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2012 (7) TMI 464 - AT - Income TaxDenial of exemption claim u/s 80-IAB - the assessee has not completed that minimum built up area by the end of the previous year relevant to the assessment year under question - the developed portion of the SEZ cannot be given on lease before completing the development of entire approved land - Held that - This presumption is against the law stated in the SEZ Act as Rule 6(2) of the SEZ Rules, 2006 provides that the letter of approval of a Developer granted shall be valid for a period of three years within which time at lease one unit has commenced production and the SEZ become operational from the date of commencement of such production. It is clear from the above Rule that the SEZ Act does not contemplate that a Developer can assign the land to the entrepreneurs only after completing the development of the entire approved land. The condition specified in the Rule to sustain the validity of the approval is that at least one unit should commence production and to that extent, the SEZ should become operational - The objection of not having developed land of one lakh sq. mtrs. thus fails. Income declared by the assessee company has not been derived from the business of developing SEZ - Held that - The assessee is a company engaged in the business of developing sector specific SEZ for IT and IT Enabled Services been granted approval by Government of India. By virtue of overriding effect of the SEZ Act, 2005, it is an established fact that the company is a Developer who is engaged in the business of developing SEZ - assessee is the developer and it need not do any other business to claim the benefit of deduction under sec.80-IAB - Assessee s SEZ is sector specific and is not required to run operating units - the only income derived in the hands of the assessee developer will be the lease rent and other service charges if any - the profits and gains of business of a developer contemplated in sec.80-IAB for the purpose of deduction thereunder, is nothing but lease/rental income. Therefore, it made it clear that the lease rental income generated in the hands of a Developer engaged in setting up of the SEZ, is the profits and gains derived from the business of developing a SEZ. Land given on a perennial lease of 99 years with further scope of renewal which in effect is nothing but a sale - Held that - SEZ Act, 2005 overrides the provisions of the Income-tax Act, 1961 for deciding the basic character of transactions entered into by the Developer and the approved entrepreneurs it is clear that the assessee-Developer has proceeded with the allotment of developed area on lease hold basis to the approved entrepreneurs, the period of lease is 99 years which is permissible under the SEZ Act, 2005 and where there is no right of sale, the possible way is only lease. It may be a perennial lease but that does not change the character of the lease - when the SEZ Act, 2005 provides that it is not permissible for a Developer to sell the land in a SEZ, it is not conceivable in law that the assessee can transfer the ownership of the property to the approved entrepreneurs through any other means. Therefore, there cannot be a case of capital gains arising in the hands of the assessee - decided in favour of assessee.
Issues Involved:
1. Eligibility for deduction under section 80-IAB of the Income-tax Act, 1961. 2. Nature of lease premium received - whether it is business income or capital gains. 3. Compliance with conditions laid down in the SEZ Act, 2005 and SEZ Rules, 2006. 4. Treatment of project development cost and other additions. 5. Levy of interest under section 234B of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Eligibility for Deduction under Section 80-IAB The assessee, a company engaged in developing a Special Economic Zone (SEZ) in Coimbatore, claimed a deduction under section 80-IAB for the assessment year 2008-09. Section 80-IAB provides a 100% deduction of the profits and gains derived from the business of developing a SEZ for ten consecutive years out of fifteen years. The assessee argued that it met all conditions under the SEZ Act, 2005, and SEZ Rules, 2006, and had obtained necessary approvals from the competent authority. The Tribunal found that the assessee was indeed engaged in the business of developing a SEZ and had obtained the required approvals. It was noted that the SEZ Act, 2005, and related rules have an overriding effect over other laws, including the Income-tax Act, 1961. The Tribunal concluded that the assessee's activity of developing a SEZ qualifies for the deduction under section 80-IAB. Issue 2: Nature of Lease Premium Received The Assessing Officer (AO) and Commissioner of Income-tax (Appeals) (CIT(A)) contended that the lease premium received by the assessee for leasing out SEZ land for 99 years amounted to a sale and should be treated as capital gains. They relied on the Supreme Court's decision in R.K. Palshikar (HUF) v. CIT, which held that a long-term lease of 99 years is akin to a sale. The Tribunal, however, disagreed, citing Rule 11(9) of the SEZ Rules, 2006, which prohibits the sale of land in a SEZ. It emphasized that the SEZ Act, 2005, overrides other laws, and therefore, the lease cannot be considered a sale. The Tribunal held that the lease premium is business income derived from developing a SEZ and qualifies for deduction under section 80-IAB. Issue 3: Compliance with SEZ Act and Rules The AO and CIT(A) argued that the assessee did not comply with the condition of developing a minimum built-up area of one lakh square meters before leasing out the land. They also noted that lease agreements were executed before the lessees obtained necessary approvals. The Tribunal found that the SEZ Act, 2005, does not require the entire approved area to be developed before leasing out portions of it. It also noted that the approvals granted to the lessees relate back to the date of their applications. Therefore, the Tribunal concluded that the assessee complied with the SEZ Act and Rules. Issue 4: Treatment of Project Development Cost and Other Additions The AO disallowed the provision for project development cost and added it to the taxable income. The AO also disallowed a donation made by the assessee and added it back to the income. The CIT(A) upheld these additions. The Tribunal noted that these issues are academic because any additions to the total income would still be part of the 100% deduction available under section 80-IAB. Therefore, the Tribunal directed the AO to re-do the assessment after allowing the deduction under section 80-IAB. Issue 5: Levy of Interest under Section 234B The assessee contested the levy of interest under section 234B. The Tribunal did not specifically address this issue, but given the direction to re-do the assessment with the deduction under section 80-IAB, it implies that the interest levy may also need reconsideration. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the AO to grant the deduction under section 80-IAB and re-do the assessment. The Tribunal dismissed the stay petition as infructuous.
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