2023 (1) TMI 667 - AT - Income Tax

Eligibility for Deduction under Section 80-IA(4) for Infrastructure Projects

The appeal was partly allowed, determining that the assessee is eligible for deduction under Section 80-IA(4) for projects involving the creation of new ... Deduction u/s 80-IA(4) - Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development - HELD THAT:- Project 1: Executive Engineer Gandhinagar : 1, 2, 3 and 4 Road - Contract covers various liabilities in respect to the assessee for any damage done in or outside of work. In this case, it may be useful to refer to CIRCULAR NO. 4/2010 [F.NO. 178/14/2010-IT(A-I)], DATED 18-5-2010, wherein Board considered the issue as to whether widening of existing roads constitutes creation of new infrastructure facility for the purpose of section 80-IA(4) of the Income-tax Act, 1961. Vide the above Circular, CBDT clarified that widening of an existing Road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility for the purpose of section 80-IA(4)(i). However, simply relaying or repairing of an existing Road would not be classifiable as a new infrastructure facility for this purpose. In the instant facts, looking into the fact that the project involved four laning of the existing roads and coupled with the terms of contract, in our considered view, the revenue from this project is eligible for deduction u/s 80-IA(4) of the Act. Project 2: Executive Engineer Gandhinagar :‘G” Road - As per the terms of agreement, we observe that this is a project undertaken for converting existing highway road into a four lane road. Project 3: Executive Engineer R&B Division Bhuj - We observe that this is a project undertaken for converting existing single lane highway road into a two lane highway road. In respect of projects 2 and 3 above, since the scope of work involves expansion of the existing roads from 3 to 4 lane (for project 2) and from 1 to 2 lane highway (for project 3), we are of the considered view that the assessee in respect of the projects 2 and 3 has brought into effect a new infrastructure facility. As per the terms of agreement, we observe that this is a project undertaken for converting existing highway road into a four lane road, our observations with respect to project 1 would apply to projects 2 and 3 as well and accordingly in view of the above observations, we are of the considered view that the assessee is eligible for claim of deduction /s 80- IA(4) of the Act in respect of projects 2 and 3. Project 4: MPRRDA P.I.U. No. 1 Pac 19114, Project 5: MPRRDA P.I.U. No. 1 Pac 1943, Project 6: MPRRDA P.I.U. No. 1 Pac 1951-A, Project 7:MPRRDA P.I.U. No. 1 Pac 1958 and Project 8: MPRRDA P.I.U. No. 1 Pac 1974 - The scope of work in respect of this project is conversion of Kutcha road to pucca road along with necessary maintenance works for a period of five years -the terms of the contract, the assessee would be required to furnish performance security and additional security in respect of this project - we are of the considered view that the assessee has brought in place a new infrastructure facility as envisaged /s 80-IA(4) of the Act and further in view of the terms and conditions highlighted above, the assessee is eligible for claim of deduction /s 80-IA(4) of the Act in respect of revenue is earned from project 4 above. Project 9: R&B Division Bhuj (Raper Dhovalia Road) - Relevant clause 17A provides for the defect liability period of one year from the certified date of completion of work. Further, the contract covers various liabilities in respect to the assessee for any damage done in or outside of work. In this case, it may be useful to refer to CIRCULAR NO. 4/2010 [F.NO. 178/14/2010-IT(A-I)], DATED 18-5-2010, wherein Board considered the issue as to whether widening of existing roads constitutes creation of new infrastructure facility for the purpose of section 80-IA(4)(i) - Vide the above Circular, CBDT clarified that widening of an existing Road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility for the purpose of section 80-IA(4) - simply relaying or repairing of an existing Road would not be classifiable as a new infrastructure facility for this purpose. In the instant facts, looking into the fact that the project involved four laning of the existing roads and coupled with the terms of contract, in our considered view, the revenue from this project No. 9is eligible for deduction u/s 80-IA(4) of the Act. Project 10: NBCC (Package XXVV) - Assessee was required performance Bank guarantee equivalent to 5% of the contract value (page 263 of the paper book). In addition, the assessee was also required to get security deposit/retention money from each earning bill equivalent to 5% of the value of each running bill (page 275 of paper book). Further, as per the terms of the contract the responsibility of mobilisation of men, material and machinery was included in the price and no separate payment on this account was able to the assessee in respect of this project. In the instant facts, looking into the fact that the project involved construction of new road and coupled with the terms of contract, in our considered view, the revenue from this project is eligible for deduction u/s 80-IA(4) of the Act. Project 11: Executive Engineer R&B Division Bhuj (Deshlapar- Siracha Road) - Looking into the fact that the project involved both widening and strengthening of the existing roads and coupled with the terms of contract, in our considered view, the revenue from this project is eligible for deduction u/s 80-IA(4) of the Act. Project 12: Executive Engineer R&B Division Bhuj (Fatehgardh- ShivgadhRoad) - As in order to be eligible for claim of deductionunder section 80-IA(4) of the Act, the primary condition which needs to be met is that the assessee should have developed/brought into existence of a new infrastructure facility. In our considered view, mere strengthening of the existing roads would not qualify as bringing into existence in a new infrastructure facility so as to be eligible for claim of deduction under section 80-IA(4) - Accordingly, in our considered view, the assessee is not eligible for claim of deduction under section 80-IA(4) of the Act in respect of revenues from project number 12. Project 13 - Executive Engineer R&B Division Bhuj (Mundra PKG-3) - We are of the considered view that the assessee has not brought into existence/developed any new “infrastructure facility” and hence he is not eligible for claim of deduction under section 80-IA(4) of the Act. As discussed above, in order to be eligible for claim of deduction under section 80-IA(4) of the Act, the primary condition which needs to be met is that the assessee should have developed/brought into existence of a new infrastructure facility. In our considered view, mere strengthening / improvement of the existing roads would not qualify as bringing into existence in a new infrastructure facility so as to be eligible for claim of deduction under section 80-IA(4) - assessee is not eligible for claim of deduction under section 80-IA(4) of the Act in respect of revenues from project number 13. Project 14: Executive EngineerKutch Panchayat Division Bhuj (Akri- Thumbadi Road) - in respect of project number 14, we are of the considered view that the assessee has not brought into existence/developed any new “infrastructure facility” and hence he is not eligible for claim of deduction under section 80-IA(4) of the Act. As discussed above, in order to be eligible for claim of deduction under section 80-IA(4) of the Act, the primary condition which needs to be met is that the assessee should have developed/brought into existence of a new infrastructure facility. In our considered view, mere strengthening / improvement of the existing roads would not qualify as bringing into existence in a new infrastructure facility so as to be eligible for claim of deduction under section 80-IA(4). Appeal of assessee partly allowed. Issues Involved:1. Eligibility for deduction under Section 80-IA(4) of the Income Tax Act, 1961.2. Classification of the assessee as a Developer or Contractor.3. Compliance with conditions specified under Section 80-IA(4) of the Act.4. Charging of interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act.5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.Detailed Analysis:Issue 1: Eligibility for Deduction under Section 80-IA(4)The primary issue is whether the assessee qualifies for the deduction under Section 80-IA(4) of the Income Tax Act, 1961. The assessee claimed a deduction of Rs. 1,04,08,739, which was disallowed by the Assessing Officer (AO) on the grounds that the assessee is a Contractor, not a Developer, and failed to maintain separate accounts for each infrastructure facility.Issue 2: Classification as Developer or ContractorThe AO's observations included that the assessee did not construct or develop any infrastructure facility, did not have agreements with government authorities, and did not submit separate Form 10CCB for each infrastructure facility. The AO concluded that the assessee is merely a contractor for work under the explanation below Section 80-IA(13).Issue 3: Compliance with Conditions Specified under Section 80-IA(4)The CIT(A) upheld the AO's order, referencing the Gujarat High Court's decision in Katira Construction Ltd. vs. Union of India, which distinguished between developing infrastructure facilities and executing works contracts. The CIT(A) observed that the appellant's contention of being a developer due to investment and cumulative nature of work lacked force in light of the High Court's principles.Issue 4: Charging of InterestGround No. 4 regarding charging of interest under Sections 234A, 234B, 234C, and 234D was deemed consequential, and no interference was called for by the CIT(A).Issue 5: Initiation of Penalty ProceedingsThe last ground of appeal regarding the initiation of penalty proceedings under Section 271(1)(c) was not interfered with, as the proceedings had not crystallized.Project-wise Analysis:Project 1: Executive Engineer Gandhinagar (1, 2, 3, and 4 Road)The project involved converting a three-lane highway into a four-lane road. The terms included earnest money, security deposits, liquidated damages for delay, and a defect liability period of three years. The CBDT Circular No. 4/2010 clarified that widening existing roads constitutes a new infrastructure facility. Thus, the revenue from this project is eligible for deduction under Section 80-IA(4).Project 2: Executive Engineer Gandhinagar (G Road)Similar to Project 1, this project involved converting an existing highway into a four-lane road. The terms and conditions were akin to Project 1, making the revenue eligible for deduction under Section 80-IA(4).Project 3: Executive Engineer R&B Division BhujThis project involved converting a single-lane highway into a two-lane highway. The terms were similar to Projects 1 and 2, making the revenue eligible for deduction under Section 80-IA(4).Projects 4 to 8: MPRRDA P.I.U. No. 1 (Various Packages)These projects involved converting Kutcha roads to Pucca roads with necessary maintenance for five years. The terms included performance security and additional security. The projects brought new infrastructure facilities into existence, making the revenues eligible for deduction under Section 80-IA(4).Project 9: R&B Division Bhuj (Raper Dhovalia Road)This project involved converting a single-lane highway into a two-lane highway. The terms included reserve amounts, performance bonds, liquidated damages, and a defect liability period. The project qualifies as a new infrastructure facility, making the revenue eligible for deduction under Section 80-IA(4).Project 10: NBCC (Package XXVV)The project involved constructing a new link road. The terms required the assessee to mobilize all necessary equipment, provide performance bank guarantees, and security deposits. The project qualifies as a new infrastructure facility, making the revenue eligible for deduction under Section 80-IA(4).Project 11: Executive Engineer R&B Division Bhuj (Deshlapar-Siracha Road)This project involved widening and strengthening an existing road. The terms included reserve money, performance bonds, liquidated damages, and a defect liability period. The project qualifies as a new infrastructure facility, making the revenue eligible for deduction under Section 80-IA(4).Projects 12 to 14: Various Road Improvement ProjectsThese projects involved strengthening or improving existing roads without creating new infrastructure facilities. The terms did not indicate the development of new infrastructure. Therefore, the revenues from these projects are not eligible for deduction under Section 80-IA(4).Conclusion:The appeal is partly allowed. The assessee is eligible for deduction under Section 80-IA(4) for projects that involved creating new infrastructure facilities but not for projects that merely involved strengthening or improving existing roads. The charging of interest and initiation of penalty proceedings were not interfered with.