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The Assistant Commissioner of Income-tax Versus East Coast Construction & Industries Ltd.

2016 (7) TMI 315 - ITAT CHENNAI

Allowability of deduction u/s.80IA - Held that:- The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all along been to encourage investment in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that the deduction under sec.80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business r .....

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ment “or” has been inserted w.e.f.1-4-2002 by Finance Act 2001. Therefore, in the considered view of the Bench, the assessee should not be denied the deduction under sec.80IA of the Act, if the contracts involves design, development, operating & maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction u/s 80IA of the Act. In the opinion of the Bench the contracts which contain above feature .....

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ontracts accordingly and grant deduction on eligible turnover as directed above. - Disallowance u/s 14A r.w.r. 8D - Held that:- 2% of the exempt income is allowed. More so, Rule 8D is not in the statute book in the assessment year 2006- 07 which was introduced w.e.f. 24.3.2008. Being so, we do not find any infirmity in the order of the CIT(Appeals) - Addition towards license fee - revenue or capital expenditure - Held that:- This issue is squarely covered by the judgment of the Jurisdict .....

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than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances productivity or efficiency of the assessee. Hence, it is to be treated as revenue expenditure - ITA Nos. 558, 559, 560 & 561/Mds/2013, C. O. Nos. 85 to 88/Mds/2013 - Dated:- 20-5-2016 - Shri Chandra Poojari, Accountant Member And Shri Duvvuru RL Reddy, Judicial Member For the Appellant : Shri Ajit Kumar Varma, .....

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he facts narrated in assessment year 2005-06. The assessee is engaged in civil construction works like construction of fly over, under pass, sewerage, water supply and treatment etc., for various local bodies, railways and state/central governments. For the purpose, the assessee had entered into contract with the State/Central Governments and local authorities to execute the infrastructural works as per the contract agreement made and claimed deduction u/s.80IA for the construction of above infr .....

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come Tax Act. Accordingly, the disallowed the claim of the assessee u/s.80IA of the Act by applying the Explanation to sec.80IA of the Act. Against this, the assessee went in appeal before the Commissioner of Income-tax(Appeals), who following the earlier order of the Tribunal in assessee s own case for the assessment year 2004-05 in ITA No.544/Mds/2010 dated 13.9.2011 allowed the claim of the assessee, by observing that the assessee is eligible for deduction u/s.80IA of the Act and against this .....

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aid of the Explanation, it was possible to contend that such expression did not include an enterprise executing a works contract. There would certainly be a demarcation between developing the facility and execution of works contract awarded by an agency engaged in developing such facility. CIT v. RADHE DEVELOPERS [2012] 341 ITR 403 (Guj) relied on. From the inception in the year 1996, deduction under sub-section (4A) of section 80-IA of the Act was available to an enterprise engaged in developi .....

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80-IA into section 80-IA and section 80-IB , with effect from April 1, 2000, this fundamental concept was not discarded. Sub-section (4) which formed part of the recast section 80-IA did not carry any material changes from the earlier provisions of sub-section (4A) of section 80-IA which existed prior to April 1, 2000. With effect from April 1, 2002, some significant changes were made in the provisions. Such changes were (i) that sub-section (4) of section 80-IA now required the enterprise to ca .....

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ise to the Central or the State Government or the local authority within the time stipulated in the agreement was done away with. These changes, however, would not alter the situation vis-a-vis the Explanation. The basic requirement of the enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining infrastructure facility was not done away with. Even as amended with effect from April 1, 2002, section 80-IA(4) could be construed as not i .....

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end the Explanation to clarify that nothing contained in the section shall apply in relation to a business which is in the nature of a works contract executed by an undertaking. What the Explanation, did was to clarify a statutory provision which was at best possible of a confusion. If that be so, the Explanation must be seen as one being in the nature of plain and simple Explanation and not either adding or subtracting anything to the existing statutory provision. If the Explanation was purely .....

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2008-09, wherein it was observed as under: 6. We have heard both the sides, perused the records and gone through the orders of the authorities below. The issue involved in this appeal is whether the assessee is eligible for the deduction under section 80-IA(4) of the Act or not. According to the Assessing Officer the assessee company had constructed water treatment plant for CMWSSB and some private entities and as per the construction contract the assessee had simply executed works contract on j .....

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. This fact was not disputed before us. It is clear from the facts available on record that the assessee has executed the works contract, i.e. water treatment plant for CMWSSB and has claimed deduction under section 80-IA(4) of the Act. The assessee is unable to establish as to how it had made investment in the project. Apart from that the assessee is not able to prove that it has not executed the work contract by producing relevant material to contradict the finding given by the Assessing Offic .....

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ction shall apply in relation to a business referred to in subsection (4) which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1). 8. As per the above Explanation to sub-section (13), works contractor is not eligible for deduction u/s 80-IA(4) of the Act. The very same Explanation was considered by the Tribunal, I Bench Mumbai in ITA No. 5172/Mum/2008 in the case of T .....

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IA) shall apply in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1). Such being the legal position, and the assessee having merely executed the works contract for infrastructure development as awarded to him, we are of the considered view that authorities below rightly declined the deduction u/s 80IA to the .....

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has been followed in the case of ACIT v. Bharat Udyog Ltd. (24 SOT 412) also, and allowed the appeal of the assessee ignoring the explanation inserted to sub-section (13) of section 80-IA by the Finance (No.2) Act, 2009. However, we find that the order of the Tribunal in the case of Patel Engineering Ltd. v. DCIT (supra) relied on by the learned CIT(Appeals) no more holds the field as an Explanation has been inserted to subsection (13) of section 80-IA by the Finance (No.2) Act, 2009, reproduced .....

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se the order passed by the learned CIT(Appeals) and restore the order passed by the Assessing Officer. 11. Insofar as the case law relied on by the learned counsel for the assessee in the case of ABG Heavy Industries Limited (supra) is concerned, the Hon ble Bombay High Court has not at all considered the issue, whether works contractor is eligible for the deduction under section 80-IA(4) or not. The only issue before the Hon ble Bombay High Court was whether the assessee has to develop the enti .....

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necessary for an assessee to develop the entire port in order to qualify for deduction under section 80-IA. Therefore this decision has no application to the facts of the present case. 12. In view of the above facts and circumstances of the case and the statutory provisions, the appeal filed by the Revenue has to be allowed and we do so. 13. In the result, the appeal filed by the Revenue is allowed. 5. The ld. AR relied on the order of the Judgment of the Supreme Court in the case of CIT v. Ber .....

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sidering the rival submissions, we can safely say that the benefit of section 80IA is available only to a developer who carries on business of developing of infrastructure facility . A person who enters into contract with another person for executing works contracts is not eligible for such a benefit. Explanation to section 80IA was inserted by Finance Act, 2007 with retrospective effect from 1.4.2000 which has further been amended by Finance (No.2) Act, 2009 with retrospective effect from 1.4.2 .....

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essment year 2003-04 by the Department on identical facts after considering the Explanation and amendment thereto. To trace the history of this deduction, we find that originally, in the provision of section 80IA, there was no mention of any development of infrastructure facility . It is only with effect from 1.4.2000, this section was divided into two portions 80I and 80IB. Section 80IA(4) prescribes about the deduction available to a developer who develops infrastructure facilities. In view of .....

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nto with the undertaking or enterprise, as the case may be. In contrast to this, a person who enters into a contract with another person (i.e. undertaking or enterprise referred to in section 80-IA) for executing works contract, will not be eligible for tax benefit under section 80-IA. 10. We have found that the assessee-company is a works contractor, who has entered into agreement with the local bodies to execute certain part of the work awarded to it through contract for infrastructure facilit .....

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u/s.80IA of the Act. Be that as it may, when we apply this provision in its letters and spirit, we find that this assessee is verily eligible for deduction u/s 80IA, as the assessee-company fulfils all the relevant conditions. The facts of this case go to prove that the assessee is a developer of infrastructure facilities. The reasons for our above conclusion are given in the following paras. Firstly, the assessee-company not only designs but also creates new products. The assessee had undertake .....

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lding or superstructure, dam, weir, canal, reservoir, tank, lake, road, well, bridge, culvert, factory, workshop, powerhouse, transformers or such other works of the State Government or public undertakings as the State Government may be by notification, specify in this behalf at any of its stages entered into by the State Government or by an official of the State Government or public undertaking and includes an agreement for the supply of goods or material and all other matters relating to execu .....

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person who executes a works contract entered into with the undertaking or enterprise, as the case may be. According to Attorney s Pocket Dictionary, in relation to a corporation or business, the term undertaking denotes its whole enterprise and the word enterprise connotes all the related activities performed either through unified operation or common control by any person or persons for a common business purpose. The mens legis with reference to developer of infrastructure facility can be gath .....

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ucture (viz., expressways, highways, airports, ports and rapid urban rail transport systems) which was lacking in our country. The purpose of the tax benefit has all along been for encouraging private sector participation by way of investment in development of the infrastructure sector and not for the persons who merely execute the civil construction work or any other works contract. Accordingly, it is proposed to clarify that the provisions of section 80- IA shall not apply to a person who exec .....

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x benefit under section 80- IA. This amendment will take retrospective effect from April I, 2000 and will accordingly apply in relation to the assessment year 200· -01 and subsequent years." It is made abundantly clear that the prescription of section 80- IA shall not apply to a person who executes work contracts entered into with an undertaking or enterprise. Thus, in a case where a person who makes investment and himself executes development works and carries out civil works, will .....

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ons relied upon by the assessee were rendered prior to the amendment and as such not relevant for deciding this issue. We, therefore, restore the order of the Assessing Officer and the Commissioner of Income-tax (Appeals). 11. To further elaborate the discussion on this issue, paras 5 & 6 of the decision of ITAT Pune Bench rendered in the case of Laxmi Civil Engg. P. Ltd vs Addl. CIT, order dated 8.6.2011 are being extracted herein below: 5. We heard both the parties and perused the orders o .....

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egard, we perused the above cited para-22 of the said judgment and for the sake of completeness, the said paragraph is reproduced as under:- "22. The submission which was urged on behalf of the Revenue is that Clause (iii) of sub-section (4A) of section 80-lA, one of the conditions imposed was that the enterprise must start operating and maintaining the infrastructure facility on or after 1 st April, 1995. The same requirement is embodied in subclause (1) of sub-clause (4) of the amended pr .....

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995. After Section 80IA was amended by the Finance Act, 2001, the section applies to an enterprise carrying on the business of (i) developing; or (ii) operating and maintaining; or (iii) developing, operating and maintaining any infrastructure facility' which fulfills certain conditions. Those conditions are (I) ownership of the enterprises by a company registered in India or by a consortiums; (II) an agreement with the central or State Government, local authority or statutory body; and (III .....

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ould lead to the conclusion that the deduction is available to an enterprise which (i) develops, or operates and maintains; or (iii) develops, maintain and operates that infrastructure facility. However, the commencement of the operation and maintenance: of the infrastructure facility should be after 1" April, 1995. In the present case the assessee clearly fulfilled this condition". Before the amendment that was brought about by parliament by Finance Act, 2001 we have already noted tha .....

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e an eligible developer for making claim of deduction u/s section 80IA (4) of the Act. From the above, it is evident that the person who only develops the infrastructure do not have the occasion to operate and maintain the infrastructure. It is further evident that the harmonious reading is necessary and mandatory in view of High Court's judgment in the case of an enterprise carrying on business or developing which is the case of the assessee, all the conditions referred to clause (i) of sec .....

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e;-vis of clause (i) of section 80IA (4) of the Act. Thus, the discussion in High Court's decision in paragraph-22 extracted above, is directly applicable to the facts of the case and eventually is entitled for the deduction under section 80IA (4) of the Act. Accordingly, the modified ground, which is common in all the four appeals is allowed in favour of the assessee. 12. Let us remind ourselves that the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd vs CIT, 196 ITR 188, has ordai .....

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y, if the assessee develops the infrastructure facility if it operates the infrastructure facility and if it maintains the infrastructure facility or to put it in simpler terms, the harmonious reading of the provisions in its entirety would lead to the conclusion that this deduction is available to an enterprise who - develops or operates and also maintains; or develops, maintains and operates that infrastructure facility. The provision for giving the impugned incentives has been examined, reexa .....

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/State government. When a certain infrastructure is needed, the concerned authorities have a broader picture in their mind aiming at acquiring certain facility for which infrastructure development is required. So, to say, when any assessee/enterprise agrees under a contract to develop such an infrastructure facility, it cannot straight away be dubbed as not the brainchild of that enterprise, but only of the authority in question. Therefore, again this provision in so far as the conditions requir .....

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t us examine the facts of the given case. It is an undeniable fact that the assessee is engaged in the civil construction work like construction of flyover, bridge underpass, sewerage, water supply etc. for various local bodies, railways, Central/State Governments. In fact, as per the terms of agreement, even the initial proposals formulated by the Department which are stated to be tentative, the assessee has the liberty to make different proposals without detrimental to the general features of .....

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ent or operation or maintenance of Special Economic Zone, and also includes any person authorized for such purpose by any such developer . In the case of ACIT vs Bharat Udyog Ltd, F Bench of ITAT Mumbai, has concluded that any assessee who is engaged in developing the infrastructure facility and also operating and maintaining the same, is entitled to the benefit of deduction u/s 80IA(4). A copy of this decision is enclosed at page 139 of the paper book. In the case of Patel Engineering Ltd vs Dy .....

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to the term developer . On the other hand, rather section 80IA(4) itself provides that assessee should develop the infrastructure facility as per the agreement with the Central Government, State Government or a Local Authority. So, entering into a lawful agreement and thereby becoming a contractor should in no way be a bar to the one being a developer . The assessee has developed infrastructure facility as per the agreement with Maharashtra Government/APSEB, therefore, merely because in the agr .....

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n u/s 80IA(4). Section 80IA(4)(i)(b) requires development of infrastructure facility and transfer thereof as per agreement and it cannot be disputed in view of the material on record that the assessee has transferred the infrastructure facility developed by it by handing over the possession thereof to the concerned authority as required by the agreement. The handing over of the possession of developed infrastructure facility/project is the transfer of the infrastructure facility/project by the a .....

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e case of BOT or BOOT and it is handed over by the Government/Authority to the developer for development of infrastructure facility/Project. The same has been the position in the given case as well. So, deduction u/s 80IA(4) is also available to this assessee which has undertaken work of a mere developer . Rather, the statutory provision as contained in section 80IA which provides for deduction of infrastructure facility no way provides that entire infrastructure facility project has to be devel .....

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dated 18.5.2010, widening of existing roads constitutes creation of new infrastructure facility for the purpose of section 80IA(4)(i) . The assessee is not required to develop the entire road in order to qualify for deduction u/s 80IA as has been held by the Hon'ble Bombay High Court in the case of CIT vs ABG Heavy industries Ltd, 322 ITR 323. The newly inserted Explanation 2 to section 80IA vide Finance Act, 2007, does not apply to a works contract entered into by the Government and the en .....

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(AT) 118, has been enlarged in its finding by the ITAT, Mumbai F Bench in its decision rendered in the case of ACIT vs Bharat Udyog Ltd , by holding that such a deduction is only to be denied to a sub-contractor and not a min contractor. Similar view has been taken by the ITAT Chennai Bench in the case of ACIT vs Smt C.Rajini (supra) in which both of us constituted the Bench. In this decision the definition and difference between works contractor and a developer has been examined in detail. The .....

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po Ltd vs CIT, 196 ITR 188. Thus, when the assessee makes investment and himself executes development work and carries out civil works, he is eligible for tax benefit u/s 80IA of the Act. Accordingly, with the foregoing discussion, we hold that the assessee is entitled to deduction u/s 80IA(4) of the Act, and therefore, we order to delete the addition made in this respect. 6. We have considered the elaborate submissions made by both the parties and also perused the materials available on record. .....

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d maintaining" or (iii) "developing, operating and maintaining" clearly indicates that any enterprise which carried on any of these three activities would become eligible for deduction. Therefore, there is no ambiguity in the Income-Tax Act. We find that where an assessee incurs expenditure on its own for purchase of materials and towards labour charges and itself executes the development work i.e., carries out the civil construction work, it will be eligible for tax benefit under .....

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structure development which reads as follows:- 80IA. (1)Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits a .....

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ions, namely:- (a) it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility; (c) it h .....

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e facility on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken pla .....

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ellip;…… (13) ……………. *Explanation. - For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1). *It introduced by Finance (No.2) Act, 2009 w..e.f. 1.4.2000 6.1 A peru .....

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infrastructure. Further, in the explanation attached to the subsection, the legislature has also entrusted the meaning of the infrastructure facilities. In our opinion, an assessee while claiming deduction has to satisfy all conditions in sub-section 4(1)(a) or (b) or (c). It is mandatory for the assessee to first satisfy sub-section clause i(a), then (b) then (c), then proviso and so on. In case the concerned assessee fails in any one of the clauses, even if it satisfies the other part of the .....

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a corporation or any other body established or constituted under any Central or State Act. Admittedly, the assessee is a limited company and it satisfies this condition. 6.2 In our opinion, sec.80IA of the Act, intended to cover the entities carrying out developing, operating and maintaining the infrastructure facility keeping in mind the present business models and intend to grant the incentives to such entities. The CBDT in Circular Nos.779 dated 14.9.1999 and 794 dated 9.8.2000 clarified that .....

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tainly, the Explanation cannot be read to do away with the eligibility of the developer; otherwise, the parliament would have simply reversed the Amendment made in the Finance Act, 2001. Thus, the aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contract or sub-contract as distinct from the developer. This is clear from the express intention of the parliament while introducing the Explanation. The explanatory memorandum to Finance Ac .....

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esent has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know how, expertise and financial resources. After the amendment the section 80IA(4) read as (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility, prior to amendment the or between three activities was not there, after the amendment or has been inserted w.e.f.1-4-2002 by Finance Act 2001. Therefore, in the considered .....

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which are pure works contracts hit by the explanation to sec.80IA(13), those work are not entitled for deduction u/s.80IA of the Act. The profit from the contracts which involves design, development, operating & maintenance, financial involvement, and defect correction and liability period is to be computed by Assessing Officer on pro-rata basis of turnover. The Assessing Officer is directed to examine the contracts accordingly and grant deduction on eligible turnover as directed above. 7. F .....

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Tribunal as well as before the lower authorities, for consideration, which was delivered on 28.3.2013. Further, neither the AO nor the CIT(Appeals) have gone through each agreement of the contract entered into by the assessee to carry out the projects. 7.1 It is also pertinent to note that in the case of CIT v. Hi Tech Arai Ltd. (321 ITR 477) the jurisdictional High Court held that simply because a Co-ordinate Bench of the Tribunal had taken a different view, the Tribunal on this occasion also .....

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d that the decision, which was rendered in ignorance of the terms of a statute or rule, having no statutory force. In view of this, in our opinion, it is appropriate to remit the issue in dispute back to the file of the AO to consider all the agreements entered into by the assessee and he shall examine the same along with the explanations and also the application of the judgment of the Gujarat High Court cited supra. Accordingly, we remit the issue in dispute to the file of the AO for fresh cons .....

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ot in the statute book in the assessment year 2006- 07 which was introduced w.e.f. 24.3.2008. Being so, we do not find any infirmity in the order of the CIT(Appeals). This ground of appeal is decided in favour of the assessee and this ground raised by the Revenue is rejected. 10. The next ground in ITA No.560 & 561/Mds/2013 is with regard to deletion of addition towards license fee of ₹ 11.04 lakhs as revenue expenditure. 11. We have heard both the parties. This issue is squarely cover .....

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s rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances productivity or efficiency of the assessee. Hence, it is to be treated as revenue expenditure. Accordingly, ITA Nos.560 & 561/Mds/13 are partly allowed. CO Nos.85 to 88/Mds/2013: 12. The first common ground in all the cross objections is in supportive of the order of the CIT(Appeals) regarding the .....

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reliance on the judgment of Madras High Court in the case of Simpson & Co. Ltd. vs. DCIT in TC(A) No.2621 of 2006 dated 15.10.12. Accordingly, this ground of cross objection is also dismissed as infructuous in CO No.86/Mds/2013. 16. The next ground raised by the assessee in CO No.87/Mds/13 is as follows: The objections raised by the Department in grounds 3 to 3.4 is not correct as the merits has already been considered in the order of the CIT(A) with reference to 14A disallowance. 17. This .....

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