Adhunik Infrastructure (P)Ltd. Vs JCIT (ITAT Kolkata)
ITAT held that even if an assessee is merely developing the infrastructural facility (without operating and maintaining the same), it is entitled to deduction u/s 80-1A. Further, condition (b) laid out in sub-section (4) of section 80-IA mandates the existence of an agreement with the Government. Moreover, if section 80-IA grants deduction on profits from the activity of development carried out in pursuance of an agreement with the Government it presupposes that assessee will earn some profits from mere development (without operating and maintaining) of the infrastructure facility. Now the relevant question that arises here is that how would an assessee engaged in mere developmental activity (and no operation) pursuant to an agreement with the Government earn profits? The obvious answer is that the assessee will recover its cost of development from the Government otherwise the entire cost of development will be a loss in its hands. Thus, if deduction u/s 80-IA is denied on the ground that the assessee had received payments from Government, then an assessee who is only a “developer” (and not an operator) will never be entitled to deduction u/s 80-IA, which is clearly not the intention of legislature as discussed by the Hon’ble Bombay High Court in case of ABG Heavy Industries Ltd supra. Thus, merely because the assessee was paid by the Government for development work, it cannot be denied deduction under section 80-IA(4) of the Act.
FULL TEXT OF THE ITAT JUDGMENT
1. This appeal of the assessee arises out of the order for the Asst Year 2010-11 of the Learned Commissioner of Income Tax (Appeals)-4, Kolkata [in short the Ld. ITA] in Appeal No. 493/CIT(A)-4/R-10/Kol/14-15 dated 24.07.2015 against the order passed by the Joint Commissioner of Income Tax- Range-10, Kolkata [ in short the ld AO] under section 143(3) of the Act dated 26.03.2013 for the Asst Year 2010-11.
2. The Ground No. 1 and 4 raised by the assessee are general in nature and does not require any specific adjudication.
3. The first issue to be decided in this appeal is as to whether the ld CITA was justified in denying the deduction claimed u/s 80IA of the Act in the facts and circumstances of the case. The interconnected issue to be decided thereon is as to whether the interest income of Rs.5,12,928 was to be set off against the interest expenditure and the net income was to be excluded for the purpose of calculation of deduction u/s 80IA of the Act and also the apportionment of expense of the expenses of Head Office is to be appropriated against the expenses towards the project for the purpose of calculation of deduction u/s 80IA of the Act.
4. The brief facts of this issue is that the assessee is a company engaged in the business of construction of roads, boundary walls, underground sewerage and drainage system etc. The return of income for the Asst Year 2010-11 was filed by the assessee company on 29.9.2010 disclosing total income of Rs 2,59,70,453/- after claiming deduction u/s 80IA of the Act to the tune of Rs 80,39,696/- . The ld AO during the course of assessment proceedings asked the assessee to furnish the copy of contract for which the claim of deduction u/s 80IA was made by the assessee. The assessee furnished the copy of contract. From perusal of the said contract, the ld AO observed as under:-
i. The contract was awarded by the public works department, the government of West Bengal.
ii.The Works was for Improvement of B.T.Road, by widening including a wearing coat on the existing black top from 11.72 KM to 17.00 in the District: of North 24 Paraganas.
iii. The tender was invited by the Superintending Engineer, Kolkata.
iv. The tender was for an amount of Rs 1,72,841,114/-.
v. As per tender document, the assessee is supposed to carry out the work as par the condition and general specification of the PWD,
vi. There is specific time frame within which the assessee is supposed to carry out the contract.
vii. As per the contract the contractor must see the damages to any property which in the opinion of the Engineer-In -Charge are due to the negligence of the contractor, are promptly rectified by the contractor at: their own cost and expenses and! According to the direction and satisfaction of the Engineer-In · -Charge.
viii. As per the contract the assessee is not supposed to sublet / assign any portion of the work.
ix. The exact work to be done has been specified in the contract.
The ld AO based on the above observed that the assessee has no discretion in the work to be done. The assessee is merely acting as an agent /contractor of the PWD, and is assigned the only function of completing the work as per the specification given. In the opinion of the ld AO, the assessee does not take any risk in the project as is prevalent in the case of a developer. The project was not conceived by the assessee. The project was conceived by the Government and assessee was merely required to execute the project envisaged by the Government. The assessee was supposed to execute the project as per specification of the PWD for a fixed and assured consideration. The ld AO observed that the assessee has not employed any new plant , machinery in execution of the contract. Old plant and machinery were used by the assessee . Hence the ld AO stated that the assessee is not eligible for deduction u/s 80IA of the Act. The assessee was not required to prepare any design of the project. The design and the drawings of the project were not done by the assessee, but it was done by the Government. The assessee was only required to implement as per the drawing. The assessee was not required to invest its own funds because initially mobilization advance was given and subsequently as per the measurements, money was paid to the assessee. Thus, there was no financial risk or involvement of the assessee in the project. The assessee’s return from doing work was guaranteed. The operation and maintenance of the B.T. Road Project was not to be done by the assessee but by the Government. Accordingly the ld AO issued a questionnaire dated 18.10.2012 to the assessee seeking for explanation as to why the claim of deduction u/s 80IA of the Act should not be disallowed.
5. The assessee in reply letter dated 8.11.2012 gave a detailed explanation and the gist of the explanation is as under:-
The assessee: is engaged in the business of construction of roads, bridges, boundary wells, underground sewerage and drainage system since 2000. During the assessment year 2010-1.1 the assessee has undertaken the project for Improvement of B. T. Road involving widening of existing road from 4 lanes to 6 lanes and developing the existing road by putting additional layers or bituminous mix in pursuant to a tender floated by Public Works Department, Government of West Bengal since December 2007, The assessee has claimed benefits u/s 801A4(i) as the assessee has fulfilled the main conditions besides fulfilling other procedural conditions as laid down in the Income Tax Act, 1961. Assessee has entered into agreement with state government represented by Eastern Circle, Public Works Department, under Government of West Bengal. Assessee has created a new Infrastructure by itself. Assessee has carried out the work (a) in the capacity of “Developer” and not as a mere works contractor for labour and services. Assessee had also referred the Bombay High Court Judgment in the case of CIT vs ABG Heavy Industries Limited (322 ITR 323). Assessee had also referred the case of Om Metals Infraprojects vs CIT (ITAT Jaipur), CIT vs Glenmark Pharmaceuticals Ltd. (324 ITR 199), Lakshmi Civil Engineering Pvt. Ltd. Vs Addl. CIT, range II, Kolhapur, ITAT Pune Bench, ACIT vs Bharat Udyog Limited (2008) 24 SOT 412 and KMC Construction Limited vs CIT (ITAT Hyderabad).”
6.The ld AO observed that the assessee has claimed deduction u/s 80IA of the Act only in respect of B.T.Road Project only because it is given on contract to the assessee by the State Government. The other works carried out by the assessee has been given on sub-contract by private parties therefore the assessee has not made any claim of deduction u/s 80IA of the Act. The ld AO from the perusal of the contract observed that the assessee is merely a contractor of the project. He applied the Explanation to section 80IA of the Act inserted by Finance Act 2009 with retrospective effect from 1.4.2000 and held that the allowability of deduction in the hands of contractor is not permissible. He also observed that no new road has been constructed. Only the existing road has been widened. Therefore, the assessee is not the developer of any infrastructure project. The ld AO observed that the assessee’s contention that widening of existing road amounts to development of the infrastructure project is not acceptable. An infrastructure project is one which leads to creation of totally new thing. There was already an existing road and it was just widened a bit. The total length of the project was also very less (less than 5 km). Such a work cannot be called as development of infrastructure project. He further observed that the assessee has not taken any risk in the project, therefore he can be called as the developer. He observed that a developer conceives a project, invests in the project, takes risks and executes the project. The work was conceived by the Government and assessee was asked to complete the work as per the terms of contract. Accordingly the ld AO held that the assessee is merely a works contractor and not developer and hence not eligible for deduction u/s 80IA of the Act in view of the Explanation inserted with retrospective effect from 1.4.2000 thereon. 6.1. The ld AO also observed the following in his order :-
4.1.25 Without prejudice to the above contention that the assessee is not eligible to claim the deduction u/s 80IA, if at any appellate stage it is held that the assessee is eligible for deduction u/s 80IA, in that case, the claim of deduction u/s 80IA may be restricted subject to the following:-
a) Claim of deduction on account of ineligible receipts
That the ld AO observed that the assessee is not eligible for claim of deduction u/s 80IA of the Act on account of interest receipts of Rs 5,12,928/- as the same was not derived from the undertaking. By placing reliance on certain decisions in this regard, the ld AO held that even if the said interest income is held to be income from business, still the same is not eligible for deduction u/s 80IA of the Act as it is not derived from the eligible undertaking.
b) Apportionment of expenses
The ld AO observed that during the year , the assessee has executed 15 different projects. While the taxes have been paid on profits from 14 projects, on the B.T. Road Project, the assessee had not paid any tax and claimed deduction u.s 80IA of the Act. On examination of all the projects he observed that many of the expenses have not been apportioned. He also observed that in computing the eligible profits of the B.T.Road Project, the assessee had claimed depreciation as per the Companies Act and not as per the Income Tax Act. The assessee company in this regard stated that all the expenses related to projects have been apportioned to the respective project account. In Head Office only, expenses related to Head Office had been debited. Therefore, Head Office expenses cannot be apportioned between the projects as Head Office had also executed some works. The ld AO examined this reply of the assessee and found that one back to back contract was taken by the Head office and given to someone else by way of whom the assessee earned commission income which was disclsoed as the HO income. Except for one work, no other work was done by the Head office. However, the assessee had claimed various expenditures in the account of Head office which are related to overall business of the assessee. The ld AO observed that the Head office existed in order to support the work and oversee the work of various projects. The expenditure of work at various sites would be impossible without the existence of Head office. He observed that the purpose of expenditure of Head office is related to the various other projects too. Applying the concept of matching principle, the expenditures of Head Office were apportioned to B.T.Road Project by the ld AO in the ratio of turnover as under:-
