Deduction Under Section 80IA/80IB – Case Laws – Assessment

Deduction in respect of profits and gains from certain industrial undertakings – Sections 80IA/80IB

1. ISSUE: MEANING OF PHRASE ‘DERIVED FROM’

The phrase “Derived from” has been a very contentious issue while applying the provisions of Sections 80IA and 80IB of the Act and other similar provisions contain same phrase. The issue revolves around the contention whether deduction is applicable for all receipts/income of the assessee or is it restricted to profits and gains “derived from”.The phrase derived from used in the Sections 80IA(1) and 80IB(1) of the Act is highlighted for reference below:-

80-IA(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise……… a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years

80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business …….a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

1.1 The issue has been discussed in detail in various judgments, which clearly brings about the concept of “income derived from” in contrast to other related concept like “income attributable to”. The decision of the Apex Court in the case of Cambay Electrical Supply Co. Ltd. 113 ITR 84 highlights the distinction between the two expressions. According to the Hon’ble Apex Court, the expression ‘attributable to’ has a much wider import than the expression ‘derived from’ thereby intending to cover receipts from sources other than the actual conduct of the business of the industrial undertaking. In other words, it can be understood to mean that there can be receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of ‘derived from’ so as to be eligible for the benefits envisaged under Section 80-IA of the Act.

1.2 Another notable judgment on the issue is in the case of Sterling Foods 237 ITR 53 (SC). Herein also, the Apex Court opined that where the nexus between the income and the industrial undertaking was not direct but was only incidental, it would not fall within the expression ‘profits derived from industrial undertaking’. Similar is the decision of the Hon’ble Apex Court in the case of Pandian Chemicals Ltd. 262 ITR 278(SC). Their Lordships, in the aforesaid case, were dealing with the question as to whether the interest derived from the deposit made with the Electricity Board could be construed as a profit derived from the industrial undertaking of the assessee for the purposes of deduction under Section 80HH. According to the Hon’ble Apex Court, the said income was not eligible for the purposes of the claim under Section 80HH. Therefore, certain income falling within the parameters of being incidental to business, can fall within the scope of the business of the assessee, yet it cannot be said to have been derived from the eligible industrial undertaking of the assessee, so as to be eligible for deduction under Section 80-IA of the Act.

1.3 The Hon’ble Supreme Court while deciding upon the case of Liberty India Ltd. Vs CIT [2009] 183 Taxman 349 (SC) brought out fine distinction between “profit linked incentives” and “investment linked incentives” and the concept of “first degree source”, “derived from” as against “attributable to”. The relevant portion of the order is as under:

“13.Before analyzing Section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of “profit linked incentives”.

Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-IB (6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub-sections (3) to (1 1A) [as they stood at the relevant time].

14. Analyzing Chapter VI-A, we find that Section 80-IB/80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for “computation of profits of the eligible business”. It is evident that Section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words “derived from” is narrower in connotation as compared to the words “attributable to”. In other words, by using the expression “derived from”, Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is:whether the DEPB credit/Duty drawback receipt comes within the first degree sources?

According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food’s case (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom.).”

1.4 In the case of Vellore Electric Corpn. Ltd. v. CIT [1997] 93 Taxman 401/227 ITR 557 (SC) where assessee-electricity distributing company had to deposit contingency reserve as stipulated in the Electricity (Supply) Act in securities authorised under the Indian Trusts Act, the Hon’ble Supreme Court held that the assessee was entitled to deduction in respect of interest earned from investment in securities there being direct and proximate connection between carrying on business as licensee under the Electricity (Supply) Act and income derived by way of interest from investment in securities. However, in the case of CIT v. Kothari Products Ltd. [2007] 295 ITR 223/[2008] 168 Taxman 236 (All.) it was held that Section 80-I should not be stretched to the limit where income derived from the industrial undertaking is reinvested by the assessee in a non-industrial undertaking for the purpose of earning income from the non-industrial undertaking. Therefore, the interest income accruing to assessee-industrial undertaking from investment in banks could not be treated as ‘income derived from an industrial undertaking’ and would not entitled to deduction under Section 80-I merely because original nucleus funds, which had yielded interest, came from an industrial under taking.

1.5 In view of the above judicial pronouncements, the Assessing Officer should collect the facts to clearly establish that the profits and gains claimed by the assessee to be eligible for deduction doesn’t fall under the purview of the concept of “derived from”. The following fact-finding may be helpful to the Assessing Officer in this regard:

Ø Examine carefully the income claimed under Section 80IA or under Section 80IB and check whether it contains income embedded therein which can be brought out of the realm of “derived from”. For example, Modvat/Duty Drawback/ DEPB income etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Section 80-IA/80-IB as such credits would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.

Ø Check whether the assessee has claimed deduction in respect of passive income like interest income, interest from margin money, compensation from sundry debtors for delayed payments etc. that are not in the nature of operational profits. Also in the case of interest subsidy, the source of the subsidy is not the business of the assessee but the scheme of the State Government. Therefore, it is not eligible for deduction.

Ø Ask the assessee to produce the books of account with documents like raw material purchase, sale book, stock register etc. in respect of the income claimed for deduction as it is necessary for the assessee to maintain the books properly and separately in order the avail the deduction. In case, the assessee neither produces records of raw material purchased nor explains process of manufacturing nor submits proof of sale, benefit of deduction under Section 80-IA could be denied. This issue was highlighted by the Hon’ble Supreme Court in the case of Arisudana Spinning Mills Ltd vs. CIT. Further, reference may be had to the judicial findings in the case of Regal Industries Ltd. V. CIT [2010] 328 ITR 175 (PUNJ. & HAR.) wherein it has been held that deduction under Section 80IA cannot be claimed by the assessee because of non-maintenance of records of purchase of raw material, proof of sale etc.

Ø  Check whether the income claimed for deduction contains any income from trading activities, from service or in the nature of commission. Business of Trading of products is not entitled to deduction under Section 80IA as the same can’t be held to be profits and gains derived from Industrial Undertaking as narrated in Liberty Shoes Ltd. V. CIT, Central Circle, Ludhiana [2007] 158 Taxman 340 (Punj. & Har.)

1.6 While drafting the Assessment Order the Assessing Officer, in addition to above fact-finding, should clearly highlight the relevant case laws depending upon the facts and circumstances of the case. The critical areas that need to be highlighted in the Assessment Order while disallowing the deduction under Section 80IA and 80IB of the Act are:-

• The profits and gains claimed for deduction doesn’t fall under the purview of “derived from”
• The case of the assessee at best falls under the category of “attributable to” and not “derived from”
• The receipt do not come within first degree source from the eligible business
• The nexus between the income and the industrial undertaking is not direct but was only incidental

The Assessing Officer may take clues from the case laws discussed below, in respect of certain types of receipts/income, which prima-face doesn’t fall within the concept of “derived from”.

Nature of receipt	Case Name / Citation
Modvat Creditor Duty Drawback or DEPB	Liberty India V. CIT [2009] 183 Taxman 349 (SC)CIT – III, Rajkot V. Orchev Pharma (P) Ltd. [2012] 25 taxmann.com 518 (SC)Eastman Exports Global Clothing (P) Ltd. [2011] 11 taxmann.com 175 (Mad.) CIT, Karnal V. Accent of Living [2010] 191 TAXMAN 88 (PUNJ. & HAR.)
Export Incentives	Assistant Commissioner of Income-tax, Indore V. Neo Sack (P) Ltd. [2010]186 TAXMAN 294 (SC).M.M. Forgings Ltd. V. Additional Commissioner of Income-tax, Range-IV [2011] 11 Taxmann.com367 (Mad.)
Service commission income	Indian Additives Ltd. V. Deputy Commissioner of Income-tax [2010] 25 taxmann 412 (SC)
Transport or Freight subsidy	CIT Vs Kiran Enterprises [2010] 189 TAXMAN 457 (HP)Janak Raj Bansal V. CIT [2010] 228 CTR 167 (HP) Ms Supriya Gill V. CIT [2010] 193 TAXMAN 12 (HP) CIT V. Maharani Packaging (P) Ltd. [2012] 24 taxmann. com 204 (HP.)CIT Vs. Maharani Packaging (P) Ltd. 55 DTR 340 (HP)
Interest on margin money deposits	Avanti Feeds Limited Vs DCIT, ITA Nos 1 170& 53/ Hyd/04 dated 23-01-09
Interest subsidy	CIT V.        Gheria Oil Gramudyog Workers Welfare Association [2010] 228 CTR 94 (HP)
CommissionIncome from supply of goods	Sharavathy Steel Products (P) Ltd. V. ITO Ward 12(2), Bangalore [2011] 15 taxmann.com 71 (Kar.)

2. ISSUE: “DEPRECIATION”

The basic issue involving depreciation is that whether the assessee has an option not to claim current depreciation and if so, whether the same would have any bearing in computing the deduction allowable under Section 80-IA/80-IB of the Act. Presently, the majority opinion of the Courts suggests towards mandatorily deduction of allowable depreciation before allowing deduction under Chapter VI-A of the I.T.Act. Even if the assessee choose to disclaim the depreciation expense, the deduction under Chapter VI-A is allowable only after taking into account the allowable depreciation.

2.1 One of the important case law related to this issue is Plastibends India Limited Vs Add CIT (2010) 31 (I) ITCL 401 (Bom-HC) wherein it was held that the quantum of deduction under Section 80 IA is not dependent upon the assessee claiming or not claiming depreciation, because under Section 80 IA the quantum of deduction has to be determined by computing total income from business after deducting allowable expenses under Section 30 to 43D. Thus for the purpose of deduction under Chapter VI-A, the gross total income has to be computed, inter alia, including depreciation allowable under Section 32 of the Act, even though the assessee has computed the Total Income under Chapter IV by disclaiming the current depreciation.

2.2 Another important judicial pronouncement on this issue is Dabur India Ltd. v CIT ITA No. 579/2007. In this case, it was held that the assessee who has claimed special deduction under Ch VI-A, the claim of depreciation is mandatory. Profits and gains of an undertaking are to be computed as per the provisions of Section 29 to Section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee not to claim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., Section 29 to Section 43A, which included Section 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A.

2.3 In view of the principles set out by the above judicial pronouncements, the Assessing Officer may collect the facts regarding claim/disclaim of depreciation for the purpose of deduction. The following fact-finding may be helpful to the Assessing Officer in this regard:

Ø Examine whether the allowable depreciation has been properly deducted before allowing deduction under Section 80-IA or 80-IB of the Act. If the assessee has not claimed the depreciation, the deduction under Section 80-IA or 80-IB should be recomputed after considering the allowable depreciation.

Ø In view of the specific provisions of Section 80- IA(5) of the Income-tax Act, 1961, the profit from the eligible business for the purpose of determination of the quantum of deduction under Section 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years.

2.4 While drafting the assessment order the Assessing Officer may keep in mind the above judicial pronouncements. The critical areas that need to be highlighted in the assessment order while allowing depreciation before deduction are:-

• It should be emphasised that Chapter VI-A is an independent code by itself for computing these special types of deductions. That such deductions were required to be computed after considering the provisions of the Act, viz., Section 29 to Section 43A, which included Section 32(2).
• It can be argued that the assessee is trying to reduce deduction under Section 80IA by adopting a device by deferring the claim of depreciation to subsequent years by keeping the WDV intact and bring forward that WDV in subsequent years as per his choice. By not claiming depreciation the assessee seeks to inflate the profits and therefore, claiming higher amount of deduction under Section 80IA.
• The Assessing Officer may quote the finding of the Hon. Supreme Court in Liberty India vs. CIT (2009) 317 ITR 218 (SC) wherein it has clearly laid down that any attempt to inflate or reduce available deduction under Section 80IA or 80IB under Chapter VIA should be discouraged and rejected.
• The Assessing Officer may also place reference on the judicial findings in the case of CIT vs Loonkar Tools Pvt. Limited 213 ITR 721 (Raj) and recent judgement of Hon’ble ITAT, Ahmedabad in the case of Radha Madhav Industries, Daman vs ITO to on 15 October, 2010.

3. ISSUE: “FILING OF RETURN UNDER SECTION 139(1)”

The basic issue involving filing of return is whether the condition for filing return of income under Section 139(1) on or before the due date is ‘mandatory’ or ‘directory’ in nature. In connection to this reference may be had to Section 80AC of the Act.

80AC. Where in computing the total income of an assessee of the previous year relevant to the assessment year commencing on the 1st day of April, 2006 or any subsequent assessment year, any deduction is admissible under Section 80-IA or Section 80-IAB or Section 80- IB or Section 80-IC [or Section 80-ID or Section 80-IE], no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of Section 139.]

80AC has been amended through Finance Act 2018, which says;

80AC. Where in computing the total income of an assessee of any previous year relevant to the assessment year commencing on or after—

(i)  the 1st day of April, 2006 but before the 1st day of April, 2018, any deduction is admissible under section 80-IA or section 80-IAB or section 80-IB or section 80-IC or section 80-ID or section 80-IE;

(ii)  the 1st day of April, 2018, any deduction is admissible under any provision of this Chapter under the heading “C.—Deductions in respect of certain incomes“,

no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of section 139.]

3.1 This Section was probably inserted to counter the effect of the decision of ITAT Pune Bench in the case of Dy. CIT v. Lab India Instruments (P.) India Ltd. [2005] 93 ITD 120 wherein it was held that deduction/exemption are allowable even if they are made in a revised return filed under Section 139(5) but before completion of the assessment. Further, it was held that the provisions of Section 139 are procedural in nature which could not affect the rights and liabilities of an assessee in absence of any specific provision to do so. The reliance was placed on a decision of Apex Court in Anchor Pressings (P) Ltd. v. CIT[1986] 27 Taxman 295 according to which if all the material are placed on record, then claim of deduction can be made even through an application under Section 154. To overcome the above view, a new Section 80AC was inserted by the Finance Act, 2006 making it effective from April 1, 2006. It provided that deductions under Section 80-IA/ 80-IB/ 80-IAB etc. cannot be allowed unless the assessee furnishes a return of his income on/ or before due date of filing of return under Section 139(1). The explanatory notes to the Circular No. 14/2006 dated 28-12-2006 expresses the intention of the Section 80AC as under:-

“Circular No. 14/2006, Dated 28-12-2006

10. Benefits of certain deductions not to be allowed in cases where return is not filed within the specified time limit.

10.1 Section 139(1) casts an obligation on every assessee to furnish the return of income by the due date. With a view to enforce the compliance in this regard by the assessees who are entitled for deduction under Section 10B from their income, a proviso (fourth proviso) to sub-section (1) of Section 10B has been inserted so as to provide that no deduction under Section 10B shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of Section 139. Similarly, with a view to enforce the compliance for furnishing the return of income by the due date by the assessees who are entitled for deductions under Section 80-IA or Section 80-IAB or Section 80- IB or Section 80-IC from their income, a new Section 80AC has been inserted so as to provide that no deduction under Section 80-IA or Section 80-IAB or Section 80-IB or Section 80-IC shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of Section 139.

10.2 This amendment takes effect retrospectively from 1-4-2006 and applies in relation to the assessment year 2006-07 and subsequent years.

3.2 One of the favourable case law related to this issue is that of the ITAT Amritsar Bench in the case of BalKishan Dhawan HUF v. ITO [2012] 18 taxmann.com 234/ 50 SOT 49 (URO) wherein it was held that Section 80AC not only contains the time-limit for claiming deduction under Section 80-IB but also indicates the consequences that would follow if the return of income containing claim for deduction is not furnished before the due date specified in Section 139(1). The Bench held that provisions under Section 80AC are mandatory. If the assessee wants to avail deduction under Section 80-IB, he has to necessarily furnish his return of income containing such claim within the time permissible under Section 139(1) since language of the Section 80AC is negatively worded and it provides in clear terms that deduction under Section 80-IB shall not be allowed if the return of income containing such claim is not furnished by the due date specified under Section 139(1).

3.3 In a related issue recently, ITAT Special Bench at Rajkot in Saffire Garments [TS -865-ITAT 2012(Rjt)], had denied deduction under Section 10A as the assessee had filed the return belatedly. ITAT SB held that the proviso to Section 10A(1A) [laying down that deduction will not be available if return is filed beyond due date under Section 139(1)] was ‘mandatory’ and not merely directory. The Proviso to Section 10A(1A) provides that “no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under Section 139(1)”. The assessee’s argument that the said Proviso is merely directory and not mandatory was not accepted by the ITAT and held that the Proviso is one of the several consequences (such as interest under Section 234A) that befall an assessee if he fails to file a Return of Income on the due date. As the other consequences for not filing the Return of Income on the due date are mandatory the consequence in the Proviso cannot be held to be directory (Shivanand Electronics 209 ITR 63 (Bom) & other judgements distinguished). Thus, denial of deduction under Section 10A was a necessary consequence of failure to file return within the specified date.

3.4 There is another decision of Ahemdabad Bench taking a slightly different view in Parmeshwar Cold Storage (P.) Ltd. v. Asstt. CIT [2011] 49 SOT 67 (URO)/ 16 taxmann.com 88. In that case, deduction was not claimed in the original return filed within the time allowed under Section 139(1). It was held that claim could be made in the revised return because Section 80AC does not so clearly mandate that return which should be filed within the time allowable under Section 139(1) must contain the claim of deduction under Section 80-IB or 80-IC. It is held therein that if the original return is filed in time, then claim under Section 80- IB/ 80-IC can be made through a revised return. Even where revised return is invalid, the claim could be made before appellate authorities in view of decision of the Apex Court in Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1. In its view, section does not require that claim under Section 80-IB should be made only through the original return filed in time. Almost on similar line, ITAT Chandigarh Bench in Elecon Pack pet v. ITO [2011] 15 taxmann.com 351/[2012] 49 SOT 402 held that where assessee had e-filed its original return of income within time allowable under Section 139(1) but could not make the claim of deduction under Section 80-IC due to system error, the claim could be made subsequently.

3.5 In few cases, the Courts have taken a view point that the provisions are directory and not mandatory in nature. Bangalore bench of ITAT in the case of Vanshee Builders & Developers P. Ltd vs. ITO, ITA No.386/ Bang/2012 held that provisions of Section 80AC were only ‘directory’ and not mandatory, provided there was reasonable cause for filing of return of income belatedly. The ITAT, Chennai in the case of Gemini Communications Ltd vs ACIT I.T.A.No. 1252/ Mds/2012 held the Assessee’s claim for deduction under Section 80IC is acceptable on basis of manual return filed by “TAPAL” and held that the Electronic filing of returns is not mandatory as per IT Act or Rules.

3.6 In view of the specific Section 80AC of the Act and a few favorable judicial pronouncements, the Assessing Officer may collect facts regarding date of filing of return by the assessee for the purpose of deduction. The following fact-finding may be helpful to the Assessing Officer in this regard:

• Examine whether the return was filed within due date specified under Section 139(1) of the Act or is it a case of belated/No return.
• Whether claim of deduction was made in the original return/belated return.
• Whether assessee has filed any revised return(s). Whether it is a case, where deduction was not claimed in the original return but claimed for the first time in the revised return.
• In case of belated return, what were the factual causes that prevented the assessee to file return within due date as per Section 139(1) of the Act.

3.7 While drafting the assessment order the Assessing Officer, may highlight the following critical areas in the assessment order:-

• The provisions of the Section 80AC may be highlighted along with the explanatory note on the section in Circular No. 14/2006 dated 28-12-2006 stated above. Further, case laws and judicial precedents may be discussed stressing the overriding effect of the specific section stating mandatory conditions.
• The Assessing Officer may place reference on the judicial findings in the case of ITAT Special Bench at Rajkot in Saffire Garments [TS-865- ITAT-201 2(Rjt)] and judicial stand in the case of Parmeshwar Cold Storage (P.) Ltd. Asstt. CIT [2011] 49 SOT 67 (URO)/ 16 taxmann.com 88.

4. ISSUE: “FILING OF FORM 10CCB”

Similar to the issue of filing of return, is the issue whether filing of Form 10CCB is mandatory or not. In connection to this reference may be had to Rule 18BBB as stipulated in Section 80IB(13) r.w.s 80IA(7) of the Act. The statutory requirement, both under the Act and the Rule, is that the audit report must be furnished ‘along with the return of income’. Strictly interpreted, this will mean that the audit report must be a necessary enclosure to the return of income. The report cannot be furnished either before or after filing the return of income. It may be noted that now rule 12(2) provides that the return of income required to be furnished in Form No. ITR-1 or Form No. ITR-2 or Form No. ITR-3 or Form No. ITR-4 or Form No. ITR-5 or Form No. ITR-6 or Form No. ITR-8 shall not be accompanied with report of audit required to be attached with the return of income under any of the provisions of the Act.

In this regard, reference may be had in the case of CIT v. Jaideep Industries [1989] 180 ITR 81 (Punj. & Har.) wherein it was held that there can be no escape from the conclusion that the requirement of audit report being filed along with the return of income is mandatory.

4.1 There are several cases, however, which take stand that filing of statutory form is only procedural and directive in nature as discussed below.

In the case of CIT v. Medicaps Ltd. [2010] 323 ITR 554 (MP) it was held that filing of audit report is procedural and directory in nature and the same can be filed at the appellate stage. In the case of

CIT v. Panama Chemical Works [2007] 165 Taxman 135/292 ITR 147 (MP) it was held that the requirement of filing the report is mandatory and failure to file it is fatal. But that is not so insofar as the requirement of filing it along with the return is concerned. If, in a given case the assessee fails to file such report along with the return and files it subsequently, but before completion of the assessment, it will not be fatal to the claim of the assessee and the ITO will have the power to accept the same if he is satisfied that the delay in filing the same was for good and sufficient reasons. In the case of CIT v. Shivanand Electronics [1994] 209 ITR 63 (Bom.) it was held that for purpose of claiming relief under Section 80J(6A), filing of audit report before ITO is mandatory, but filing of audit report along with the return is not mandatory. Further, it was held that no duty is cast on the ITO to ask an assessee who has failed to file the audit report, to do so before rejecting his claim for relief.

The ITAT, Kolkata in the case of DCIT v. Tide Water Oil Co.(I) Ltd, ITA No. 20151/Kol/10 dated 20-1-2012.BCAJ Pg. 27, Vol. 43 B Part 5, allowed deduction under Section 80IB though the form no. 10CCB was filed in the course of reassessment proceedings only and was not filed with the return of income nor during the course of assessment proceedings. The ITAT held that the assessee is not making any fresh claim for deduction under Section 80IB but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings and hence deduction to be allowed.

In the case of Eagle Synthetics (P.) Ltd. v. ITO [2011] 16 taxmann.com 255 (Ahd. – Trib.) it was held that where assessee did not claim deduction under Section 80-IB as it was not having sufficient profit as per return of income but during assessment Assessing Officer enhanced profit by making addition/ disallowance, assessee should be granted an opportunity to file audit report in respect of its claim under Section 80-IB. In CIT v. Sitaram Bhagwandas [1976] 102 ITR 560 (Pat.) and CIT v. Universal Trading Co. [1978] 114 ITR 412 (Cal.), it was held that report can be filed with revised return if not filed with original return.

In the case of CIT-I, Chennai Vs M/s AKS Alloys (P) Ltd. one of the question of law was whether filing of Form 10CCB is mandatory or not. It was held that it is well settled by a number of judicial precedents that before the assessment is completed, the declaration could be filed. In fact, the said issue came to be decided by the Karnataka High Court in the case in CIT vs. ACE Multitaxes Systems (P) LTD. (2009) 317 ITR 207(Karnataka), wherein it was held that when a relief is sought for under Section 80IB of the Act, there is no obligation on the part of the assessee to file return accompanied by the audit report, thereby, holding that the same is not mandatory. Therefore, it is clear that before the assessment is completed if such report is filed, no fault could be found against the assessee. That was also the view of the Delhi High Court in the case in CIT v. Contimeters Electiricals (P) LTD -(2009) 317 ITR 249(Delhi), wherein the Delhi High Court, by following the judgements of the Madras High Court in CIT V. Arunachalam (A.N.)-(1994) 208 ITR 481 and in CIT v. JAYANT PATEL (2001) 248 ITR 199 (Mad) held that the filing of audit report along with the return was not mandatory but directory and that if the audit report was filed at any time before the framing of the assessment, the requirement of the provisions of the Act should be held to have been met.

In the recent case of the ITAT Ahmedabad in the case of Zest Aromas (P) Ltd. Vs CIT-II, it was held that as per the requirements of Section 80-IA(7), read with Section 80-IB(13) and Rule 18BBB, no deduction under Section 80-IB will be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed, have been audited by an accountant and the report of such audit in prescribed form duly signed and verified by such accountant is furnished. Since in instant case, deduction under Section 80-IB has been allowed by the Assessing Officer admittedly without such report, the Commissioner was justified in holding the order of the Assessing Officer as erroneous insofar as it was prejudicial to the interests of revenue. Therefore, invocation of provisions of Section 263 by the Commissioner, cancelling the assessment order and directing the Assessing Officer to make a fresh assessment was upheld. It was, however, made clear that since the audit report has been filed by the assessee before the Commissioner during revisional proceedings, the Assessing Officer while framing the fresh assessment, will examine the admissibility of the claim of deduction under Section 80-IB taking into consideration the audit report filed before the Commissioner.

4.2 As seen from the above, most of the judicial findings support the view that filing of Form 10CCB is directory in nature and can be filed before the completion of the assessment proceedings. The Assessing Officer may check the correctness of the claim keeping in view the details filled in the Forms.

5. ISSUE: “DEDUCTION ON ENHANCED INCOME”

The issue here is that whether income enhanced by the Assessing Officer on account of disallowances, excess stock found and surrendered etc. is eligible for deduction under Section 80IA/80IB of the Act. In this regard, a few of the case laws are discussed below.

In the case Home Tex V. CIT [2012] 20 taxmann. com 729 (Punj. & Har.) it was held that excess stock voluntarily surrendered by the assessee at the time of Survey can’t be considered for calculating deduction under Section 80IB as the assessee had failed to show that the amount which was invested in the excess stock and was surrendered at the time of survey was derived from industrial undertaking. In this case, the assessee-firm was exclusively engaged in manufacturing and export of textile goods. A survey was carried out at the premises of the assessee-firm wherein excess stock was found on physical verification. In course of survey, the assessee surrendered Rs. 40,00,000 on account of excess stock as per physical verification voluntarily. The surrender of additional income was over and above the regular income as per books of account. Later on, the assessee submitted that the undisclosed income was on account of surrender of additional stock found during the course of survey and, therefore, the same was to be considered for calculating deduction under Section 80-IB. The claim was rejected by Assessing Officer as well as the Tribunal. The Hon’ble High Court held that the assessee had failed to show that the amount, which was invested in the excess stock and was surrendered at the time of survey was derived from industrial undertaking. In the absence of any such finding or nexus established by the assessee, the Tribunal had rightly declined the claim of deduction under Section 80-IB in respect of excess income surrendered during survey on account of excess stock which was not reflected in the regular books of account

In the case of Commissioner of Income-tax v Harshwardhan Chemicals [2003] 131 Taxman 813 (RAJ.) High Court of Rajasthan, Jaipur denied deduction on the enhanced income, which was not derived from industrial activities by the assessee. The assessee was engaged in the business of manufacturing and selling of Single Super Phosphate (SSP) fertiliser. The Assessing Officer disallowed deduction under Sections 80HH and 80-I on enhanced income by way of excessive subsidy showing bogus purchases and sales in its books of account, as it was not earned out of the industrial activities carried out by the assessee. On appeal, the Commissioner (Appeals) affirmed the order of the Assessing Officer. On second appeal, however, the Tribunal held that if an assessee is found to have involved itself in earning unaccounted money, it cannot be held disentitled from claiming the other statutory benefits which are available to it at that time for its carrying on the business in the backward area. The Hon’ble High Court held that for deduction under Section 80HH, there should be profit and gains from newly established industrial undertaking and profit should be from the industrial activities carried out by the industry. Same requirement is for deduction under Section 80-I. When there was no dispute that the part of the income, on which the deduction under Sections 80HH and 80-I had been denied, related to the income other than the income from industrial activities of the assessee, the Tribunal had committed error in allowing deduction on the subsidy amount, which had been claimed on showing bogus enhanced purchases and sales by the assessee. The Assessing Officer as well as the Commissioner (Appeals) were justified in denying deduction under Sections 80HH and 80-I on such additional income which had nothing to do with the industrial activities.

In the case CIT vs. Allied Industries, 229 CTR 462 (HP) [BCAJ] it was held that additional income surrendered by the assessee firm having been added to the income of the business itself, it is to be considered while working the deduction under Section 80IB. The assessee was in the business of manufacturing tractors and automobile components. The assessee was entitled to deduction under Section 80-IB of the I. T. Act, 1961. In the course of the assessment proceedings for the A.Y. 2001-02, the assessee offered a sum of Rs.2,50,000 for taxation to cover up all discrepancies. The Assessing Officer added the amount but disallowed the claim for deduction under Section 80-IB in respect of this amount. The Tribunal allowed the assessee’s claim and held that the amount offered by the assessee as addition for the purposes of taxation would amount to profits and gains of business and were entitled for deduction under Section 80-IB. On appeal filed by the Revenue, the Himachal Pradesh High Court upheld the decision of the Tribunal and held: “Additional income surrendered by the assessee firm having been added to the income of the business itself, is to be considered while working out deduction under Section 80-IB, in the absence of any finding of any authority that the said income was derived from any undisclosed source.”

In the case of M/s Datta Constructions Ltd. Vs. ACIT July 2012 2 ITA NO. 2077/Hyd/201 1 the Assessing Officer had made an addition of Rs. 1,51,13,120/- under Section 40A(3) and treated it as deemed income. The assessee contested that the disallowance made under Section 40A(3) would enhance the profit and thereby the deduction under Section 80IB should be allowed on the recomputed profit. The CIT(A) held that since the assessee is entitled for 100% deduction of the profits under Section 80IB of the Act, the disallowance made by the AO under Section 40A(3) would enhance the profits of the business and therefore the assessee is entitled to deduction under Section 80IB on the enhanced profit. The ITAT placed reliance on the Hon ’ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., 233 CTR 24, held as under:- “Exemption under Section 10A – profits and gains derived from exports – addition on account of disallowance of employer’s and employees’ contribution towards PF/ESIC

– Disallowance of the PF/ESIC payments has been made because of the statutory provisions i.e. Section 43B in the case of the employer’s contribution and Section 36(1) (v)r.w.s. 2(24)(x) in the case of the employee’s contribution which have been deemed to be the income of the assessee- plain consequence of the disallowance and the add back that has been made by the AO is an increase in the business profits of the assessee – Exemption under Section 10A is allowable with reference to such enhanced income.” Thus the ITAT confirmed the order of the CIT(A) and the grounds raised by the revenue on this issue was dismissed.

5.1 In view of the above judicial pronouncements, the Assessing Officer before making any disallowance should collect facts to clearly establish that the enhanced income is not the income, which would form part of the income eligible for deductions. The following points may be kept in mind while framing the assessment order:

Ø In case assessee claims to take deduction on the excess stock surrendered at the time of survey, the Assessing Officer should rebut the claim by shifting the onus on the assessee to show that the amount which was invested in the excess stock and was surrendered at the time of survey was derived from industrial undertaking. If the assessee is not able to substantiate or establish nexus then it is a clear-cut case of non-allowance of the deduction on the excess stock amount surrendered at the time of Survey Operation.

Ø Examine the nature of income enhanced because of the disallowances. As per the facts of the case, if the income enhanced doesn’t have the characteristics that warrants allowance of deduction then the enhanced income shouldn’t be allowed the benefit of the deduction under Section 80IA/80IB of the Act. For example, enhanced income not falling under the purview of “derived from” undertaking or enterprise, income not forming part of the regular business income etc.

Ø Assessing Officer should check whether the additional (enhanced) income results in enhancement of the business profits or not. If the enhanced income were from the source other than the business profits eligible for deduction, then the enhanced income will not be eligible for deduction. The AO should give a clear finding that the said income was derived from an undisclosed source and not from eligible business.

6. ISSUE : “INITIAL ASSESSMENT YEAR FOR DEDUCTION”

The deduction under Section 80IA/80IB is available to the assessee for specified number of years. The controversy is mainly on account of the year that should be considered as the first/initial assessment year for the purpose of deduction. Relevant portion of the Section 80IA and 80IB stating the starting point/period of deduction is given below:-

“80IA(2) 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 lines :

Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or clause (c) of the Explanation to clause (i) of sub-section (4), the provisions of this sub-section shall have effect as if for the words “fifteen years”, the words “twenty years” had been substituted.

80IB(14) (c) “initial assessment year” –

(i) in the case of an industrial undertaking or cold storage plant or ship or hotel, means the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the cold chain facility or the ship is first brought into use or the business of the hotel starts functioning;

 (ii) in the case of a company carrying on scientific and industrial research and development, means the assessment year relevant to the previous year in which the company is approved by the prescribed authority for the purposes of sub-section (8);

(iii) in the case of an undertaking engaged in the business of commercial production or refining of mineral oil referred to in sub-section (9), means the assessment year relevant to the previous year in which the undertaking commences the commercial production or refining of mineral oil;

(iv) in the case of an undertaking engaged in the business of processing, preservation and packaging of fruits or vegetables or in the integrated business of handling, storage and transportation of foodgrains, means the assessment year relevant to the previous year in which the undertaking begins such business;

(v) in the case of a multiplex theatre, means the assessment year relevant to the previous year in which a cinema hall, being a part of the said multiplex theatre, starts operating on a commercial basis;

(vi) in the case of a convention centre, means the assessment year relevant to the previous year in which the convention centre starts operating on a commercial basis;

(vii) in the case of an undertaking engaged in operating and maintaining a hospital in a rural area, means the assessment year relevant to the previous year in which the undertaking begins to provide medical services;

6.1 As seen from the above, Section 80IA as it stands presently does not define the term ‘initial assessment year’. However, S. 80-IA as it stood prior to 31-3-2000, defined the term ‘initial assessment year’ basically in two ways depending on the type of deduction available. Erstwhile S. 80-IA provided for the following two types of deductions :

(i) Ten or fixed consecutive years starting from the first year of commencement – like an undertaking engaged in cold storage plant, ship or hotel;

(ii) Ten years out of twelve/fifteen years starting from the first year of commencement – like an undertaking engaged in the business of developing, maintaining and operating any infrastructure facility;

The new Section 80IA w.e.f. 1-4-2000 inserted vide the Finance Act, 1999, w.e.f 1-4-2000 substituted the erstwhile Section S. 80-IA with two sections, namely, 80-IA and 80-IB. While doing so, the undertakings originally eligible for deduction for a fixed block of years like the one stated in clause (i) above, namely, the cold storage plant, ships, etc. are covered by S. 80-IB and undertakings which have the option to claim deduction for ten consecutive years within a block of twelve or fifteen years, like the infrastructure undertakings, are retained under the new S. 80-IA. A brief comparison is given below:

Erstwhile S. 80-IA effectiveupto31.3.2000	Present S. 80-IA	New 80-IB (Similar to old 80-IA)
Eligible period of deduction varied from undertaking to undertaking, industry to industry.	Deduction is available for ten years in a block of fifteen years for all undertakings (Ss.2).	Eligible period of deduction variesfrom undertaking to undertaking.
Initial assessment year varied from undertaking to undertaking as defined in sub-section(12)(c).	Not defined.	Initial assessment year is defined for each type of undertaking separately in sub-section (14)

A few of the issues with regard to the determination of the initial year for the purpose of deduction are highlighted below.

6.2 The Hon’ble Gujarat High Court in the case of CIT v. Jolly Polymers, 342 ITR 87 (Guj.) stated that in order to qualify for deduction under Section 80IB(4) of the Act, one of the essential requirement is that the industrial undertaking should have begun to manufacture or produce articles or things on or before March 31, 2004. It was held that where the assessee had not even applied for a factory license before 31 March 2004, the necessary condition under Section 80IB was not fulfilled. However, where application for license was already made before 31 March 2004, but license was obtained shortly thereafter, such lapse must be viewed as purely technical and it would not come in way of grant of deduction under Section 80IB.

The High Court, Delhi in the case of CIT vs. Nestor Pharmaceuticals Ltd. 322 ITR 631 (Delhi) [2010] held that the Initial assessment year for the purpose of Section 80IA is the assessment year relevant to the previous year in which the commercial production is started and not the assessment year in which there was only a trial production. Trial production does not amount to manufacture of the products. It is only when commercial production commences, that the assessee would become entitled to deduction under Section 80-IA/80-IB. Trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether it can be used ultimately in the manufacture of the final article. These are, therefore, ‘trial runs’. Therefore, with mere trial production, the manufacture for the purpose of marketing the goods has not started which starts only with commercial production, namely, when the final product to the satisfaction of the manufacturer has been brought into existence and is now fit for marketing. The quantum of commercial sale would be immaterial. Merely because some closing stock was shown as on 31-3-1988, would not lead to the conclusion that there was commercial production as well. Naturally, even for the purpose of trial production material would be needed and there would be production which will result in stock of finished goods.The year of trial production will not be treated as ‘initial year’ for purpose of Section 80-IA/80-IB.

In the case Madras Machine Tools Mfrs. Ltd. v. CIT [1975] 98 ITR 119 (Mad.) it was held that production of small quantities of insignificant value will not suffice. Where there has not been any regular and substantial production or manufacture of articles, and the few articles, produced are quite insignificant in value and quantity, it could not be said that the company has started production and manufacture of the articles in the relevant accounting year.

In the case Addl. CIT v. Southern Structurals Ltd. [1977] 110 ITR 164 (Mad.) it was highlighted that Production of prototype will not suffice to commence the claim of deduction. The manufacture or production of articles must be in some commercial sense. Mere manufacture of a prototype will not amount to commencement of manufacture.

The ITAT Agra Bench in the case of Aqua Plumbing (P) Ltd v Asst CIT, 46 SOT 366( Agra) (Trib) held that the conditions as laid down for claiming deduction under Section 80IA /80IB are to be complied within the initial year and not in all the assessment years in which the assessee is eligible for deduction. Once the assessee has complied with the conditions as laid down in Sections 80IA / 80IB in the initial year, expansion or extension of the existing unit by acquiring assets of another units in a subsequent year does not disentitle the assessee to claim deduction under Sections 80IA/80IB in respect of increased profit due to such expansion or extension of industrial undertaking.

The ITAT, New Delhi Bench in the case of Tata Communication Internet Services Ltd. v. ITO, APPEAL NO: ITA No. 4214/Del/2010 held that bar provided in Section 80-IA(3) is to be considered only for first year of claim of deduction under Section 80- IA. Thus, the eligibility for the claim of deduction under Section 80-IA by applying the restraints of Section 80- IA(3) cannot be considered for every year of the claim of deduction under Section 80-IA but can be considered only in the year of formation of the business. Once the assessee has been shown to have used new plant & machinery which was not previously used for any purpose and once it is shown that the undertaking is not formed by splitting up or reconstruction of a business already in existence and the assessee becomes entitled to the deduction under Section 80IA, in the subsequent years, it is well available to the assessee to acquire fresh machinery and plant whether new or previously used for any purpose. As the deduction is available on the income of the undertaking and the bar provided under Section 80IA(3) is in relation to the formation of undertaking, once the formation is complete the development of undertaking cannot be put under restrain of Section 80IA(3) of the Act. The eligibility for the claim of deduction under Section 80IA by applying the restraints of Section 80IA(3) cannot be considered for every year of the claim of deduction under Section 80IA but can be considered only in the year of formation of the business.

6.3 In view of the facts of the case and the above judicial positions, the Assessing Officer may check the correctness of the claim of the assessee. However, the following check-points may be considered for the AO:-

Ø Whether the production started by the assessee is trial production or commercial production. In case the assessee claims to be trial run then the claim should be substantiated by sufficient documentary evidences.

Ø  When did the assessee apply for the requisite licenses/permissions.

7. ISSUE: “SET OFF OF LOSSES”

In recent times, huge controversy has arisen on the issue of notional carry forward and set-off of loss from eligible undertaking as mentioned in Section 80IA(5) of the Act. This is an important issue in determining the eligible profit of the eligible undertaking and the available period of deduction under Section 80-IA.

Section 80-IA(5) reads as under :

“(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.

Section 80IB does not provide for notional losses in the Section 80IA(5) literally. But sub-section of Section 80-IB envisages that “the provisions contained in sub-section (5) and sub-sections (7) to (12) of Section 80-IA shall, so far as may be, apply to the eligible business under this section”, so what has to be done under Section 80-IA(5) has to be done, in the context of Section 80-IB also.

7.1 The dispute with regard to the Section 80IA(5) are on two counts. First, is the mandate of fiction created by the Section 80IA(5) to carry forward and set off the notional loss of the eligible business. Second, is the year of applicability of the fiction i.e. if the notional loss has to be carried forward then what should be the “initial year” for consideration i.e. first time the deduction is claimed or year the eligible business is started.

There are case laws in support of the stand that Section 80IA(5) creates a fiction and it mandates a notional carry forward of loss from eligible business presuming that the eligible business is the only source of income. Reference may be had to the findings of the ITAT Ahmedabad in the case of Asstt. CIT v. Goldmine Shares & Finance (P.) Ltd. [2008] 113 ITD 209 (Ahm.) (SB) wherein it was held that the Section is a Legal Fiction and though losses were set off against other sources income, they are to be assumed as not set off in absence of existence of another source and for computing the profit and gains for the purposes of determination of the quantum of deduction one has to once again notionally bring back already set off losses, etc. and set off the same against the profits and gains in a year in the deduction is claimed.

This view is supported in the case of Income tax Officer (OSD), Company Circle VI(3), Chennai v. Sicgil India (P.) Ltd. [2009] 119 ITD 184 (CHENNAI) (TM) which gave a finding that in view of the specific provisions of Section 80-IA(5) of the Income-tax Act, 1961, the profit from the eligible business for the purpose of determination of the quantum of deduction under Section 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years.

Now the issue for consideration is that, though the provisions of S. 80-IA(5) are unambiguous and it warrants notional loss to be set off, which year onwards the fiction would be applicable i.e. first time the deduction is claimed or year the eligible business is started.

Let say in the case of Windmill the Section 80IA provides for deduction of 100% of income for a period of ten consecutive years out of fifteen years. One possible interpretation of Section 80IA(5) is that the loss of the undertaking of the windmill from the year in which it starts generating electricity is to be notionally carried forward for setting off against the profits from windmill in the subsequent years and only after the entire loss is absorbed by the income from windmill, deduction under Section 80IA is available. The other interpretation is that only the loss incurred in any year after first time deduction is claimed is required to be set off before deduction can be claimed in any subsequent year. Thus, one method of working would be to treat the windmill division as the only source of income from the first year, notionally carry forward the loss including the unabsorbed depreciation and set off against the income from windmill division till that entire loss is fully set off and then start claiming deduction under Section 80-IA. Other alternative would be to set off the loss of windmill division against the income from the other division and once the loss of windmill is fully set off against either income from the windmill or other division, then start claiming deduction under Section 80-IA. By this method, the assessee would be in an advantageous position since he can claim the deduction in respect of windmill from an earlier point of time and also for the entire period of ten consecutive years within the span of 15 years.

The question here is which method is the correct one for claiming deduction under Section 80-IA in respect of income from the windmill. In order to analyse this further, we need to find answer to below questions:

1. Whether the ‘initial assessment year’ referred in S. 80- IA(5) is the first year of commencement of production or the first year claim of deduction under Section 80-IA ?

2. Whether the fiction, namely, ‘eligible business was the only source of income’ under Section 80-IA(5) is to be applied only from the second year of the claim or from the second year of the commencement of operation of the windmill?

There are arguments on both sides for the above two questions. As regards the first question, we need to look at concept of ‘initial assessment year’ as per Section 80- IA. The section as it stands presently does not define the term ‘initial assessment year’ and the assessee has an option to claim deduction for ten consecutive years within a block of twelve or fifteen years . In connection to the above section following clauses mentioned in Form 10CCB, under the Rule 18BBB, indicate that the date of commencement of operation by the undertaking is different from initial assessment year from when the deduction is claimed, as shown below:

(a)    Clause 8 – “Date of commencement of operation/ activity by the undertaking”

(b)    Clause 9 – “initial assessment year from when the deduction is being claimed”.

7.2 In view of the changed position of Section 80IA post Finance Act, 1999, one may claim that the term the ‘initial assessment year’ under the present S. 80-IA is the first year of claim and not the first year of operation/ commencement of production.

Assuming there is no dispute that Section 80IA(5) creates a fiction and the fiction mandates a notional carry forward of loss from eligible business presuming that the eligible business is the only source of income, the moot issue is the year of applicability of the fiction. One interpretation could be that the losses of the years prior to the initial assessment year need to be notionally carried forward. Another interpretation could be that the loss of the years commencing from the initial assessment year (i.e., the first year of claim) alone is to be notionally carried forward. Therefore, loss from the eligible business in the years prior to the initial assessment year absorbed against the profits of other businesses, need not be notionally brought forward and has no effect on the deduction claimed. Accordingly, the fiction under Section 80-IA(5) is applicable only from the second year of claim and not prior to it.

The tilt of the Judiciary is towards the second interpretation that the fiction is applicable from the second year of claim and not prior to it. The fiction in Section 80IA(5) is limited to assuming that, during the previous year relevant to the initial assessment year, the eligible business is the only source of income. The provision looks forward to a period of ten years from the initial assessment year (year of option). The fiction does not look backwards to the year beginning, referred to in subsection(2). In construing a fiction, it is impermissible to invoke a further fiction or enlarge the same. Ref :AIR 1966 SC 870; AIR 1963 SC 448 1996 (2) SCC 449.

Above stand is also taken in the case of Mohan Breweries v. ACIT, 116 ITTD 241 (Chennai). This case pertains to A.Y. 2004-05 (i.e., after the amendment of S. 80-IA by the Finance Act 1999), In this case, the Madras Tribunal has held that the initial assessment year is the first year of claim and S. 80-IA itself becomes applicable only when the assessee makes the claim for the first time and not before that.

It is argued that, in the case of ACIT v. Goldmine Shares and Finance P Ltd., 113 ITD 209 (Ahd.) (SB), the undertaking had been set up prior to 3 1-3-2000, and is not applicable to the changed position of Section 80IA post amendment by Finance Act, 1999. The Special Bench held that before claiming deduction, the losses of the earlier years (i.e., the first year of commencement of business being the initial assessment year) are to be brought forward notionally and set off against the income of the current year. It placed reliance on the Circular 281, dated 22-9-1980. However, the ratio of this decision and the said Circular are relevant for undertakings set up till 3 1-3-2000 and not for those set up on or after 1-4-2000. When the Mohan Breweries case was referred before the Special Bench, the Tribunal distinguished it on facts. It pointed out that the assessee, Goldmine Shares had claimed deduction in the year of setting up of undertaking itself and whereas in Mohan Breweries case, the year of claim was after the year of setting up of the undertaking.

The Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. Vs. ACIT (2010 38 DTR (Mad) 57) considered both the above decisions. It held that provision of Section 80-IA(5), treating eligible undertaking as a separate sole source of income, is applicable only when the assessee chooses to claim deduction under S. 80-IA and same cannot be applied to a year prior to the year in which assessee opted to claim relief under S. 80-IA for the first time. As initial year is not defined in S. 80-IA, the year of option has to be treated as the initial assessment year for the purpose of S. 80-IA. Thus, Madras High Court overruled the Ahmedabad Special bench decision and upheld the judgment of Chennai Bench in the case of Mohan Breweries & Distilleries Ltd. Vs ACIT(2 008) 114 TTJ 532 which has held that Section does not mandate that first year of 10 consecutive assessment years should be always first year of set-up of enterprise. The High Court has held that as initial year is not defined in Section 80IA as compared to Section 80IB where it is specifically provided that the year of commencement of business will be the initial year for the purpose of claiming the deduction, the year of option has to be treated as initial assessment year for the purpose of Section 80IA.

The ITAT, Bangalore in the case of Anil Lad Vs DCIT [2011] held that loss and depreciation of eligible unit prior to “initial assessment year” , if set-off against other income, then it is not to be notionally carried forward. The facts of the case were that in AY 2006-07 the assessee installed a windmill, the profits of which were eligible for 100% deduction under Section 80-IA. Owing to depreciation and loss, the assessee did not claim s. 80-IA deduction in AY 2006-07 & 2007- 08 and set-off the loss and depreciation against other income. In AY 2008-09, the assessee earned profits from the windmill and claimed deduction under Section 80-IA. The AO & CIT (A) relied on the Special Bench decision in ACIT vs. Gold Mines Shares & Finance 116 TTJ (Ahd) (SB) 705 and held that in view of Section 80IA(5), the loss and unabsorbed depreciation of the eligible unit, though set-off against the other income, had to be “notionally” carried forward for set-off against the profits of the eligible undertaking. Allowing the appeal the ITAT held that, though in Gold Mines Shares & Finance 116 TTJ (Ahd) (SB) 705 it was held that in view of Section 80IA(5), the eligible unit had to be treated as the only source of income and the profits had to be computed after deduction of the notionally brought forward losses and depreciation of the eligible business even though they were in fact set-off against other income in the earlier years, the Madras High Court held in Velayudhaswamy Spinning Mills P. Ltd. v. ACIT 38 DTR 57 held that such a notional exercise was not contemplated by Section 80IA(5). It was held that the fiction in Section 80-IA(5) that the eligible unit is the only source of income begins from the “initial assessment year” which is not the same thing as the year of commencement of activity. The law contemplates looking forward to a period of ten years from the initial assessment and does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off has taken place in an earlier year against the other income, the Revenue cannot rework the set off amount and bring it notionally. The fiction in Section 80-IA(5) is for a limited purpose and does not contemplate to bring set off amount notionally. The judgement of a constitutional court has overriding effect.

7.3 As seen from the above judicial pronouncements, the Courts have interpreted the start year of applicability of the fiction i.e. the initial assessment year as the first year of claim and not the first year of operation/ commencement of production.

8. Another issue is whether in computing deductions under Section 80-IA loss of one eligible unit can be set off or adjusted against the profit of another eligible unit ?

In view of Section 80-IA(5), which begin with a non-obstante clause, the quantum of deduction is to be computed as if the eligible undertaking were the only source of income of the assessee during the relevant years. In other words, each eligible undertaking or unit is to be treated separately and independently. It is only those undertakings, which have a profit or gain, which would be considered for computing the deduction, not the loss making undertakings. The plain reading of the provision suggests that the loss of one such eligible undertaking cannot be set off against the profit of another such eligible undertaking to arrive at a computation of the quantum of deduction that is to be allowed to the assessee under the said sections.

8.1 In this regard, we may refer to the decision of Supreme court in the case of Dewan Kraft Systems [297 ITR 305 (Delhi)], which considered the provisions of Section 80IA(7) of the Income Tax Act. In that case, the question arose with respect to computation of the deduction in relation to three units – the Kalamb Unit, the Delhi Unit and the Noida Unit. This court held that while computing the deduction under Section 80-IA of the said Act, the profits and gains of the Kalamb unit for the purposes of determining the quantum of deduction under Section 80-IA(5) was to be computed as if such eligible business of the said unit was the only source of income of the assessee. This court observed that the Assessing Officer had erroneously mixed the profits of the Delhi and Noida units and had thereby restricted the deduction to the extent of business income and that such an exercise was in total disregard of the provisions of sub-section (7) of Section 80-IA of the said Act. It was held that the Kalamb unit, being the only unit of the assessee eligible for deduction under Section 80-IA, was to be treated as an independent unit and the same was to be treated as the only source of income of the assessee for the purposes of computing deduction under Section 80-IA.

Similar view was held by Delhi High Court in the case of CIT vs. Sona Koyo Steering Sys. Ltd.[2010] 189 Taxman 110 (Delhi). In this case the assessee has two units, namely, a steering unit and an axle unit. In all these years, the assessee was incurring losses in one of the two units and profits in the other unit. The assessee claimed deduction under Section 80-I of the Income-tax Act, 1961 – The Assessing Officer, while computing the deduction allowable to the assessee, set off the losses of one unit against the profits of the other unit and, thereafter, sought to compute the deduction. – Commissioner of Income-tax (Appeals) also took the same stand as the Assessing Officer. The plea of the assessee before the Income-tax Appellate Tribunal was that the two units are independent units and only the profit making unit should be considered eligible for the purposes of computing the deduction under Section 80- I(6) read with the provisions of Section 80-1(6). The Tribunal accepted the plea of the assessee and held that undertaking entitled to special deduction to be treated as an independent unit. The court observed that the test for deciding whether two units are independent or not is to see whether they are capable of functioning autonomously without relying on each other. It is irrelevant whether the two units are producing same or different products as long as they satisfy the above test.

8.2 Thus for the purposes of determining the quantum of deduction under Section 80-IA the taxable income of the eligible business of the industrial undertaking is to be ascertained as if such undertaking were an independent unit owned by the assessee concerned and the assessee has no other source of income. Consequently, the unabsorbed losses, unabsorbed depreciation, etc. relating to the eligible industrial undertaking etc., are to be taken into account in determining the quantum of deduction under Section 80-IA even though these may actually have been set off against the profits of assessee from other sources. There is no warrant for reducing the loss of one eligible undertaking from the profits of the other eligible undertaking. Such an analysis will lead to misinterpretation of the unambiguous language of section, which otherwise talks of granting deduction in respect of the profits and gains derived from such industrial undertaking. It is abundantly clear that there is no reference to the aggregate of profits from all the eligible industrial undertakings. Therefore, if there is profit derived from a particular industrial undertaking that will qualify for deduction without reduction of loss suffered by any other eligible industrial undertaking.

9. ISSUE: MEANING OF WORD ‘UNDERTAKING’

In Section 80-IA the concept of ‘undertaking’ is a critical condition for the application of section. Other conditions mentioned in the Section 80-IA can be satisfied only when there is an ‘undertaking’. Thus it is important to understand the meaning of the term ‘undertaking’ in order to understand the scope of deduction available under Section 80-IA. It is to be noted that the deduction under Section 80-IA is applicable to ‘Undertaking’ or ‘Enterprise’ and not to the ‘Assessee’ per se.

The benefit of Section 80-IA is not available to a unit or new unit unless the unit is in the nature of an ‘undertaking’. The term ‘unit’, according to the New Oxford Dictionary of English, signifies an individual thing or person regarded as single and complete, especially for purposes of calculation. It also signifies a ‘device that has a specified function’. The term ‘undertaking’, on the other hand, is defined in the same Dictionary as ‘task that is taken on’ and also as ‘the action of undertaking to do something.’ The Income-tax Act does not define the term ‘undertaking’ though the term ‘industrial undertaking’ is defined in Section 33B as ‘any undertaking which is mainly engaged in the business of …. or in the manufacture or processing of goods …’

In the absence of an explicit statutory definition of the term ‘undertaking’, it is subject to various interpretations. In order to constitute an ‘undertaking’, the unit must undertake the specified task. In the context of Section 80-IA, the obligation or task to be undertaken by a unit is the manufacture or production of articles or things specified in that section in its own right and consequently derives the profits or gains there-from. It should not only be a separate and independent unit but a well integrated unit capable of undertaking the manufacturing or production of articles or things.

Mere existence of an ‘undertaking’ is not sufficient. The ‘undertaking’ should also be new in the sense that it should have begun to manufacture or produce specified articles or things after the prescribed time schedule. Therefore, there must primarily be manufacture or production of articles or things involving a new undertaking or undertakings.

9.1 A few of the case laws in relation to the issue of Industrial undertaking, reconstruction, number of workers etc. is tabled below for ready reference.

Head	Citation	Observations in brief
Meaning ofIndustry	CIT v. J.B. Kharwar & Sons [1987] 163 ITR 394 (Guj.)	Where there is systematic activity, organised by co-operation between employer         and      employee        (the direct and substantial element is commercial), for the production and/or distribution of goods and services calculated to satisfy human wants and wishes, prima facie, there is an ‘industry’ in that enterprise. The true focus is functional and the decisive test is the nature of the activity with special emphasis on the employer-employee relations
Hotel is not an industrial undertaking	Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 538 (SC).	Taking this into account, apparently, the business of a hotel, is a trading activity and not that of an industrial undertaking. A flight kitchen operating as an ancillary unit of a hotel cannot also be treated as an industrial undertaking
New industrial undertaking	CIT v. Mahaan Foods Ltd. [ 2009] 177 Taxman 274 (Delhi).	True test to claim deduction under Section 80-IA is not whether new industrial undertaking connotes expansion of existing business of assessee but whether it is all the same a new and identifiable undertaking, separate and distinct from existing business.
Reconstruction’	Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC)/CIT v. Orient Paper Mills Ltd. [1989] 176 ITR 110 (SC)	Reconstruction of business involves the idea of substantially the same persons   carrying  on substantially the same business. Where the new industrial undertakings are separate and    independent          production units in the sense that the commodities or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as business formed by reconstruction of the old business.The fact that an assessee by establishment of a new industrial undertaking expands his existing business would not on that score deprive him of the benefit. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. There must be a new emergence of a physically separate unit which may exist on its own as a viable industrial unit. One thing is certain that the new undertaking must be an integrated unit by itself
Take-over of firm by company is not reconstruction	CIT v. Gaekwar Foam & Rubber Co. Ltd. [1959] 35 ITR 662 (Bom.).	Where under an agreement a company took over the business of a partnership firm by allotting shares to its partner, the take-over did not amount to ‘reconstruction’ –
‘Splitting up’ –	CIT v. Hindustan General Industries Ltd. [1982] 137 ITR 851 (Delhi)	The expression ‘splitting up’ of the business already in existence indicates a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently
Worker	CIT v. K.G. Yedyurappa & Co. [1985] 152 ITR 152 (Kar.).	In the absence of any definition of the word ‘worker’, the court has to take its ordinary meaning which may mean casual, permanent or temporary. There is therefore no reason why the word ‘worker’ should not include all these three categories
Average number is to be worked out	CIT v. Sawyer’s Asia Ltd. [1980] 122 ITR 259 (Bom.)/CIT v. Ormerods (I) (P.) Ltd. [1989] 176 ITR 470 (Bom.)	There can be no hard and fast rule by which one can determine whether there has been substantial compliance with the prescribed limit of at least 10 workers. It would suffice if, on an average, there had been 10 workers employed in the undertaking, even though the number of workers employed during some part of the previous year was less than 10.
‘Owner’ cannot be counted as worker	CIT v. P.R. Alagappan [1988] 173 ITR 82 (Mad.).	When   the      clause refers  to ‘undertaking employs ten or more workers’, it is not intended to convey that the undertaking is to be treated as an employer independent of the assessee who owns the undertaking. Hence, the owner must not be counted as a worker for computing the number of workers
Position during abnormal situations like strike	CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 220 ITR 84/87 Taxman 152 (AP).	Where  the      number           of  worker employed by the assessee fell below the minimum stipulated number owing to the closure, strike or other valid reasons, the strength of employees during such abnormal situations could not be taken as a criterion for denying relief
Employment during substantial period may suffice	CIT v. Taluja Enterprises (P.) Ltd. [2001] 250 ITR 675 (Delhi).	In order to qualify for relief, the undertaking must have employed ten or more workers substantially during the period for which relief was claimed. There could be no hard and fast rule by which one could determine whether there had been substantial compliance. It is for the authority or the court to so decide based upon the facts before it
Succession or sale does not amount to reconstruction	CIT v. Devson Ltd./CIT v Kashmir Fruit and Chemical Industries [1975] 98 ITR 311 (J&K).	If a new business has come into existence by virtue of succession or sale, the question of reconstruction does not arise at all
Workers deployed on all processes must be counted	CIT v. Sultan & Sons Rice Mill [2005] 272 ITR 181 /CIT v. Hanuman Rice Mills [2005] 275 ITR 79 (All.)/CIT v. Ajmani Industries [2006] 153 Taxm 43(All.).	Various processes starting from purchase of raw material and till the sale of finished goods form an integral part of manufacturing process and workers and labourers employed in all these processes are ‘workers employed in the manufacturing process’. The words ‘employ ten or more workers in the manufacturing process’ normally would cover the entire process carried on by the industrial undertaking for converting the raw material into finished goods
Contract labourers, job workers etc. can’t be counted for determining the number of workers	R & P Exports v. CIT [2005] 146 Taxman 404/279 ITR 536 (All.).	The words ‘to employ’ would take colour from associated words and expressions such as ‘worker’, ‘industrial’ undertaking’ used in the section. The employee is one who works for others for hire. The employer is one who employs services of other persons. In the context of the section, there fore, ‘employee’ will include only such workers who are directly employed by the assessee. If the employer is an assessee, only then the deduction can be claimed. The word ‘employee’ has been used in the sense of contract of service and not contract for service. Thus, the artisans and karigars from whom the work is got done on contract basis, job basis or per piece basis are not workers employed by the assessee and they cannot be counted for finding out the minimum number of stipulated workers
(Contra)Contract labourers must be counted as ‘workers’	CIT v. Prithviraj Bhoorchand [2005] 280 ITR 94 (Guj.).	The term employed by the statute is ‘employs’ twenty or more workers. The plain dictionary meaning of ‘employ’ is to use the services of a person in return for payment. The Tribunal would therefore be right in law in holding that,where the assessee had the ultimate control over the affairs of the establishment which comprised more than 20 workers through the contractor, the statutory requirement had been met with, and that the assessee was entitled to the deduction

10. ISSUE: MANUFACTURING VS. PROCESSING

The fine line of dissimilarity between manufacturing and processing for the purpose of deduction under Section 80IA/80IB is one of the most debated issues in these sections. The relevant portion of the section mentioning these terms is reproduced below for ready reference.

Sections 80-IA and 80-IB substituted for Section 80- IA by the Finance Act, 1999, w.e.f. 1-4-2000.

“ Eligibility conditions are enumerated in subsection (2) (iii) of Section 80-IB, which is:

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : –

(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India :”

Also wef 01.04.2009 following definition of the term manufacture has been inserted:

(29BA) “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b)bbringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;

10.1 A few recent and important case laws addressing the controversy of manufacturing vs processing are discussed below to understand the determining factors relevant to the issue.

Case laws	Important observations
1)[2010] 186TAXMAN 439( SC) Income- tax Officer, Udaipur v. Arihant Tiles & Marbles (P.) Ltd. *	Facts:The assesses were engaged in the business of manufacture/production of polished slabs and tiles from marble blocks. The activities included excavation /extraction of marble blocks by mine owners in raw shape; processing of such blocks on single blade/wire saw machines using advanced technology to square them up by separating waste material; sawing of squared up blocks for making slabs; filling cracks by epoxy resins and fibre netting; polishing of slabs on polishing machines and cutting them into required dimensions and buffing of polished slabs and tiles by shiner. They had been consistently regarded as manufacturer/producer by the various Government departments and agencies and the processes undertaken by them had been treated as manufacture under the Excise Act and allied tax laws. For the relevant assessment year, they claimed deduction under Section 80-IA on the plea that the activities undertaken by them constituted manufacture or production in terms of Section 80-IA. The lower authorities including the Tribunal disallowed the claim of the assessees. However, the High Court accepted the claim of the assessees holding that in the instant case, polished slabs and tiles stood manufactured/produced from the marble blocks and, consequently, the assessees were entitled to the benefit of deduction under Section 80-IA.Observations: The word ‘production’ is wider in its scope as compared to the word ‘manufacture’. Further, the Parliament itself has taken note of the ground reality and has amended the provisions of the Act by inserting Section 2(29BA) vide the Finance Act, 2009, with effect from 1-4-2009, wherein the word ‘manufacture’ is defined. In the instant case, the Court was not concerned only with cutting of marble blocks into slabs, but was also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. From the processes/activities undertaken by the assessees, it was clear that there were various stages through which the blocks had to go through before they became polished slabs and tiles. One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. In the instant case, the blocks converted into polished slabs and tiles after undergoing the various processes certainly resulted in emergence of a new and distinct commodity. The original block did not remain the block; it became a slab or tile. In the circumstances, not only there was manufacture, but also an activity which was something beyond manufacture and which brought a new product into existence. Therefore, the activity undertaken by the assessees constituted manufacture or production in terms of Section 80-IA.
2) [2009] 177TAXMAN 217(MAD.) Commissioner of Income-tax v. Vinbros & Co.* (Confirmed by Supreme Court)	Facts:The assessee, engaged in manufacturing and bottling of Indian Manufactured Foreign Liquor (IMFL) from rectified spirit, claimed deduction under Section 80-IB. The Assessing Officer rejected the claim on the ground that the process carried on by the assessee did not constitute ‘manufacture’ within the meaning of Section 80-IB. On appeal, the Commissioner (Appeals) confirmed the disallowance. On second appeal, the Tribunal allowed the deduction on the ground that the rectified spirit was not mentioned in the 1st item of 11th Schedule, ‘bear, wine and other alcoholic spirits’ and, consequently, the assessee being a small scale industrial unit was entitled to deduction under Section 80-IB.Observation: The assessee did not just add water before selling the final product. It was an admitted fact that quite apart from water, the assessee had to add several items to make it fit for human consumption. Following the decision in the case of Dy. CST (Law), Board of Revenue (Taxes) v. Pio Food Packers [1980] 46 STC 63 (SC), wherein it was observed that the test for determination of whether manufacture can be said to have taken place is whether the commodity which is subject to the process of manufacture can no longer be regarded as the original commodity, but it is recognised in the trade as a new and distinct commodity, the Tribunal held that what was purchased by the assessee was not a potable product and but for the blending, the commodity could not have become a saleable commodity. Even though the raw materials were not manufactured by the assessee, yet there was nexus of the process by blending original product to make it a saleable commodity totally different from the one originally obtained. The end product was totally different and commercially a different commodity than the major input, rectified spirit, which was not fit for human consumption and hence, the changes made to the original product resulted in as different commodity, which was recognized in thetrade.
3)[2010] 188TAXMAN 188 (SC) Commissioner of Income-tax, Mumbai v. Emptee Poly-Yarn (P.) Ltd.*	Facts:The question which arose for determination in the instant appeal was as to whether twisting and texturising of partially oriented yarn (‘POY’) would amount to ‘manufacture’ in terms of Section 80-IA.Observation: POY (Partially Oriented Yarn) is a semi-finished yarn not capable of being put in warp or weft. It can only be used for making a texturised yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the experts, crimps, bulkiness, etc., are introduced by a process called as thermo-mechanical process into POY which converts POY into a texturised yarn. If one examines this thermo- mechanical process in details, it becomes clear that texturising and twisting of yarn constitutes ‘manufacture’ in the context of conversion of POY into texturised yarn. The definition of the word ‘manufacture’ is made explicit by the Finance (No. 2) Act, 2009 which states that ‘manufacture’ shall, inter alia, mean a change in bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Applying this definition to the facts of the instant case, it could be mentioned that the above thermo-mechanical process also ought to be about a structural change in the yarn itself, which is one of the important tests to be seen while judging whether the process is manufacture or not. The structure, the character, the use and the name of product are the indicia to be taken into account while deciding the question whether the process is a manufacture or not. However, it cannot be said that texturising or twisting per se in every matter amounts to manufacture. It is the thermo-mechanical process embedded in twisting and texturising when applied to a partially oriented yarn which makes the process as a manufacture.
4)[2010] 187 TAXMAN 275 (SC)Oracle Software India Ltd.	Facts:The assessee was a 100 per cent subsidiary of a USA company. It was incorporated with the object of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computer softwares. Itwas entitled tosub-licence the software developed by the US company. It imported master media of the software from the US company which was duplicated on blank discs, packed and sold in the market along with relevant brouchers. According to the assessee, it used machinery to convert blank CDs into recorded CDs which along with other processes became a software kit and process undertaken by it to convert blank CDs into recorded CDs constituted manufacture or processing of goods in terms of section 80- IA and, thus, it was entitled to deduction under that section. The Assessing Officer held that since the software on the master media and the software on the recorded media remained unchanged, there was no manufacture or processing of goods involved in the activity of copying or duplication and, hence, the assessee was not entitled to deduction under section 80- IA. The High Court, however, allowed the assessee’s claim.Observation: In the instant case, it was found that the software on the master media was an application software. It was not an operating software or a system software. It could be categorized into ‘Product Line Applications’, ‘Application Solutions’ and ‘Industry Applications’ . A commercial duplication process involves four steps. For the said process of commercial duplication, one requires master media, fully operational computer, CD blaster machine (a commercial device used for replication from Master Media), blank/unrecorded compact disc, also known as recordable media and printing software/labels. The master media is subjected to a validation and checking process by software engineers by installing and rechecking the integrity of the master media with the help of the software installed in the fully operational computer. After such validation and checking of the master media, the same is inserted in a machine which is called as the CD Blaster and a virtual image of the software in the master media is thereafter created in its internal storage device. This virtual image is utilized to replicate the software on the recordable media. Virtual image is an image that is stored in computer memory but it is too large to be shown on the screen. Therefore, scrolling and panning are used to bring the unseen portions of the image into view. If one examines the above process in the light of the details given hereinabove, commercial duplication cannot be compared to home duplication. Complex technical nuances are required to be kept in mind while deciding issues of the instant nature. The term ‘manufacture’ implies a change, but every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/ process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of the word ‘manufacture’. Applying the above test to the facts of the instant case, it was clear that the assessee had undertaken an operation which rendered a blank CD fit for use for which it was otherwise not fit. The blank CD was an input. By the duplicating process undertaken by the assessee, the recordable media, which was unfit for any specific use, got converted into the programme which was embedded in the Master Media and, thus, blank CD got converted into recorded CD by the aforestated intricate process. The duplicating process changed the basic character of a blank CD, dedicating it to a specific use. Without such processing, blank CDs would be unfit for their intended purpose. Therefore, processing of blank CDs dedicating them to a specific use, constitutes a manufacture in terms of section 80- IA(12)( b) , read with section 33B. [Para 10]
5)[2001] 117TAXMAN 368 (SC) Gem India Mfg. Co.	Facts:The assessee was engaged in cutting and polishing of diamonds. The Tribunal as well as the High Court allowed its claim under Section 80-I on ground that its activities amounted to manufacturing or production of goods.Observation: 1. The Tribunal took the view that because in ‘common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same, the physical characteristics of shape and class, etc., are substantially different’. It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusion that, either in common or in commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not the best foundation for a decision. 2. The High Court, as aforestated, concluded that the case was covered by its decision in the case of London Star Diamond Co. (I.) Ltd. (supra). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of Section 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the ‘processing of goods’ to convert them into marketable form. The question that the High Court and we are here concerned with is whether in cutting and polishing diamonds the assessee manufactures or produces articles or things. 3. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.

10.2 After going through the provisions of the Act, background of the provisions as well as the legislative intent coupled with important arguments in favor and against the provisions, following important areas emerge, which are to be kept in mind at the time of investigation as well as drafting the assessment order.

Ø After the definition of the term manufacture has been added to the Act, the controversy of manufacturing vs processing has been put to rest to some extent.

Ø        The new and distinct object should comeinto being and the manufactured item should have different name, character, use, chemical composition or integral structure.

Ø It is also important to understand the process in detail, through which the new product or article comes into existence without which a rational opinion may not be formed.

Ø Wherever possible, in order to understand an intricate process advice of experts may be taken by the AO. At the senior level a panel of experts may be kept ready to take a decision on such issues, which will also help in creating a database for all future reference (Hon’ble Supreme Court suggested while remitting the case of Morinda Co-operative Sugar Mills Limited to CIT(A) in its order dated 26.09.20 12)

11. ISSUE: CONTRACTOR Vs. DEVELOPER

The distinction between contractor and developer for the purpose of deduction under Section 80IA/80IB has always been a point of controversy. Before going into the relevant case law highlighting the issue, the relevant portion of the section is reproduced below for ready reference.

Sections 80-IA and 80-IB substituted for Section 80-IA by the Finance Act, 1999, w.e.f. 1-4-2000.

“ Eligibility conditions are enumerated in subsection (4)(i) of Section 80-IA, which is:

(4) This section applies to –

(i) any enterprise carrying on the business [of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining] any infrastructure facility which fulfils all the following conditions, namely : –

[75. Substituted for “of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating” by the Finance Act, 2001, w.e.f. 1-4-2002.]

(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 has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995:”

Following explanation has been added to this section explaining that the deduction is not allowable to a contractor:

[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).]”

{9. Substituted by the Finance (No. 2) Act, 2009, w.r.e.f. 1-4-2000. Prior to its substitution, Explanation, as inserted by the Finance Act, 2007, w.r.e.f. 1-4-2000, read as under :

“Explanation. – For the removal of doubts, it is hereby declared that nothing contained in this section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case may be.”}

The above explanation was added for the reasons expressed in the memorandum to the Finance Act-2007, which is reproduced below.

“Clarification regarding developer with reference to infrastructure facility, industrial park, etc. for the purposes of Section 80-IA

Section 80-IA, inter-alia, provides for a ten-year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones.

The tax benefit was introduced for the reason that industrial modernization requires a massive expansion of, and qualitative improvement in, infrastructure (viz., xpressways, 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 executes a works contract entered into with the undertaking or enterprise referred to in the said section. Thus, in a case where a person makes the investment and himself executes the development work i.e., carries out the civil construction work, he will be eligible for tax benefit under Section 80-IA. 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 the tax benefit under Section 80-IA.

This amendment will take retrospective effect from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years.”

11.1 Relevant Circulars:

In this connection following circulars are important to note, as the same clarify the position to be taken by the department while deciding the issue at hand related to this controversy as well as various appellate authorities have also referred to these circulars while deciding the cases.

A. Definition of Port as Infrastructure facility for the purpose of Sections 10(23G) and 80-IA

1. the Board has received various representations seeking clarification whether structures at ports for storage, loading and unloading etc. will fall under the definition of “port” for the purposes of Sections 10(23G) and 80-IA of the Income-tax Act, 1961.

2. The Board has considered the matter andit has been decided that such structures will be included in the definition of“port” for the purposes of Sections10(23G) and 80-IA of the Income-tax Act, 1961, if the following conditions are fulfilled:

(a) the concerned port authority has issued a certificate that the said structures form part of the port, and

(b) such structures have been built under BOT or BOLT schemes and there is an agreement that the same would be transferred to the said authority on the expiry of the time stipulated in the agreement.

Circular : No. 793, dated 23-6-2000.

CLARIFICATION ONE

1. Reference is invited to Board’s Circular No. 793, dated 23- 6-2000 and amendment in Section 80-IA by the Finance Act, 2001.

2. “Port”, for the purposes of Sections 10(23G) and 80-IA ofthe Income-tax Act, 1961, includes structures at the portsfor storage, loading and unloading etc., if the following conditions are fulfilled:

(a) the concerned port authority has issued a certificate that the said structures form part of the port, and

(b) such structures have been built under the BOT or BOLT schemes and there is an agreement that the same would be transferred to the said authority on the expiry of the time stipulated in the agreement.

This definition is applicable to assessment year 2001-02 and any earlier assessment year.

3. However, for and from assessment year 2002-03 onwards, structures at the ports for storage, loading and unloading etc. will be included in the definition of “port” for the purpose of Sections 10(23G) and 80-IA of the Income-tax Act, 1961, if the following condition is fulfilled:

the concerned port authority has issued a certificate that the said structures form part of the port,

Circular : No. 10/2005, dated 16-12-2005.

B. Whether Build-Own-Lease-Transfer (BOLT) Scheme of Indian Railways shall be eligible for benefit under Section 80-IA, since it is not legally possible for any enterprise other than Indian Railways to maintain and operate Railway System

1. The Finance Act, 1995 has introduced sub-section (4A) in Section 80-IA of the Income-tax Act, 1961 providing for a five-year tax holiday and a deduction of 30 per cent in the subsequent five years within a period of twelve assessment years beginning with the assessment year in which an enterprise (which may be owned by a company or a Consortium of companies) begins operating and maintaining an infrastructure facility on Build-Operate-Transfer (BOT) or on Build-Own-Operate-Transfer (BOOT) basis, subject to certain conditions specified in that sub-section.

One of the conditions to be fulfilled by the enterprise is that it should develop, maintain and operate a new infrastructure facility which shall be transferred to the Central Government, etc., within the period stipulated in the agreement. The definition of infrastructure as per sub-section (12) of Section 80-IA includes a rail system also.

2. The Indian Railways have formulated a Build-Own-Lease-Transfer (BOLT) Scheme, whereunder a private enterprise will provide the necessary and crucial components of a Railway system, own them for a stipulated period but will not maintain or operate the same. Instead, the enterprise will lease the asset (only necessary and crucial components of a Railway System) back to Indian Railways for maintenance and operation, and shall ultimately transfer it to Indian Railways.

3. This is to clarify that, the said (BOLT) Scheme of the Indian Railways shall be eligible for the benefit of Section 80-IA of the Income-tax Act, 1961, since it is not legally possible for any enterprise other than the Indian Railways to maintain and operate a Railway System. However, this concession shall be applicable only to an infrastructure facility meant for development of Rail System and not to any other infrastructure facility including Rolling Stocks. Circular : No. 733, dated 3-1-1996.11.2 Some recent and important case laws addressing the controversy of Contractor vs Developer are discussed below. The case might have been decided against the revenue but the important observations by the court/ tribunal and arguments raised on behalf of the assessee are key take away for future cases. It also acts as guide as to what facts should be collected and incorporated in the order.

1) 322 ITR 323(BOM) (2010) ABG Heavy Engg. Ltd.	Facts:The assessee was awarded a contract for leasing of container handling cranes at the Jawaharlal Nehru Port Trust (‘JNPT’) in terms of the policy of the Government of India to encourage private sector participation in the development of infrastructure. Under the contract, the assessee was responsible for supplying installation, testing, commissioning and maintenance of the cranes. In terms of the agreement, the JNPT agreed to pay certain lease charges over a period of ten years. The contract envisaged two options. Under the first option, operation and maintenance was to be carried out by the assessee and under the second option, only maintenance was to be carried out by it. In the event, the assessee was not to carry out operation of the cranes, the lease charges were to be reduced by certain amount. The assessee assumed the responsibility of making the equipments available for operation for a minimum number of days as stipulated in the contract and became liable to pay liquidated damages for non-availability of the equipments after their commissioning. After the expiry of the lease period of ten years, the assessee was liable to hand over the equipments to the JNPT free of cost. The assessee claimed the benefit of deduction under Section 80-IA. The Assessing Officer rejected the claim holding that the assessee was merely engaged in the business of supplying, installing, testing, commissioning and maintaining cranes at the Port and was not in the business of developing, maintaining and operating a Port and, consequently, it could not be held to be in the business of developing an infrastructural facility. Observations: 1. The first circular in that regard was issued on 23-1-1996, which specifically dealt with whether Section 80-IA(4A) would be applicable to a BOLT Scheme involving an infrastructure facility for the Indian Railways. The circular clarified that an infrastructure facility set up on a BOLT basis for Railways would qualify for deduction. 2. That was followed by the two circulars of the CBDT dated 23-6-2000 and 16-12-2005. The first of those circulars recognized that structures for storage, loading and unloading, etc., at a port built under a BOT and BOLT scheme would qualify for deduction. 3. The subsequent circular dated 16-12-2005 once again clarified the position of the CBDT that structures, which have been built, inter alia, under a BOLT Scheme up to the assessment year 200 1-02, would qualify for a deduction under Section 80-IA. In fact, from the assessment year 2002-03, the process was further liberalized, consistent with the basic purpose and object of granting the concession. 4. This was perhaps a practical realisation of the fact that a developer may not possess the wherewithal, expertise or resources to operate a facility, once constructed. The Parliament eventually stepped in to clarify that it was not invariably necessary for a developer to operate and maintain the facility. The fact that in such a scheme, an enterprise would not operate the facility itself was not regarded as being a statutory bar to the entitlement to a deduction under Section 80-IA. The Court could not be unmindful in the instant case of the underlying objects and reasons for a grant of deduction to an enterprise engaged in the development of an infrastructure facility. 5. The assessee undertook an obligation for supplying, installing, testing, commissioning and maintenance of container handling equipments, namely, the cranes in question. The JNPT had a dedicated container handling terminal. The only activity at the terminal consisted of the loading, unloading and storage of the containers. Under the contract, the assessee was obligated to provide the equipment in question in an operable condition. The terms of the contract, however, made it clear that it was the obligation of the assessee to make the equipment available for operation for a stipulated minimum number of days during the year and made the assessee liable to liquidated damages in the event it was not possible to make equipment available. 6. The assessee did not have to develop the entire Port in order to qualify for a deduction under Section 80-IA. The condition of a certificate from the Port Authority was fulfilled and the JNPT certified that the facility provided by the assessee was an integral part of the Port. The assessee developed the facility on a BOLT basis under the contract with the JNPT. On the fulfilment of the lease of ten years, there was a vesting in the JNPT free of cost.
2)[2012] 25 taxmann.com 260 (Bang.) ITAT Yojaka Marine (P.) Ltd.	Facts:The assesses-company was a marine works contractor and supplier of machineryand equipment on hire. It claimed deduction under Section 80-IA on the ground that it had undertaken the construction operation and maintenance of an infrastructure facilityinpursuance of an agreement with ‘IWAI’ which consisted of bank protection work in the Champakara and Udyog Mandal Canals in Kerala and protection of  Tapi river bank under the authority of Surat Municipal Corporation, Gujarat.The Assessing Officer, after examining the agreements for the works undertaken by the assessee, concluded that the agreements represented only a works contract granted to the assessee for refurbishment of a portion of the protection wall of the canals and the river bank respectively and the work orders issued by IWAI and Surat Municipal Corporation carried out by the assessee did not have any element of developing, operating and maintaining any infrastructural facility as claimed by the assessee and, therefore, disallowed the assessee’s claim for deduction under Section 80-IA. Observation: 1. The description of the work executed by the assessee in the relevant period is certainly not development of infrastructure as the Champakara and Udyog Mandal Canals in Kerala were constructed/developed decades ago. 2. Work of the assessee executed in respect of these two canals and the Tapi river bank, is, at best, work which is a sub-activity in the category of repairs and maintenance. 3. The assessee executed works contracts for and on behalf of the concerned Government bodies and there is certainly no element of developing or operating and maintaining or developing, operating and maintaining of any infrastructure facility as envisaged in clause (c ) to the Explanation to sub-section (4) of Section 80-IA. 4. The Explanation to Section 80-IA inserted by the Finance Act, 2007, is retrospective in effect from 1-4-2000; it is clarificatory in nature and clearly spells out the legislative intent that the benefit of deduction under Section 80-IA was not to be granted or extended to work contractors as in the instant case of the assessee
3)[2010] 35 SOT 171 (MUM.) (LB) ITAT(LARGERBENCH)B.T. Patil & Sons Belgaum Construction (P.) Ltd.	Facts:The assessee was a civil contractor, engaged in the construction of various projects of the Government of Maharashtra, the Government of Karnataka and various local authorities. The Assessing Officer did not allow the deduction as in his opinion, the assessee had not fulfilled conditions stipulated in sub-section (4) of Section 80-IA inasmuch as the infrastructure was not owned by the assesseecompany; there was no agreement between the assessee-company and the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining any infrastructure facility which fulfilled the conditions as set out in clause (i) of sub-section (4); the assessee did not carry any business in infrastructure facility; the assessee was not in any business of infrastructure facility as it had just constructed the properties belonging to the Government/statutory bodies and parted with them after getting the contract amount fixed for this purpose; the construction was done by the assessee as per the requirements of the Government/ statutory bodies and this work was done for and on behalf of the Government and statutory bodies and not for operating any infrastructure facility. Observation: 1. ‘Infrastructure facility’ as per the Explanation , it is found to have been defined exhaustively by referring to a road project, airport, port, etc., a highway project, a water supply project and irrigation project, etc. 2.         What  are       eligible for       deduction        under   this      sub-section      are       the            profits  and gains derived from the development of infrastructure facility and not something de hors it. 3. So, in order to be eligible for deduction the development should be that of the infrastructure facility as a whole and not a particular part of it, it may be possible that some part of development work is assigned by the developer to some contractor for doing it on his behalf. That will not put the undertaker of such work into the shoesof a developer.
4.) [2004]4 SOT 1(MUM.)ITAT Patel Engineering Ltd.	Facts:During the relevant assessment year, the assessee was engaged in the business activity of construction of two projects, allotted by two State Governments. The assessee claimed that the above two projects of construction of specialised structures and tunnels were ‘infrastructure projects’ and it ‘developed’ the same and, therefore, it was entitled to deduction under Section 80-IA(4). The Assessing Officer rejected the assessee’s claim. On appeal, the Commissioner (Appeals) agreed with the Assessing Officer. Observation: 1. When an assessee is only developing an infrastructure facility/project and is not maintaining and not operating it, obviously, such an assessee will be paid for the cost incurred by it; otherwise how will the person, who develops the infrastructure facility project, realise its cost? If the infrastructure facility is just after its development, transferred to the Government, naturally the cost would be paid by the Government. Therefore, merely because the Maharashtra Government or APSEB had paid for the development of infrastructure facility carried out by the assessee, it could not be said that the assessee did not develop the infrastructure facility. 2. Mere ‘development’ as such and unassociated/unaccompanied with ‘operate’ and ‘maintenance’ also falls within such business activity as is eligible for deduction under Section 80-IA. 3. Projects which were executed by the assessee were highly technical and specialised, as also extremely tricky and did involve huge risks as well. It was also revealed from record that for executing such projects, the assessee had deployed people, plant and machinery, technical expertise, know-how and the financial resources. 4. The term ‘contractor’ is not essentially contradictory to the term ‘developer’. On the other hand, rather Section 80-IA(4) itself provides that assessee should develop the infrastructure facility as per 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.
5) Sugamconstructions Ltd..ITAT- D-Bench Ahemdabad Date of order: 26.12.2012	Facts:The assessee is engaged in the construction of rail/road bridges of certain govt. authorities and bodies. Assessee claimed deduction under Section 80-IA and AO has disallowed the same on the ground that assessee is a contractor and not a developer. Observation: 1. Assessee has undertaken responsibility of execution of work. 2. It has developed its own design and applied the technology to complete the work. 3. Risk in execution of the work was taken by assessee. It was responsible for any damage or loss. 4. On ownership , the term” it is owned” applies to the enterprise carrying out the business and not the infrastructure facility being developed. 5. Merely because the agreement mentions the assessee as contractor, does not mean that assessee is not a developer. 6. ITAT relied on the Decision of Guj HC in case of Radhe developers.

11.3 After going through the provisions of the Act, background of the provisions as well as the legislative intent coupled with important arguments in favor and against the provisions, following important areas emerge, which are to be kept in mind by the Assessing Officer at the time of investigation as well as drafting the assessment order.

Ø The Explanatory Memorandum to Finance Act 2007 clearly 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 sta tes that the incentive is intended to benefit developers who undertake entrepreneurial and investment risk and not contractors who only undertake business risk. Without a doubt, both developer and contractor undertake huge risks, deployment of technical personnel, plant and machinery, technical expertise, know-how and financial resources. Distinction between the two would be the key to determine the eligibility for tax holiday. Typically, this difference can be brought out based on the following parameters:

Capital investment: Whether the investment is inte nded for the project as a whole or merely with respect to construction activity.

Risks undertaken: Entrepreneurial risk associated to the project versus risk limited to the services pro vided or work done.

Responsibility: Designing and execution versus exe cution based on instructions.

Performance guarantees: Extended to entire project (including issues arising due to external factors) ver sus covering construction work done alone (limited to work done by the contractor)

Ø In practice, however, it is not so easy to clearly compartmentalize the developer and the contractor. This is because in a large number of contracts, the developer / contractor undertakes a large number of risks, which could be more than the risks in a works contract but less than risks undertaken by a developer in, say, a BT contract. Therefore, the interpretation should be on a case-to-case basis keeping in mind the initial Request for Proposal (RFP) floated by the government. The initial tender floated mentioning the exact comprehensive work to be undertaken by the successful bidder may be an important determinant as to what is the level of risk and investment , that is taken by the assessee.

The facts should be gathered keeping in mind the above determinants and should be clearly brought out in the order, if the assessee is not found eligible for deduction.

12.WAY FORWARD

Generally, all beneficiary sections (deductions, exemptions etc.) of the Act are associated with bundle of controversies; likewise, Sections 80IA and 80IB of the Act also have their share of large number of debatable issues. In order to minimize litigations in respect of these sections, following structural mechanisms are suggested:-

• Better co-ordination between different Departments: – The assesses, intended to be benefited by the tax holiday provisions of Section 80IA/80IB of the Act, are invariably required to take several sanctions, approvals etc. from other Departments. The conditions stipulated in the Act in respect of the eligible class of assessees, may be circulated to relevant Departments, and modalities may be worked out in such a manner that unless these conditions of the I.T. Act are fulfilled, no or conditional approvals or sanctions are extended. This would not only protect the interest of the Revenue but also enable better co-ordination between various Departments to ensure that only the targeted beneficiaries derive the benefits.
• Standing Committee for clarifying or modifying the issues under litigation:- The Department should form a standing committee to look into the ongoing litigations and come out with suggestions regularly for amendments in the Act or Circular or Notification or Instructions in order to reduce litigation. For example, in the changed scenario of compulsory e-filing of returns of income for companies, whether filing of audit report with the return of income is still compulsory, especially in the situation where there is no mechanism to upload audit report electronically. Further, the Section 80IA(7) states audit report to be filed along with the “return of income”. Now, the debatable issue is whether ‘return of income’ means original return of income only or does it include belated / revised returns of income also. If the intent of legislature is to make filing of audit report mandatory along with original return of income then the phrase “return of income” may be changed to “return of income under Section 139(1) of the Act”. Also, the Department can think of changing the format of e-filed return ITR-4 to include details that are required to be filed in the requisite Form 10CCB so that there is no need to further file the audit report manually.
• Clarification regarding nature of certain provisions; mandatory or directory:- Although, all the conditions mentioned in various provisions of the Sections of the Act including Section 80IA/80IB of the Act are intended to be mandatory in nature i.e. to be complied in strict and literal manner. However, especially in respect of these beneficial sections, Hon’ble Courts on several issues have stated that the conditions mentioned in the sections are not mandatory but are merely directory in nature particularly in respect of filing of details like returns, audit reports. Inspite of Circulars and Explanation Memorandum clearly stating the mandatory nature of conditions, the Courts have taken liberal view on several occasions. One way out can be that, the Department may come out with an umbrella Circular / guidance note stating the sections and the conditions thereof that are exclusively mandatory in nature so that there is no ambiguity in this regard.

12.1 The Section 80IA(3) stipulates condition that deduction shall not be available in cases where the undertaking is formed by splitting up, or the reconstruction, of a business already in existence. What constitutes splitting/reconstruction is a matter of debate. When an assessee acquires under a slump sale the entire business consisting of eligible undertakings, whether the assessee violates the condition of splitting/reconstruction mentioned above? Where the ownership of a business or undertaking changes hands, whether the eligibility for deduction is attached with the undertaking or with the person/ entity who owns the undertaking?

12.2 There are several litigation issues in respect of Section 80IB(10) like whether deduction is available to the person who is developing and building housing project who doesn’t have the ownership over the land ? Whether the developer/contractor should follow the accounting method of “percentage completion method” or “project completion method”? Whether breach in upper limit of 1500 sq. ft. for built-up area in Delhi and Mumbai for some of the units would warrant disqualification of deduction for whole of the project or on proportionate basis ? What should be the treatment of common area, commercial area in housing project ?

The Explanation to Section 80IA(4)(i) states the meaning of “infrastructure facility” as (a) road including toll road, a bridge or a rail system (b) a highway project            (c) a water supply project, water treatment system, irrigation project…………….. (d) a port, airport, inland waterway, inland port or navigational channel in the sea. As seen from the Explanation defining “infrastructure facility”, most of the facility mentioned are in the nature of system or project whereas clause (d) states a port, airport etc. Thus, this has led to debate what exactly is a port? Whether work of creating facility related to part of the port system fall under the definition of “infrastructure facility”. Although Circular No. 793 dt. 23.06.2000 has defined the meaning of port but still this has not settled disputes. The moot question remains, whether the intent of the section is to provide deduction benefits only to those enterprise who are involved in carrying on business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining of whole of the project or system or deduction is also available to facilities forming sub-part of the project/system ?

12.3 There are several debatable issues related to Section 80IB(9) providing deduction to undertaking for a period seven consecutive assessment years engaged in refining of mineral oil or commercial production of natural gas in blocks. The amendment made by Finance Act 2009 vide the Explanation, explaining the meaning of ‘undertaking’ as all blocks licensed under a single contract, has got into controversy with the writ petition filed by M/s Niko Resources and M/s Jyothi Technologies. These assesses claim to interpret ‘undertaking’ as one well or cluster of wells and not the whole block for the purpose of deduction. Therefore, the meaning of ‘undertaking’ as per Section 80IB(9) is under controversy. Secondly, the assessee claim that the period of deduction of seven years is applicable for each well/cluster of wells separately, however, the Department is of the view that the deduction is available for the period of 7 years for the whole block in view of the definition of undertaking. Further, the amendment vide Finance Act 2009 inserting Section (iv) and (v) to 80IB(9) clearly reveals the intent of the legislature that prior to the amendment no deduction was available in respect of Natural Gas, whereas several assesses have claimed that Mineral Oil includes Natural Gas prior to this amendment also.

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Author

V. K. Gupta, DIT (Int. Taxation), Ahmedabad

Robin Rawal, DDIT (Int. Taxation) – II, Ahmedabad

Rajneesh Yadav, DDIT (Int. Taxation) – I, Ahmedabad

(Republished With Amendments)