ITAT answers some important and inter-related issues relating to deduction u/s 80IA
In a recent judgment, ITAT has dealt with some important issues relating to deduction under section 80IA of the Income Tax Act, 1961 with respect to works contract, cessation of liability and deduction not claimed in original return
ABCAUS Case Law Citation:
5259 (2026) (11) abacus.in ITAT
Important Case Laws relied upon by Parties:
CIT v. Jain Exports (P) Ltd.
CIT V Sun Engineering P. Ltd., 198 ITR 297 (SC)
Assistant Commissioner of Incometax v. Rajesh Jhaveri Stock Brokers (P.) Ltd
CIT v. Vatika Township
In the instant case, the Revenue had challenged the order passed by the CIT(A) inter alia in allowing the deduction u/s 80IA of the Income Tax Act claimed by the assessee, disregarding the fact that deduction u/s 801A of the Income Tax Act of the Income Tax Act, 1961 (the Act).
A search action u/s 132(1) of the Act was carried out on residential and business premises of the respondent assessee and other groups. Various assets/ books of account and documents were found and seized during the course of search.
A notice u/s 148 of the Act was issued and served upon the assessee in compliance of clause (i) of Explanation to section 148 of the Act. The Assessee in response to the notices, filed return of income inter alia claiming deduction 80IA for the very first time. Statutory notices u/s 143(2) and 142(1) of the Act were issued and served upon the assessee, assessee furnished details/ explanations.
After examining assessee’s submissions in the background of seized documents, the assessing officer noticed that the assessee had offered huge income as cessation of liability u/s 41(1) of the Act for two Assessment Years constituting 96.4% of its total sundry creditors.
The Assessing Officer (AO) noticed that the basic details in respect of the sundry creditors like name of the person/entity, PAN, complete address, contact number, nature of services/goods provided, opening/ closing balance, year-wise copies of ledgers etc. were not provided by the assessee. The AO further noticed that the fundamental object of raising said sundry creditors was to reduce the net profit for the relevant assessment year.
The details in respect of cessated liabilities were sought by AO time and again, but the same was not provided by the assessee. The AO observed that assessee has surrendered bogus sundry creditors (others) under the garb of “cessation of liability” after invoking provisions of section 41 of the Act.
As a result, the AO added the amount offered as cessation of liability to the income by treating it as bogus liability. The AO also made an addition of 5% of aggregated expenses being the expenses claimed by the assessee which were coupled with the creation of bogus liabilities. The AO also disallowed the deduction u/s 80IA.
The CIT(A) partly allowed the deduction u/s 80IA and inter alia deleted the aforesaid two additions. However, the ITAT restored the issue of deletion of said additions back to the file of the AO to adjudicate the issue a fresh. Before the Tribunal, the Revenue raised an additional ground that the CIT(A) erred in allowing the deduction u/s 80IA of the Act claimed by the assessee.
The important issues arising from the case can be summarised as under:
- Entitlement of deduction u/s 80IA not claimed in original return
It was contended that the CIT(A) while allowing deduction u/s 80IA had also ignored the vital fact that the assessee company had neither claimed deduction u/s 80IA in the preceding years nor did it claim deduction in the ITR filed by it u/s 139(1) of the Act. However, the claim of deduction was made first time by filing return in response to notice u/s 148 in Form 10CCB after the search proceedings stating that the said claim was inadvertently omitted in the original return
The assessing officer had also based his finding in the same line by taking strength from Supreme Court decision.
The CIT(A) observed that the decision of the Hon’ble Supreme Court applies when the original assessment was completed and the fact was highlighted in the judgement. However, there was no assessment completed prior to issuance of notice u/s 148 in the present case. Further the Hon’ble Supreme court in another case held that intimation order u/s 143(1) doesn’t constitute an assessment.
The CIT(A) further observed that the Hon’ble Karnataka High Court on identical facts held that fresh claim can be made if the assessment was not completed u/s 143(3) or 147 before the issuance of notice. And the Hon’ble High Court had also relied on one decision of the Supreme Court in which it was held that once proceeding u/s 148 of the Act was initiated, the original order of assessment got effaced. The CITA() held that since in the present case the assessment was not completed before issuance of notice so the judgment of Supreme Court was wrongly applied by the AO.
With regard to the contention of the Revenue that the claim being an afterthought, the CIT(A) opined that while it was true that the assessee claimed this deduction for the first time only after the search, this alone cannot be ground to deny it. The AO’s remarks about mala-fide intent was not supported by any provision that if an assessee doesn’t claim a deduction in initial years it forfeits the right to claim it later. The Income Tax Act allows an assessee to choose the claiming the 80-IA deduction from the start of the infrastructure project till the period it is completed. It is not mandatory to start the claim from the first profit-making year.
The CIT(A) came to the conclusion that the assessee was eligible for deduction under Section 80-IA(4) on the profits of its infrastructure development business. The AO’s disallowance was rooted in an incorrect interpretation of law and an unwarranted suspicion about the timing. Neither ground is sustainable. The evidence clearly showed that the appellant developed infrastructure facilities and thus falls within the ambit of Section 80-IA.
The Tribunal noted that in the instant case, the assessment proceedings did not attain finality. The proceedings proposed to be taken up by the assessee were not unconnected with the escapement of income. Therefore, there was no error in the finding given by CIT(A) on this legal issue.
- Can deduction be disallowed treating assessee a mere contractor
It was the case of the Revenue that deduction u/s 80IA of the Income Tax Act can be claimed only against the profit and gains derived from eligible business. i.e. maintaining, developing and operating infrastructure facilities like roads, bridges, highways or water projects etc., none of which were applicable to the assessee, being a contractor. That the business activity of the assessee was found as “work contract” on the basis of GST details.
The CITA) had examined the legal criteria for eligibility under Section 80-1A(4)(i) of the Act and found that assessee qualified each of the conditions.
The CIT(A) noted that the main bone of contention was whether the appellant qualifies as “developing” the infrastructure facility or if it is excluded as a mere contractor. On this, the law after 2009 (when Explanation to Section 80-IA was introduced with retrospective effect from 1.4.2000) says that the deduction shall not apply to a person executing a works contract entered into with an enterprise, which is eligible to claim the deduction. In simpler terms, if a company is just a contractor working for some other enterprise which itself is claiming 80-IA, then the contractor can’t claim it. But if the company is itself the enterprise that entered into an agreement with the government to develop theinfrastructure, it is not hit by the explanation.
The CIT(A) further noted that the above interpretation had been upheld in several cases, notably by the Hon’ble Bombay High Court and by various Tribunals i.e. Pune ITAT and recently by the Hon’ble Madras High Court as well. The Bombay High Court noted that the assessee, who developed port infrastructure under a contract with a Port Trust, was eligible for 80-IA even though it did not operate the facility, because one of the enumerated activities (developing) was carried out by it.
The CIT(A) observed that in the present case, the assessee did enter into agreements with government authorities for executing infrastructure projects. The AO had not disputed the existence or authenticity of the agreements, in fact, the Department’s own paper book contained copies of letters of award, bank guarantee submissions, and correspondence which clearly indicate that the appellant was the principal contractor responsible for building the infrastructure.
With respect to the question whether the assessee qualified as “developing” the infrastructure facility., the CIT(A) opined that the term “developing” in this context means designing, constructing and completing the facility (in contrast to operating it). It was evident that the assessee undertook all construction activities using its own resources. It assumed the entrepreneurial risk: for example, the appellant had to furnish a bank guarantee of 10% of project cost to the government as performance security -this was a strong indicator that it was responsible for the successful development of the project at its own risk and cost. A mere labour contractor or supervised work provider does not typically furnish such guarantees; instead, the party responsible for the project’s completion does. The assessee also bore the financial risk of cost overruns, as the contracts were for a fixed price (barring escalation clauses, etc.) and payment was contingent on milestones.
The CIT(A) further held that The AO’s stance that the appellant should also “operate and maintain” the facility to be eligible was a mis-interpretation of Section 80-1A(4). The clause explicitly uses the disjunctive “or” between developing, operating and maintaining, and developing, operating and maintaining. This means an enterprise can qualify by doing any one of the three types of activities. It is not necessary to do all.
Further, the CIT(A) noted that the AO did not point out any specific condition of Section 80-IA(4) that the appellant failed to meet, apart from the “works contractor” argument. The appellant’s projects (roads, bridges, irrigation systems) certainly qualified as “infrastructure facility as defined in clause (i) of the Explanation to 80-IA(4) The commencement of operation/transfer was before the cut-off date (since the projects were completed much earlier than the current year). Thus, substantively, all conditions were met.
The Tribunal noted that it was not disputed that the assessee was engaged in the business of construction of dams for which the contracts are allotted by the State Govt. for irrigation project.
The Tribunal further noted the decision of Hyderabad bench of the tribunal which held that whether the assessee is a developer or works contractor is purely depends on the nature of the work undertaken by the assessee. Each of the work undertaken has to be analyzed and a conclusion has to be drawn about the nature of the work undertaken by the assessee.
The Co-ordinate Bench held that the material was required is to be brought in by the assessee by sticking to the quality and quantity irrespective of the cost of such material. The Government did not provide any material to the assessee. It provided the works in packages and not as a works contract. The assessee utilized its funds, its expertise, its employees and takes the responsibility of developing the infrastructure facility. The losses suffered either by the Govt. or the people in the process of such development would be that of the assessee. The assessee handed over the developed infrastructure facility to the Government on completion of the development. Thereafter, the assessee has to undertake maintenance of the said infrastructure for a period of 12 to 24 months. During this period, if any damages are occurred it shall be the responsibility of the assessee. Further, during this period, the entire infrastructure shall have to be maintained by the assessee alone without hindrance to the regular traffic. Therefore, it is clear that from an un-developed area, infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18-05-2010, such activity is eligible for deduction under section 801A(4) of the Act. This work cannot be considered as a mere works contract but has to be considered as a development of infrastructure facility. Therefore, the assessee is a developer and not a works contractor as presumed by the Revenue.
The Tribunal opined that it was not disputed that the assessee company was engaged in construction of infrastructural work and contracts are allotted to it by the State Govt. for irrigation projects etc. The ingredients of section 80IA (4)(b) of the Act referred hereinabove were attracted in assessee’s case subject to the provisos provided thereunder. Further, the assessee had to utilize its funds, its expertise, its employees and took the responsibility of developing the infrastructure facility and satisfies the other conditions as observed by the Hyderabad ITAT.
However, with regard to the two projects of the assessee, the Tribunal opined that the company was not entitled for the claim of deduction u/s 80IA of the Act, being infrastructural facilities commencing after above stated sun set clause. Further, the period of 10 years has to be considered for the eligibility of claim only in respect of particular infrastructural facility in view of second proviso to section 80IA(4) of the Act.
- Impact of cessation of liability on deduction u/s 80IA
The Revenue contended that claim of deduction u/s 80IA could be claimed only against the profits and gains derived from eligible business and not against liability on cessation u/s 41(1) of the Act in the garb of sundry creditors which were non-genuine and fictitious.
In other words, the issue was whether cessation of liabilities earlier claimed in the 80IA business when offered as income under section 41(1) of the Act would qualify as profit of the eligible business for the purpose of section 80IA of the Act?
The assessee contended that the claim of deduction was allowable against the income determined u/s 41(1) and relied upon various case laws in its favour which held that as cessation of liabilities u/s 41(1) pertain directly business activities so the same qualifies for deduction u/s 80IA,
The assessee contended that cessation of liability was related to expenses that were earlier debited in the profit and loss account of 80IA-eligible projects, and such expenses were claimed in earlier years as part of the infrastructure business. The liabilities ceased in the current year and were voluntarily offered as income under section 41(1). The assessee emphasized that the income so offered pertains to the 80IA-eligible business alone and hence forms part of eligible business profit.
The CIT(A) in view of the explanation and facts and issues mentioned in various case laws held that clearly the cessation of liabilities which were originally incurred and claimed as part of the expenses in the eligible 80IA infrastructure business, when reversed or written back must enhance the profit of the same business and accordingly qualify for deduction.
However, since the Tribunal had already set aside the issue to the AO for determining the genuineness of sundry creditors for which cessation had been claimed, this issue was also set aside to the assessing officer for determination accordingly.
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