2011 (2) TMI 92 - AT - Income Tax

Deduction u/s 80-IA(4)(iii) - Test of an independent unit - The test is not that who operates the independent units run in the multistoried structure. It is also not the question whether all the stories are occupied by one tenant or different tenants - The test to be applied is the functional test. The unit must be physically independent with independent facilities and instrumentation power connection door number and the facility of functioning independently i.e. every unit must be in a position to carry on its activities without depending upon other units even though all the units are situated under the same roof but in different floors - The assessee has successfully satisfied the above stated functional test of an independent unit Thus the objection raised by the assessing authority does not exist - The assessee was running five/four units as prescribed by the conditions of approval granted by the Ministry of Commerce and Industry. Approval and notification - Once the projects are approved and notifications are made by the appropriate authorities the approval and the notification run back to the date of commencement of the activities - This is for the simple reason that once the assessee has acquired the land from a Government agency for a specific purpose the assessee has to start complying with the conditions stipulated by the State Government agency. Developing of IT Parks takes sufficient long time. The assessee applies for the approval and notification as soon as the project is initiated. If the assessee waits to get order of approval and the notification order to initiate the project the project would be a non-starter. It is on the basis of the applications already made to the concerned authorities that the assessee is carrying on the essential construction activities which consumes a lot of time - it is almost impossible to insist that the assessee can initiate the project only after getting the final approval and the notification of the concerned authorities. The more equitable construction of the situation as always approved by law is that the Government approval and the CBDT notification once granted to the assessee take care and cover of the earlier period as well - This is for the reason that the approval and notification have been granted to those eligible undertakings as such - The crucial question to be examined is whether the eligible undertaking for which the assessee has sought deduction has been in fact approved and notified - If the answer is yes the assessee qualifies the condition laid down in the project scheme. - Therefore it is not proper on the part of the Assessing Officer to decline the deduction on the ground that the assessee has started functioning even before the formal order of approval and notification - This is not a ground to deny exemption to the assessee. Hence both the grounds highlighted by the assessing authority to deny deduction to the assessee are not sustainable in the facts of the case Thus the two appeals filed by the assessee are allowed

Issues Involved:

1. Eligibility for deduction under section 80-IA(4)(iii) of the IT Act, 1961.
2. Compliance with conditions prescribed by the Scheme and approving authorities.
3. Definition and recognition of "units" for the purpose of deduction.
4. Timing of approvals and notifications relative to the commencement of operations.

Issue-wise Detailed Analysis:

1. Eligibility for deduction under section 80-IA(4)(iii) of the IT Act, 1961:

The core issue revolves around whether the assessee qualifies for the deduction under section 80-IA(4)(iii), which pertains to profits and gains from industrial undertakings or enterprises engaged in infrastructure development. The assessee claimed deductions for the assessment years 2007-08 and 2008-09, which were disallowed by the assessing authority and upheld by the Commissioner of Income-tax(A). The Tribunal examined the statutory provisions and found that the assessee met the general statutory conditions, such as being a registered company in India, not formed by splitting up or reconstructing an existing business, and developing IT Parks as per agreements with a state government agency.

2. Compliance with conditions prescribed by the Scheme and approving authorities:

The Tribunal noted that the conditions for claiming the deduction under section 80-IA(4)(iii) are twofold: statutory conditions and conditions prescribed by the approving authorities (Ministry of Commerce and Industry and CBDT). The assessee complied with the statutory conditions. However, the assessing authority's objections were based on the second set of conditions, such as the minimum extent of developed area, the number of functional units, and the timing of approvals. The Tribunal found that the assessee had indeed met these conditions, including the development of IT Parks and the operation of the required number of units.

3. Definition and recognition of "units" for the purpose of deduction:

A significant point of contention was whether the floors of a multi-storied building leased to the same tenant could be considered separate units. The Tribunal concluded that the units should be recognized based on their functional independence, not merely on the basis of tenancy. The Tribunal accepted the assessee's argument that each floor, with its independent facilities and operations, should be treated as a separate unit, thus meeting the requirement of five units for 2007-08 and four units for 2008-09.

4. Timing of approvals and notifications relative to the commencement of operations:

The assessing authority had also objected to the fact that the assessee started developing and operating the units before receiving formal approval and notification from the CBDT. The Tribunal held that it is impractical to expect the assessee to wait for formal approvals before commencing development, given the time-consuming nature of such projects. The Tribunal emphasized that once the approval and notification are granted, they should be considered retroactive to cover the period from the project's initiation.

Conclusion:

The Tribunal concluded that the lower authorities erred in denying the deduction to the assessee. It directed the assessing authority to grant the benefit of deduction under section 80-IA(4)(iii) for the assessment years 2007-08 and 2008-09, as the assessee had met all the necessary conditions. The appeals filed by the assessee were allowed.

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