Whether, for purpose of availing Sec 80IA(4) benefits, it is necessary for assessee to own infrastructure facility - NO, rules ITAT

THE issues before the Bench are - Whether, for the purpose of availing Sec 80IA(4) benefits, it is necessary for the assessee to own the infrastructure facility; Whether when the assessee is a contractual developer, which owns the construction activity and executes the development work, it suffices for the assessee to claim Sec 80IA(4) benefits and Whether when the assessee develops, operates and maintains an infrastructural facility, it meets the conditions for claiming Sec 80IA benefits. And the verdict goes in favour of the assessee.

Facts of the case

Assessee Company is engaged in the development of irrigation canals and Railways tracks including conversion of gauge. It filed its ROI claiming deduction 80IA(4) on the ground that it was a developer and had developed and

maintained infrastructure facility. AO denied the claim of the assessee on the ground that assessee was not developer rather a work contractor. The main plank of the AO’s view was that for claiming deduction under Sec 80IA(4), the assessee should have owned the infrastructure facility. The CIT(A) affirmed the view of the AO.

On appeal before the ITAT, the AR of the assessee argued that the word owned as used in section connotes that the enterprise which carried out development should be owned by a Company and it did not mean that the infrastructure facility should be owned by such company. The AR of the assessee further pointed out to various clauses of the agreement to contend that assessee had worked as a developer and not as a mere work contractor and had deployed its own funds and had undertaken all sorts of responsibilities such as smooth movement of traffic and precautions for the lives of people and their cattle during the development and finally, had handed over the site to the Government after complete development.

After hearing the parties the ITAT held that,

++ the deduction available for any enterprise earlier under section 80IA (4A) are also made available under Section 80IA(4) itself. Further, the very fact that the legislature mentioned the words (i) “developing” or (ii) “operating and 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;

++ where an assessee incurred expenditure for purchase of materials himself and executes the development work i.e., carries out the civil construction work, he will be eligible for tax benefit under section 80 IA of the Act. In contrast to this, an assessee, who enters into a contract with another person, including Government or an undertaking or enterprise referred to in Section 80 IA of the Act, for executing works contract, will not be eligible for the tax benefit under section 80 IA of the Act. We find that the word “owned” in subclause (a) of clause (1) of sub section (4) of Section 80IA of the Act refer to the enterprise. By reading of the section, it is clear that the enterprises carrying on development of infrastructure should be owned by the company and not that the infrastructure facility should be owned by a company;

++ according to sub-clause (a), clause (i) of sub section (4) of Section 80-IA the word “it” denotes the enterprise carrying on the business. The word “it” cannot be related to the infrastructure facility, particularly in view of the fact that infrastructure facility includes Rail system, Highway project, Water treatment system, Irrigation project, a Port, an Airport or an Inland port which cannot be owned by any one. Even otherwise, the word “it” is used to denote an enterprise. Therefore, there is no requirement that the assessee should have been the owner of the infrastructure facility;

++ the Government handed over the possession of the premises of projects to the assessee for the development of infrastructure facility. It is the assessee’s responsibility to do all acts till the possession of property is handed over to the Government. The first phase is to take over the existing premises of the projects and thereafter developing the same into infrastructure facility. Secondly, the assessee shall facilitate the people to use the available existing facility even while the process of development is in progress. Any loss to the public caused in the process would be the responsibility of the assessee;

++ the material required is to be brought in by the assessee by sticking to the quality and quantity irrespective of the cost of such material. The Government does not provide any material to the assessee. It provides the works in packages and not as a works contract. The assessee utilizes its funds, its expertise, its employees and takes the responsibility of developing the infrastructure facility. The losses suffered either by the Govt. or the people in the process of such development would be that of the assessee;

++the decision relied on by the counsel for the assessee in the case of CIT vs. Laxmi Civil Engineering works squarely applicable to the issue under dispute which is in favour of the assessee wherein it was held that mere development of a infrastructure facility is an eligible activity for claiming deduction under section 80IA of the Act after considering the Judgement of the Mumbai High Court in the case of ABG Heavy Engineering. The case of ABG is not the pure developer whereas, in the present case, the assessee is the pure developer;

++ an Explanation was inserted in Section 80IA of the Act, in the Finance Act-2007 and 2009, to clarify that mere works contract would not be eligible for deductions under section 80IA of the Act. But, certainly, 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 contact or sub-contract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. 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 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;

++ counsel for the assessee clearly demonstrated before us that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know-how, 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, after the amendment “or” has been inserted w.e.f. 1-4-2002 by Finance Act 2001. Therefore, in our considered view, the assessee should not be denied the deduction under section 80IA of the Act as the contracts involves, development, operating, maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract.