2017 (9) TMI 643 - AT - Income Tax

ITAT allows interest deduction for business use and infra development under Income Tax Act

The Income Tax Appellate Tribunal (ITAT) allowed the appeal of the assessee in a case involving disallowance of interest paid to banks for business ... Eligibility for the benefits of section 80 IA - assessee is in business of developing infrastructure facility - whether assessee can be said to be carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility as envisaged in section 80IA(4)(i)? - Held that:- CIT(A) has misdirected himself in inferring that assessee was merely executing a works contract as a contractor and not as a ‘developer’. At this stage, we may also make a reference to clause 3.7 of the Part – III of contract for supply of DFA unit dealing with Post Warranty Maintenance Contract. The said clause prescribes that assessee was obligated to make a separate offer to IOC for post-warranty maintenance of the system supplied by the assessee. The said clause itself indicates that assessee not only designed, engineered, got it fabricated and supplied the contract as a developer and was also providing warranty; and, in the post-warranty period, a separate offer was to be made. Therefore, factually speaking, we are unable to concur with the lower authorities that assessee was merely a ‘contractor’ and not a ‘developer’ so far as it relates to the water treatment systems supplied to the IOC. In this view of the matter, in our view, assessee qualifies for the benefits of section 80 IA of the Act. Assessee has not claimed the deduction in the earlier years therefore, it is ineligible for the said deduction in the instant year - Held that:- On this aspect, the Ld. Representative for the assessee has pointed out that in the earlier years assessee was supplying the water treatment equipment to concerns, such as Thermax, L&T, etc. and that it was only for the first time in assessment year 2008-09 that it was awarded the tender by IOC. It was, therefore, in this context, the claim has been made in the instant year. The Ld. Representative for the assessee also pointed out that the time period prescribed for the deduction under section 80 IA(4) of the Act is 20 years and in that context it is eligible for the claim of deduction in assessment year 2009-10, since the first year was assessment year 1992-93; inasmuch as, assessee was incorporated on 09/10/1991. In our considered opinion, the aforesaid assertions made out by the assessee clearly belie the observations made by the CIT(A) and on this ground also we find no reason to uphold the stand of the CIT(A). Therefore, in conclusion we set-aside the order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee for deduction under section 80 IA(4) of the Act. Thus, on this aspect assessee succeeds. Disallowance being interest for delay in making payment due for the credit card facility - addition u/s 37 - Held that:- So far as the use of the credit card is concerned, there is no dispute that the same has been done in the course of assessee’s business. At the time of hearing, the Ld. Representative for the assessee pointed out that interest liability was raised on the assessee by the credit card company which was settled by the assessee in the instant year and, therefore, the interest liability in question crystallized during the year itself. The impugned expenditure could not be treated as a prior period expenditure, rather the said expenditure has clearly crystallized during the year under consideration and, therefore, deserves to be allowed in computing the business income. Thus, assessee succeeds on this aspect also. Issues Involved:1. Disallowance of interest paid to banks for business purposes.2. Disallowance of deduction claimed under section 80IA(4) of the Income Tax Act.3. Interpretation of the deduction period under section 80IA(4).4. Classification of the assessee's work as that of a 'contractor' vs. 'developer'.5. Consideration of facts presented before the CIT(A) and the Assessing Officer.6. Ignoring judicial pronouncements supporting the assessee's stand.7. Denial of proper and sufficient opportunity of being heard.Issue-wise Detailed Analysis:1. Disallowance of Interest Paid to Banks:The assessee contested the disallowance of Rs. 4,43,121/- made by the Commissioner of Income Tax (Appeals) [CIT(A)] for interest paid to various banks, arguing that it was for business purposes and compensatory in nature. The Income Tax Appellate Tribunal (ITAT) found that the interest liability was related to the business use of a credit card and had crystallized during the year under consideration. Therefore, the ITAT concluded that the expenditure should not be treated as a prior period expense and allowed the deduction.2. Disallowance of Deduction under Section 80IA(4):The assessee claimed a deduction under section 80IA(4) on the ground that it was in the business of developing infrastructure facilities, specifically water treatment systems for Indian Oil Corporation Ltd. (IOC). The Assessing Officer (AO) and CIT(A) denied the deduction, arguing that the assessee's activities did not qualify as 'development' of infrastructure facilities but were merely 'works contracts'. The ITAT, however, found that the assessee was responsible for designing, engineering, supplying, supervising installation, and commissioning the water treatment systems, which qualified as developing infrastructure facilities. Thus, the ITAT directed the AO to allow the deduction under section 80IA(4).3. Interpretation of Deduction Period under Section 80IA(4):The CIT(A) stated that the deduction under section 80IA(4) could be claimed for any ten consecutive assessment years out of fifteen years, whereas the assessee argued that it should be twenty years for a 'Water Treatment System' as per the proviso to section 80IA(2) read with the Explanation to section 80IA(4). The ITAT agreed with the assessee's interpretation and allowed the deduction for the specified period.4. Classification as 'Contractor' vs. 'Developer':The AO and CIT(A) classified the assessee as a 'contractor' rather than a 'developer', which disqualified it from claiming the deduction under section 80IA(4). The ITAT examined the scope of work undertaken by the assessee, which included designing, engineering, supplying, supervising installation, commissioning, and providing training. The ITAT concluded that these activities qualified the assessee as a 'developer' rather than a mere 'contractor', thereby making it eligible for the deduction.5. Consideration of Facts Presented:The assessee argued that the CIT(A) did not appreciate all the facts presented before him and the AO. The ITAT reviewed the voluminous documents and agreements submitted by the assessee, demonstrating the comprehensive scope of work undertaken. The ITAT found that the CIT(A) and AO had misdirected themselves in their conclusions and upheld the assessee's claim based on the detailed evidence provided.6. Ignoring Judicial Pronouncements:The assessee contended that the CIT(A) ignored various judicial pronouncements supporting its stand. The ITAT referred to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. ABG Heavy Industries Ltd., which supported the claim that carrying on the business of developing infrastructure facilities alone was sufficient for the deduction under section 80IA(4). The ITAT relied on this and other relevant judicial precedents to support its decision in favor of the assessee.7. Denial of Proper Hearing:The assessee claimed that it was not given a proper and sufficient opportunity of being heard by the CIT(A). The ITAT did not find it necessary to dwell on this procedural issue in detail, as it had already decided in favor of the assessee on substantive grounds.Conclusion:The ITAT allowed the appeal of the assessee, directing the AO to allow the deduction under section 80IA(4) and the interest expenditure, thereby ruling comprehensively in favor of the assessee on all contested issues. The order was pronounced in the open court on 18/08/2017.