Assessee cannot be declined deduction u/s 80IA(4) merely on the ground that the assessee was not a developer but was a contractor only – ITAT
In a recent judgment, ITAT Mumbai has held that assessee cannot be declined deduction u/s 80IA(4) merely on the ground that the assessee was not a developer as the assessee has not himself conceived the idea of infrastructure but has merely entered into a contract with the Govt.
ABCAUS Case Law Citation:
4462 (2025) (03) abcaus.in ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) NFAC in allowing deduction u/s 80IA of the Income Tax Act, 1961 (the Act) related to three Assessment Years to the respondent assessee.
The respondent assessee was a company engaged in the business of execution of civil and development contracts and during the year under consideration the return of income was filed declaring after claiming deduction u/s 80IA of the Act.
However, the AO disallowed the claim of the assessee for deduction u/s 80IA of the Act by holding that the assessee company had not carried out any work of development of new infrastructure facility and that simply relying of an existing road would not be classified as a new infrastructure facility for the purpose of section 80IA(4)(i) of the Income Tax Act.
Before the Tribunal, one of the the ground taken by the Revenue was that the relationship between assessee and the government was that of the contractor and the contractee and the assessee had acted as a contractor only on a specific contract allotted by its principals, cost of which had been reimbursed from the principals who were the actual owner/developer.
The assessee contended that it had carried out the contracts of road widening and renovation of existing road and therefore it cannot be termed as work contractor, as the work that is being done by the company was and of maintaining the infrastructure and for that assessee has to purchase the material and was bearing the risk by way of indemnifying the agencies of any defect in the construction of road.
Apart the assessee also submitted that the issue in question has been been thoroughly examined by the CBDT and it has been decided that widening of an existing road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as ‘new infrastructure facility’ for the purpose of Sec. 80IA(4)(i) of the Act.
The Tribunal observed that for preceding seven years, this issue had been decided by the Income Tax Settlement Commission (ITSC) in allowed the appeal in favour of the assessee of the assessee by dismissing the grounds raised by the Revenue which were similar as in the instant case.
The Tribunal noted the ITSC had examined the statutory provisions, the circulars issued by the CBDT and the legal issues arising from the various judicial pronouncements with reference to the factual aspects of the contracts carried out by the assessee in respect of which the deduction under Section 80IA of the Act. The ITSC had opined that the assessee had have satisfactorily established the admissibility of the section 80IA deduction. The department’s reliance on the judgment of the Hon’ble Supreme Court was held to be misplaced, as the above judgement was rendered in the context of Section 147/148 of the Act.
In view of the findings of the ITSC, the Tribunal opined that it can be safely concluded that the assessee was a developer in view of the work certificate which mentioned the contract amount and nature of the work and that the works ‘pertained to the road widening which was part of the Highway Road Project and Infrastructure Development. The Construction material was not supplied by the Govt. Body but was that of the assessee that the defect liability period was for 60/30 months which means that for that much period after the execution of the contract the risk remained with the assessee, and assessee company employed its own Machinery and Technical Staff for execution of the work.
Further, the Tribunal noted that the contract mandated the assessee for a minimum number of deployment of engineer with requisite years’ experience. The contract further gave a list plant and Machinery to be deployed on the work along with their maximum age, which established that the assessee uses its own expertise and technical skills.
The Tribunal reached the conclusion that the assessee was a developer within the meaning of section 80IA(4) as the assessee had made investments for carrying out the work and has not merely supplied labour. The assessee had entered into a contract with the Govt. Bodies, which was one of the conditions for claiming deduction u/s 80IA(4) and this regard the Explanatory Memorandum to finance Bill, 2007 states that the section intends to encourage private investment in developing infrastructure. The said memorandum also clarifies that only a person who enters into a contract with an eligible assessee u/s 80-IA to carry out work, is ineligible which was not the fact in this case and therefore, the assessee was a developer and not a mere contractor for the purpose of section 80IA(4) of the Act.
The Tribunal relied upon the decision of the Co-ordinate Bench of Kolkata ITAT wherein it was held that as per section 194C of the Act, “works contract” does not include a contract wherein, the contractor, in addition to employing labour, procures material from a third party. Thus, contracts involving mere labour of the contractor are included in the purview of “works contract”. The Co-ordinate Bench observed that while interpreting the term ‘work’ u/s 194C of the Act, the Hon’ble Supreme Court had held that words ‘any work’ in section 194C(1) of the Act means any work including supply of labour to carry out work and is not intended to be confined to or restricted to works contract. The issue before the Hon’ble Supreme Court was whether the term “work” used in section 194C needs to be restricted to “works contract”.
The Co-ordinate Bench had held that in a case where a person makes the investment and himself executes the development work i.e. carries out the civil construction work, he will be eligible for tax benefit under section 80-IA of the Act. In contrast to this, a person who enters into a contract with another person (i.e., undertaking or enterprise referred to in section 80-IA) for executing works contract, will not be eligible for benefit under section 80-IA.
The Tribunal observed that the amended provisions of section 80-IA of the Act provides three alternate conditions, namely the assessee could either (i) develop or (ii) operate and maintain or (iii) develop, operate and maintain the facility. Therefore, any one of the above activities would qualify for the deduction and it is not necessary to carry out all the activities as contended by the Revenue.
The Tribunal further observed that apparently, one of the reasons that prevailed upon the AO to hold the assessee as a mere contractor, was that the assessee had not conceived the idea of developing infrastructure but it was the Government which had conceived it and the assessee had merely carried out/executed the same. And hence, according to the AO, the assessee was a mere contractor. In this regard, the Tribunal opined that deduction u/s 80-IA was declined on the ground that the assessee had merely entered into an agreement with the Govt. and/or the assessee had received payments from Government, then in that eventuality, a “developer” will never be entitled to deduction u/s 80-IA.
The Tribunal opined that merely because the assessee was paid by the Government for development work, it cannot be denied deduction u/s 80IA(4) of the Act. Similarly, an assessee cannot be declined the deduction on the ground that the assessee has not himself conceived the idea of infrastructure but has merely entered into a contract with the Govt.; entering into a contract with the Govt. is a sine qua non for claiming the deduction u/s. 80IA(4) of the Act.
Accordingly, the appeals of the Revenue were dismissed.
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