services including cafeteria or restaurant, recreation facilities, swimming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Once those entrepreneurs applied for the approval from the competent authorities, it is quite natural that they will proceed with further formalities for obtaining the approval. It is not practically feasible to do all the activities necessary to take possession of the lease hold land only after the formal receipt of the approval. Where the entrepreneurs have been granted approval, those approval relates back to the date of applications put in by them. Therefore, the reasons pointed out by the Commissioner of Income-tax (Appeals) are without any basis. 19. Therefore, in the facts and circumstances of the case, the learned counsel submitted that the findings arrived at by the Commissioner of Income-tax (Appeals) are without any basis and contrary to the facts. The first objection of the Commissioner of Income-tax (Appeals) is that the assessee company has assigned the lease hold right even before developing the lease hold land as required in the letter of approval. This is not correct. The assessee has leased out land to the entrepreneurs to the extent developed, which is permissible. The assessee has clearly demarcated between the developed area leased out to entrepreneur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in lump sum does not amount to any 'salami' but the payments were in the nature of lease rent alone. He explained that the assessee has received premium for lease. Those receipts are in the nature of consideration for leasing of SEZ premises. There is no transfer or parting of right by the SEZ Developer. The learned counsel stated that the intention of the parties are apparent in the lease agreements and the intention is to be upheld, in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Motors General Stores (66 ITR 692). He has also placed reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of Nagasuri Raghaveswara Rao v. CIT (66 ITR 496) to support his argument that the intentions of the parties are to be gathered from documents and surrounding circumstances to decide the nature of transactions. He has also relied on the decisions of the Hon'ble Supreme Court in the cases of Durga Das Khanna v. CIT (72 ITR 796) and Continental Construction Ltd. v. CIT (195 ITR 81). 23. The learned counsel concluded that the assessee is entitled for deduction under sec.80-IAB of the I.T. Act, 1961. 24. Dr. Yogesh Kamat, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al lease agreement for a long period of 99 years. The Hon'ble Supreme Court in the case of R.K. Palshikar (HUF) v. CIT (172 ITR 311) has held that de facto speaking such lease is in fact, nothing else but sale. The learned Commissioner contended that the Assessing Officer has rightly relied on the said judgment of the Hon'ble Supreme Court. When the perennial lease of 99 years is examined, it is very clear, that in reality, it was only a sale. That means, the assessee company has transferred its property and therefore, the income arising on such sale is in the nature of capital gains. 29. In the matter of other additions also, the learned Commissioner supported the orders passed by the lower authorities. He concluded that the appeal filed by the assessee may be dismissed. 30. We heard both sides in detail. 31. Sec.80-IAB of the I.T. Act, 1961 provides for deductions in respect of profits and gains by an undertaking or enterprise engaged in development of SEZ. The section provides that where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a SEZ, notifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals with the letter of approval to the Developer. Sub-rule (2) thereof provides that the letter of approval of a Developer shall be valid for a period of three years within which time at least one unit commenced production and the SEZ becomes operational from the date of commencement of such production. Rule 11 provides the procedure for demarcating processing area and non-processing area in a SEZ. Sub-rule (5) thereof stipulates that the land or built up space in the processing area or Free Trade and Warehousing Zone shall be given on lease only to the entrepreneurs holding a valid letter of approval issued under Rule 19 and the lease period shall not be less than five years but notwithstanding any other condition in the lease deed, the lease rights would cease to exist in case of the expiry or cancellation of the letter approval. Sub-rule (6) of Rule 11 provides that the Developer holding land on lease basis shall assign lease hold right to the entrepreneur holding valid letter of approval. Sub-rule (8) thereof provides that the Developer may allot land in the processing area on lease basis to a person desiring to create infrastructure facilities for use by the prospective units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEZ. 41. Therefore, the only income derived in the hands of the assessee developer will be the lease rent and other service charges if any. The assessee is not expected to derive income from operating business units engaged in the sector of Information Technology and Information Technology Enabled Services. The profits and gains of business of a developer contemplated in sec.80-IAB for the purpose of deduction thereunder, is nothing but lease/rental income. Therefore, it is an anti-thesis of the law stated in sec.80-IAB to hold that lease rental income is not "profits and gains" of business in the hands of assessee developer. 42. The law provides in sec.80-IAB that having approved by the Government of India, developing a SEZ, by itself is the business contemplated under sec.80-IAB for providing deduction in respect of a Developer. The statute itself has made it clear that the lease rental income generated in the hands of a Developer engaged in setting up of the SEZ, is the profits and gains derived from the business of developing a SEZ. 43. The lower authorities have tried to ignore the above statutory provision by raising certain objections. The first objection is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the concerned parties have commenced negotiations for allotment of lease hold right prior to the formal receipt of the approval from the competent authority. It is to be seen that business activities are carried on in a comprehensive manner so as to make the business operational at the earliest point of time. The lower authorities are not justified in holding such a view against the assessee company. 45. The finding of the lower authorities is that the income earned by the assessee is in the nature of capital gains because 99 years of lease agreement executed by the assessee company amounted to sale of the property. It is already mentioned that the SEZ Act, 2005 overrides all other Laws. This is made specific in sec.51 of the SEZ Act, 2005. It is also clear that Rule 11(9) of the SEZ Rules, 2006 provides that a Developer shall not sell the land in the SEZ. The legal consequence of the above statute is that the assessee as a Developer of SEZ is prohibited from selling the land developed by him in the SEZ. When the law does not approve the sale, there cannot be a transfer of property. It is not possible to hold a view that the lease amounted to sale of the property for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessing area or Free Trade and Warehousing Zone shall be given on lease only to the entrepreneurs holding a valid letter of approval and the minimum period of lease shall be 5 years. The SEZ Act, 2005 does not allow a Developer to sell the land in the SEZ. The Developer can only lease out the land to the entrepreneurs holding a valid letter of approval. Minimum period of lease is 5 years. The maximum period is not specified. 48. Therefore, it is clear that the assessee-Developer has proceeded with the allotment of developed area on lease hold basis to the approved entrepreneurs, viz., M/s. Robert Bosch India Ltd., M/s. Cognizant Technology Solutions India (P) Ltd. and M/s, KGISL IT Parks (P) Ltd. in accordance with SEZ Act, 2005 and SEZ Rules, 2006. The period of lease is 99 years which is permissible under the SEZ Act, 2005. Where there is no right of sale, the possible way is only lease. It may be a perennial lease but that does not change the character of the lease. The length of lease period is usually determined by business, technological, financial and other operational considerations. Where the approved entrepreneurs set up units in SEZ with investments of billions of ru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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