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TMI Blog2025 (5) TMI 1651X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 3. The common grounds raised by Revenue for AY 2012-13, 2013-14 & 2017-18 read as under:- 1. The order of the learned Commissioner of Income tax (Appeals)-19, Chennai is against facts and circumstances of the case. 2. The learned Commissioner of Income tax (Appeals)-19, Chennai has erred in deciding that the assessee is eligible for deduction u/s.80IA of the Income tax Act, 1961 without taking into consideration that the assessee has earned profit on percentage completion method, thus earning income and claiming deduction even before the whole work is completed and also it is to be noted that the assessee has not earned any income from operating an infrastructure facility. 3. On the facts and in the circumstances of the case, the ld.CIT(A) has failed to appreciate that the assessee is a mere "Contractor", but not a "Developer" without considering the findings of the assessing officer and thereby decided that the assessee is eligible for deduction u/s.80IA of the Income tax Act, 1961. 4. On the facts and in the circumstances of the case, the ld.CIT(A) has failed to appreciate that the intention of the Legislature is to provide deduction u/s.80IA only to the person d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iming deduction u/s.80IA(4) of Rs. 4,11,08,393/- for the A.Y. 2013-14. 6. The core issue in the present batch of appeals relates to the disallowance of deduction claimed u/s.80IA of the Act made by the assessing officer primarily on the ground that the assessee was merely executing works contracts and did not satisfy the conditions stipulated u/s.80IA(4), specifically stating that the assessee did not operate and maintain the infrastructure nor undertook development under BOT/BOOT models by holding as under: "4. It is noticed that assessee has claimed deduction of Rs. 4,11,08,393/- under section 80IA(4), In connection with this claim written submission is filed stating the assessee is developing certain infrastructure projects income of which is claimed as deduction under section 80IA(4). Regarding the eligibility of the deduction the main claim of assessee is that all the jobs undertaken by the assessee clearly satisfies the requirements stipulated by section 80IA(4). It is further stated that assessee is not a works contractor' as defined in the explanation to section 80IA(4). It is stated that during the assessment year under consideration assessed has derived profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um) 646. 6. On examining the facts of assessee's case it is noticed that assessee has carried out construction work and profits earned from this activity is being claimed as deduction under section 80IA(4). Sub-section (1) of 80IA provides for a deduction of an amount equal to hundred per cent of profits and gains derived from such business for ten consecutive assessment years. Further, sub-section (2) of section 80IA states that the deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution line. Thus it is clear that deduction under section 80IA is allowable only when the enterprise begins to operate any infrastructure facility. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. The Bill proposes an identical ten year tax holiday that may be availed in a block of fifteen years. It is also proposed to do away with the mandatory requirement that such infrastructure facility shall be transferred to the Central Government, State Government local authority or any other statutory authority" (also ref. CBDT Circular no. 14/2001 dated 9/11/2001) Thus, as contained in the above clarification an assessee is entitled to deduction under section 80IA only after the infrastructure facility is developed and begins to operate. Further, as can be made out from the section the deduction will be in respect of income generated from operation of the infrastructure facility in the following specified years as mentioned in the section. Thus, it is clear that first an asset in the form of infrastructure facility has to come into existence, which may be a bridge, road, irrigation system, telecommunication system, power generation/distribution system, industrial park or special economic zone, and thereafter, income generated from this asset is eligible for deduction under section 80IA(4). Profit from erecting an infrastructure facility is not eligible for deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structure facility is eligible for deduction under section 80IA(4) r.w.s 80IA(2), Since assessee has not earned any income from operating any infrastructure facility the question whether assessee is a developer or contractor becomes immaterial/irrelevant. In the written submission filed during the reassessment proceedings assessee has referred to CBDT Circular dated 18/5/10 and has stated that the same mentions that the infrastructure developed and handed over to the Government is also eligible for deduction under section 80IA(4) of the Act. Also reference is made to the decision of the ITAT, Mumbai Bench in the case of Patel Engineering Ltd. Vs. DCIT 84 TTJ 646. The CBDT circular has been perused. The operating part of the Circular is reproduced below, "Section 80IA(4) (i) provides for a deduction to an undertaking engaged developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility subject to satisfaction of the conditions laid down in the section. The Explanation to section 80IA(4)(i) states that for the purpose of this clause, infrastructure facility means inter alia: (a) a road including toll road, a bridge or a rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus it is clear from the provisions of the section and as supported by the afore-mentioned relevant judgments, deduction under section 80IA(4) is available, from A Y 2002-03 onwards even if a particular taxpayer/ assessee carries on any one of the three types of activities viz. (i) developing, (ii) maintaining or (iii) operating eligible infrastructure facility. The provisions as it stood in the relevant point in time do not mandate that the tax payer must adopt a model of BOT/BOOT and will have to necessarily maintain the infrastructure facility for particular period. This inference is supported by the afire-mentioned judicial decisions. 15. It is apposite to mention that the provisions u/s.80IA(4A) of the Act were deleted from the Act when the provisions of Section 80IA(4) of the Act were introduced afresh by the Finance Act, 1999, The deduction available for any enterprise earlier u/s.80IA(4A) has also been made available u/s.80IA(4) its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sizing and modification of design relating to the project till finalization of the project and handing over to the authority concerned. It is noticed that the agreements are for developing bridge/ irrigation canal for a longer period of stretch as a whole. It is quite obvious that the ownership of land would continue to vest with the Government/Local authority even during the execution of the impugned project. However, the developer would exercise and maintain the site /land on which the project is executed during the period of agreement. It is quite possible that in certain situations, the Government would give broad design contour of the work; the developer would modify the design with the approval from the engineers of the Government agencies/ local authority being the contractee but that would not alter the status of the developer as works contractor. (b) Developer is required to lake over the existing premises/ site of the projects and would hand over the site with the infrastructure facility to the government agencies concerned. (c) Developer needs to display managerial responsibility by engaging the suitable and requisite qualified/ skilled/ semi-skilled staff the labo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on may be called as a contractor as he entered into a contract. But the word "contractor" is used to denote a person entering into an agreement for undertaking the development of infrastructure facility. Every agreement entered into is a contract. The word "contractor" is used to denote the person who enters into such contract. Even a person who enters into a contract for development of infrastructure facility is a contractor. Therefore, the contractor and r,, developer cannot be viewed differently. Every contractor may not be a developer but every developer developing infrastructure facility on behalf of the Government is a contractor. 30.in the backdrop of the above discussion, the facts of the present case to find out whether the assessee is acting as a developer or contractor; whether the appellant has derived income/profits from developing infrastructure facility and deduction has been claimed from out of the profits on developing those projects by analyzing the agreements and documents concerned with regard to the projects for which the appellant has claimed deduction are analyzed. 31. Perusal of agreements in respect of the afore-mentioned projects cited in para 9 supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the task of formation of tank for irrigation purpose; and of LBB Lower Bhavani Shutter work when the appellant has provided Screw Gearing Shutters after designing in Lower Bhavani Project Main canal. As per the clauses, the appellant has entered into agreement with the respective authorities such as PWD, and Rural Roads Division of the Government of Tamilnadu, and Local authorities to carry out Irrigation projects and bridge work; that the appellant had to execute the work by mobilizing men, material; the appellant had to give Guarantee money; the appellant is under obligation to pay liquidated damages in case of default in quality for a stipulated period as mentioned in the agreement. A perusal of the agreements entered into by the appellant with the agency that awarded the works indicates that the appellant is under an obligation to undertake risks relating to financial, technical and entrepreneurial and managerial risks associated with erecting/ developing the works /projects concerned. It is also to be noted that the appellant is fastened with a liability period for the works/contracts as per the terms and conditions mentioned therein. 33. Scrutiny, prima facie reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial, technical and entrepreneurial and managerial risks associated with erecting/ developing the works /projects concerned. It is also to be noted that the appellant is fastened with a liability period for the works/contracts as per the terms and conditions mentioned herein. 35. The responsibility of the assessee is to develop the said area into more useful infrastructure facility. In the process, every act required (whether mentioned in the agreement or not) in converting the area into more useful one shall be that of the assessee. The assessee has to undertake the responsibility of developing bridges and Irrigation facilities and they been, after completion of the development of infrastructure, handed over to the Government. The appellant is under obligation for prescribed period to pay damages in case of quality. From the above facts, it is clear that the assessee has executed and handed over development work to the Government/Government Bodies. The substantive work carried out by the appellant in respect of the projects mentioned above partake the character of eligible infrastructure facility that has not been disputed by the AO inasmuch as the appellant has carried out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derable force in the argument of the appellant inasmuch as it is a developer in terms of the provision and it is not a works contactor for it had incurred 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, transporting them, technical expertise, technical know-how, deployment of technical personnel, mobilizing the laborers, plant and machinery, supervision and coordination and control to complete the projects. 39. Thus, it is clear that the agreement is on a Principal to Principal basis and therefore was not a works contractor simpliciter but a developer. It is seen that from an un-developed area that existed at the time of agreement, the eligible infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18-05-201 0, such activity is eligible for deduction under section 80IA(4) of the Act. This cannot be considered as a mere works contract but appellant has to be considered as a developer of infrastructure facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contact or subcontract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. The explanatory memorandum to Finance Ac 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 deduction under section 80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business risk. The appellant has undertaken risks in terms of deployment of technical personnel, plant and machinery, expertise and financial resources. Further the order of Tribunal in the case of B.T.Patil cited supra is prior to amendment to sec 80IA(4), 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,06,86,503/-. Thus, the depreciation for the afore-mentioned eligible 80IA projects for the AY under consideration in the present appeal as per the above ratio works out to Rs. 2,81,92,221/-. Thus the profit before tax for the 80IA projects, after factoring depreciation as per the Act is Rs. 3,83,80,455/-. Thus the AO is directed to restrict the deduction u/s.80IA of the Act to Rs. 3,83,80,455/- as against the appellant's claim of Rs. 4,11,08,393/-. 46. In view of the foregoing discussions with reference to the facts of the case of the appellant and in view of the decisions discussed supra, I hold that the AO has not considered the aforementioned aspects, in correct perspective including the eligibility of deduction for a developer simpliciter, the distinction between a developer and a works contractor considering the scope of work executed by the appellant with ref ere nee to tested principles on the said distinction, the financial, technical, materials, entrepreneurial and managerial risks incurred by the appellant, the nature of eligible projects executed by the appellant during the A Y under consideration. Therefore, the AO's disallowance is untenable and consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es activities in the nature of a 'works contract,' the benefit of deduction u/s.80IA(4) of the Act shall not be available. These amendments, with retrospective effect from 1.4.2000, restrict the tax benefit u/s.80IA(4) for projects executed as works contracts. Thus, a clear distinction between a 'developer' and a 'contractor' is crucial. The nature of the assessee's work, discerned through a detailed analysis of agreements, scope of work, and conduct during execution, determines whether the assessee is a 'developer' or 'works contractor.' 10. In support of the above arguments the ld.DR submitted the written submissions. The summary of the same are given below: - The ld.DR relied upon the following agreements to understand the nature of activities carried out by the assessee entered with (a) Tamilnadu Water supply and drainage board dated 10.04.2014, (b) Suptd. Engineer, PWD, Vaippar Basin Circle, WRO, Virudhanagar, dated 13.04.2012 and (c) EE, Storm Water Drain Dept, GCC, Chennai - 3 dated April 2010 and (d)Suptd. Engineer, Storm Water Drain Dept, GCC, Chennai - 3 dated April 2010. The ld.DR contended these agreements are filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rguments the ld.AR relied on the following judicial precedents: i) Judgement of Hon'ble Madras High Court dated 07.03.2019 in the case of PCIT Vs VA Tech Wabag P.Ltd. in TCA Nos.196 - 201 of 2019. ii) Judgement of Hon'ble Madras High Court dated 12.03.2019 in the case of CIT Vs Chettinad Lignite Transport Services P. Ltd.(107 taxmann.com 362) iii) Judgement of Hon'ble Bombay High Court dated 15.02.2010 in the case of CIT Vs ABG Heavy Industries Ltd. (189 taxman 54). iv) Judgement of Hon'ble Gujarat High Court dated 19.02.2023 in the case of PCIT Vs Monte Carlo Construction Ltd. in T.A No.786/2023. v) Decision of ITAT., Mumbai Benches in the case of Bhinmal Contractors Property & Land Developers P. Ltd. Vs. ACIT (03 taxmann.com 296) 14. Further, the ld.AR referred paras 14 to 26 of ld.CIT(A) order in support of the claim that the assessee is eligible for the deduction as provided in section 80IA(4) of the Act as a developer. The Ld.AR submitted that the Explanation u/s.80IA(13), which disqualifies "works contracts," was specifically aimed at subcontractors or persons merely executing tasks without any entrepreneurial or financial risk and further argued that the Ld.CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en captured in Page No.14 and 15 of the impugned order had interpreted that the conditions need not be cumulatively satisfied especially in view of the usage of the terminology 'or' as against 'and'. Therefore, respectfully following the judicial precedents, we are of the considered view that there is no prerequisite to satisfy all the conditions cumulatively to be eligible for deduction u/s.80IA of the Act. 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. 17. We have examined the reporting made by the assessee and it is important to note that the deduction u/s.80IA of the Act 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. Moreover, the deduction claimed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 19. In light of the above factual matrix, 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. 20. Our above adjudication rendered for the assessment year 2013-14 in ITA No.334/Chny/2021 would apply mutatis mutandis to ITA Nos.333 & 335/Chny/2021, and 847/Chny/2022 for assessment years 2012-13, 2017-18 & 2016-17 also. Hence, the appeals filed for the assessment years 2012-13, 2016-17 and 2017-18 are also dismissed. 21. With regard to the appeal filed for the A.Y.2016-17, the said adjustment is also made in the intimation order issued u/s.143(1) of the Act, on this aspect, we concur with the order of the ld.CIT(A) that the said adjustment would fall outside the scope of Section 143(1) of the Act. Hence, we uphold the order of the ld.CIT(A) by dismissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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