Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘B’ DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
PER AMIT SHUKLA, J.M.: The aforesaid appeals have been filed by the Revenue against the separate impugned orders of ld. Commissioner of Income Tax (Appeals)-XIII, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Years 2008-09 to 2011-12. The sole issue involved which is common in all the years relates to deduction u/s.80-IAB and even the finding given by the Assessing Officer and ld. CIT(A) are same, therefore, same were heard together and are being disposed of by way of this consolidated order. We shall take up the appeal for the Assessment Year 2008-09 wherein the final year of claim of deduction u/s.80-IAB has been made.
ITA No. 9227/Del/19 (AY 2008-09) 2. The appeal filed by the revenue is against order dated 13/09/2019 passed by CIT(A)-3, New Delhi. 3. The brief facts of the case before us are that the assessee is a real estate developer and has undertaken project of developing Special Economic Zone at Gachibowli Village, Shrilingampalli Mandal, Ranga Reddy District, Hyderabad in the year under reference. The SEZ project was approved by Board of approval constituted under SEZ Act, 2005. Further, the BOA has also specified list of authorized operation that can be carried out in SEZ.
3 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
The issue before us is the correctness of claim of deduction u/s 80-IAB of the Income Tax Act, 1961 in respect of SEZ Project. The assessee has claimed deduction in respect of profit derived from development and sale of bare shell building blocks in SEZ to Co-developer M/s. DLF Assets P. Ltd. The claim of deduction is based on the premise that construction of bare shell buildings being an authorized operation constitute development of SEZ in terms of section 80IAB of the Income Tax Act, 1961 and profit arising from sale of such building blocks is eligible for deduction. 5. In this case, originally the assessment was completed u/s 143(3) vide order dated 29/12/2020 wherein the claim of deduction u/s 80-IAB was accepted. Thereafter, the CIT initiated revisionary proceedings u/s 263 disputing the correctness of claim of deduction u/s 80-IAB and directed the assessing officer to re-examine the issue in the light of observation contained in the order u/s 263 dated 14/03/2013.The assessee successfully challenged the order u/s 263 before ITAT and revenue took the matter to Hon’ble Delhi High Court. Eventually, the Hon’ble High Court vide order dated 22/02/2018 in ITA 507/2014 upheld the order u/s 263 and directed the assessing officer to examine the issue of deduction u/s 80-IAB of the I.T. Act, 1961. The question of law framed before High Court is as under: “(i) Did the Income Tax Appellate Tribunal (ITAT) fall into error in holding that the application of Section 263 by the
4 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
CIT(A) in the circumstances of the case was not warranted? (ii) Did the ITAT fall into error in holding, on the merits, that sale of assets and buildings to the co-developer could have been treated as capital gain and not business income?” 6. In the consequential proceedings u/s 143 read with section 263, the assessing officer rejected the claim of deduction u/s 80IAB on the ground that development and sale of building is not a business activity but capital account transaction resulting in earning of capital gain and same being not in the nature of business, the benefit u/s 80-IAB is not available. The assessing officer further held that profit arising from sale of building cannot be allowed as deduction u/s 80-IAB as the sale of building is not permissible u/s 80- IAB of the Income Tax Act, 1961. Aggrieved by the assessment order u/s 143(3)/263 dated 22/12/2018, the assessee company preferred appeal before CIT(A) which was allowed and against the relief allowed by the CIT(A) the revenue is in appeal before us.
6.1 The revenue has raised following grounds of appeal: 1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO wherein AO has disallowed deduction claimed by the assessee u/s 80IAB of the Income Tax Act, 1961 amounting to Rs. 5,73,94,33,765/-.
5 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
6.2 Subsequently, revenue also raised additional grounds which are reproduced hereunder: 1. "The Ld. CIT(A) erred in holding that reasonableness of amount received was an issue related merely to method of valuation, thereby, failing to notice that the extraordinary profit was contrary to the explicit provisions of sub section (3) of section 80-1AB of the Income Tax Act, 1961".
"The Ld. CIT(A) erred in brushing aside the aforesaid by observing that the AO had discussed but not eventually taken into account the price of transaction, ignoring the principle that acts of omission by the Assessing Officer cannot, ipso facto, comprises the basis of granting relief by an Appellate Commissioner as held by the Hon'ble Jurisdictional High Court in CIT-II vs Jansampark Advertising & Marketing Pvt Ltd (231 Taxman 384)"
7.1 The Ld. CIT DR appearing for the revenue made elaborate argument assailing the order of CIT(A) and submitted that development and sale of bare shell buildings cannot be considered as activity of development of SEZ in terms of 80-IAB. The assessee in support of order of CIT(A) filed detailed submission which are extracted hereunder:
6 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
7 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
8 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
9 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
10 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
11 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
12 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
13 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
14 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
15 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
16 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
17 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
18 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
19 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
20 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
21 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
7.2 During the course of hearing, it was pointed out by the ld. Counsel for the assessee that this precise issue has been considered by this Tribunal in following cases. • DLF Ltd. Vs. Addl. CIT (ITA No.2126/D/2013 for AY 2008-09 • DLF Info City Developer (Chennai) Ltd. • DLF Cyber City Developers Ltd.
Wherein this issue has been decided in favour of the assessee. Even the ld. CIT(A) has followed the Tribunal order in the case of DLF Ltd. Vs. Addl. CIT (ITA No.2126/D/2013). Thus, this issue stands squarely covered in favour of the assessee. In response, the ld. DR had filed written submission received from the Assessing Officer.
22 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
23 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
24 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
25 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
26 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
27 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
28 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
29 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
30 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
31 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
32 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
33 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
34 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
35 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
36 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
37 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
38 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
39 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
40 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
41 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
42 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
43 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
44 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
45 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
46 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
47 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
48 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
49 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
50 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
51 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
52 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
53 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
54 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
55 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
56 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
57 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
58 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
59 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
60 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
61 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
62 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
63 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
64 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
7.3 The Ld. AR for the respondent assessee supported the order of CIT(A) and submitted that the SEZ project being a
65 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
BOA approved project and assessee having satisfied all the pre-requisite conditions in terms of SEZ Act read with Section 80-IAB, the claim of deduction is proper. The counsel also filed detailed rejoinder to revenue’s submission which are reproduced here below:
66 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
67 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
68 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
69 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
70 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
71 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
72 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
73 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
74 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
75 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
76 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
77 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
78 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
79 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
80 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
81 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
82 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
83 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
84 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
85 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
86 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
87 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
88 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
89 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
90 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
91 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
92 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
93 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
94 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
95 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
96 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
97 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
98 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
99 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
100 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
101 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
102 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
103 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
104 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
105 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
106 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
107 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
108 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
109 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
110 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
111 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
The gist of arguments and contentions raised by both the sides can be summarized as under: Arguments of the revenue: i) The assessee is only involved in development of project and having not carried out operation and maintenance of the project, the statutory requirement of sec. 80IAB has not been complied with. ii) Development and sale of bare shell building structure is not an authorized operation. iii) Reliance on clarification communication dtd. 18/01/2021 and 20/01/2021 issued by Ministry of Commerce and Industry is misplaced as same were not issued by Board of Approval and as such these clarifications have no relevance. iv) Profit from sale of bare shell structure is in the nature of capital gain and not business income. v) In the alternative, consideration for sale of bare shell structure is in the nature of advance lease rental and the benefit should be apportioned and spread over during the period of lease. vi) The asseessee has generated exorbitant profit and same being not in confirmity with provisions of sec. 80IA(10), such profit is not eligible for deduction u/s. 80IAB. vii) Reference to decision of DLF is also not relevant as issue of exorbitant profit in terms of provisions of
112 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
sec. 80IA(10) was not examined by ITAT. Further reference to clarification vide communication dtd.18/01/2021 and 20/01/2021 by Tribunal in that case is also misplaced.
Arguments of the assessee: i) The SEZ project and activity of development of Bare Shell building blocks is approved by BOA vide specific approvals dated 21/06/2007. ii) The fact of approval and development of bare shell building and its sale being authorized operation was categorically confirmed by BOA vide clarification dated 18/01/2011 and 20/01/2011 issued by Ministry of Commerce and Industry. iii) That the question before Hon’ble High Court and issue raised by the assessing officer in assessment order u/s 143(3)/263 being limited to nature of income from the sale of bareshell building blocks i.e. whether income so derived is business income or capital gain and allowability of deduction in respect of the same, the various arguments raised by the Ld. DR in written synopsis are extraneous to the subject matter of dispute before ITAT and are untenable. iv) That assessee is a real estate developer and carrying out development of bare shell building blocks and operation and maintenance of other
113 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
infrastructure facility in SEZ is part of its core business activity and as such there is no case of any income assessable under the head capital gain v) It was further submitted that as per CBDT Circular no. 16/2017 dated 25th April, 2017, income arising from SEZ is to be treated as business income under the head “Profit and gains of business”. vi) That clarification dated 18/01/2011 and 20/01/2011 were issued by SEZ Division of Ministry of Commerce were in fact issued by members of BOA on behalf of BOA. vii) That the provisions of section 80-IAB requires development of SEZ as precondition and there is no cumulative requirement of carrying out activity of operation and maintenance of SEZ. viii) That section 80-IAB is offshoot of SEZ Act, 2005 and upon satisfaction of condition laid down by BOA, the assessee is eligible for claim of deduction u/s 80-IAB. ix) That the formula for working out development consideration for transfer of bare shell building blocks was based on capitalization of income approach and same being approved by BOA as part of Co-developer agreement, there can be no dispute regarding the correctness of development consideration.
114 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
x) That the issue of valuation in terms of section 80IA(10) is alien to the issue of eligibility to claim u/s 80-IAB and same is irrelevant. xi) Even otherwise, the issues raised for the first time before Tribunal are out of context as no such issues were raised by the revenue before High Court or considered even by the assessing officer in consequential order.
Decision
We have carefully gone through the facts of the case and submission of the parties. The only issue under consideration is statutory claim u/s. 80IAB in respect of SEZ Approved Project. The background of the controversy has been brought out in para 2 to 5 above. In order to examine the case of the revenue, it is necessary to make reference to the provisions of sec. SEZ Act and provisions of sec. 80IAB. These provisions have already been extracted in the reply of the parties as extracted supra.
We have noted that in the above said case, the approval was duly granted to the respondent assessee by Board of Approval being statutory authority in terms of provisions of SEZ Act, 2005. Vide approval dated 23/10/2006, the assessee company was recognized as a ‘Developer’ for the purpose of setting up of SEZ for IT/ITES sector. The sale of
115 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
bare shell building blocks was duly approved as permissible activity as part of SEZ Project.
The revenue at the original stage has only raised the issue of statutory benefit u/s. 80IAB. However, subsequently, they have raised additional grounds, which are extracted hereunder:- 1. "The Ld. CIT(A) erred in holding that reasonableness of amount received was an issue related merely to method of valuation, thereby, failing to notice that the extraordinary profit was contrary to the explicit provisions of sub section (3) of section 80-1AB of the Income Tax Act, 1961". 2. "The Ld. CIT(A) erred in burshing aside the aforesaid by observing that the AO had discussed but not eventually taken into account the price of transaction, ignoring the principle that acts of omission by the Assessing Officer cannot, ipso facto, comprises the basis of granting relief by an Appellate Commissioner as held by the Hon'ble Jurisdictional High Court in CIT-Il vs Jansampark Advertising & Marketing Pvt Ltd (231 Taxman 384)"
Having heard detailed arguments of both sides in respect of additional ground, we ae inclined to admit the same as this issue is integral part of the issue in dispute.
The assessment order being subject matter of dispute has been passed by the AO pursuant to order of the High Court dtd.22/02/2018. It is noted that the issue raised before High Court was only to the effect that the income from
116 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
the project was in the nature of capital gain and not business income and as such benefit of statutory provision u/s. 80IAB is not admissible. The AO in the consequential order has primarily raised very same objection that income from the approved project is in the nature of capital gain and not eligible for deduction u/s. 80IAB. The CIT(A) decided the issue in favour of the assessee as per following finding: “6.5 During the course of appellate proceedings, the Ar has also brought on record the order of Hon'ble ITAT Delhi in the case of DLF Ltd. vs. Addl. CIT in ITA Nos. 2126/Del/2013 and 2749/Del/2013 for AY 2008-09, in which vide order dated 27.05.2019, the Hon'ble ITAT has decided similar issues in the case of group company of the appellant, which are also raised in the present case. These issues are- ….. 6.6 On perusal of the above order, it is observed that the Hon'ble ITAT Delhi has clearly held that the transfer of bare shell buildings is an authorized operation of developing of SEZ as per the SEZ Act, 2005 and the profit earned from transfer of bare shell buildings constitutes part of the operating profit and the said income/profit is eligible for deduction u/s 801AB of the Act. It has also been held that the income from sale of buildings is purely in the nature of business income and the same cannot be re-characterized as capital gains. Similar additions made in subsequent years by the AO have been allowed by my ld. predecessors also. The facts of the present case are similar to the facts in the above referred case and therefore, following the decision of Hon'ble ITAT Delhi (supra), it is held that the appellant is entitled for deduction u/s
117 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
801AB of the Act in respect of the profit earned from transfer of bare shell buildings and the sale of bare shell buildings cannot be treated as transfer of Capital Asset. 6.7 The AO has also held that the transfer of bare shell buildings has been done at artificially high value in order to claim the benefit of deduction u/s 801AB of the Act. It is further held that the appellant has opted for Rent Capitalization Method in order to arrive at the fair market value of the sold assets. In this regard, it is observed that the AR has duly explained the reason for the method of valuation adopted by the appellant. Moreover, it is observed that out of the three methods prescribed, not one method has been made mandatory and the basic princip6le which needs to be looked into is that the transaction is held that arm's length price. In this case, the appellant has explained that the price was determined commercially by both the parties on the basis of prevailing market rent rates and the same was incorporated in the MOU and the co-developer agreement. It is also observed that in this year under consideration, the appellant has shown the revenue on the basis of 42.71% by applying POCM method and the balance amount has been recognized as revenue in the subsequent years and in those years, the rate/value of the transaction has already been accepted by the AO. Moreover, a perusal of the assessment order also shows that although the AO has discussed the issue of price of transaction, but the AO has not taken the same into account while computing total income of the appellant. In view of this, I am of the opinion that no adverse view can be taken about the pricing of the transaction of sale of bare shell buildings.
118 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
6.8 Keeping in view the above facts and discussion and following the decision of Hon'ble ITAT Delhi (Supra) and of the ld. CIT(A) in the case of appellant in AYs 2009-10 to 2011-12, it is held that the appellant is entitled for deduction u/s 801AB of the Act in respect of the profit earned from transfer of bare shell buildings and the sale of bare shell buildings cannot be treated as transfer of Capital Asset. Accordingly, the addition made by the AO is deleted and the grounds of appeal are allowed.”
Having gone through the facts of the case and keeping in mind the arguments advanced by both the sides, we now take up various issues for consideration and adjudication. In this context, it will be appropriate to take note of relevant provisions of SEZ Act, 2005 and Sec. 80-IAB which have been specifically referred to by the parties:-
Section 2 – Definition c) "authorised operations" means operations which may be authorised under sub-section (2) of section 4 and sub- section (9) of section 15; (e) "Board” means the Board of Approval constituted under sub-section (1) of section 8; (f) "Co-Developer" means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (12) of section 3; (g) “Developer” means a person who, or a State Government which, has been granted by the Central Government a letter
119 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
of approval under sub-section (10) of section 3 and includes an Authority and a Co-Developer; (p) "infrastructure facilities" means industrial, commercial or social infrastructure or other facilities necessary for the development of a Special Economic Zone or such other facilities which may be prescribed; (za) "Special Economic Zone" means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;
Section 4 - Establishment of Special Economic Zone and approval and authorisation to operate to, Developer (2) After the appointed day, the Board may, authorise the Developer to undertake in a Special Economic Zone, such operations which the Central Government may authorise.
Section 27 –
Provisions of Income tax Act, 1961 to apply with certain modification in relation to Developers and Entrepreneurs
The provisions of the Income-tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorised operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule.
Section 51 – Act to have overriding effect.
120 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
(1) The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
Section 80-IAB – Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone. (1) Where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years: Provided that the provisions of this section shall not apply to an assessee, being a developer, where the development of Special Economic Zone begins on or after the 1st day of April, 2017. (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 a Special Economic Zone has been notified by the Central Government :
121 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
Provided that where in computing the total income of any undertaking, being a Developer for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (13) of section 80-IA, the undertaking being the Developer shall be entitled to deduction referred to in this section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in sub-section (1) or sub-section (2), as the case may be : Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer. (3) The provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA shall apply to the Special Economic Zones for the purpose of allowing deductions under sub- section (1). Explanation.—For the purposes of this section, "Developer" and "Special Economic Zone" shall have the same meanings respectively as assigned to them in clauses (g) and (za) of section 2 of the Special Economic Zones Act, 2005.
122 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
15.1 In order to appreciate the nature of controversy, we may make reference to relevant facts as relating to development of SEZ Project : 15.2 As noted elsewhere in this order, the assessee company being a real estate developer, with an intention of developing SEZ, moved a proposal to Board of Approval for setting up of SEZ at Gachibowli Village, Shrilingampalli Mandal, Ranga Reddy District, Hyderabad. The object of the assessee company was to undertake systematic development of SEZ and construction of Bare Shell Office building Blocks for onward sale to Co-developer. It is noted that the entire process right from obtaining permission for setting up of SEZ to carrying out activity of development and transfer of bare shell building blocks to Co-developer was approved by BOA at various stages. Further, the lower authorities have not disputed the existence of approval by the designated authority. The gist of approvals as enclosed in the paperbook filed by the respondent assessee is as under: • Approval dated 23/10/2006, by the Ministry of Commerce & Industry (SEZ Section) approving the setting up of a sector specific SEZ for IT/ITES sector at Ranga Reddy District, Hyderabad, Andhra Pradesh. • Copy of notification dated 26/04/2007 issued by the Ministry of Commerce and Industry, Department of Commerce (thereby notifying the total area of 10.617 hectares at Gachibowli village, Shirlingampalli Mandal, Ranga Reddy District in the state of Andhra Pradesh as SEZ.
123 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
• Approval dated 21/06/2007 granted to assessee by BOA specifying authorized operations in respect of SEZ Project • Approval dated 01/05/2007 by BOA recognizing M/s. DLF Assets P. ltd. as Co-developer in the SEZ project. • Copy of corrigendum dated 06/11/2007 to approval dated 01/05/2007 • Approval dated 18/06/2007 granted to Co-developer by BOA specifying authorized operations in respect of SEZ Project • Approval dated 01/06/2009 granted to Co-developer by BOA approving the definitive Co-Developer Agreement dated 20/03/2008.
15.3 The thrust of argument of respondent assessee was that once the approval was granted by BOA and assessee complied with all requisite conditions, there remains no dispute regarding the issue of deduction u/s 80-IAB as the provisions of SEZ Act have overriding effect.
16.1 The assessee also made reference to clarification dated 18/01/2011 and 20/01/2011 issued by SEZ Section of Ministry of Commerce and Industry wherein it has been elucidated that activity of construction of bare shell building blocks and its transfer to Co-developer is authorized operation under SEZ Act, 2005.
16.2 However, the revenue in its written synopsis has attacked the validity of these clarifications on the ground that said clarifications were issued by Ministry of Commerce and Industry, Government of India and same cannot be
124 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
considered to have been issued by Board of Approval constituted under SEZ Act.
16.3 We would like to deal with this contention of the revenue raised for the first time before us even though the validity of said clarifications was never disputed by the assessing officer, CIT u/s 263 or CIT(A). We do not find any substance in this argument of the revenue. The Ld. Counsel for the assessee in his rejoinder has placed on record the administrative set up and constitution of Board of Approval from which it becomes clear that SEZ Section of Ministry of Commerce has been entrusted upon the duty to issue clarifications and notification on behalf of the BOA. It is further noted that the officials issuing the clarifications dated 18/01/2011 and 20/01/2011 participated in BOA meeting as members and as such it is more than apparent that clarifications were in fact issued by the BOA only. Our attention was also drawn to the independent verification conducted by CIT during revisionary proceedings u/s 263 vis-à-vis the authenticity of these clarifications and it is noted that the enquiry letter dated 02/12/2011 addressed and sent to BOA was answered in affirmative thereby confirming the sanctity of these clarification. Thus, the revenue’s challenge to the validity and applicability to the clarifications issued by the BOA is of no consequence and merely for the purpose of creating unnecessary controversy. In any case, these letters are merely clarificatory in nature and only support the approval accorded by the Board of Approval.
125 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
On careful analysis of provisions of SEZ Act, 2005 read with Section 80-IAB of the Income Tax act, 1961, it is observed that the SEZ Act, 2005 was enacted on 23/06/2005 for the purpose of establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto. Vide Second Schedule of the SEZ Act, amendments were made to the Income tax Act, 1961 for providing incentive to units operating in SEZ (Section 10AA, Section 54GA and section 80-LA) and entities engaged in development of SEZ (Section 80-IAB) by way of insertion of these sections. The purpose behind introduction of section 80-IAB is to encourage and incentivise the assessee to undertake development of SEZ so that object of the SEZ Act could be achieved. In simple words, the legislature has carefully designed the scheme in a way that section 80-IAB is the first step towards achieving the ultimate objective of “promotion of exports and matters connected therewith or incidental thereto” because it is only after the development of infrastructure facility in SEZ, that the entities engaged in exports will be able to operate.
18.1 In the light of fundamentals facts noted above, it clearly emerges that the claim of deduction 80-IAB is required to be examined in accordance with scheme and purpose of SEZ Act, 2005. On word-by-word reading of section 80-IAB, the following sentences holds relevance which are analysed hereunder:
126 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
i. profits and gains derived by an undertaking or an enterprise; ii. any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005; iii. be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years; iv. Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer; v. The provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA shall apply to the Special Economic Zones for the purpose of allowing deductions under sub- section (1); vi. Explanation.—For the purposes of this section, "Developer" and "Special Economic Zone" shall have the same meanings respectively as assigned to them in clauses (g) and (za) of section 2 of the Special Economic Zones Act, 2005.
127 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
18.2 We find that the tenor of section 80-IAB is to encourage development of infrastructure facility in SEZ. Further, the sub-section (1) use plain and simple term ‘developing a Special Economic Zone’ without any further conjunction unlike section 80-IA(4)(i). As to what constitute ‘developing’ has not been defined in the section and for this purpose it would be appropriate to construe the meaning of the word ‘develop’ in its popular sense. As per Concise Oxford Dictionary, 9th Edition, the word “develop” means - (a) to construct new buildings on land and (b) to convert land to a new purpose, so as to use its resources more fully. Further as per Collins Dictionary the definition of word “develop” is given as - to improve the value or change the use of (land), as by building.
18.3 From the above definition, it is amply clear that that the word ‘develop’ is of wide connotation and the benefit of deduction u/s 80-IAB is available in respect of various kinds of building and construction activity aimed towards development of SEZ notified land, not to mention that such activities must be authorized by the BOA. The assessee, in the present case, is developing bare shell building blocks which are defined in the Clause 1.1.6 of the definitive Co- Developer agreement dated 20/03/2008 as under: “Bare Shell Building” means the entire bare shell facilities including the built up structures with lift lobbies, external facades, fire suppression system as per building norms, cement flooring, no plaster on concrete columns, walls or
128 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
ceiling except on brick walls wherever provided, as developed by the Developer in accordance with the sanctioned plan as also shown in the plan annexed hereto as Annexure F to be granted to the Co-developer for executing the Co-Developer operations on the terms agreed hereto, but not including any Infrastructure developed by the Developer
The assessee has also developed infrastructure utilities under the said Co-developer agreement vide clause 1.1.17 read with Annexure H. The detail of such facilities is as under: i. Sewage Treatment Plant ii. Water Treatment Plant iii. Landscaping iv. Roads v. Street Lighting vi. Fire Protection System vii. Effluent Treatment Plant viii. Parking ix. Telecom and Communication
18.4 We are convinced that activity of construction of bare shell building blocks having approx. built up are of 41,13,332 Sq Ft on 26.225 acres of SEZ notified land and development of allied infrastructure utilities satisfies the criteria of development based on provisions of SEZ Act and consequential approval and there is no doubt in our mind that said activities clearly tantamount to developing of SEZ in terms of section 80-IAB of the I.T. Act.
129 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
19.1 There is another angle to view the facts of the present case. When we look at section 27 and section 51 of the SEZ Act, 2005, Section 27 provides that provisions of the Income Tax Act shall apply to developer carrying out authorized operation which to our understanding necessarily means that such developer will be eligible for the benefits under Income tax Acct, 1961 as introduced through SEZ Act. Section 51 states that provision of SEZ Act will have overriding effect on any other statute including Income tax Act, 1961. Pertinently, the term ‘developer’ as used in section 80-IAB has been assigned the same meaning as defined in section 2(g) of the SEZ Act. Section 2(g) and 2(p) of the SEZ Act which defines the word “Developer” and “Infrastructure facilities” are as under: (g) “Developer” means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (10) of section 3 and includes an Authority and a Co-Developer; (p) "infrastructure facilities" means industrial, commercial or social infrastructure or other facilities necessary for the development of a Special Economic Zone or such other facilities which may be prescribed;
The reference to the definition of the term “infrastructure facilities” is useful as the same clearly states that development of industrial, commercial or social infrastructure facilities amounts to development of a SEZ.
130 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
19.2 On harmonious reading of section 27, definition of word developer and infrastructure facility as given in SEZ Act, 2005 and the provisions of section 80-IAB takes us to the irresistible conclusion that a developer who is engaged in authorized operations of development of infrastructure facility shall be eligible to claim deduction u/s 80-IAB of the I.T. Act. Now, in the present case, there is no quarrel to the fact that construction of bare shell building blocks was specifically approved by the BOA as authorized operation. On application of the above conclusion to the facts of present case, we find that assessee is a BOA recognized developer carrying out authorized operation of construction of bare shell building blocks for office space and such requirement of development of SEZ under 80-IAB stands fulfilled in all aspects.
20.1 Apropos the issue of authorized operation, the revenue has also contended that development of bare shell building cannot be considered as authorized operation or activity of development of SEZ in terms of section 80-IAB of the I.T.Act, 1961. In this regard, we are inclined to accept the contention of the Ld. Counsel on behalf of the assessee that the benefit of deduction u/s 80-IAB, as per the plain reading of the section, is available to undertaking carrying out activity of development of SEZ which has to be read in consonance with authorized operations prescribed by the BOA and it is not open to the revenue to define the nature or type of work or impute artificial meaning to the term developing of SEZ as used in the section. In the discussion contained in preceding
131 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
paras, we have already deliberated upon the meaning of word ‘Develop’ in the context of Section 80-IAB read with SEZ Act, 2005 and held that activity of construction of bare shell building blocks satisfy the criteria of development of SEZ as envisaged u/s 80-IAB and as such the approach of the revenue cannot be countenanced.
20.2 We further find strength from the decision of Hon’ble Jammu and Kashmir High Court in the case of CIT v. TRG Industries (P.) Ltd. [2017] 297 CTR 58 (J&K). In that case, the Hon’ble High Court while dealing with the issue of deduction u/s 80-IA held that once the assessee has developed infrastructure facility under a contract with government or an authority, the Assessing Officer cannot describe the nature of work which will constitute infrastructure facility for the purpose of granting deduction. The observation of the Hon’ble High Court is as under: 13. The first and the foremost requirement is that the assessee developer should come within the ambit of Section 80-IA (4)(i)(a)(b) which the assessee satisfies. There is no dispute since there is a valid contract as required. The next requirement for the benefit to be extended under the said provision is that the enterprise should provide an infrastructure facility in relation to establishing a road, a bridge or a rail system or Airport. There is no specific intendment as to the nature of work to be undertaken as is evident from the explanation. Therefore, the word contained therein has wide amplitude. The Assessing officer was not correct in prescribing certain limits and describing the
132 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
nature of work. In other words, the assessing authority attempts to dissect the contract and hold that it does not justify the claim for deduction. That we are not inclined to accept. If the requirement of Section 80-IA (4)(i) and Section 80-IA (4)(i)(c) explanation is satisfied, then the benefit has to flow. 14. The provisions of Section 80-IA (4)(i) applies to an enterprise carrying business of a developer, who satisfies the requirement of Section 80-IA 4(i)(a)(b)and provides an infrastructure facility as set out in the explanation. 15. If the provision is read as a whole and the explanation is read in terms of the said provision, it would be amply clear from the facts of the present case that the assessee in this case is an enterprise carrying on the business of a developer has entered into an agreement with the Central Government or the State Government or an authority prescribed under Section 80-IA (4)(i)(b) and has provided the infrastructure facility in terms of explanation to Section 80-IA(4)(i)(c), the details of which are set out in the chart. 16. The Assessing Officer has tried to read more into the provision by describing what is the nature of work that will qualify for the benefit of deduction under Section 80-IA(4). The authority is bound to consider the claim as is contained in the provisions. If certain works are accepted as infrastructure facility and other works denied at the whim of one or other authority it will lead to an incongruous result whereby different assessing officers will take different yardsticks. The proceedings will thereby become arbitrary and capricious.”
133 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
20.3 The above decision of Hon’ble Jammu and Kashmir High Court fortifies the apparent conclusion that development activities carried out by the assessee meet the obligation, spirit and purpose of section 80-IAB read with SEZ Act, 2005.In our considered view, the construction of bare shell building blocks in SEZ was an approved operation by BOA and same being synonymous to developing of SEZ in terms of Section 80-IAB, there is no scope left to ascribe any other meaning for the purpose of granting benefit of deduction under the Income Tax Act and any attempt to do so will defeat the purpose of SEZ act and consequential benefit extended u/s 80-IAB.
21.1 The revenue has raised another argument that assessee is only constructing bare shell building blocks and not engaged in operation or maintenance of the SEZ. The revenue has placed reliance on second proviso to section 80-IAB. The respondent assessee has repelled this argument on the ground that there is no cumulative requirement in the section 80-IAB that assessee should also operate or maintain the SEZ. We find that the argument of the revenue is without any merit. As noted above, the very language of sub-section (1) of section 80-IAB does not require anything over and above developing of SEZ. Even assuming thatactivity of operation and maintenance of infrastructure facilities may form part of development activity but non carrying out of the same cannot, in any case, disentitle the assessee from claiming the statutory benefit u/s 80-IAB once it is proved that assessee
134 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
has developed Infrastructure within the SEZ. Further, the thrust of the revenue on second proviso which grants deduction to transferee developer upon transfer of operation and maintenance is misplaced as the said proviso merely extends the benefit of deduction on the activity of operation and maintenance of infrastructure facility to the transferee developer and same cannot be read in a way to make the activity of operation and maintenance of infrastructure facility as mandatory requirement for a valid claim of deduction u/s 80-IAB of the I.T. Act.
21.2 Under similar facts, in context of section 80IA, Hon’ble Gujarat High Court in the case of Pr.CIT v. NilaBaurat Engineering Ltd.[2017] 399 ITR 242 (Gujarat) [SLP dismissed by Supreme Court] has held that profit arising from development and transfer of infrastructure facility will be eligible for deduction u/s 80-IA. The relevant observation of Hon’ble High Court is reproduced hereunder: 6. The proviso to sub-section (4) thus makes an enabling provision providing a deeming fiction whereby upon transfer of any infrastructure facility for the purpose of operating and maintaining, the transferee could claim the deduction for the remainder of the period. The crucial words here are "the transfer of infrastructure for the purpose of operating and maintaining' and thus the transferee who would now step in the shoes of the transferor for the limited purpose of operation and maintenance, could claim deduction on the profit element arising out of such activity. We may recall, under sub-section (4) of Section 80IA of the Act, an enterprise carrying on the
135 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
business of developing, or operating and maintaining, or developing, operating and maintaining infrastructure facility would be eligible for deduction. Thus this provision itself envisages that in a given project the developer and person who maintains and operates may be different. Merely because the person maintaining and operating the infrastructure facility is different from the one who developed it, would not deprive the developer the deduction under the said section on the income arising out of such development. By virtue of the operation of the proviso, the developer would not be deprived of the benefit of deduction under sub-section (1) of Section 80IA on the profit earned by it from its activity of developing the infrastructure facility. The proviso does not operate as to depriving the developer of the benefit of the deduction even after the facility is transferred for the purpose of maintenance and operation but would split the profit element into one derived from the development of the infrastructure and that derived from the activity of maintenance and operation thereof.
Further, Hon’ble Bombay High Court in the case of CIT v. ABG Heavy Industries Ltd. 322 ITR 323 (Bom) (SLP of revenue dismissed by Supreme Court [2011] 336 ITR 15) in the context of section 80IA has specifically held that there is no requirement for compliance of all the three activities of development, operation and maintenance together. We also observe that it is neither feasible nor practicable for the assessee to carry out cumulative activity of development, operation and maintenance of SEZ and reading of such requirement will defeat the purpose of section 80-IAB read
136 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
with intention of SEZ Act. Accordingly, we are of the view that profit arising from the activity of construction and sale of bare shell building blocks is eligible for claim of deduction u/s 80- IAB of the Act.
22.1 With regard to the issue of profit and gains derived from any business of developing SEZ, we find that the intention behind the section is to incentivise the act of developing SEZ and as such profit and gains earned from carrying out such development falls within the purview of deduction u/s 80-IAB. The interpretation propounded by the revenue that the sale of bare shell building blocks results in capital gain which is not eligible for deduction u/s 80-IAB is too far-fetched and comes in the teeth of the very object of the section. Even going by the strict interpretation of the section, there is no pre-condition that income must be assessable under a particular head of income and mere use of words “profits and gains” or “business” does not in any way takes to us to the conclusion that only income under the head “profit and gains of business” is eligible for deduction u/s 80-IAB. This being the position, the primary reasoning of the assessing officer in denying the benefit of deduction on the ground that income from sale of bare shell building blocks is in the nature of capital gain does not find favour with us. In the light of uncalled for apprehension, the CBDT has issued Circular no. 16/2017 dated 25th April, 2017 as per which, any development activities and nature of consequential income
137 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
will be categorized as business income for the purpose of statutory benefit.: “The issue whether income arising from letting out of premises/developed space along with other amenities in an Industrial Park/SEZ is to be charged under head ‘Profits and Gains of Business’ or under the head ‘Income from House Property’ has been subject matter of litigation in recent years. Assessees claim the letting out as business activity, the income arising from which to be charged to tax under the head ‘Profits and Gains of Business’ whereas the Assessing officers hold it to be chargeable under the head ‘Income from House Property’ 2. The matter has been considered by the Board. Income from the Industrial Parks/SEZ established under various schemes framed and notified under section 80-IA(4)(iii) of the Income-tax Act, 1961 ('Act') is liable to be treated as income from business provided the conditions prescribed under the schemes are met. In the case of Velankani Information Systems Pvt Ltd., [2013] 35 taxmann.com 1 (Karnataka) the Hon'ble Karnataka High Court observed that any other interpretation would defeat the object of section 80-IA of the Act and government schemes for development of Industrial Parks in the country. SLPs filed in this case by the Department have been dismissed by the Hon'ble Supreme Court. In a subsequent judgment dated 30-4-2014 in ITA No. 76 & 78/2012 in the case of CIT v. Information Technology Park Ltd., [2014] 46 taxmann.com 239 (Karnataka) the Karnataka High Court has reaffirmed its earlier views. It has held that,
138 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
since the assessee-company was engaged in the business of developing, operating and maintaining an Industrial Park and providing infrastructure facilities to different companies as its business, the lease rent received by the assessee from letting out buildings along with other amenities in a software technology park would be chargeable to tax under the head "Income from Business" and not under the head "Income from House Property". The judgment has been accepted by the Board. 3. In view of the above, it is now a settled position that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park/SEZ notified in accordance with the scheme framed and notified by the Government, the income from letting out of premises/developed space along with other facilities in an industrial park/SEZ is to be charged to tax under the head 'Profits and Gains of Business'. 4. Accordingly, henceforth, appeals may not be filed by the Department on the above settled issue and those already filed may be withdrawn/not pressed upon.”
22.2 In any case, it is not in dispute that assessee is real estate developer and is actively engaged in execution of real estate projects. In fact, from the main object clause in the Memorandum of Association of the assessee company, it becomes more than evident that primary object of the assessee is to acquire and develop commercial and business premises. As already noted above, the assessee has carried out substantial amount of work in SEZ which included
139 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
construction of huge built area aggregating 41,13,332 Sq. Ft. which is divided into various phases and blocks alongwith development of essential infrastructure facilities. It is worth noting that development of project of such a huge magnitude not only requires business experience and acumen but also resources. Not failing to mention that the only the work of getting approvals from designated authority under SEZ Act took time of over two years. We are afraid to observe that assessing officer has overlooked the crucial facts and ground realities relating to the SEZ project and was carried away by the mere fact that there was sale of bare shell building blocks resulting in profit. No doubt, isolated transaction of sale of a building can surely stir up the debate of capital gain v. business income, however, execution of SEZ project including planned development of several blocks of buildings, devotion of resources throughout considerable number of years and providing necessary infrastructural support facilities leaves no room for sustenance of the allegation that assessee earned capital gain on sale of bare shell building blocks.It is worthwhile to make reference to the concept of business as observed by the Hon’ble Supreme Court in the case of Narain Swadeshi Weaving Mills v. CCE [1954] 26 ITR 765 (SC) as relied upon the Ld. Counsel for the assesee. The relevant observation is reproduced hereunder: The word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the others hand, a single and isolated transaction has been held to be conceivably capable of falling
140 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is.
22.3 Undoubtedly, the execution of SEZ project and construction of bare shell building blocks along with infrastructure facilities is nothing but a systematic and organized activity in accordance with primary object of the assessee i.e. real estate development and falls under the realm of business operations.
22.4 It will not be out of context to note that even though the assessing officer has considered the income from the SEZ project as in the nature of capital gain, however, while making final computation of income, the profit computed by the assessee under Percentage Completion method has been assessed to tax after disallowing the claim of deduction u/s 80-IAB. The assessing officer has not spelt out how and in what manner the provisions of section 45 are to be applied and how the capital gain is to be worked out. We fail to see any rational behind such action of the assessing officer and it is clear the entire debate of capital gain v. business income in the context of sale of bare shell building blocks lacks conviction on part of the assessing officer. It is clear that only objection and attempt of the assessing officer was to deny benefit of statutory deduction u/s 80-IAB of the I.T. Act,
141 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
1961. Further, in respect of very same project, the assessing officer himself in AY 2012-13 has considered and accepted the loss under the head “Income from business and profession”.
22.5 We have also considered and find support from the decision of Co-ordinate bench in the case of DCIT v. DLF Ltd. in ITA No. 2749/D/13 dated 27/05/2019 as applied by the CIT(A).
22.6 Further on application of principle of strict interpretation of incentive provisions as laid down by Hon’ble Supreme Court in the case of Commissioner of Customs (Imports) v. Dilip Kumar and Company &Ors (2018) 9 SCC 1 (FB)(SC), we find that in the present case, all the important elements of section 80-IAB have been satisfied and in absence of any ambiguity in interpretation of plain language of section 80-IAB read with provisions of SEZ Act, the said judgment does not advance the cause of the revenue.
22.7 Culmination of the aforesaid discussion takes us to an ineluctable conclusion that the facts of the present case ticks all the right boxes for valid claim of deduction u/s 80-IAB of the I.T. Act, 1961.
23.1 Before concluding, we deem it proper to address the contention of the revenue vide additional ground regarding the issue of reasonableness of development consideration received by the assessee on sale of bare shell building blocks
142 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
to Co-developer M/s. DLF Assets P. Ltd.. The argument of the revenue hinges on the fact that assessee has claimed excessive deduction by inflating the price of development consideration charged from related concern/co-developer M/s. DLF Assets. P. ltd.. In fact, the revenue has gone to the extent of treating the sale of bare shell building as in the nature of lease and disputing the method used for determining the Development consideration.
23.2 We are constrained to observe that the arguments regarding reasonableness of development consideration are de-hors the issue of eligibility of claim of deduction u/s 80- IAB. As noted elsewhere in this order, the revenue’s in its initial ground raised by Tribunal is aggrieved by the order of CIT(A) allowing the claim of deduction 80-IAB and as such the primary dispute before us is eligibility of deduction and not quantum or reasonableness of claim. However, vide additional ground, the Revenue has raised the issue of quantum of deduction before us.
23.3 Be that as it may, we have already answered the issue of eligibility of claim of deduction u/s 80-IAB in favour of the assessee. Further, on closer perusal of the assessment order, we find that even though the assessing officer made some effort in gathering the local circle rate of immovable and constructed property for the purpose of comparison with the rate of development consideration charged by the assessee, however, nothing further was done to work out the arm’s
143 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
length price in terms of section 80-IAB(3) read with 80-IA(10). The first appellate authority while noting the above also rendered positive finding about the correctness of method adopted by the assessee for determining rate to be charged for development consideration. To our mind, the issue of reasonableness of deduction and working of quantum is not fully arising out of the assessment order and is not related to the principal issue of eligibility of deduction u/s 80-IAB which formed the basis of revisionary order u/s 263 and Hon’ble High Court’s order. However, for the sake of completeness, we would like to give finding on this aspect as well.
23.4 The Ld. Counsel for the assessee countered the contention of the revenue on the ground that the rate of development consideration for transfer of bare shell building blocks was determined on the basis of income capitalization method. It was further submitted that the said formula was duly approved by BOA in its approval to definitive Co- developer agreement.
23.5 On careful consideration of controversy in hand, we find that CIT(A) has rightly noted that income/lease capitalization method is a recognized method for determination of transfer value of bare shell building blocks. The formula so used forms part of the approved definitive Co-developer agreement and is reproduced hereunder:
144 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
Clause 2.9 The Parties agree that the Development Consideration shall be determined on the Project Completion Date, on the basis of following formula: X = (A/B) – (C+D) Where: X = Development Consideration A = Average rental value as on the Project Completion Date for the Warm Shell Buildings as computed by the Co- Developer* B = Prevailing capitalization rate for the Warm Shell Buildings in accordance with international standards on the Project Completion Date, as determined by the Developer C = Charges incurred by the Co-Developer for conversion of Bare Shell Building into Warm Shell Buildings D = The rent for 1 year *For unoccupied portions of the Warm Shell Buildings, the average rental value shall be calculated on the basis of the highest rental value mentioned in the last five agreements entered into with tenants for the occupied portions of a Warm Shell Building.
The assessee has also placed on record the working of rate per sq ft in accordance with formula approved by the board. It is not even the case of the revenue that development consideration is not in accordance with approval formula as laid down in the approved agreement.
23.6 Further, it is important to note that BOA while granting approval to the definitive Co-Developer agreement invited comments from representative of the department of revenue
145 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
(DOR). As a matter of record, the DOR conveyed no objection to the formula so used for determining the development consideration and the objection was limited to the issue of lease of land vide letter dated 26/05/2009. Pursuant to such objection, the BOA in its approval inserted the disclaimer and gave right to the department to examine the taxability of income from lease of land only. It is implicit that the method of valuation of development consideration and the issue of transfer of bare shell building to Co-developer was acceptable to the representative of department of revenue at the time of granting of approval by the BOA.
23.7 We also find that the under very similar circumstances, the issue of method and valuation of development consideration was examined by Coordinate Bench in the case of sister concern JCIT v. DLF Info City Developers (Chennai) Ltd. in ITA No. 5366/Del/2012 order dated 21st February,2014wherein the Tribunal affirmed the correctness of rent capitalization method, capitalization rate and rate of development consideration determined in accordance with the same for transfer of bare shell buildings in SEZ: 20. In ground Nos. 11 to 13 (revenue’s appeal) the issue raised is about the determination of development consideration. We find that the AO has not considered any factual aspect of the case as regards reasonableness of deduction and has disallowed entire deduction after considering the legal issues only. Section 80IA(8) provides for adjustment in the profit if the value of the goods or services
146 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
does not correspondent to the market value of such goods or services on the date of such transaction. The assessee objected the applicability of S. 80IA(8)on the reasoning that there is no transaction of transfer of goods or services from one eligible business to any of its other non-eligible business. Since the transaction in the present case has been made only with the eligible business of separate and distinct assessee i.e co-developer who is also entitled to deduction u/s 80IAB of the Act, we are of the view that the Ld. CIT(A) has rightly accepted the above contention of the assessee. 21. The AO has not only questioned the applicability of rent capitalization method for determining development consideration of bare shells, the AO has also pointed out as to why other methods of valuation should not be applied but has not discussed about the suitability or applicability of such methods in the facts of the present case or about the effect and consequences of such method in determining development consideration. It is also not a case, where reference can be made to the Departmental Valuation Officer (DVO) for determining the development consideration of bare shells u/s 142(1) without rejecting the books of account of the assessee (as the same has not been rejected by the AO). And since Section 55A is not applicable in the case of the assessee, it can also not be referred thereunder. Thus the Ld. CIT(A) in our view has rightly held the action of the AO in referring the matter to the DVO as misplaced. The Ld. CIT()A has also rightly not agreed with the contention of the AO that the Rent capitalization method adopted by the assessee is not prescribed or approved by any accounting policy or by any method of valuation of properties. Whereas the rationale
147 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
behind Rent Capitalization Method is an intentionally accepted method of valuation of properties and has got legal recognition in Rule 3 of Schedule III of the Wealth Tax Act, wherein value of the property is determined on the basis of Net Maintainable Rent. 22. The Ld. CIT(A) has worked out value of development consideration on the basis of marketing of value of bare shell at Rs.6225 by applying capitalization rate of 9.5% on annual net maintainable rent of Rs.657.64 as against actual value of development consideration at Rs.6947. The assessee is ground No. 2 of its appeal has disputed adoption of capitalization sale of 9.5% as against 9% applied by the assessee and working of net maintainable rent. We find substance in the contention of the Ld. AR in this regard as while doing so the Ld. CIT(A) has totally disregarded this important and material aspect of the fact that the BOA has approved the working formula as per agreement dated 20/3/2008. Clauses 2.9 and 2.6 (page No. 130 and 129 of the paper book) thereof are relevant, which are being reproduced hereunder:- Clause 2.9 (paper book Page 130) “The parties agree that the Development Consideration shall be determined on the Project Completion Date, on the basis of the following formula: X= (A/B)-(C+D) X - Development Consideration A - Average rental value as on the project completion date for the Warm Shell buildings, as computed by the Co-Developer*
148 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
B - Prevailing Capitalisation rate for the Warm Shell buildings in accordance with international standards on the project completion date, as determined by the developer. C - Charged incurred by the Co-developer for conversion of Bare Shell buildings D - The rent for 1 year * For unoccupied portions of the Warm Shell buildings, the average rental value shall be calculated on the basis of the highest rental value mentioned in the last five agreements entered into with tenants for the occupied portions of a Warm Shell Buildings." However, consideration so worked out shall be subject to minimum of Rs.6550/- as per clause 2.6 (Paperbook Page 129) Clause 2.6 (Paperbook Page 129) "In consideration for the developer agreeing to execute this agreement, the Co-developer shall make the payment of such amount as Development Consideration in favour of the Developer as is agreed to between the Parties, subject to minimum payment of Rs. 6,550.00 (Rupees Six Thousand Five Hundred Fifty Only) per square feet of building space within the SEZ Building (the "Minimum Payment"). The Parties agree to make and accept, subject to applicable law, part payment of the said development consideration in the manner agreed to in this agreement, including on the respective Transfer and Hand-over dates." Relevant points for consideration 23. We agree with the plea of the Ld. AR that following are the relevant point for consideration of the issue:-
149 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
i. There was no dispute at the assessment stage regarding reasonableness of development consideration and the issue was raised only during appellate proceedings. ii. The development consideration was from one eligible business to another eligible business and both developer and co-developer were approved under SEZ Act for exemption u/s. 80IAB and as such there is no adverse revenue implication. iii. That entire income was derived from approved project and it is not open to have one income for assessment purposes and different income for granting exemption. iv. The development consideration is on the basis of approved formula laid down in the co-developer's agreement duly approved by Board of approvals. v. Income was on the basis of books of accounts and there is no dispute about genuineness of transaction or a case of rejection of books of accounts. vi. Average rent was not properly worked out as CIT(A) has disregarded car parking charges, which is independent source of income and not part of rent of premises and as such same cannot be disregarded. Further, adjustment of vacancy allowance is unwarranted in the context of working of capitalized value as concept of vacancy allowance is not relevant for determination of value of asset and same is relevant only for the purpose of computation of income under the head "Income from house property". vii. Agreed capitalization rate of 9% was duly acted upon by both the parties and same cannot be disregarded as same is in accordance with approved formula mentioned in clause 2.9 of the approved co-developer agreement (Paper book page
150 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
130) ~ Further, capitalization rate of 9% is not in dispute in asstt. year 2007-08, 1st year of exemption, the same cannot be disputed in subsequent years. viii. Rent capitalization rate of 9% is as per internationally recognized norms and even as per formula laid down in Wealth Tax Rules. (Schedule-III) Capitalization rate of 8% was provided for working out value of property. ix. The CIT(A) has even disregard the fact that co-developer's agreement was for 49 years and capitalize value was determined on thebasi s of present average rent. 24. We are thus of the considered view that the Ld. CIT(A) was not justified in adopting the capitalization sale of 9.5% as against 9% adopted by the assessee. While setting aside this action of the Ld. CIT(A), we direct the AO to accept the approved working of the assessee in this regard and allow the consequential relief. Ground No.2 of the appeal of the assessee is thus allowed. The Ground No. 3 is an alternative ground to Ground No. 2, hence it does not need adjudication. Issue raised in Ground Nos. 11 to 13 of the Revenue is thus decided against the revenue.
23.8 The facts, terms of arrangement and method for valuation of development consideration in the present case are similar to that in the case of DLF Info City Developers (supra), thus the observation and finding of the Coordinate Bench are relevant and applicable.
23.9 In these circumstances, once the method for determining the transfer value of bare shell building blocks was approved by the BOA which is a designated authority comprising of
151 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
representative from various ministry and departments, we see no reason to entertain the unfounded objection of the revenue regarding the correctness of the method which is not only to rake up fresh controversy but also contrary to the very concept of approvals and authority of BOA under SEZ Act, 2005. Not to forget, the provisions of SEZ Act have overriding effect. Thus, the issue raised by the revenue regarding the method of valuation is misconceived and does not warrant deeper delving on our part keeping in view the decision of Coordinate bench in the case of DLF Info City Developers (Supra).
23.10 As a result, the original as well as additional grounds raised by the revenue are answered in negative and the appeal is dismissed.
Now taking up the appeals for AY 2009-10, 2010-11 and 2011-12. The grounds raised by the revenue in these appeals are as under:
AY 2009-10 – ITA No.2503/DEL/2013 Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting addition of Rs. 400,33,67,733/- made by the Assessing Officer made on account of disallowance of deduction u/s 80IAB of the I.T. Act, 1961? Whether the CIT(A) under the facts and circumstances of the case and in law was justified in treating the income from sale of assets as business income as against the capital gain assessed by the Assessing Officer?
152 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
AY 2010-11 – ITA No. 4435/DEL/2013 1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 2,30,62,92,834/- made by the AO made on account of disallowance of deduction u/s 80IAB of the Act.
Whether the CIT(A) under the facts and circumstances of the case and in law was justified in treating the income from sale of assets as business income as against the capital gain assessed by the AO?
AY 2011-12 - ITA No. 168/DEL/2016 Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in law and on facts of the case in holding that the assessee was eligible for the claim of the deduction u/s 80IAB of the IT Act amounting to Rs. 1,03,98,55,436/-.
As noted earlier, the common issue running across all these appeals is the issue of deduction u/s 80-IAB of the Income Tax Act, 1961. It is further noted that the facts of all these appeals are exactly same as arising in respect of the same project and there is no change in the nature of activity, agreement or income which is subject matter of claim of deduction u/s 80-IAB of the Income Tax Act, 1961. The approval accorded by BOA is relevant and covers all these years also. 25. We are conscious of the fact that the appeal relating to AY 2009-10 and 2010-11 were earlier decided by Coordinate bench vide order dated 17/04/2014 thereby dismissing the appeal of
153 I.T.A. No. 4435 & 2503/D/2019, 16/Del/2016, 9227/Del/2019
the revenue by relying upon the orders of Tribunal in sister concern cases. The appeals relating to AY 2008-09, 2009-10 and 2011-12 travelled to Hon’ble High Court. As noted elsewhere, for AY 2008-09, the Hon’ble High Court directed the assessing officer to pass assessment order consequent to revisionary order u/s 263 and for AY 2009-10 and 2010-11, issue was restored back to Tribunal for independent adjudication.
While deciding the appeal for initial AY 2008-09 in ITA No. 9227/Del/19, we have at length dealt with various aspects of claim of deduction u/s 80-IAB and have independently reached to the considered conclusion that the assessee company has made a valid claim of deduction u/s 80-IAB in respect of SEZ Project at Ranga Reddy District, Hyderabad.
In absence of any distinguishing feature and keeping in view the finding rendered in appeal for AY 2008-09 which is the first year of claim of deduction, we uphold the order of CIT(A) allowing the claim of deduction u/s 80-IAB of the Income Tax act, 1961. Thus, the appeals filed by the revenue in ITA No. 2503/Del/13, 4435/Del/13 and 168/Del/16 are dismissed. 28. In the result, all the appeals of the Revenue are dismissed.
Order pronounced in the open Court on 17th November, 2021. Sd/- Sd/- [PRASHANT MAHARISHI] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 17th November, 2021