Deduction for SEZ developers applies to approved co developers who assume operation and maintenance, allowing incentive continuity with verification.

An approved co-developer under the Special Economic Zones regime is eligible for the developer deduction for profits from operation and maintenance of SEZ units where statutory approval and long term operational control exist. The proviso limiting deduction to a transferee on transfer of operation and maintenance is directed to continuity of the incentive period and transfer of operational responsibility, not to completion of the entire SEZ or absolute divestment by the original developer. Phased development and regulatory approval of co developers permit entitlement; procedural/formal documentary objections do not defeat substantive eligibility provided departmental verification prevents duplicate claims. Deduction allowed subject to arithmetic verification of quantum and period.

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Issues: Whether a co-developer approved under the Special Economic Zones Act, 2005 is eligible to claim deduction under section 80-IAB of the Income-tax Act, 1961; and whether the second proviso to section 80-IAB(2) precludes such a claim where the whole SEZ is not fully developed or where the original developer has not absolutely extinguished rights.

Analysis: Section 80-IAB, as introduced by section 27 and the Second Schedule of the Special Economic Zones Act, 2005, adopts the meanings of "Developer" and "Special Economic Zone" from the SEZ Act. Section 2(g) of the SEZ Act expressly includes a co-developer within the definition of "Developer," while sections 3(11) and 3(12) provide the statutory mechanism for approval of co-developers. The second proviso to section 80-IAB(2) permits deduction to a transferee developer on transfer of operation and maintenance; its language focuses on the transfer of operation and maintenance and continuity of the incentive period, not on completion of the entire SEZ or absolute divestment of all rights by the original developer. The SEZ legislative and regulatory framework contemplates phased development and statutory recognition of co-developers assuming operation and maintenance responsibilities. On the facts, the assessee was approved as a co-developer, assumed long-term operational control of six fully operational warehouses by lease and derived profits from authorised SEZ operations. Procedural objections regarding electronic form fields and production of the original developer's returns do not negate substantive eligibility where the original developer did not claim the deduction and departmental verification is available to prevent duplication.

Conclusion: The assessee, as an approved co-developer, is entitled to claim deduction under section 80-IAB of the Income-tax Act, 1961 for the profits derived from operation and maintenance of the specified warehouses; the deduction claimed for Assessment Years 2018-19, 2020-21 and 2021-22 is allowed subject to arithmetical verification of quantum and eligible period under section 80-IAB(2).

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