DY. COMMISSIONER OF INCOME TAX , CIRCLE-2(1), HYDERABAD vs. KOYA AND COMPANY CONSTRUCTION LIMITED, HYDERABAD

The grounds raised by the Revenue in ITA No.916/Hyd/2019 read as under :

Whether on the facts and circumstances of the case, the CIT(A) is correct in allowing the deduction claimed by the assessee u/s801A(4) of the Income Tax Act, when the assessee was executing only specific work and not development of facility as whole and failed to satisfy the conditions of being a developer?

Whether on the facts and in circumstances of the case, the CIT(A) is correct in ignoring the specific findings of the assessing officer that disentitle the assessee for relief under section 801A of the Act?"

The brief facts of the case are that the assessee is a company engaged in the business of civil contracts works. The returns of Income filed by the assessee for Asst Years 2003-04, 2004-05 & 2005-06 showing total income of Rs. 66,16,440/-, Rs. 2,98,88,080/- & Rs. 3,54,88,930/- respectively, were taken up for scrutiny and the assessments were completed u/s. 143(3) of the Act with total assessed income of Rs. 3,55,05,410/-, 9,44,47,976/- & Rs. 6,93,75,033/- respectively, by disallowing claims of 80IA of the Act. Thereafter, the action of the AO was upheld by the LD.CIT(A) for AYs 2004-05 & 2005-06. Further, for the A.Y. 2003- 04, the LD.CIT(A) enhanced the income and consequential order

1. As per the directions of the Tribunal, the Assessing Officer has initiated proceedings u/s 143(3) and notice u/s 143(2) along with questionnaire calling for the details were issued on 09.10.2012 and duly served on the assessee. Thereafter, assessee filed its reply along with his submissions why it is entitled for deduction u/s 80IA(4) of the Act. Thereafter, the Assessing Officer, upon detailed examination of the contract agreements and perusal of submissions made by both parties, conducted an analysis of each contract for eligibility under section 80IA. This was done to give effect to the directions of the Hon'ble ITAT, in light of the decisions of various judicial authorities, circulars, clarifications, and submissions from both sides. Accordingly, the AO completed the assessments under section 143(3) read with section 254 of the 4 Koya and Company Construction Limited

Aggrieved with such assessment orders, assessee filed appeals before the LD.CIT(A), who granted part relief to the assessee by passing common order dt.15.03.2019, wherein it was held as under :

Aggrieved with the order of LD.CIT(A), the Revenue is now in appeal before us.

Before us, the Ld.DR submitted that the Tribunal, in the case of the assessee for the earlier assessment years, had decided the issue in favour of the assessee. Our attention was drawn to the order passed by the Ld.CIT(A), which has been reproduced hereinabove. The ld.DR further submitted that the Revenue has already filed an appeal before the Hon'ble High Court and the present appeal has been filed with a view to continue the litigation.

Per contra, ld.AR has submitted that the relief was granted to the assessee by the Tribunal for earlier assessment years. Our attention was drawn to paragraphs 4 and 5 the order passed in ITA No.867/Hyd/2018 dt.10.10.2018 for A.Y. 2014-15, wherein the Tribunal had decided the issue in favour of the assessee by holding as under :

Having regard to the rival contentions and the material on record, we find that the order of the CIT(A) for the A.Y. 2006-07 consequent to remittance by the Tribunal has become final and the Revenue has not filed any appeal before the Tribunal. We also find that the CIT(A) for the A.Y. 2014-15 has verified the nature of contracts before holding that they are not mere works contracts. Therefore, we see no reason to interfere with the order of the CIT(A), which is in consonance with the directions of the ITAT in the earlier years. Accordingly, the grounds raised by the Revenue are dismissed.”

It was submitted by the ld.AR that for A.Y. 2006-07, an identical issue came up for consideration before the CIT(Appeals)-2, Hyderabad, wherein the Ld.CIT(A), vide its order dt.09.02.2018 at page 121, has held as under :

3 The learned DR assailed the order of the CIT (A) stating that it is not a speaking order and the reasons for allowing deduction were not forthcoming from the order of the CIT (A). The learned DR referred to the order of the AO and submitted that as per the analysis done by the AO, assessee was doing only work contract and hence is not eligible for deduction. Per contra, the learned Counsel submitted that as per the directions of the ITAT, assessee company furnished detailed submissions segregating the development contracts and work contracts and the claim of 7 Koya and Company Construction Limited

We have perused the facts on record and circumstances in this case, the legal principles arising herein and we arrive at our considered view that so far as the legal parameters are concerned, it has been very elaborately analysed by the ITAT in the assessee's own case that if the assessee is conducting developmental activities, then the deduction is allowable, but if it is only relate to the work contracts, then such deduction is not allowable. We also find as per the MA filed by the assessee the ITA No 507 of 2015 Koya and co. Hyd Tribunal had directed the AO to segregate as regards the total contracts which one is development contracts and which are only works related contracts. Contracts which are development contracts, to that extent deduction is allowable u/s 801A of the Act. AD without examining the nature of contract as directed has treated all of them as work contracts. Coming to the order of the learned CIT (A), all these aforesaid parameters were to be examined and put forth in his otherwise elaborate and extensive order. But however, for reasons best known to him, though he has allowed the said deduction to the assessee, but the reasons for allowing those deductions were not at all farthcoming in his order. The order of the learned CIT (A) is not at all a speaking order, nor it has expressed in any way all the cogent reasons for which the assessee is eligible for the deduction claimed for. It is a matter of judicial exercise and knowledge that as per the ruling of the Apex Court in several cases, the quasi judicial authority are supposed to provide a specking order whereby the way of thought is specifically mentioned therein and if it is not a speaking order, then it is bad in law. This so because the mental process and thought leading to the decision is very much unclear. In the instant case, though the assessee has gone before the ITAT, we find in our considered view the order of the ITAT is essentially clarificatory in nature regarding the legal position of the assessee, but it is not decisive in nature so as to clearly decide whether in the given facts and situation, the assessee is eligible for deduction or not. Neither we find the CIT (A) has given a reasoned order for his decision. Therefore, under the circumstances and in the interest of justice, we find it deem and proper to send this file back to the CIT (A) to give a finding ITA No 507 of 2015 Koya and co. Hyd about the nature of the contracts undertaken by the assessee and whether the segregation undertaken by the assesseevis-à-vis the development contract and work contracts is correct or not. We expect the learned CIT (A) to examine all contracts and give a finding on each of the contracts and determine the issue of deduction in a much more definite way, by way of a speaking order. Accordingly the appeal of the Revenue is allowed for statistical purposes."

It was further submitted by the ld.AR that after the receipt of remand report, the Ld.CIT(A) has examined various issues and thereafter, granted relief to the assessee. In this regard, ld.AR has drawn our attention to Paragraphs 6 to 6.7 of the order (placed at page 126 of the paper book), wherein it was held as under :

1 It is seen that during the assessment proceedings u/s.143(3) r.w.s. 254, the appellant submitted information/details of the nature of work Involved in the development of Infrastructure of water supply projects. Further, a comprehensive statement on the contracts/projects executed by the appellant over AYs 2006-07, 2007-08, 2008-09 and 2009-10 giving details of project name, total turnover u/s 801A projects and other projects and the profits derived as per the separate accounts maintained, year- wise and project-wise etc. were reportedly filed before the AO. As per the submissions of the appellant, it is eligible for deduction u/s 80IA In respect of 29 projects out of total 41 projects executed during the year under consideration, for which exhaustive details/explanation was given for each contract along with copies of salient features of Contract, terms of contract, operation &maintenance details, provision of defect correction during liability period etc.

2 Before me, the AR furnished copies of documents filed before the AO along with the comprehensive statement of Turnover, Profits eligible u/s 80IA etc. and working of deduction u/s 80IA on pro-rata basis on turnover as per the directions of Hon'ble ITAT in the Paper Book (PB) filed. From this comprehensive table and the supporting details/ documents furnished, it 9 Koya and Company Construction Limited was submitted that out of total turnover of Rs.147.54 crores, profit of Rs.6,00,15,663/- (after set off of losses) was claimed as eligible for deduction u/s.80IA and profit of Rs.2,62,68,763/- was claimed to be profit on account of projects not eligible for deduction u/s.80IA.

3 It is seen from the assessment order that the AO, without analyzing each of the 29 contracts claimed to be eligible for deduction u/s 80IA by the appellant, went on to generally examine the four conditions laid down by the ITAT and held that the appellant is not eligible for deduction u/s.80IA(4) in respect of all the projects being executed. The AO summarily brushed aside the claim of the appellant by stating "upon detailed examination of contract agreements and perusal of submissions made by the assesse company, it is held that all contracts are in the nature of pure works contracts and therefore not eligible for deduction u/s.80IA as examined in light of directions of Hon'ble ITAT". The case law relied upon by the AD is also not relevant to the facts of the appellant.

4 The conclusion drawn by the AO and the basis for the said conclusion goes against the spirit and directions issued by the Hon'ble ITAT to the AO to work out deduction u/s.801A(4) on the eligible projects. As mentioned above, the Hon'ble ITAT clearly held that the projects executed by the appellant are eligible for deduction u/s.801A. With regard to quantification and computation of deduction u/s.80IA(4) only, the AO was directed to examine the projects, segregate the works contracts and eligible contracts and work out the deduction u/s.801A on pro-rata basis on turnover. However, as stated above, the AO has simply disallowed the entire claim.

5 It is worthwhile to note that on similar set of facts, the Hon'ble ITAT allowed deduction u/s.801A(4) in respect of eligible projects of the appellant for the AY 2007- OS vide order in ITA No.1840/H/2012 dated 05.04.2013 and for the AY 2008-09 & 2009-10 vide order in ITA Nos.417 & 418/H/2013 dated 23.08.2013 (The Department was in appeal in ITAT as the CIT(A) allowed the appeals of the appellant). It is seen that the AO vide orders dated 25.08.2014 for the AYs 2008-09 & 2009-10 and order dated 11.03.2015 for the AY 2007-08 passed consequential orders allowing deduction u/s.80IA as per the order of Hon'ble ITAT. It was submitted by the appellant that same contracts under execution in the AY 2006-07 also continued in the AY 2007-08, 2008-09 & 2009-10 on which deduction u/s.80IA was already allowed by the AO in the consequential order. The AR thus argued that on the same/similar set of facts, deduction u/s 80IA was allowed in the subsequent years, whereas it was denied for the year under consideration, which is arbitrary.

6 In view of the above and the factual matrix, examination of the projects reflecting the development of infrastructure facility, operation & maintenance, defect correction during liability period, financial risk/involvement etc. furnished by the appellant and acceptance of the claim in the subsequent years on the same/similar projects etc., it is held

7 Coming to the quantum of deduction, it is seen that the appellant claimed deduction u/s 80IA of Rs.6,00,15,663 in the return of Income. It was submitted during the appeal proceedings that the appellant derived profit of Rs.9,24,89,732 and loss of Rs. 3,24,74,069 form the eligible projects. However, Instead of claiming deduction u/s 80IA in respect of projects giving rise to profit only, it was erroneously claimed on the net profit arising from the eligible projects, after reducing the losses from the profits derived. It was contended that appellant is entitled to claim deduction u/s 80IA only from such eligible projects which resulted in profit. The AR however submitted that the Hon'ble Tribunal directed that the deduction has to be allowed on pro-rata basis on turnover. The AR accordingly submitted that the eligible deduction u/s 80IA, as per the directions of Hon'ble ITAT is Rs.7,29,56,073 as per the working given hereunder:

On the basis of the above, it was submitted by the ld.AR that the issue is, in fact, covered in favour of the assessee, and therefore, the order passed by the Ld.CIT(A) is correct. Furthermore, the ld.AR has drawn our attention to page 28 of the order of Ld.CIT(A), wherein details of 38 projects are provided in a 11 Koya and Company Construction Limited tabulated manner. The ld.AR has drawn our attention to page 30 of the order, wherein the Ld.CIT(A) has mentioned that the contracts at Sl. Nos.1, 17, 18, 19, 21, 29 and 32 needs adjudication and that they did not percolate to A.Y. 2005-06 or A.Y. 2003-04. The Ld.CIT(A) has examined each contract and thereafter, had given a finding at page 42 of the order (reproduced in paragraph 4 of this order).

The ld.AR further submitted that the issue is covered by the earlier order of Tribunal and it was submitted that for A.Y. 2006- 07, against the order of Ld.CIT(A) dt.16.11.2018, no appeal has been preferred by the Revenue. It was submitted that in the judgment of the hon'ble Supreme Court, in the case of CIT Vs Bergar Paints reported in 138 taxman 586, it was submitted that once the Revenue has chosen not to challenge the correctness of law in respect of the assessee, then it is not open for the Revenue to challenge the correctness in other cases.

In rebuttal, the ld.DR has submitted that the appeal has been preferred before the Hon'ble High Court against the first order. Ld.DR besides submitting that the issue is covered, had further filed the written submissions, which is to the following effect :

We have heard the rival submissions and perused the material on record. Admittedly, the Tribunal in ITA No.507/Hyd/2015 order dt.27.06.2016, had remitted the matter to the file of Ld.CIT(A), as the earlier order of Ld.CIT(A) was not a speaking order. Subsequently, the Ld.CIT(A), in the order passed to give effect, granted relief to the assessee for A.Y. 2006-07 vide its order dt.09.02.2018. 14. It is an admitted fact that the LD.CIT(A) at page 30 of his order has mentioned that six contracts for the assessment year 2003-04 has not percolated to the assessment year 2006-07 and similarly, two contracts for the assessment year 2004-05 have not percolated to the assessment year 2006-07. The contracts for the assessment year 2005-06 have percolated to the assessment year 2006-07. Thus, the LD.CIT(A) concluded that the contracts at Sl.Nos.1, 17, 18, 19, 21, 29, 32 and 34 have not been percolated for 13 Koya and Company Construction Limited

With respect to the contracts at Sl.Nos.1, 17, 18, 19, 21, 29, 32 and 34 at pages 30 to 41, the LD.CIT(A) has held as under :

It is the contention of the ld.AR that these contracts have been examined and were found to be parametria similar to the other contracts, which were examined for the assessment year 2006-07 and therefore, the relief was granted. In our considered opinion, the contracts at Sl.Nos.1, 17, 18, 19, 21, 29, 32 and 34 were required to be independently examined afresh by reference to the terms of the contract and following the direction of the Tribunal in ITA No.507/Hyd/2015 (supra) and thereafter, it is required by the Ld.CIT(A) to record a finding as to whether these contracts are the work contracts fulfilling the criteria as laid down under Section 26 Koya and Company Construction Limited

In light of the above, we remand back the matter in respect of contracts at Sl.Nos.1, 17, 18, 19, 21, 29, 32 and 34, as mentioned hereinabove, to the file of Ld.CIT(A) to record a separate finding having reference to the decision of Tribunal in ITA No.507/Hyd/2015, the provision of Section 80IA of the Act and terms of the Contracts. After examining the terms of the contract, Ld.CIT(A) is required to record finding whether the contracts entered by the assessee in respect of Sl.Nos.1, 17, 18, 19, 21, 29, 32 and 34 were in nature of Work Contracts or Contracts for Work ? Accordingly, the matter is remanded to the file of Ld.CIT(A). Thus, the appeals of the Revenue are allowed for statistical purposes.

In the result, all the appeals of Revenue are partly allowed for statistical purposes.