Understanding section 80-IA & IB with latest case laws. Part – IV.

The section is most important sections for infrastructure development companies and manufacturing units as because of this section only, they able to reduce their tax burden and hence accordingly require a detailed  knowledge on this.  In past we had discuss the subject in
detail and reference of the same is given below:

SN	Part	Link reference
1	One	http://taxbymanish.blogspot.in/2012/07/understanding-deductions-of-section-80.html
2	Two	http://taxbymanish.blogspot.in/2013/09/understanding-deductions-of-section-80.html
3	Three	http://taxbymanish.blogspot.in/2014/03/few-points-on-section-80-ia.html

Given below few more recent case laws which enable the taxpayer to get more understanding in respect of deduction allowable under section 80-IA & IB.

·         The AO order should have reason with application of mind for rejection of exemption claim by the taxpayer. Refer, Hemalatha (P. V) v. Asst. CIT, VOL 34 PG 8.

·         No exemption allowed on surrendered income which offer after search. Refer, Hill View Infrastructure P. Ltd., VOL 34 PG 128.

·         No exemption allowed for Income from sale of water to cargo ships for cleaning engines. Refer, Harbour and Infrastructure Ltd. v. Deputy CIT, VOL 33 PG 634.

·         Even Building permission rejected for technical ground, the project is entitled for exemption. Refer, CIT .v.Tarnetar Corporation, 362 ITR 174

·          In case of sale of business by sale of building, plant and machinery before expiry of period of exemption, transferee is entitled to deduction for remaining period. Refer, CIT .v. WEP Peripherals Ltd, 362 ITR 508.

·         The process of bottling of gas into gas cylinders, which requires a very specialised process and independent plant and machinery, amounts to production of "gas cylinders" containing gas for the purpose of claiming deduction u/s 80-IB. Refer, Puttur Petro Products P. Ltd. .v. ACIT, 361 ITR 290.

·         Can be allowed pro rata relief in respect of units fulfilling conditions laid down in section 80-IB(10). Refer, Deputy CIT v. Rajarathnam Construction P. Ltd, VOL 33 PG 466.

·         Assembling of computer hardware is a manufacturing activity and hence entitled for exemption. Refer, CIT v. Sai Infosystem India P. Ltd, 365 ITR 433.  

·         No requirement to furnish completion certificate from local authority for housing project approved by competent authority prior to April 1, 2005. Claim allowable if assessee able to prove completion of housing project within prescribed period. Refer, ITO v. Kura Homes P. Ltd, VOL 33 PG 37.

·         Amendment to section 80IB(10) with effect from April 1, 2005 restricting the built up area of shops and commercial establishments included in housing project is Prospective  and hence not applicable to projects approved prior to April 1, 2005. Refer, ITO .v. Velentine Developers, 31 ITR 452.

·         Assessee had developed a “Housing project” at Dharavi, which is a Slum Rehabilitation Project (SRA), as approved by the Government of Maharashtra. One of the conditions in section 80IB (10) is that the project size should be more than one acre. However by Finance Act (no 2) 2004, the legislature has removed the restriction of the project size by a proviso in case of SRA project. Subsequently vide notification dated 3-8-2010 and notification dated 5-1-2011 the SRA projects had been notified by the Board. It was submitted that the proviso was inserted to cure defect and will have retrospective effect. The Tribunal held that the proviso has been inserted to relax the condition provided under clause (a) and (b) of section 80IB (10) and not for adding any new condition which is otherwise not required for housing projects for availing the benefit of deduction under section 80IB (10). Accordingly the assesses project is entitled to the benefit of proviso and eligible for deduction. Refer, Ramesh Gunshi Dedhia .v. ITO, 148 ITD 356.

·         Court yard cannot be included to calculate the built up area. Refer, Commonwealth Developers .v. ACIT, 102 DTR 89.

·         There is no presumption that surrendered income is eligible for deduction under s. 80-IB. Burden is on assessee to demonstrate that surrendered income is derived from industrial undertaking and is eligible for s. 80-IB. In the absence of evidence to establish direct nexus of income with industrial undertaking, assessee was held not entitled to deduction. Refer, Tudor Knitting Works P. Ltd. .v. CIT, 360 ITR 453.

·         Interest on short-term deposit is not income earned or derived from manufacturing activity undertaken by industrial undertaking. Also, tank hire charges received by assessee from consumers separately billed and charged is not includible in profits and gains from manufacturing activity undertaken by industrial undertaking. Refer, Krishak Bharati Co-op Ltd .v. CIT, 360 ITR 209.

·         Relief granted under s. 80HH cannot be deducted from gross total income for computing of relief under s. 80-I. Refer, CIT .v. Hindustan Pipe Udyog Ltd, 360 ITR 437.

·         If developer does not (without just cause) develop to full extent of FSI, a part of the sale proceeds has to treated as being for sale of FSI and  denied S. 80-IB(10) deduction. Refer, CIT .v. Moon Star Developers, Gujarat HC.

·         Prescribed authority had granted approval u/s. 80IB(8A) to the assessee. The approval was renewed/extended twice after being satisfied about the main objective of the assessee, research and development activities carried on by it and the infrastructure facilities available with it. Assessee’s claim for deduction could not be disallowed by the AO on the ground that the activity of clinical trials  of pharmaceuticals carried on by the assessee could not be termed as research and development. Refer, SIRO Clinpharm (P.) Ltd. .v. Dy.CIT, 98 DTR 1.

·         The assessee was engaged in the business of extraction of granite boulders from hills and producing granite aggregates of different sizes by crushing and segregating through mechanical process. It claimed deduction under section 80-IB of the Income-tax Act 1961. Whether activity of extraction of granite boulders from hills and producing granite aggregate would constitute ‘manufacture’ and hence eligible for deduction u/s. 80-IB of the Act. It was held that the same amounted to manufacture within the meaning of section 2(29 BA) of the Act. Furnishing SSI certificate is not mandatory. Refer, Poabs Rock Products (P) Ltd. .v. ACIT, 61 SOT 143.

·         In the return of income filed, the assesse claimed a deduction u/s.80-IB of the Act for an amount of Rs.10,78,976/-. During the course of the hearing before the CIT(A), the assessee for the first time raised an additional claim for deduction u/s. 80-IB of Rs.50,61,142/-. The Tribunal noted that the claim was never made before the AO and hence did not allow the additional claim for deduction u/s. 80-IB. Refer, Chiranjeevi Wind Energy Ltd. .v. ACIT, 29 ITR 534.

·         The word “manufacture” implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinct name, character or use. The assessees would put the imported material to series of manual and mechanical processes and through such exercise so undertaken, bring into existence entirely new, distinct and different commodities which are marketable . Thus, the Tribunal, in our opinion, correctly came to the conclusion that this process amounted to manufacturing. Refer, CIT .v. Mitesh Impex, Gujarat HC .

·         The effect of s. 80-IA(9) is that s. 80-IA deduction has to be reduced for s.80HHC deduction in all cases and not only when the combined deduction exceeds the profits. Refer, CIT .v. Atul Intermediates, Gujarat HC.

·         Company purchased various components and assembled them to prepare water filter-cumpurifiers. Where a new distinct article called water purifier, having commercial market, came into existence and original components no longer remained, activity was to be held as manufacture, and  not assembling, and therefore, deduction under section 80-IC was to be allowed. Refer, Aquamall Water Solutions (P.) Ltd. .v. CIT, 60 SOT 78.

·         Assessee was engaged in manufacturing and sale of fragrance. In manufacturing process, flowers were purchased from Uttar Pradesh and distilled oil extracted from such flowers were brought to assessee's manufacturing unit at Uttarakhand. Assessing Officer having noticed that most important activity, namely, extraction of oil from flowers had taken place in Uttar Pradesh and not in Uttarakhand, assessee was not entitled to benefit of section 80IC. Since after procuring distilled oil many a things were required to be mixed and then those were to be processed and steamed, distilled oil obtained by assessee from Uttar Pradesh did not remain distilled oil at time of sale of its product and same became a different product. Therefore, assessee was entitled to benefit of section 80IC. Refer, Dy.CIT .v. Natural Fragrances, 219 Taxman 28.

·         Assessee purchased imported PCBs, RAMs, high and low transmission wireless adaptors, wireless antennae components, flash ram software, Red Hat Linux software and other networking components- Using these components, assessee redesigned and developed a single product to suit requirement of project of customer. Since various materials that had gone into making of radio frequency  identification device having thus undergone a change and that they had lost their original identity and a totally different marketable product being manufactured, assessee would be entitled to deduction under section 80-IC. Refer, CIT .v. Gemini Communication Ltd, 219 Taxman 37.

·         Housing projects-Lay out approval of the assessees project to be considered and not the earlier approval which was not implemented and hence entitled for exemption. Refer, ITO .v. AV. Bhat Developers, 145 ITD 305.

·         Tribunal held that deduction under section 80-IB(10) is specifically provided in respect of profit earned from development and construction of housing projects on or after 1-10-1998.therefore, since construction and development of housing projects is sine qua non for claim of deduction under section 80-IB(10), deduction was not available to assessee company as it had just undertaken development of plots and their sales, and no construction activity was undertaken in respect of residential units proposed on such plots during relevant assessment year. Refer, Navratan Techbuild (P.) Ltd. .v. ACIT, 60 SOT 81.

·         Provisions of section 80-IB(10) nowhere require that only those developers who themselves own land can deduction. ,[Followed CIT .v. Radhe Developers (2012) 341 ITR 403 (Guj)(HC)]. Refer, CIT .v. Shreeji Developers, 218 Taxman 100.

·         Manufacturing different masala powders amounts to manufacturing activity eligible for deduction under section 80IB. Refer, ACIT .v. Navas M. Meeran, 60 SOT 74.

·         AO disallowed claim of deduction under section 80-IB in respect of two eligible projects, as loss on  two other eligible projects was more than such profit. Tribunal held that profit derived from a particular eligible industrial undertaking is qualified for deduction under section 80-IB without  reduction of loss suffered by any other eligible industrial undertaking, subject to gross total income of assessee, where gross total income of assessee, after adjusting losses suffered by assessee in other projects was more than claim of deduction under section 80-IB, deduction could not be disallowed. Refer, Shriram Properties (P.) Ltd. .v. ACIT, 60 SOT 75.

·         Where assessee got his accounts audited by an accountant as defined in Explanation below subsection (2) of section 288, deduction under section 80-IA could not be denied on ground that report of such audit was not furnished along with return of income. Refer, CIT .v. Sanjay Kumar Bansal, 219 Taxman 41.

·         Assessee set up a unit for generation and distribution of power to its chemcial works division and charged rate at which said division would have purchased electricity from SEB/UPPCL. Surplus power which could not be stored was sold to UPPCL at lesser price. While computing deduction under section 80-IA, Assessing Officer reduced profit shown by assessee by taking price at which electricity was sold to UPPCL. Price which had been adopted by assessee for electricity generated by eligible business transferred to its other business would be considered for purpose of computation of profits and gains of eligible business in terms of section 80IA(8). Refer, CIT .v. Kanoria Chemicals & Industries Ltd, 219 Taxman 35.

·         Assessee was running a cold storage plant. In course of assessment, assessee claimed deduction under  section 80I. Assessing Officer rejected assessee's claim. Tribunal, however, allowed assessee's claim.  It was noted that section 80-I was amended by inserting sub-section (1A) with effect from 1-4-1990 whereby operation of cold storage plant qualified for deduction, since instant case was concerned with assessment year 1989-90, aforesaid amendment would not benefit assessee running business of cold storage. Therefore, assessee's claim for deduction was to be rejected. Refer, CIT .v. Amar Nath Singhal, 219 Taxman 27.

·         Assessee carried on business of quarrying of granite stones and after cutting and polishing them exported them abroad. Since there was no evidence to come to a definite conclusion as to whether assessee was doing manufacturing activity or not, it was appropriate to remand matter to AO for purpose of eliciting and proving same. Refer, CIT .v. Vijay Granites (P.) Ltd., 219 Taxman 165.

·         Deduction u/s 80-IB is not to be allowed unless return is furnished. Where the assessee-company filed delayed return of income, involving refund claims arising due to deduction claimed under section 80IB, CBDT alone could consider claim of assessee to condone delay. Matter remanded. Refer, Unique Shelters (P.) Ltd. .v. UOI, 218 Taxman 99.

·         To claim deduction under section 80-IC(2)(b), an undertaking is required to carry on both activities, i.e., processing and plantation of tea. Refer, DCIT .v. Sewujpur Tea Co. (P.) Ltd, 59 SOT 88.

·         The assessee-firm was engaged in business of development of land and construction of residential building. The Assessing Officer denied deduction under section 80-IB to assessee on ground that land was not in name of firm, and assessee acted merely as an agent for collection of land consideration on behalf of land owner. Benefit of section 80-IB(10) would be available if developer had dominance control over project and had developed land at its own cost and risk. Where transport expenses were disallowed for want of deduction of TDS, deduction under section 80- IB to be allowed on such disallowance.

·         The assessee-firm was engaged in business of development of land and construction of residential building. The Assessing Officer denied deduction under section 80-IB to assessee on ground that land was not in name of firm, and assessee acted merely as an agent for collection of land consideration on behalf of land owner. Benefit of section 80-IB(10) would be available if developer had dominance control over project and had developed land at its own cost and risk. Where transport expenses were disallowed for want of deduction of TDS, deduction under section 80- IB to be allowed on such disallowance. Refer, ITO .v. Keval Construction, 59 SOT 13.

·         Deduction allowable on construction projects approved after 1-10-1998 wherein area of flats was less than 1500 sq. ft. Refer, CIT .v. Ashray Premises (P.)Ltd, 34 taxmann.com 165.

·         Assessee is not eligible for deduction under section 80-IB in respect of interest received from security deposit with Electricity Board.  Refer, Midas Polymer Compounds (P.) Ltd. .v. ACIT, 59 SOT 87.

·         The processes of mounting bought out components on panel and wiring them undertaken by assessee in making electrical control panels though not 'manufacture' would amount to 'production'. All fabricated components, were assembled in a definite manner, each performing its function, so as to function as a cohesive unit. Therefore, assessee was eligible for deduction under section 80-IB(1) and denial of deduction on the ground that the same was an assembly job was not justified. Refer, ITO .v. Advance Power Engineering, 59 SOT 79.

·         Assessee, engaged in manufacture and sale of components of CNC lathes and similar machines claimed deduction under section 80-IB as a SSIU. Held, the conditions for qualifying as a small scale industry was to be fulfilled on an year to year basis and not merely in initial year alone and since investment in plant and machinery exceeded prescribed limit, assessee was not entitled to deduction. Refer, Ace Multi Axes Systems Ltd. v. DCIT, 59 SOT 76.

·         Deduction under section 80-IA should be allowed in respect of profits derived from transmission or distribution of power through network of new transmission or distribution lines. / Since nexus of interest income on bank deposits with business of undertaking was not direct but incidental, same could not be considered as profit and gain derived from eligible undertaking hence and, thus, deduction claimed under section 80-IA in respect of interest income was to be rejected. Refer, Kinfra Exports Promotion Industrial Parks Ltd. .v. DCIT, 59 SOT 57.

·         Where the assessee had applied for approval required under section 80-IA(4)(iii), under Industrial Park Scheme which had lapsed and application under new scheme was still pending, it was not  eligible for deduction under section 80-IA. Refer, SSPDL Ltd. .v. DCIT, 59 SOT 68.

·         The three conditions as laid down under section 80-IA(4) have to be read separately and, therefore, if an assessee fulfills any of the said three conditions, its claim for deduction under section 80-IA cannot be denied. Therefore, where the assessee was engaged in activity of extension of runway at airport, it was to be regarded as developer within meaning of section 80-IA(4) and, thus, its claim for deduction   under section 80-IA was to be allowed. Refer, TRG Industries (P.) Ltd. .v. DCIT, 59 SOT 64.

·         The mandatory requirement to employ 10 or more workers by an industrial undertaking with the aid of power specified as quantum number as per sec.80-I(2)(iv). It does not recognise the fact whether  the employees are direct employees or engaged through sister concern. Refer, CIT .v. Delhi Press Patra Prakashan Ltd, 260 CTR 253.

·         The assessee has five manufacturing units and it is eligible for deduction under section 80IC in respect of Baddi unit only. The Tribunal found that the turnover of Baddi unit was 2.54 per cent of the  total turnover. Therefore directed the Assessing Officer to compute the deduction under section 80IC by treating 2.54 percent of the total expenditure attributable to Baddi unit. Refer, Amartex Industries Ltd. v. Addl. CIT, 155 TTJ 43 (Chd.)(Trib.).

·         Communication net work product is manufacture and entitled to deduction. Refer, CIT v. Gemini Communication Ltd, 357 ITR 759.

·         Deduction under section 80-IB could not be denied to assessee who was engaged in development of Geographical Information System software by converting raw data supplied by its customers into maps by digitizing and vectorizing it. Refer, Bahvin Arun Shah v. ITO, 91 DTR 377.

·         The question that arose before the court was whether transport subsidy, power subsidy, interest subsidy and insurance subsidy reduce cost of production of an industrial undertaking, is there first degree nexus between said subsidies and profits and gains derived by industrial undertaking and, therefore, deduction under sections 80-IB and 80-IC has to be granted in respect of subsidies so received. The court held, that since transport subsidy, power subsidy, interest subsidy and insurance  subsidy reduce cost of production of an industrial undertaking, there is first degree nexus between said subsidies and profits and gains derived by industrial undertaking and, therefore, deduction under  sections 80-IB and 80-IC has to be granted in respect of subsidies so received. Refer, CIT v. Meghalaya Steels Ltd, 91 DTR 81.

·         Assessee-company received service charges for operating and maintaining a heavy water plant owned  by Government, which was next to its own ammonia plant. Such service charges received were not considered as part of profit of industrial undertaking eligible for deduction under section 80I, by Assessing Officer as plant was not owned by assessee. The question that arose before the court was whether the service charges received was directly relatable to operation and management of heavy water plant, which was an industrial undertaking and whether these service charges were to be considered as profits of industrial undertaking eligible for deduction as section 80I does not require ownership of an industrial undertaking. The court answered the question in affirmation and in favour of the assesse. Refer, Krishak Bharti Co-operative Ltd. v. Dy. CIT, 91 DTR 1.

·         Entitled for benefit under section 80-IB(10) in respect of flats completed before prescribed limit even though the housing project was not completed in time due to reasons beyond control. Refer, Ramsukh Properties v. DCIT, 138 ITD 278.

·         Project approved after 1-04-2004-Submissions of completion certificate from local authority is mandatory –Non submission of certificate the assessee is not entitled to deduction. Refer, Sainath Estates (P) Ltd. v. DCIT, 88 DTR 11.

·         The AO disallowed the assessee’s claim of deduction under Section 80-IB on the ground that the assessee is having commercial area exceeding 5% as well as 2000 sq.ft. The CIT(A) confirmed the disallowance. The Tribunal observed that the amendment by inserting clause (d) in Section 80IB(10) is not applicable for the assessment years in question i.e. 2003-04 & 2004-05, and thus relying on the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Brahma Associates 333 ITR 289, held that no disallowance can be made on account of commercial establishment in the project. The High Court following the aforesaid decision as also the fact that the issue had been decided in favour of assessee in its own case in the earlier years dismissed the departmental appeal. Refer, CIT v. Jogani Construction Ltd, 217 Taxman 95.

·         Main purpose of S. 80IB(11) is construction of godowns specifically for stocking food grains for greater efficiency in grain management system and minimize post harvest food grain losses. Hence, it was held that mere handling and transportation of food grains and storing same at godowns owned by Food Corporation of India (FCI) would not make assessee eligible for deduction u/s 80IB(11) as it is nothing attributed towards infrastructure development. Refer, ITO v. Shankar K. Bhanage, 139 ITD 39.

·         As there is a direct nexus between Transport, subsidy, power subsidy, bank interest subsidy and insurance subsidy, that directly contribute to the profits and gains of an industrial undertaking, hence, the profits derived by a undertaking on account of aforementioned subsidy are liable for deduction u/s. 80-IB or Sec. 80-IC. Refer, CIT v. Pride Coke (P) Ltd, 261 CTR 17 (Gau.)(HC).

·         The AO disallowed the assessee claim for deduction u/s. 80-IB(10) since assessee did not own the land and name of the assessee did not appear in the permission for development granted by local authority. The CIT(A) and the Tribunal allowed the deduction to the assessee. On appeal by the department, the High Court following its own decision in case of CIT v. Radhe Developers (2012) 204 Taxman 543(against which the SLP was dismissed by the Supreme Court),  held that the assessee cannot be denied deduction u/s. 80-IB(10). Refer, CIT v. Vishal Construction Co, 217 Taxman 96 (Guj.)(HC).

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