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2014 (5) TMI 737 - AT - Income TaxDeduction u/s 80IB - development of SEZ - authorized operation - transfer of bare shells buildings by the assessee to co-developer - as per the revenue, as per sec. 9(2) only Board of Approval is empowered to grant approval of SEZ or authorized operations in the SEZ and not the Ministry of Commerce - Admission of additional evidence Application of provision of Rule 46A(1) clause (c) and (d) of the Rules - Held that - The additional evidences form integral part of the decision making process of the Board of Approval and are necessary for arriving at correct legal conclusion These evidences are very crucial and necessary for deciding the legal status of the appellant under the SEZ Act as well as its consequential entitlement or otherwise of deduction u/s. 80IAB of the Act - if the evidence is genuine and reliable, then the assessee should not be denied the opportunity to produce such evidence and it would be incorrect to shut out an assessee in the process of administration of justice from leading evidence to prove its case. As per the provisions of clause (a) and (b) subrule (3) of Rule 46A, the AO is duty bound to examine the evidence or document produced by the appellant and/or to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant the evidences are in the nature of further clarifications, form integral part of the correspondence between Department of Commerce and Department of Revenue before granting the approval vide letter dated 01.06.2009, go to the very root of matter in deciding the eligibility or otherwise of the appellant s claim of deduction u/s. 80IAB of the Act and need to be taken into account in deciding major grounds of appeal - the provisions of clause (c) and (d) of sub-rule (1) of Rule 46A are clearly attracted in the assessee s case the order of the FAA is comprehensive and reasoned, thus, there is no reason to interfere in the order Decided against Revenue. Allowability of claim of deduction u/s 80IAB of the Act - Profits derived from transfer of bare shells buildings - Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Held that - There was clear approval to both the assessee and the co-developer for development, operation and maintenance of the SEZ wherein the initial arrangement by the assessee was to carry out part development and lease out the land and the building thereupon to co-developer for a lease period of 49 years - The assessee and co-developer later on executed an addendum to the co-development agreement dated 29/11/2006, wherein the lease of land continued to be for 49 years and the bare shell buildings constructed by the assessee were proposed to be transferred to the co-developer for a development consideration of Rs.4,845 per square fit - From the clarifications dated 18/1/2011 and 20/1/2011 issued by the Ministry of Commerce as well as from the letter of Director CBDT their remains no scope for any doubt that this disclaimer is applicable only to transfer of land in the guise of long term lease by receiving lease rentals/down payments/premium etc commensurate with the sale value of land as provided in the letter dated 6/5/2009 of the Director CBDT. CIT(A) was rightly of the view that once the authorized operations were approved by the Board of Approval vide letter dated 19/6/2007, there was no further requirement of getting the same authorized operations approved again in terms of approval letter dated 1/6/2009 - No further approval of transfer of bare shell was required since the agreement dated 20/3/2008 providing for transfer of bare shell to the co-developer for an agreed development consideration forms integral part of approval letter dated 1/6/2009 issued by BOA - the AO was having no jurisdiction or authority to sit in the judgment of the Board of Approval and challenge the validity of approval given by the Ministry of Commerce. CTI(A) has rightly agreed with the plea of the assessee that the tax disclaimer condition mentioned in the co-developer approval is primarily to be in by the BOA in the approvals granted to put a curb on the wrong practice of leasing the land for long periods and receiving one time payment in the form of lease rentals/down payments/premium etc. which tantamount to sale of land in the guise of long term lease - The assessee has obtained requisite approvals from the BOA in most transparent manner by disclosing not only development consideration but also the basis for determining the same - the consequential benefits that is available to a developer under the Income Tax Act cannot be denied - The AO does not have any jurisdiction to question the validity or the legality of authorized operations which have been approved by the BOA/Central Government - all the conditions as required to be specified under the SEZ Act/Rules are fulfilled and the assessee is approved developer for all the intent and purposes of Section 80 IAB of the Act Decided in favour of Assessee.
Issues Involved:
1. Legality of the first appellate order. 2. Fair market value determination of development consideration. 3. Excess deduction claimed under Section 80IAB. 4. Admission of additional evidence by CIT(A). 5. Jurisdiction of AO to challenge approval validity. 6. Eligibility for deduction under Section 80IAB for profits from bare shell buildings. 7. Applicability of rent capitalization method. 8. Determination of development consideration and capitalization rate. 9. Classification of bare shell buildings as stock-in-trade or capital asset. Detailed Analysis: 1. Legality of the First Appellate Order: The assessee challenged the first appellate order on grounds that the CIT(A) erred in law and facts, particularly in determining the fair market value of development consideration and restricting the deduction under Section 80IAB of the Income Tax Act. 2. Fair Market Value Determination: The CIT(A) determined the fair market value of the development consideration at Rs. 6225 per square foot as opposed to Rs. 6947 per square foot claimed by the assessee, thereby restricting the deduction under Section 80IAB to Rs. 1178.05 crores instead of Rs. 1352.32 crores. 3. Excess Deduction Claimed: The CIT(A) confirmed an addition of Rs. 174.27 crores as excess deduction claimed rather than ignoring the same, which the assessee contested. 4. Admission of Additional Evidence by CIT(A): The revenue argued that the CIT(A) erred in admitting letters/clarifications from the Ministry of Commerce as additional evidence, contending that only the Board of Approval (BOA) is empowered to grant approval of SEZ operations, not the Ministry of Commerce. The CIT(A) admitted these additional evidences after calling for a remand report from the AO, which was objected by the AO. 5. Jurisdiction of AO to Challenge Approval Validity: The CIT(A) held that the AO has no jurisdiction to challenge the validity of approval given by the Ministry of Commerce, which the revenue disputed, arguing that the approval was subject to taxability examination by IT authorities. 6. Eligibility for Deduction under Section 80IAB: The main issue was whether the assessee was eligible for deduction under Section 80IAB for profits derived from the transfer of bare shell buildings to its co-developer. The CIT(A) and Tribunal found that the assessee's activities were authorized operations under the SEZ Act and eligible for deduction under Section 80IAB. 7. Applicability of Rent Capitalization Method: The CIT(A) accepted the rent capitalization method used by the assessee for determining the development consideration of bare shells, which the AO had questioned. The Tribunal upheld the CIT(A)'s decision, noting that the method was internationally recognized and legally valid. 8. Determination of Development Consideration and Capitalization Rate: The CIT(A) determined the development consideration at Rs. 6225 per square foot with a capitalization rate of 9.5%, which the assessee contested. The Tribunal directed the AO to accept the capitalization rate of 9% as used by the assessee, noting that it was in accordance with the approved formula and internationally recognized norms. 9. Classification of Bare Shell Buildings: The AO treated the bare shell buildings as capital assets, whereas the CIT(A) and Tribunal concluded that they were stock-in-trade, consistent with the assessee's business activities and the SEZ Act provisions. Conclusion: The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 80IAB for the assessee, dismissed the revenue's appeal, and allowed the assessee's appeal regarding the capitalization rate and development consideration determination. The Tribunal emphasized the statutory authority of the BOA and the SEZ Act's provisions, which override other laws, ensuring the assessee's eligibility for the claimed deduction.
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