DCIT, GURGAON vs. M/S. DLF INFO CITY DEVELOPERS (CHENNAI) LTD., GURGAON

In various grounds of appeal, the Revenue has challenged the allowability of claim of deduction under section 80IAB for sums amounting to Rs.202, 52,07,111/-.

At the outset, the Ld. Counsel for the assessee submitted that, the issue of allowability of deduction under section 80IAB had come up for consideration before the Tribunal in assessment years 2008-09 and 2009-10 wherein, after detailed discussion and analysis, allowability of deduction under section 80IAB has been allowed on similar set of facts and grounds. Even the Ld. CIT (A) has followed the order of the Tribunal and Assessing Officer also has relied upon his predecessor’s order. He pointed out that in the grounds of appeal also, the Revenue has stated that the Tribunal has failed to appreciate the proviso to section 80IAB(2), which means that the Revenue is aggrieved by the order of the Tribunal for earlier assessment years.

On the other hand, the ld. CIT (DR), Ms. Rachna Singh, filed a detailed written submission before us to highlight the Revenue’s stand on the issues involved.

The brief facts are that the assessee-company was incorporated on 17/3/2005 for the purpose of the business of developing, operating and maintaining real estate projects which inter-alia included development of Special Economic Zone (SEZ) and related infrastructure. During the year, the assessee has declared an income of Rs.369.99 crores against the cost of Rs.167.47 crores. Besides development income, land lease rent and other income were also shown. The assessee in its return of income has claimed deduction under section 80IAB amounting to Rs.202,52,07,111/- in respect of development income relating to development of SEZ at Chennai during the year. The Assessing Officer, following the stand taken by the Assessing Officer, in assessment years 2008-09 and 2009-10 on similar facts observed that the deduction claimed by the assessee under section 80IAB is not admissible in respect of profit derived from SEZ project at Chennai, because assessee had sold bare shell building to co- developer, M/s DLF Assets Pvt. Ltd., which was not an authorized operation under the ‘Special Economic Zones Act, 2005’ and ‘Special Economic Zone Rules, 2006’. The Assessing Officer was of the view that deduction under section 80IAB is admissible only on profits from operation and maintenance of SEZ and not on profit on sale of assets earned by the assessee from transfer of bare shell building to the co-developer. The Assessing Officer, while coming to this conclusion, has also referred to the ‘disclaimer clause’ contained in clause 3(xvii) of the approval letter dated 1/6/2009 issued in the case of co- developer by the Board of Approval, SEZ section, Department of Commerce and Industry, Government of India. The said disclaimer mentions that particular terms and conditions of lease agreement will not have any bearing on the treatment of income by way of lease rentals/down payments/premium, etc. for the purpose of assessment under the Income Tax Act and the Assessing Officer will have to examine the taxability of the income under the Income Tax Act. On the strength of such disclaimer, the Assessing Officer disallowed the entire claim of deduction under section 80IAB made by the assessee. The Assessing Officer further held that income from transfer of assets, which were not stock-in-trade in the books of account, is to be treated as income chargeable under the head capital gains and consequently, the said income is not eligible for deduction under section 80IAB as co-developer. Lastly, the Assessing Officer held that development income of the assessee is nothing but future rentals, as the valuation of bare shell building had been worked out by the assessee by adopting rent capitalization method. The deduction under section 80IAB was permissible for a period of 10 years and there was no provision for claiming deduction in one year when the income is referable to future rental income of 49 years. Thus,, the Assessing Officer observed that the claim of the assessee for deduction under section 80IAB is admissible to the extent of 1/49th of the total development income received in one financial year and accordingly, worked out disallowance at Rs.202,52,07,111/-.

Before the ld. CIT (A), assessee has made detailed submission giving the entire background of the claim as well as orders of the Tribunal for earlier assessment years. The ld. CIT(A) has highlighted the following relevant facts qua this issue which, for the sake of ready reference, are reproduced hereunder:-

The ld. CIT(A) also took note of various Tribunal decisions right from assessment years 2007-08 to 2009-10, not only in the case of the assessee but also in other group companies, wherein exactly similar issue of allowability of deduction under section 80IAB was decided. The list of such decisions considered by the ld. CIT(A) are as under:-

The ld. CIT (A), after considering the detailed submissions made by the assessee as well as the order of the Assessing Officer and other relevant materials placed before him, accepted that the facts and the issues involved are exactly identical to the assessment years 2008-09 and 2009-10, wherein these issues have been thrashed out in detail and no new facts have been brought on record by the Assessing Officer or by the assessee in this year. After incorporating the relevant observations and finding of the Tribunal in 5470, 5366 and 5367/DEL/2012, order dated 21/2/2014, the ld. CIT (A) accepted the assessee’s claim for deduction under section 80IAB. The relevant observations and finding of the ld. CIT(A) in this regard read as under:-

Regarding the issue with regard to the treatment of income derived from transfer of bare shell building to the co- developer for consideration in the nature of capital gains as done by the Assessing Officer, the ld. CIT(A) again after referring and relying upon the order of the Tribunal for assessment years 2007-08 and 2008-09, allowed this issue after observing and holding as under:- “49. In this background, it is observed that the appellant during the instant year has also recognised revenue from constructed properties by following Percentage of Completion Method (POCM) as done in the previous years. The accounting policy adopted by the appellant company has been duly certified by the auditors in the Annual Accounts as notes as under: "Revenue from constructed properties:

The appellant has submitted that the Cost of development includes estimated internal development costs, external development charges, construction costs and development/ construction materials, which is charged to the profit and loss account based on the percentage of revenue recognized as per accounting policy, in consonance with the concept of matching costs and revenue. Final adjustment is made on completion of the applicable project. It has been pointed out that there has been no change in the method of accounting during the year under appeal in comparison to earlier years. In support, the appellant has furnished the operational figures as follows:- Sr.No. Particulars A.Y, 2010-11 A.Y. 2009-10 1 369.35 1350.53 Revenue from Operation Cost Written off 166.90 367.91 2

Therefore, by regularly following the mercantile system of accounting, the appellant has recognized the revenue as per AS-I notified by the Govt.; followed Percentage of Completion Method (POCM) as per AS-7 issued by the institute of Chartered Accountants of India in conformity with all intent and purposes of AS-I notified vide notification dated 25.01.1996; has recognized lease rentals notified vide notification dated 25.01.1996; has recognized lease rentals of land on accrual basis after handover of the bare shell buildings in accordance with Accountant Standard 19 i.e. accounting for leases; has been maintaining and operating the SEZ and has received the development consideration on transfer of bare shells to the Co-developer upon being such transaction approved by the Board of Approval.

The appellant has carried out construction activity in conformity with the authorized operations, approved by the Board of Approvals consequent upon notification of its vacant land for the purpose of development, operation and maintenance of SEZ. Thus, expenditure incurred on construction of bare shells undisputedly remains work in progress. The A.O/s observation with regard to co-relation to the classification of assets shown by the co-developer, and assuming that the transfer of bare shell was a sale of capital asset assessable as capital gains is devoid of any reasoning in as much as against the very principles of accountancy and provisions of Act, when the bare shell buildings were neither part of the capital work in progress nor fixed assets of the appellant. The A.O. in the assessment order has not categorically held the income of the appellant to be assessed as capital gains since no such addition has been made, the observations of the A.O. have been without prejudice in disallowing the claim of the appellant for deduction U/s 80 IAB, that in alternative the income of the appellant shall constitute capital gains on the reasoning that it had transferred bare shells as an asset in the SEZ. The observations of the Ld. A.O. lack merit as work in progress in the business of construction cannot be treated as capital asset. Section 2(14) of the Income Tax Act specifically excludes stock in trade from the definition of asset. Thus, development income derived by the appellant from transfer of bare shell buildings in SEZ cannot be treated as short term capital gains, considering the business of developer and accounting treatment adopted in the books of accounts irrespective of the treatment by the co-developer in its books of account as fixed assets. Therefore, I am of the view that observations of the A.O. are not on sound footing in holding that the income can be assessed as capital gains.

In view of my above observations, which find support from the order of my predecessor for the AY 2008-09 & 2009- 10, as well as of the Hon'ble ITAT for the AY 2007-08 and 2008-09, it is held that the profits derived on account of development consideration of bare shells would constitute the 'profits and gains' derived from development, operation and maintenance of SEZ within the meaning of section 80IAB. Accordingly, it is held that the appellant is eligible for claim of deduction u/s 80 IAB of the Act. The ground No.3 of appeal is allowed.”

Thus, the ld. CIT (A) has followed the decision of the Tribunal for earlier years in the assessee’s own case on similar set of facts, which are admittedly permeating in this year also.

However, the ld. CIT-D.R. in her written submission has highlighted the points which have been raised by the Assessing Officer in the assessment order and also summarized her submissions rebutting the order of the ld. CIT(A) in the following manner:-

She further submitted that proviso to section 80IAB is clear that deduction under section 80IAB is available to a developer who develops a SEZ and transfer operation and maintenance of such SEZ to another developer, then deduction under section 80IAB shall be allowed to the said developer and will not be allowable to the assessee. Thus, she submitted that in terms of proviso itself the claim cannot be allowed. She further made her submissions on interpretation of the statute and strict construction of such statute especially in light of the provisions envisaged in proviso.

On the other hand, the ld. counsel for the assessee contended that all these issues which have been raised by the ld. CIT-D.R. had duly taken note by the Tribunal in earlier years which fact too had been noted in detail by the ld. CIT (A), hence earlier precedence has to be followed.

After considering the aforesaid submissions and on perusal of the material referred to before us, we find that the issue of allowability of deduction under section 80IAB on similar set of facts and reasoning was prevalent in the assessment years 2008-09 and 2009-10, wherein the Tribunal after threadbare analysis of the provisions of the Act as well as the material placed on record, has allowed the deduction. If such deduction under section 80IAB has been allowed in initial years and there is no change in the material facts in subsequent years including the year under consideration, ostensibly then, as a matter of judicial precedence, no different view or stand can be taken. This proposition is well settled by the Hon'ble Delhi High Court in the case of CIT vs. International Tractors Limited reported in [2017] 84 taxmann.com 132 (Delhi), wherein in the context of allowability of deduction under section 80IA, the Hon'ble High Court laid down that, where assessee industrial undertaking had fulfilled the eligibility condition to claim deduction under section 80IA in the initial year, then the benefit of deduction would be extended for next 10 years irrespective of whether after initial year there was an expansion of industrial undertaking by increased investment in plant & machinery that have taken it outside ambit and scope of that provision. Thus, the Hon'ble High Court highlighted the principles of consistency, especially in the case of allowability of deduction under Chapter VIA and similar other sections in the said chapter that once in the initial year, claim has of deduction has been allowed, then such a claim for deduction cannot be disturbed in succeeding years if the same material facts are permeating. Here in this case, not only in the initial assessment year but also in subsequent assessment year also, the similar issue of claim of deduction under section 80IAB has been discussed and analysed in detail and thereafter the said claim has been allowed in third and fourth year, therefore, the said deduction now cannot be disallowed on same set of facts. If the Revenue is aggrieved by the order of the Tribunal in earlier years, the right recourse would be to approach the higher judicial forum, that is, Hon’ble High Court under section 260A. Thus, on similar set of facts and without there being any change of law, no different view can be taken by this Tribunal. Accordingly, the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue are dismissed.

In the result, appeal of the Revenue is dismissed.