Govt.-Commissioned Developer Not Required to Own Infrastructure to Claim Deduction u/s 80-IA(4): Bombay HC [Read Order]

The Bombay HighCourt recently clarified that an assessee executing infrastructure projects for the Government is not required to “own” the infrastructure facility to qualify as a “developer”, and be eligible to avail deductions under Section 80-IA(4) ofthe Income Tax Act, 1961.

The High Court was hearing income tax appeals filed by the Revenue challenging orders of the Income Tax Appellate Tribunal (ITAT), by which the Tribunal allowed deduction of ₹80.47 crore to the respondent M/s Patel Engineering Ltd.

The primary issue for the adjudication of the Court was whether the constructor-assessee could be treated as a developer of infrastructure facilities despite not owning the projects in question. The issue pertained to profits derived from two infrastructure projects - namely, Srisailam Project in Andhra Pradesh and Koyna Project in Maharashtra. The Assessee had been enlisted by the respective State Governments to conduct such works.

The assessee had filed its returns for the Assessment Years 2000-01 and 2001-02, claiming deduction under Section 80-IA(4), however, the Assessing Officer disallowed the claim on the ground that the assessee neither owned the infrastructure facilities nor satisfied the conditions prescribed under Section 80-IA(4).

Though the Commissioner of Income Tax (Appeals) upheld the disallowance, the ITAT allowed the deduction, holding that the assessee was engaged in developing infrastructure facilities and was therefore entitled to the benefit of the provision.

The Revenue, represented by N. C. Ranganayakulu contested this matter before the High Court, contending that the assessee was merely a contractor executing works awarded by Government authorities and not a developer. It was argued that the benefit under Section 80-IA(4) was intended only for entities that develop infrastructure projects using their own resources and assume associated risks, which was not the case of the assessee.

Senior Advocates Percy Pardiwala and Rafique Dada among others appeared for the Assessee and maintained that it had undertaken development activities in respect of the projects and satisfied the statutory requirements, and that ownership of the infrastructure facility was not a pre-condition to be able to claim deductions under Section 80-IA(4).

The Division Bench of Justice M. S. Karnik and Justice S. M. Modak observed that Section 80-IA(4) does not mandate ownership of the infrastructure facility as a pre-condition for claiming deduction.

The Court noted that the particular section was inserted into the Act to incentivise participation of private entities in infrastructure development which were traditionally dominated by public sector undertakings.

The Bench refuted the Revenue’s narrow construction of the term of “developer” to exclude entities merely because they execute projects pursuant to Government contracts. The Court stated: “The assessee was involved in complete development of the project from designing the project as per the specification provided in the tender, deciding the assets to be deployed on its choice and discretion, amount and resources to be invested, costing the same out, bearing the financial and operational risk and ultimately executing the project.”

Accordingly, the concurred with the view of the ITAT that the assessee had fulfilled the conditions prescribed under the provision and was entitled to the benefit of deduction.

The Revenue appeals were accordingly dismissed and the Assessee’s eligibility to claim deduction under Section 80-IA(4) in respect of profits derived from the infrastructure projects were upheld.

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