2014 (9) TMI 1065 - AT - Income Tax

Denial of deduction u/s 80IA in respect of infrastructure facility developed for M/s Sardar Sarovar Narmada Nigam Limited (SSNNL) - Revenue contends that assessee has entered into a works contract agreement with SSNNL which is not an entity specified in sub-clause (b) of section 80IA(4)(i) - Held that - The tests laid down by the Hon ble Supreme Court in the case of Som Prakash Rekhi (supra) are fulfilled in the present case and it would be appropriate to deduce that SSNNL is an instrumentality or an agency of the State. Therefore, SSNNL is to be understood as an entity akin to those specified in sub-clause (b) of clause (i) to sub-section (4) of section 80IA of the Act. Therefore, the objection of the Revenue that SSNNL was a company incorporated under the provisions of the Companies Act, 1956 and is therefore outside the purview of section 80IA(4)(i) of the Act is unfounded. In-fact, the Hon ble Supreme Court in the case of Som Prakash Rekhi (1980 (11) TMI 113 - SUPREME COURT OF INDIA) specifically observed that merely because an entity is created under a statute and not created by a statute is not an important criteria. The test relating to the purpose, State control and functions performed are more important and determinative of the issue. Such tests, in our view, are clearly applicable in the case of SSNNL, and it is to be understood as an entity specified in section 80IA(4)(i)(b) of the Act.In the light of the aforesaid discussion, in our view, SSNNL being a mere extended arm of the Government of Gujarat carrying out governmental functions can be understood as an entity qualifying for consideration u/s 80IA(4)(i)(b) of the Act. The objection of the Revenue in this context is thus rejected. Whether assessee was not a developer so as to be eligible for deduction u/s 80IA(4) of the Act? - Held that - . In the present case, the assessee has used own-developed technology and its own resources to conceptualize, design, erect, commission, test and operate the Saurashtra Branch Canal Pumping Scheme . Therefore, in our view, assessee is to be understood as a developer , and distinct from a contractor qua the impugned contract awarded by SSNNL. The judgement of the Hon ble Bombay High Court in the case of CIT vs. ABG Heavy Industries Ltd., (2010 (2) TMI 108 - BOMBAY HIGH COURT ), clearly supports the plea of the assessee of being a developer. Nojustification to deny the claim of deduction u/s 80IA(4) of the Act merely because the cost of the project executed by the assessee was not fully funded by the assessee itself.n view of the aforesaid discussion, we therefore hold that assessee is eligible for the claim of deduction u/s 80IA of the Act amounting to ₹ 40,02,10,981/- in respect of the profits derived from development of infrastructure facility for SSNNL. The order of the CIT(A) is set-aside and the Assessing Officer is directed to allow the deduction. Disallowance of Provision for Pension scheme for employees - Held that - The Hon ble Supreme Court in the case of Bharat Earth Movers vs. CIT, (2000 (8) TMI 4 - SUPREME Court) has held that the liability was not a contingent liability. In this view of the matter, we are of the opinion that this issue is required to be remitted back to the file of the Assessing Officer for ascertaining the reasonableness of the provision made by the company for meeting the incremental liability of this year incurred by it under pension scheme; proportionate with the entitlement earned by the employees in question, subject to any ceiling if any prescribed in the said scheme as applicable on the relevant period. The Assessing Officer is directed to decide the issue afresh after providing adequate opportunity of being heard to the assessee. Thus, the said Ground of Appeal is allowed for statistical purposes. Restricting the deduction u/s 80IA of the Act for the Godavari Lift Irrigation Scheme developed by the assessee for the Government of Andhra Pradesh - Held that - CIT(A) made no mistake in disregarding the action of the Assessing Officer scaling down the deduction u/s 80IA of the Act to the extent of ₹ 6,63,61,181/- in respect of profits earned from Godavari project. In so far as the assessee s eligibility for the claim of deduction u/s 80IA of the Act with respect to the Godavari project is concerned there is no dispute. We are in agreement with the CIT(A) that the profit shown by the assessee in its books of account relating to the Godavari project has been disregarded by the Assessing Officer on mere conjectures and surmises. No doubt, the profit ratio in case of the Godavari project is higher in comparison to other projects undertaken by the assessee in different assessment years. So however, such a difference can only be a basis to further verify the factual aspects, but the difference in profit-ratio by itself, cannot be a ground to disbelieve the same. The Assessing Officer has not brought out any cogent material or evidence to say that the profits declared by the assessee, based on the audited books of account suffer from any infirmity. Therefore, action of the CIT(A) deleting the disallowance of ₹ 6,63,61,181/- out of deduction u/s 80IA of the Act is hereby affirmed. Allowance of Provision for warranty - Held that - It was a common point between the parties that the Provision for warranty cannot be considered as a contingent liability following the judgement of the Hon ble Supreme Court in the case of Rotork Control India P. Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA ). The CIT(A), in our view, has correctly decided the issue in the light of the judgement of the Hon ble Supreme Court, which we hereby affirm

Summary

Issues Involved:
1. Denial of assessee's claim for deduction u/s 80IA of the Income Tax Act.
2. Disallowance of provision for pension scheme for employees.
3. Restriction of deduction u/s 80IA for the Godavari Lift Irrigation Scheme.
4. Disallowance of provision for warranty.

Detailed Analysis:

1. Denial of Assessee's Claim for Deduction u/s 80IA of the Act:

The primary issue is the denial of the assessee's claim for deduction under section 80IA of the Income Tax Act, amounting to Rs. 40,02,10,981/-, in respect of the infrastructure facility developed for M/s Sardar Sarovar Narmada Nigam Limited (SSNNL). The assessee is a company engaged in various engineering and infrastructure projects. The claim was denied by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] on the grounds that the conditions prescribed in section 80IA(4)(i) were not fulfilled.

The AO contended that the assessee was not a developer as envisaged in section 80IA(4) and merely executed a works contract for SSNNL. The AO also noted that SSNNL was not a Central or State Government or a local authority or any other statutory body, and thus the condition prescribed in sub-clause (b) of clause (i) of sub-section (4) of section 80IA was not met.

The Tribunal examined the background of SSNNL, noting that it was a fully government-owned entity created to execute governmental functions, such as the Sardar Sarovar project. The Tribunal referred to the Supreme Court's tests in the case of Som Prakash Rekhi vs. Union of India, which determine whether an entity is an instrumentality or an agency of the State. The Tribunal concluded that SSNNL, being a mere extended arm of the Government of Gujarat, qualifies as an entity specified in section 80IA(4)(i)(b).

The Tribunal also addressed the objection that the assessee was not a developer but merely a contractor. It noted that the assessee was responsible for conceptualizing, designing, erecting, commissioning, and operating the infrastructure project, thus qualifying as a developer. The Tribunal referred to the Bombay High Court's judgment in CIT vs. ABG Heavy Industries Ltd., which supported the assessee's claim of being a developer.

The Tribunal rejected the Revenue's objections, including the claim that the infrastructure facility must be owned by the assessee and that the entire investment must be made by the assessee. The Tribunal directed the AO to allow the deduction claimed by the assessee under section 80IA.

2. Disallowance of Provision for Pension Scheme for Employees:

The assessee claimed a provision for pension scheme for employees amounting to Rs. 2,49,66,190/-. The AO disallowed the claim, considering it a contingent liability. The assessee relied on the Calcutta High Court's decision in CIT vs. National Insurance Company of India and the Supreme Court's decision in Bharat Earth Movers vs. CIT, which held that such liabilities are not contingent.

The Tribunal remitted the issue back to the AO to ascertain the reasonableness of the provision made by the company for meeting the incremental liability under the pension scheme. The AO was directed to decide the issue afresh after providing an opportunity to the assessee.

3. Restriction of Deduction u/s 80IA for the Godavari Lift Irrigation Scheme:

The assessee claimed a deduction of Rs. 39,39,21,458/- for the Godavari Lift Irrigation Scheme developed for the Government of Andhra Pradesh. The AO restricted the claim to Rs. 32,75,60,277/- on the grounds that the profit shown by the assessee was abnormally high and invoked section 80IA(8). The CIT(A) disagreed with the AO and deleted the disallowance but made a disallowance of Rs. 18,70,849/- on account of unallocated interest expenditure.

The Tribunal upheld the CIT(A)'s decision to disregard the AO's scaling down of the deduction, noting that the AO did not point out any discrepancies or defects in the audited Profit & Loss Account. The Tribunal also affirmed the CIT(A)'s allocation of interest expenditure, finding it justified.

4. Disallowance of Provision for Warranty:

The AO disallowed a provision for warranty amounting to Rs. 1,76,13,328/- but allowed a deduction of Rs. 1,67,03,218/- for actual utilization. The CIT(A) allowed the entire provision for warranty as an allowable expenditure, following the Supreme Court's decision in Rotork Control India P. Ltd. vs. CIT, but reversed the amount allowed by the AO, resulting in a net relief of Rs. 9,10,110/-.

The Tribunal affirmed the CIT(A)'s decision, noting that the provision for warranty cannot be considered a contingent liability.

Conclusion:

The Tribunal allowed the appeal of the assessee partly, directing the AO to allow the deduction under section 80IA and remitting the issue of the pension scheme provision back to the AO. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on the Godavari project and the provision for warranty.