Whether an assessee developing an infrastructure facility of Government is a contractor and ineligible for claim of deduction under Section 80-IA?
In a recent case, the issue whether an assessee developing an infrastructure facility of Government is merely a contractor and thus ineligible for claim of deduction under Section 80-IA came up before Hon’ble Bombay High Court wherein it was held that if assessee developing an infrastructure facility of government is treated as a contractor instead of a developer, then no assessee would ever be able to claim the deduction under Section 80-IA of the Act.
ABCAUS Case Law Citation:
5080 (2026) (03) abcaus.in HC
In the instant case, the Commissioner of Income Tax (The Revenue) had challenged the order passed by the Income Tax Appellate Tribunal (ITAT/Tribunal) in holding that the respondent assessee was a developer of infrastructure facilities and eligible for deductions under Section 80-IA(4) of the Income Tax Act, 1961 (the Act).
The assessee was a public limited company and was engaged in the activity of construction of two Dam projects, the work of which was allotted to the assessee by the two State Governments. The assessee claimed that the said two projects were infrastructure projects and the assessee had developed the same and, therefore, it was entitled to deduction under Section 80-IA(4) in respect of the profits derived from the execution of the said projects.
However, the Assessing Officer (AO) disallowed the deduction on the premise that the assessee fulfilled none of the conditions mentioned in Section 80-IA for claiming deductions. It was the case of the Revenue that the assessee did not own the infrastructure facility and it was owned by the State Governments.
The CIT(A) confirmed the order of the Assessing Officer. However, ITAT vide its impugned allowed the appeal of the assessee and dismissed the cross appeals filed by the Revenue.
The Hon’ble High Court observed that the AO had disallowed the deduction claimed inter alia on the following grounds: (i) That assessee was only a civil contractor and not a developer of the infrastructure. (ii) Under Section 80-IA of the Act, the enterprise should own the infrastructure. (iii) That infrastructure was not “transferred” to Central Government or State Government etc. (iv) That the assessee had only developed a part of the infrastructure and not the whole of it. (v) That the assessee had merely carried out the works as per specifications laid down by the State Government.
The Hon’ble High Court observed the various amendments made to section 80IA and section 10(23G) from Finance Act, 1991 to 2001 and particularly vide Finance Act 2007 (with retrospective effect from 1st April 2000), whereby an Explanation to section 80-IA of the Act was inserted to the effect that the deduction under section 80-IA of the Act would not be available to a person who executes a “works contract” entered into with the undertaking or enterprise. Further, in 2000 it was further declared that the deduction shall not apply to works contract awarded by any person and executed by the undertaking or enterprise referred to in sub-section (1).
The Hon’ble High Court concurred that development by its intrinsic nature means bringing something into existence by way of scientific structural planning, technical expertise and precise execution. As against that, a works contract means a contract executed as per the planning, design and direction of some other person.
The Hon’ble High Court further concurred with the submission of the respondent that the Explanation inserted by the amendment made vide Finance Act, 2007 as well as Finance Act, 2009 is not applicable in the case where the assessee executes the work by shouldering investment & technical risk by employing team of technically & administratively qualified persons and where it is also liable for liquidated damages if it fails to fulfil the obligation laid down in the agreement.
The Hon’ble High Court observed a decision of the Gujarat High Court wherein the assessee was engaged by the State Government bodies for construction or roads. The allegation of the Revenue was that the assessee was merely a contractor and not a developer of the infrastructure project. The Court came to the conclusion that the assessee was a developer and not a contractor, and is therefore eligible for deduction under Section 80-IA of the Act.
The Hon’ble High Court observed that if the contention of the Revenue is accepted that the assessee is not a developer and is therefore not eligible for deduction under Section 80-IA of the Act, it leads to absurdity. This is because if the interpretation is accepted, no assessee would ever be able to claim deduction under Section 80-IA of the Act. In case of every public project where the Government has sought private participation for which it has granted the tax holiday, it will be the case of the Revenue that the entity executing the project is merely a works contractor and not a developer and, is therefore, not entitled to deduction under Section 80-IA of the Act.
The Hon’ble High Court observed that if, just because the Government specifies its needs from the particular project and provides for a periodic payment, the assessee is treated as a contractor instead of a developer, then no assessee would ever be able to claim the deduction under Section 80-IA of the Act.
The Hon’ble High Court further opined that the argument of the Revenue that the project belongs to the Government and, therefore, the assessee was not a developer, also leads to an absurd result, because no public project, especially like roads, expressways, dams,etc. could belong to a private participant and are bound to be a part of the Government’s initiative.
Further the Hon’ble High Court held that the mere fact that the assessee was receiving periodic payments as and when a particular stage of the project was completed, does not make the assessee a works contractor. The periodic payments are merely a part of the agreement between the assessee and the Government. The person who would bid for a project by incorporating the finance cost that would be incurred in the said project, and while doing so, an assessee is bound to take into consideration the fact of periodic payments that were to be received. The same does not make it a works contract.
The Hon’ble High Court also noted that the assessee had deployed machines worth crores of rupees and also bought machineries specifically for the said project.
The Hon’ble High Court further observed that as held by the Gujarat High Court that a developer undertakes the overall responsibility for development of the project, including managerial and financial obligations, and exercises control over the project during the development period, even though the ownership of the underlying land remains with the Government. The Court also clarified that merely describing the assessee as a “contractor” in the agreement or the deduction of TDS under the relevant provisions would not determine its status, and that ownership of the infrastructural facility is not a requirement for claiming deduction under section 80-IA
The Hon’ble High Court further observed that as held by the Bombay High Court, an assessee need not develop the entire infrastructure facility to qualify for deduction under section 80-IA. It was recognized that even where the assessee undertakes specific components of an infrastructure facility, such as installation, commissioning, operation, and maintenance of port equipment, it would still qualify as a developer eligible for the deduction.
Lastly, the Hon’ble High Court noted that the Revenue contended that since the land on which the infrastructure facility had been developed always belonged to the Government and the assessee has already been paid for construction work, there is no question of transfer of infrastructure facility by assessee. The Hon’ble High Court opined that the term “transfer” has to be understood in the factual context of the present case. There is no dispute that the land was handed over to the assessee for carrying out the development work. After completion of the development activity, the same was handed back to the State Government. This would constitute a transfer within the meaning of Section 80-IA(4)1B which requires development of infrastructure facility and in view of the material on record, it can be safely concluded that the assessee has transferred the infrastructure facility developed by him by handing over the possesssion thereof to the Government as required under the agreement. The land involved in the infrastructure facility always belongs to the Government whether it would be a case of BOT, BOOT, Build-Transfer (BT) and is handed over by the Government to the developer for development of infrastructure facility/project.
The Hon’ble High Court observed that in the instant case, the project was in the nature of build and transfer being merely a development project and did not involve “operate” aspect of the same. Consequently, once the infrastructure facility was developed, the same was to be handed over to the Government on its completion which would amount to a transfer within the meaning of Section 80-IA (4).
Accordingly, the appeal of the Revenue was dismissed and Substantial question of law was answered against the Revenue and in favour of the assessee.
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