2026 (2) TMI 1122 - AT - Income Tax

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 ... Disallowance of deduction u/s 80-IAB - assessee, being a co-developer, was not eligible for deduction - Scope of term “developer” - arithmetical eligibility - correct understanding of the legislative architecture of section 80-IAB read integrally and harmoniously with the Special Economic Zones Act, 2005 - HELD THAT:- A combined reading of the provisions of the Income-tax Act and the SEZ Act demonstrates that section 80-IAB was enacted to complement and give fiscal effect to the scheme of the SEZ Act. The provision is consciously worded in line with the definitions, structure and approvals contemplated under the SEZ Act, 2005. Section 3(11) and section 3(12) together contemplate a structured statutory mechanism by which a person, after entering into an agreement with the Developer, is approved by the Central Government to provide infrastructure facilities or undertake authorised operations in the identified area of the SEZ and, upon such approval, assumes the legal character of a Co-Developer. The SEZ Act thus does not treat a co-developer as an inferior or peripheral participant; it statutorily assimilates a co-developer into the category of “Developer” for all purposes of the Act. When section 80-IAB itself adopts this definition, there remains no legal room to contend that a co-developer stands excluded from its ambit. It is an undisputed fact that assessee has also been approved as co-developer by the Ministry of Commerce and Industry, Government of India and accordingly, for the purpose of Section 80-IAB assessee has to be treated as falling within the definition of “developer” because meaning assigned to word “developer” in SEZ Act, 2005 also includes co-developer. It is trite that Section 51 of SEZ Act 2005, the SEZ has an overriding effect of any other law including the Income Tax Act. Thus, AO’s reasoning, endorsed by CIT(A), that section 80-IAB applies only to a “developer” and not to a “co-developer”, therefore collapses at the level of plain statutory interpretation. It proceeds on an artificial bifurcation which the statute itself does not recognise. Construction of sub-section (2) of section 80-IAB and, in particular, the second proviso thereto - The insistence that the assessee must furnish copies of the return of income of the original developer ignores practical and legal realities. The assessee is a separate juridical entity and cannot be compelled to produce the confidential tax returns of another taxpayer. The assessee has furnished a declaration from the original developer affirming non-claim of deduction u/s 80-IAB in respect of the six warehouses. If the Department harboured any doubt, it was fully empowered to verify its own records. The statutory concern is to prevent duplication of deduction beyond the permissible ten years; that concern can be addressed by departmental verification without shifting an impossible burden onto the assessee. We also cannot lose sight of the broader interpretative principles governing incentive provisions. While it is true that deductions are matters of legislative grace, it is equally settled that provisions enacted to promote economic growth and infrastructure development must be construed in a manner that advances, rather than frustrates, their object, so long as the express statutory conditions are satisfied. Courts and tribunals are not at liberty to add conditions under the guise of strict construction. The repeated emphasis in judicial precedent that words cannot be read into a statute when they are not there applies with full force to the present controversy. We are of the considered opinion that the assessee satisfies the substantive requirements of section 80-IAB. It is a co-developer approved under the SEZ Act, statutorily included within the definition of “Developer”; it derives profits from authorised operation and maintenance of infrastructure within a duly notified FTWZ; the SEZ was notified within the eligible period and development commenced prior to the cut-off date; and the arrangement by which operation and maintenance was entrusted to the assessee falls within the ambit of the second proviso to section 80-IAB(2). The disallowance of deduction on grounds extraneous to the statutory text cannot be sustained. Accordingly, the deduction claimed by the assessee u/s 80-IAB is directed to be allowed, subject to arithmetical verification of the quantum and the eligible period within the framework of section 80-IAB(2). 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).