Income Tax Appellate Tribunal (ITAT) Chennai in a recent judgment has held that individual proprietary concerns/HUF/Firms are not eligible for deduction under section 80IA(4) of the Income Tax Act, 1961 for developing/operating infrastructure facility.

It was also held that   where assessee incurs expenditure on its own for purchase of materials and towards labour charges and itself executes the development work, it will be eligible for tax benefit under section 80 IA.

Case Details:
ITA No.620/Mds/2013 and ITA No.360/Mds/2015 AY : 2009-10 2010-11
Assistant Commissioner of Income Tax (Appellant) vs Shri.B. Dhanasekaran (Respondent)
Date of Order: 06-11-2015

Brief Facts of the Case:
The assessee was an individual. The Assessing Officer completed the assessment u/s.143(3) making the disallowance of section 80-IA claimed on the ground that the  assessee was merely a works contractor, not a developer and the assessee did not develop any infrastructure facility by investing own funds. Rather it executed the work contracts awarded by the clients involved in construction of infrastructure related projects. Merely by executing the contracts relating to infrastructure projects assessee could not be treated as ‘’developer’’ of infrastructure. Secondly, the provisions of 80IA(4) applies to any enterprise which is owned by a company whereas the assessee was an individual having proprietary concern.

Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) observed that the assessee was not a works contractor but a developer as stipulated u/s 80IA(4) of the Act. He held that section 80-IA(4) applies to any enterprise, which carries on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facilities, which fulfill all the above conditions. From the assessment year 2000-01, deduction is available if the assessee is carrying out the business of anyone of the above mentioned three types of activities. Merely because the transferee had paid for the development of infrastructure facility carried out by the assessee, it cannot be said that the assessee did not develop the infrastructure facility. If the interpretation done by the Assessing Officer is accepted, no enterprise carrying on the business of only developing the infrastructure facility would be entitled to deduction u/s. 80 IA(4), which is not the intention of the Law. An enterprise who develop the infrastructure facility is not paid by the Government, the entire cost of development would be a loss in the hands of the developer as he is not operating the infrastructure facility. CIT(A) further observed that after taking a contract from the Government, if the assessee develops infrastructure facilities, the assessee would be regarded as 'developer' and not as a 'works contractor'. In the instant case, the assessee firm had carried on entire construction/ development of the infrastructure facilities and satisfied all the conditions of sections 80 IA(4)(i)(a) of the act. Thus, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee.

Important Excerpts from ITAT Judgment
We have considered the elaborate submissions made by both the parties and also perused the materials available on record. We have also gone through all the case laws cited by both the parties. We find that the provisions of Section 80IA(4) of the Act when introduced afresh by the Finance Act, 1999, the provisions under section 80IA(4A) of the Act were deleted from the Act. The deduction available for any enterprise earlier under section 80IA(4A) are also made available under Section 80IA(4) itself. Further, the very fact that the legislature mentioned the words (i) "developing" or (ii) "operating and maintaining" or (iii) "developing, operating and maintaining" clearly indicates that any enterprise which carried on any of these three activities would become eligible for deduction. Therefore, there is no ambiguity in the Income-Tax Act. We find that where an assessee incurs expenditure on its own for purchase of materials and towards labour charges and itself executes the development work i.e., carries out the civil construction work, it will be eligible for tax benefit under section 80IA of the Act. In contrast to this, a assessee, who enters into a contract with another person including Government or an undertaking or enterprise referred to in Section 80 IA of the Act, for executing works contract, will not be eligible for the tax benefit under section 80 IA of the Act........

A perusal of the statutory provisions makes it clear that it does not provide a blanket deduction i.e. in order to succeed in a claim of deduction; the concerned assessee has to derive profits and gains from any business referred to in sub-section 4. Further, sub-section 4 prescribes applicability of clause i.e. the case in which the deduction provision would apply. It is in this sub-section that the legislature has enumerated the nature of the undertakings, their activities in contributing raising of infrastructure. Further, in the explanation attached to the sub-section, the legislature has also entrusted the meaning of the infrastructure facilities. In our opinion, an assessee while claiming deduction has to satisfy all conditions in sub-section 4(1)(a) or (b) or (c). It is mandatory for the assessee to first satisfy sub-section clause i(a), then (b) then (c), then proviso and so on. In case the concerned assessee fails in any one of the clauses, even if it satisfies the other part of the sub-section, the claim has to be rejected. Now we proceed to decide as to whether the assessee proprietorship concern satisfies sub-section 4(i) of the “Act” or not. For the said subsection, a reading of the provision makes it unambiguous that the concerned claimant has to be an enterprises carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility and it has to be owned by a consortium of such company or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act. Admittedly, the assessee is a proprietorship. As we notice from the relevant statutory provision, the enterprise in the nature of proprietorship nowhere finds mention in the mandate of the legislature.

As it is seen, the earlier portion of the statutory provision prescribes a company registered in India or a consortium of such companies or by an authority or corporation or any other body established or constituted and so on. In our view, the latter part is liable to be read in the light of the earlier part by following the principles of ejusdem generis.

Further, it was noticed that in the case of M/s. Ramky Infrastructure Ltd vs. DCIT, in ITA No.472/Hyd/2009 & others the Hyderabad bench of the Tribunal vide order dated 17.07.2013 observed in his order in para 14 following the earlier order of the Tribunal in the case of NCC-ECCI(JV) vs. ITO in ITA Nos. 124 & 125/Hyd/2009 vide order dated 17.06.2013 inter alia that word ‘owned’ in sub-clause (a) on clause (1) of sub-section (4) of section 80IA of the Act referred to the enterprise. In other words, the enterprises carrying on development of the infrastructure facilities should be owned by a company or consortium of companies. The infrastructure facilities need not be owned by a company. It was held that the word ‘ownership’ is attributable only to the enterprise carrying on the business which would mean that only companies are eligible for deduction under section 80IA(4) and not any other person like new HUF Firm etc. Hence, we hold that the assessee fails to satisfy the applicability clause of the provision as envisaged under section 80IA(4)(i) of the “Act”.

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