COMMISSIONER OF INCOME TAX vs. M/S PRIMAL PROJECTS (P) LTD

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF NOVEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.196 OF 2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX

CENTRAL CIRCLE, C.R. BUILDING

QUEENS ROAD, BANGALORE. 2. DEPUTY COMMISSIONER OF INCOME TAX

CIRCLE-1(4), BANGALORE. ... APPELLANTS (BY SRI. JEEVAN J. NEERALGI, ADV.,) AND: M/S. PRIMAL PROJECTS (P) LTD., NO.97/B, I FLOOR, 6TH BLOCK KORAMANGALA, BANGALORE.

... RESPONDENT (BY SRI. PAVAN KUMAR, ADV., FOR SRI. S. PARTHASARATHI, ADV.,) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 28.02.2011 PASSED IN ITA NO.1297/BANG/2010 FOR THE ASSESSMENT YEAR 2007-08, PRAYING TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (II) SET ASIDE THE APPELLATE ORDER DATED 28.02.2011 PASSED BY THE ITAT, 'B' BENCH, BANGALORE IN APPEAL

2 PROCEEDINGS ITA NO.1297/BANG/2010, AS SOUGHT FOR IN THIS APPEAL, IN THE INTEREST OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 27.03.2012 on the following substantial question of law: (i) Whether the Tribunal was correct in law in allowing assessee's appeal by holding that the assessee is eligible for deduction under section 80IA(4)(iii) of the I.T. Act, 1961 even when the assessee has failed to satisfy the conditions put forth in the said provisions. (ii) Whether the Tribunal was correct in law to allow the deduction under section 80IA(4)(iii) of the I.T. Act, 1961 when the assessee had not fulfilled the conditions

3 envisaged by the Government of India as well as those included in the Industrial Park Scheme, 2002 and therefore contravened the provisions of Rule 18C(3) of the Income-Tax Rules and as such whether because of this reason can the order passed by tribunal be said as perverse in nature. (iii) Whether on the facts and circumstances of the case, the Tribunal erred in law in interpreting the intentions of the legislation to promote large number of industrial units in the Industrial Park, by holding that the five floors leased to a single company would constitute five independent Industrial units and satisfy the criteria mentioned in para 1(vii) of the approval letter issued by the Ministry of Commerce and Industry. (iv) Whether the Tribunal was correct in law in interpreting Industrial Park Scheme, 2002 by holding that the five floors leased out to a single entity i.e. M/s. Accenture Services (P) Ltd., would constitute five separate taxable entities and

4 therefore the assessee had not violated the condition that no single unit shall occupy more than 50% of the allocable industrial area of an Industrial Park. (v) Whether the Tribunal was correct in law to allow the deduction under section 80IA of the I.T. Act when the assessee had constructed only 2,01,350/- Sq.ft. instead of the required area of 2,41,620 Sq.ft. and therefore had not fulfilled the condition laid out in the approval granted by the Ministry of Commerce and notification from Ministry of Finance. (vi) Whether the Tribunal was correct in law to allow the deduction under section 80IA of the I.T. Act for the financial year 2006-07 when the notification was issued by the CBDT, Ministry of Revenue on 31.05.2007 and therefore when the assessee had developed and started the Unit even before the approval and before getting notified by the CBDT.

5 2. The factual background, in which the aforesaid substantial questions of law arise for our consideration need mention. The assessee is engaged in the business of development of Information Technology parks and similar infrastructure facilities. The assessee was allotted 27 acres and 50 guntas of land in Phase-I and 33 acres of land in Phase-II on 10.11.2003 by Karnataka Industrial Area Development Board (KIADB) for development of Information Technology park and the allied infrastructure facilities. The assessee entered into a Joint Development Agreement (JDA) with M/s Millenia Realtors (P) Ltd. On 14.12.2003 to develop the Information Technology Park. The assessee on 16.12.2003 obtained permission to develop the lands in joint venture with M/s Millenia Realtors (P) Ltd. Thereafter, on 02.04.2005, the assessee entered into an agreement for sale of five units in 2A campus to individuals and subsequently, on 02.08.2005 entered into an agreement for sale of the balance of 4 units in

6 2A campus to individuals. The assessee thereafter, on 05.12.2006 applied for obtaining the approval of the Ministry for the campus 2A as an Industrial Park. On 31.05.2007, approval under Section 80IA was notified by the Central Board of Direct Taxes (CBDT). The assessee filed the return of income for the Assessment Year 2007-08 and disclosed the income of Rs.16,69,69,844/-. In computing the income, the assessee claimed deduction to the tune of Rs.16,68,51,429/- under Section 80IA(4)(iii) of the Act. The assessing authority by an order dated 26.10.2004 disallowed the claim of the assessee on the ground that the assessee has not complied with the mandatory conditions stipulated in the scheme framed by the Central Government viz., Industrial Parks Scheme, 2002 (hereinafter referred to as 'the scheme' for short). It was held that five software companies were not located at the time of sale of built up area and one unit was occupying more than 50% of the industrial area, which

7 is in violation of the mandatory conditions mentioned in the scheme. It was held that the assessee is not entitled to benefit of deduction under Section 80IA(4)(iii) of the Act. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 29.01.2010 dismissed the appeal preferred by the assessee inter alia on the ground that the substantial development of the software park has taken place even before the approval was granted by the competent authority and therefore, the assessee is not entitled to benefit under Section 80IA(4)(iii) of the Act. The assessee thereupon approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 28.02.2011 inter alia held that though entire developed area has been leased out to the assessee to a single company, yet the functional test has to be applied and each unit has to be independent with separate facilities,

8 instrumentation, power connection, door number and capacity to function independently. It was further held that since, the units are functioning independently on different floors even though are situated under the same roof, the assessee has successfully complied the functional test of five independent units. It was further held that five separate functional units were operating in the Assessment Year in question. It was further held that it was not proper on the part of the Assessing Officer to decline the deduction under Section 80IA(4)(iii) of the Act on the ground that the assessee had started functioning even before the formal approval was issued under the scheme. Accordingly, the appeal preferred by the assessee was allowed. In the aforesaid factual background, the revenue has filed this appeal. 4. Learned counsel for the revenue submitted that in order to claim deduction under Section 80IA(4)(iii) of the Act, a assessee has to satisfy the conditions mentioned in the scheme framed and notified

9 by the Central Government as well as the rules. It is further submitted that the tribunal failed to appreciate that the assessee did not comply with the conditions envisaged in the scheme and also did not comply with the requirement contained in Section 18C contained in the Income Tax Rules. It is also argued that as per the approval granted to the assessee, the assessee was required to develop an area of 2,41,620 square feet, out of which 95% was for industrial use, but developed only 2,01,350/- square feet as per Joint Development Agreement, which works out to less than 90% and as per the approval granted by Ministry of Commerce and Industry, the number of industrial units located in the Industrial Parks should have been five, whereas, for the Assessment Year 2007-08, only one software company i.e., Accenture Services P. Ltd. was located. It is further submitted that as per the Scheme, 'unit' means a separate and distinct entity, but in the instant case,

10 Accenture Services P. Ltd is only one unit, which has occupied five floors. 5. It is further submitted that the assessee sold the entire built up area on 01.04.2007 for a total consideration of Rs.21,02,87,575/- i.e., prior to notifying the approval which was granted to the assessee on 05.12.2006. Therefore, the assessee is not entitled to deduction under Section 80IA(4)(iii) of the Act. It is also submitted that the assessee has not complied with the requirement contained in Section 6F of the Scheme inasmuch as one single unit has occupied more than 50% of the allocable area. It is also urged that the expression 'unit' for Industrial park has to be interpreted ejusdem generis with the meaning of the term in Clause (i) of the Scheme, therefore, a unit which is an industrial park has to be a part of the building, which has to be dealt with independently under the state of central laws for the purpose of stamp duty under the Stamp duty Act and for the purpose of levy of capital gain under the Act.

11 It is also contended that a unit means a separate taxable entity. It is also argued that Section 80IA of the Act is a incentive provision granting tax benefit and therefore, the same has to be construed strictly and the provision of the taxing statute has to be construed in a manner, object / purpose of the enactment is a cheat. In support of aforesaid submissions, reliance has been placed on decisions of the Supreme Court in 'GOPAL REDDY VS. STATE OF ANDHRA PRADESH JT,', 1996 (6) SC 268, 'P.VARGHESE VS. ITO', (1981) 131 ITR 597 (SC), INDIAN HOTEL CO. LTD. VS. ITO', (2000) 245 ITR 538 (SC). 6. On the other hand, learned counsel for the assessee submitted that the finding of the tribunal that the respondent constructed required number of units is a question of fact and by no stretch of imagination can be said to be perverse. It is also submitted that the finding that the respondent has fulfilled the requirements as laid down in Section 80IA(4)(iii) of the

12 Act are pure findings of fact, which has not been assailed by the revenue. It is also contended that tribunal has rightly applied the functional test and has held that the assessee has complied the requirement with regard to a unit and a unit should be a functionally independent unit having common facilities and the scheme does not envisage that a unit would mean a separate software company. It is also submitted that the units developed by the assessee were sold to different persons as held by the Assessing Officer himself in paragraph 19 of the order, which clearly shows that the units were separate entities capable of being sold separately and were subject to Stamp Duty And Registration Act. It is also pointed out that the assessee has not constructed the required area was not raised by the revenue and therefore, does not arise for consideration. It is also pointed out that mere delay in issuing the concerned Notification on the part of the Central Board of Direct Taxes (CBDT), deduction under

13 Section 80I could not be denied to the assessee. In support of aforesaid submissions, reliance has been placed on decisions of 'COMMISSIONER OF INCOME- TAX, CENTRAL-III, MUMBAI VS. ACKRUTI CITY LTD', (2013) 31 TAXMANN.COM 275 (BOMBAY), 'GANESH HOUSING CORPORATION LTD. VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4 & 1 (2012) 21 TAXMANN.COM 157 (GUJ.) and decision of the Supreme Court in 'DEPUTY COMMISSIONER OF INCOME-TAX VS. GANESH HOUSING CORPORATION LTD.', (2012) 25 TAXMANN.COM 305. 7. We have considered the submissions made on both sides and have perused the record. Before proceeding further, it is apposite to take note of Section 80IA(4)(iii) of the Act as well as Rule 18C of the Income Tax Rules, 1962 as it existed prior to 08.01.2008, which read as under:

14 "Section 80IA(4) (iii)- any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified79 by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006 :

Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter in this section referred to as the transferee undertaking), the deduction under sub-section (1) shall be allowed to such transferee undertaking for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee undertaking :

Provided further that in the case of any undertaking which develops, develops and operates or maintains and operates an industrial

15 park, the provisions of this clause shall have effect as if for the figures, letters and words "31st day of March, 2006", the figures, letters and words "31st day of March, 2011" had been substituted" 18C. Eligibility of Industrial parks and Special Economic Zones for benefits under Section 80-IA(4)(iii) - (1) The undertaking shall begin to operate an industrial park during the period beginning on the 1st day of April, 1997 and ending on the 31st day of March 2002. (1A) The undertaking shall begin to develop or develop and operate or maintain and operate a special economic zone any time during the period beginning on the 1st day of April, 2001 and ending on 31st day of March, 2006. (2) The undertaking shall be duly approved by the Ministry of Commerce and Industry in the Central Government under the scheme for industrial park or Special Economic Zones notified by the Ministry.

16 (3) The undertaking shall continue to fulfill the conditions envisaged in the scheme. (4) On approval under sub-rule (2), the Central Board of Direct Taxes, shall notify industrial parks for benefits under Section 80-IA. 8. In exercise of powers conferred by clause (iii) of sub-section (4) of Section 80IA of the Act, the Central Government has framed the Scheme which is known as Industrial Park Scheme, 2002. Clause(2)(i) of the Scheme defines the expression 'unit' which means any separate and distinct entity for the purpose of one or more State or Central Tax law. Clause 6 of the Scheme deals with criteria for automatic approval. Clause 6(f) provides that no single unit referred to in Column No.2 (of the table given in sub paragraph (b) of paragraph 6) shall occupy more than 50% of the allocable industrial area of an industrial model town or industrial park or growth centre. Clause 7 deals with non-automatic

17 approval. There cannot be any dispute with the legal proposition that in order to claim the benefit of deduction under Section 80IA(4)(iii) of the Act, the conditions mentioned in the Scheme have to be complied with. 9. In the backdrop of aforesaid factual position, we may advert to the facts of the case. Paragraph 2(i) of the Scheme defines the expression 'unit' to mean a separate and distinct entity for the purpose of one or more state or Central Tax Laws. Paragraph 6 of the Scheme deals with criteria for automatic approval. Para 6(f) provides that no single unit shall occupy more than 50% of the allocable industrial area of an industrial model town or industrial park or growth center. The Assessing Officer in its order has held that in the relevant Assessment Year, the assessee did not have five industrial units, therefore, the assessee is not entitled to benefit of deduction under Section 80IA(4)(iii) of the Act. The Commissioner of Income Tax

18 (Appeals) has held that since, the assessee had carried out the substantial development of the work prior to obtaining approval, therefore, the assessee is not entitled to benefit of deduction under Section 80IA(4)(iii) of the Act. It is pertinent to mention here that assessee has developed Information Technology Park on the basis of an agreement entered into by it and Karnataka Government Agency. The business was set up before or after the time prescribed in the statute. The tribunal has recorded a finding that even though, assessee has leased out five / four floors to a particular tenant, but the tenants are carrying on their operations as independent units and their activities are functionally different. It has further been held that each floor is physically identified for all functional purposes. It has also been held that approval granted by Ministry of Commerce and Industry itself is a testimony that the assessee company has developed infrastructure facilities in the form of Multi storied structure to accommodate

19 independent units to operate separate identities and individualities of the unit do not disappear only for the reason that the entire developed area has been leased out to a single company. The tribunal has therefore, applied the functional test and has held that each unit occupying a different floor is independent with independent facilities, instrumentation, power connection, door number and facility of functioning independently. It has been held that each unit is in a position to carrying on its activity without depending on other units. Therefore, a finding has been recorded in favour of the assessee that the assessee has successfully satisfied the functional test of an independent unit. 10. The tribunal has further held that assessee had applied through non automatic approval to get its campuses approved for deduction under Section 80IA(4)(iii) of the Act. It has further been held that once the projects are approved and the notifications are

20 issued by the competent authorities, the approvals and the notifications would relate to the date of commencement of the activities and therefore, the benefit of deduction cannot be deprived to the assessee on the ground that he had carried out substantial part of the software projects prior to grant of approval. Thus, the assessee has been held entitled to the benefit of deduction under Section 80IA(4)(iii) of the Act. 11. The submissions raised in this appeal on behalf of the revenue that the assessee was required to develop 95% of the area for industrial use, but has failed to do so was never urged before the tribunal. It is pertinent to note that since, the assessee had applied for non automatic approval under paragraph 7 of the scheme, therefore, the requirement contained in paragraph 6(f), which requires a unit not to occupy more than 50% of the allocable area does not apply to the case of the assessee. Rule 18C of the Rules does not have a bearing on the claim of the assessee with regard

21 to eligibility of deduction under Section80IA(4)(iii) of the Act in the fact situation of the case. Even otherwise, whether or not the assessee has complied with the conditions laid down in the Scheme in order to enable it to claim deduction under Section80IA(4)(iii) of the Act is a pure question of fact. The findings recorded by the tribunal have not been assailed by the revenue on the ground that the same are perverse. The aforesaid findings of fact could not be demonstrated to be perverse. Therefore, interference of this court in exercise of powers under Section 260A of the Act is warranted. [SEE: SYEDA RAHIMUNNISA VS. MALAN BI BY L.RS. AND ORS. (2016)10 SCC 315 and PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE & ORS. VS. SOFTBRANDS INDIA P. LTD., (2018) 406 ITR 513] In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the

22 assessee. In the result, the appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss