Understanding deductions of section 80-IA & IB with Latest Case Laws Part II

We had earlier discuss in detail about the concepts of section 80-IA & IB   along with various case laws earlier in article. Over a period of time, there are number of judgments’ comes from various levels of courts from different locations of India and hence it is very important to know the same for the correct treatment of infrastructure deduction.

·  In the case of Vanshree Builders and Developers P. Ltd. v. CIT , ITAT held that deduction u/s 80-IB is allowable still the Return filed after expiry of time specified in section 139(4).

· Assessee company is engaged in the business of civil construction. It entered into contract with land owners for development of residential cum commercial complex on land. The assessee claimed deduction u/s 80IB(10). It was noted from the records that neither aggregate amount of sale agreement entered into nor advance received there against had been mentioned. It was held that reasonable certainty as to the realization of sale proceeds were crucial to income recognition, and both sale agreement as well as advance received in pursuance thereof were vital thereto. Matter was thus, remanded back to AO. Refer, Dy. CIT v. Vertex Homes P. Ltd, 140 ITD 300 (Hyd.)(Trib.).

·  Assessee has undertaken the development and construction of housing project hence eligible deduction. Assessee completed the construction on 6th march 2006, corporation certified the completion on 28th Dec. 2007, one of the authorities namely CMDA had issued a letter on 13th June, 2008 cannot be ground to reject the claim of assessee. The Court also held that open terrace could not be the subject – matter of inclusion as a built up area to deny the benefit under section 80IB (10). Appeal of revenue was dismissed. Refer, CIT v. Sanghvi&Doshi Enterprises, 81 DTR 75 (Mad.) (High Court).

· Assessee did not make a claim of deduction in AY 2003-04 and 2004-05, rather made the claim for the first time before CIT (A) by filing an additional ground. It was held that the provisions of S. 80IB(5) inserted by Finance Act, 2009 which are applicable retrospectively from AY 2003-04, clearly provides that in case assessee fails to make a claim in the return of income, the claim could not be allowed. The provision was applicable for AY 2003-04 and 2004-05. Therefore, in the view of these provisions which are quiet unambiguous and clear, claim of assessee cannot be allowed. Refer, Hindustan Colas Ltd. v. ACIT, 151 TTJ 421(Mum)(Trib.).

· The assessee owned a hotel which was eligible for deduction u/s 80IA. Since sub-sec. (7) of S. 80IA provide for determination of amount of deduction whereas section 80AB and S. 80A(2) provide for amount actually allowable while computing total income, assessee’s contention that provisions of S. 80A(2) and 80AB shall not be applicable, cannot be accepted. Matter remanded. Refer, Hotel & Allied Trades P. Ltd. v. Dy.CIT, 140 ITD 309 (Cochin)(Trib.).

· It was held that Interest received from the irrigation department, government of Assam as per the order of the Court for the delay involved in the payment in connection with delivery of goods to Irrigation Department constituted income derived from the industrial undertaking of the assessee and is eligible for deduction u/s. 80-IC. Refer, CIT v. Universal Pipes (P) Ltd, 254 CTR 311 (Gau.)(High Court).

· Assessee would be eligible for deduction under section 80 IB of the Act if he employ ten or more worker who are working in his direct supervision and control, even though the employees are casual or contractual workers. Refer, CIT v. Nanda Mint & Pine Chemicals Ltd, 80 DTR 329 (Delhi)(High Court).

· Court held that, converting limestone into limestone powder was a manufacturing activity and income derived from such activity was eligible for deduction u/s. 80IA and 80IB. Refer, CIT v. Supriya Gill, 254 CTR 559.

· Following the judgment of Supreme Court in Liberty India v. CIT (2009) 317 ITR 218(SC) the court held that the assessee was not entitled to deduction under section 80-IA on export incentives being profits arising from the DEPB scheme. Refer, M. M. Forgings Ltd. v.Add. CIT, 349 ITR 673.

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

·  Assessee engaged in manufacture of fragrance, attar, etc. In the state of Uttarkhand was entitled to deduction u/s. 80-IC; end product manufactured by the assessee and sold is altogether different from distilled oil. Distilled oil is one of the raw material for producing fragrant, fragrant compound or attar. Refer, Natural Fragrances v. Dy. CIT, 79 DTR 181.

·  Where a developer follows percentage completion method, and profit attributable to completed project is taxed in respective year, deduction under section 80-IB(10) is also to be granted simultaneously in that year. Refer, Kura Homes P. Ltd. v. ITO, 139 ITD 445 (Hyd)(Trib.).

·  The assessee made investment in fixed asset in plant & machinery exceeding prescribed limit. Deduction could not be allowed where the assessee was not considered a small scale industrial undertaking u/s 11B of Industrial (Development & Regulations)Act, 1951 thereby not complying the provisions of Section 80IB (2)(iii). Refer, Sawaria Pipes Ltd. v. ACIT, 18 ITR 573 (Hyd.)(Trib.).

· Karnataka High court in the case of CIT v.Anriya Project Management Services (P) Ltd (2012) 209 Taxman 1, held that Since housing project  of assessee was  approved  prior to 1-4-2005 the definition of built area inserted by Finance (No.2 ) Act, which came in to effect from 1-4-2005 is only prospective in nature and it has no application to housing project projects approved  prior to that date .

· Supreme court in the case of Arisudana Spinning Mills Ltd v. CIT held that In absence of separate books, Assessing Officer is  entitled to estimate eligible profits.

· Conversion of HDPE bags in to laminated HDPE bags will amount to manufacture or production of goods. Refer, Jhaveri Coaters (P) Ltd v. ACIT, 74 DTR 145.

· Profit earned from related parties more in relation to unrelated parties, allowance of deduction u/s 80IB not to be restricted to same proportion at which profit was derived from unrelated parties thus, working of deduction to be made on individual basis and not on an average basis. Refer, OPG Energy (P.) Ltd. v. Dy.CIT, 52 SOT 321 (Chennai) (Trib.).

·  Inland container depots are inland ports and entitled to exemption as per section 80IA(4) as infrastructure facility. Refer, Container Corporation of India Ltd v. ACIT, 72 DTR 297 (Delhi) (High Court).

·  Delhi High court in the case of CIT v. Nanda Mint and Pine Chemicals Ltd, 345 ITR 60 held that The Assessing Officer denied the deduction on the ground that the assessee had not employed ten or more workers as required under section 80IB(2)(iv). The Assessing Officer has not considered the casual or the contractual employees and not treated them as workmen. In appeal the Appellate authorities treated the casual and contractual employees as workmen and allowed the claim of assessee. On appeal by revenue the Court up held the view of Tribunal and held that casual or contractual workers are workers and assessee is entitled to deduction under section 80IB..

· Approval having been granted on 28th March 2005, assessee entitled to deduction for the Asst years 2005â€06 , 2006â€07 and 2007â€08. Refer, CIT v. Akshy Eminence Developers (P) Ltd, 72 DTR 406 (Kar.)(High Court).

· Application for notification was not made before cutoff date i.e 31 St March 2006 on which date the 2002 scheme came to an end, the assessee is not entitled to claim benefit under section 80IA(4)(iii). Refer, Regency Soraj Infrastructures v. UOI, 249 CTR 280.

· Assessee engaged in providing fax and email services was granted license for carrying on internet and internet telephony services w.e.f. October 2000. The assessee having been allowed deduction under Section 80IA in A.Y. 2004â€05 as an undertaking engaged in business of internet and internet telephony services, same could not have been disallowed in A.Y. 2006â€07 on the ground of fulfillment of conditions of subâ€section (3) thereof r/w cl.(ii) of subâ€s (4) of S. 80IA inserted w.e.f. 1/4/2005. Refer, CIT v. TATA Communications Internet Services Ltd., 71 DTR 303 (Delhi)(High Court).

·  Mumbai ITAT in the case of  Hercules Hoists Limited held that  Loss of eligible unit, even if set-off against non-eligible profits, has to be aggregated & carried forward for set-off against future eligible profits  

·  Whether Explanation in Sec 80IA(4) having retro-operation is unconstitutional, although it only attempts to clarify that deduction would not be available in case of execution of works contracts – NO

·  Mumbai ITAT in the case of Shevie Exports held that Absorbed losses pre “initial assessment year” need not be set off.

·  Pune ITAT in the case of Belgaum Constructions Pvt. Ltd vs. ACIT held that Larger Bench verdict in B. T. Patil vs. ACIT 32 DTR 1 is not good law.

·  Gujarat High court in the case of Katira Constrictions limited held that Explanation that s. 80IA(4) does not apply to “works contracts” is clarificatory and its retrospective operation is valid.

·  Whether when deduction claimed u/s 80IA was subjected to appellate proceedings and finally settled in favour of assessee, reassessment can still be initiated beyond four years - NO: Bombay HC.

·  Whether benefits of Sec 80IA(4) are available only to a company and not to persons like HUF, firm and Individual - YES, rules ITAT.

·  Whether penalty is imposable if assessee makes false claim of Sec 80IA benefits on sub-contracted work and also furnishes CA Certificate in this regard - YES: Delhi HC .

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

·  Sec 80IA(4)(c) - Whether substantial renovation and modernisation is necessary condition for claiming deduction, and it can be done by increasing book value of assets by 50%: YES, rules ITAT.

·  Whether interest received for delayed payment from customers can be said to have direct nexus with sales of the Undertaking, and hence would be eligible for deduction u/s 80IA - YES: ITAT.

·  Whether a Diagnostic Centre is an industrial undertaking within the meaning of Section 80-IA - NO: Delhi HC.

·  Whether when assessee originally a sub-contractor, but becomes direct party to pact, cannot claim benefit of deduction u/s 80IA, merely because they have not developed entire project - NO: ITAT.

·  When assessee incurs costs for purchase of export quota, unutilisation of such quota is necessarily to be treated as revenue loss - YES: ITAT.

·  Whether when AE pays higher rate of interest on delayed payment as compared to third parties, no fault can be found with AO for initiating reassessment for transfer of profits to assessee eligible for Sec 80IA benefits - YES: HC

·  Whether income earned from development of software upgrades for Network Management Systems for smooth working of VSAT service, as part of business of telecommunication, is eligible for deduction u/s 80-IA(4) - YES: HC

·  Mumbai ITAT in the case of Pratibha Industries held that S. 153A assessment is mandatory even if no incriminating material is found. Distinction between “developer” and “works contractor” in s. 80-IA(4) explained.

·  Whether when an allowance claimed by assessee involves a question of law, same cannot be disallowed by treating it as a mistake u/s 154 - YES: Supreme Court.

·  Whether assessee is entitled to claim deduction 80IB(10) proportionately in respect of residential units where there is also commercial area constructed if all other conditions are satisfied - YES: Madras HC

·  Commencement of commercial production means Installation of new plant and machinery will amount to new industrial undertaking hence the assessee entitled to deduction. Refer, CIT v. Hindustan Pencils Ltd., 343 ITR 379 (Bom.)(High Court).

·  The assesse claimed the deduction under section 80IB as a small scale industrial under taking treating the investment in Plant and machinery being less than 1 crore if items are considered as per notification dated 10 the December, 1999 issued under section 11B of the IDR Act i.e. tools, jigs, dies, moulds, fixtures patterns and spare parts for maintenance and cost of consumable stores are excluded and its net balance of plant and machinery comes to Rs.34,80,428 . The Assessing Officer has not accepted the contention of assessee. In appeal the Tribunal held that cost of equipments such as tools, jigs dies, moulds, spare parts and consumable stores as well as vehicles value has to be excluded while computing the status as a small scale industrial undertaking and allowed the claim of assessee. Refer, KHS Machinery (P) Ltd. v. ITO, 69 DTR 283 (Ahd.)(Trib.).

·  Deduction is available only in cases where application for license was made before the end of previous year (31st March , 2004) and not where it was not made at all or made after the end of previous year. Refer, CIT v. Jolly Ploymers, 249 CTR 421 (Guj) (High Court).

·  Common area has to be excluded from the built up area. Refer, CIT v. Raghavendra Constructions, 70 DTR 257 (Kar.)(High Court).

·  The Electricity Board purchased power produced by assessee who was manufacturer of Yarn and had installed windmill for the purpose. Where electricity generated by assessee was collected by Electricity Board at lower rate and released to assessee whenever required, it was held that profits of the eligible undertaking were to be determined on the basis of the annual loading cost of electricity purchased by assessee from Electricity Board. Refer, Excel Cotspin (India) P. Ltd. v. Dy. CIT, 15 ITR 57 (Chennai)(Trib.).

·  Return of income, nor was it filed in the course of assessment proceedings, the assessee is not making any fresh claim for deduction u/s. 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. Refer, 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.

·  Despite “Dependence” on Old Unit, Unit Can Be “New Industrial Undertaking”. Refer, Gujarat Alkalies & Chemicals Ltd v. CIT.

·  The assessee which is involved in manufacturing activities and selling of additives on commission basis , claimed deduction under section 80IB on service income, interest on deposits interest received from employees, commission received , compensation from sundry debtors for delayed payments and income on imported materials. Though the assessee preferred appeal against all the issues the court has admitted the appeal only in respect of service income and commission received. The court held that section 80IB and 80IA are code by themselves. As the finding has been given by the Tribunal that the income is not derived from industrial undertaking , deduction under section 80IB is not eligible. Order of Tribunal confirmed. Refer, Indian Additives Ltd v. Dy. CIT, 67 DTR 389.

·  The assessee is engaged in the business of production of perfumed hair oil using coconut oil and mineral oil as per the requirement of Hindustan Lever Ltd . The assessee claimed the deduction under section 80IB.The Assessing Officer rejected the claim. In appeal before the Tribunal the Tribunal allowed the claim of assessee. On appeal by revenue the Court following the ratio of supreme Court in CCE v. Zandu Pharmaceutical Works Ltd (2006) 12 SCC 453,wherein it has been held that addition of perfume to coconut oil to produce perfumed oil constitute a manufacturing process, hence decision of Tribunal holding that the assessee is engaged in manufacturing activity is justified . The appeal of revenue was dismissed.(A.Y. ITA no 5779 of 2010 dt 30-11-2011 ). Refer, CIT v. Beta Cosmetics, P 31 -683 (2012)43-B BCAJ (Bom) (High Court).

·  Mumbai high court held that Multiple housing projects on 1 Acre Plot is permissible, assesses eligible for deduction. Refer, CIT v. Vandana Properties.

·  Date of commencement of development and construction of housing project was date when assessee actually started and carried out the work of development and not when the project was first approved. Residence flats sold to company was let out by company for commercial use, exemption to assessee cannot be denied. Two flats exceeded 1000 square feet each , exemption can be allowed proportionately after excluding profits from two flats. Refer, Maju Gupta (Smt) v. Asst. CIT, 134 ITD 503 (Mum) (Trib).

·  The assessee has entered into ‘Development agreement’ with Kalpataru Park Millenium Co-Operative Housing Society Ltd for the purpose of developing the housing project .The Assessing Officer has rejected the claim under section 80IB(10),holding that the assessee is not the developer. The Commissioner (Appeals) held that the assessee is entitled to deduction . On appeal by the revenue the Tribunal held that the developer had all dominant control over the project and developed the land at his own cost and risks . All transactions pertaining to the project have been entered in entirety in the books of account of the assessee . The Co-operative Society did not account for any  eceipts or expenditure in connection with the building of house .The Tribunal has analysed various clauses in the agreement and come to the conclusion that the assessee is the developer. The Tribunal also held that the decision of Apex court in K.Raheja Development Corporation is dealing with Karnataka Sale Tax Act, hence ratio can not be applied to interpret the provisions of section 80IB (10). Accordingly the Tribunal held that the assessee is eligible for deduction under section 80IB (10) ,accordingly the appeal of revenue was dismissed. Refer, DCIT v. Parshwanath Reality P.Ltd, BCAJ –January -2012-477 (Ahd)(Trib).

·  Loss of earlier year set off cannot be considered only the loss from the initial assessment year to be brought forward. Refer, Asst.CIT v. Eveready Spinning Mills Ltd, 14 ITR 491.

·  Assessee which is in the business of producing of TV sets by purchasing and assembling items like cabinet, chassis, IC, Picture tube, etc., could be held to be manufacturing activity and entitled to deduction under section 80IC. Refer, CIT v. I. Tech Electronics, 341 ITR 533.

·  Assessee in the return of income claimed the excess depreciation due to mistake. The same was rectified and revised chart was filed due to which claim under section 80IA was increased. The Tribunal held that assessee is entitled to deduction as per revised chart. Assessee maintained separate books of account, and also allocated the expenses. The Assessing Officer allocated the expenses in “total turn over ratio”. The Tribunal held that when the assessee maintained a separate books of account apportioned of expenses on the basis of “total turn over ratio” was not proper and dismissed the appeal of department. Refer, ACIT v. P. I. Industries, 144 TTJ 353.

·  Assessee which is engaged in the business of manufacturing and sale of cotton hosiery goods, claimed deduction under section 80I in respect of dry cleaning charges. The Court held that dry cleaning charges do not constitute income derived from industrial undertaking, hence, not eligible for deduction. Refer, Nahar Spinning Mills Ltd. v. CIT, 66 DTR 257.

·  One unit of the assessee is eligible for deduction under section 80IC, where as other two units are not eligible for deduction under section 80IC. The Assessee has filed a consolidated statement without substantiating individual items as to how why they should not be considered for the purpose of allocation of common expenses. The Court held that allocation of financial expenses to the eligible unit has to be in the ratio of turnover of the eligible business to the total turnover for the purpose of computing deduction under section 80IC. Refer, Controls & Switchgear Co. Ltd, 66 DTR 161.

·  Assessee is a builder is engaged in construction and development of residential units. For the relevant years the assessee filed its return of income declaring nil income after claiming deduction under section 80IB(10). The Assessing Officer rejected the claim on the ground that completion certificate was issued on later date by Municipal Authorities and covered area /built up area of residential units was more than prescribed limit. Tribunal found that as the housing project was approved by local authority on 22â€3â€2001 (Before 1stday of 2004), same had to be completed on or before 31â€3â€2008. As per the clarification issued by Municipal corporation date of completion of project was 27â€2â€2008. When the launch of project the Incomeâ€tax Act did not define the ‘built up area’ As per M.P. Nagar Grah Nirman Adhiniyaam and M.P.Bhumi Vikas Niyam, 1984, which were applicable to assesse’s case, built up area was less than prescribed limit of 1500 sq. ft. Refer, Global Reality v. ITO, 134 ITD 407.

·  The assessee entered into a ‘development agreement’ with the owner of the land pursuant to which it agreed to develop the land. Deduction under section 80â€IB(10) in respect of the profits arising from the said activity was claimed on the ground that it was “derived from the business of undertaking developing and building housing project approved by the local authority”. The Assessing Officer & CIT(A) rejected the claim on the ground that the assessee was not the “owner” of the land and that the approval of the local authority to, and the completion certificate of, the “housing project” was given to the owner and not to the assessee. However, the Tribunal allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal: Section80IB(10) allows deduction to an undertaking engaged in the business of developing and constructing housing projects. There is no requirement that the land must be owned by the assessee seeking the deduction. Under the development agreement, the assessee had undertaken the development of housing project at its own risk and cost. The land owner had accepted the full price of the land and had no responsibility. The entire risk of investment and expenditure was that of the assessee. Resultantly, profit and loss also accrued to the assessee alone. The assessee had total and complete control over the land and could put the land to the agreed use. It had full authority and responsibility to develop the housing project by not only putting up the construction but by carrying out various other activities including enrolling members, accepting members, carrying out modifications engaging professional agencies and so on. The risk element was entirely that of the assessee. The assessee was a “developer” in common parlance as well as legal parlance and could not be regarded as only a “works contractor”. The Explanation to section 80IB inserted w.r.e.f. 1.4.2001 has no application as the project is not a “works contract”. Further, as the assessee was, in part performance of the agreement to sell the land, given possession and had also carried out the construction work for development of the housing project, it had to be deemed to be the “owner” under section 2(47)(v) r.w.s. 53A of the TOP Act even though formal title had not passed (Faqir Chand Gulati vs. Uppal Agencies(2008) 10 SCC 345 distinguished). Refer,     CIT v. Radhe Developers, 204 Taxman 543.

·  Excise income and insurance claim received for shortage of material is entitle to deduction under section 80IB. Refer, ITO v. Electro Ferro Alloys Ltd, 13 ITR 594.

·  Department has not challenged the decision of Tribunal in the case of assessee for earlier years holding that the assessee is engaged in manufacturing activity and thus entitled to deduction under section 80IB. High Court refused to entertain the question applying the rule of consistency. Refer, CIT v. Arts & Crafts Exports, 66 DTR 85.

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