2014 (12) TMI 141 - AT - Income Tax

Deduction u/s 80IB - development of SEZ - authorized operation as per SEZ Act 2005 and SEZ Rules, 2006 - transfer of bare shells buildings by the assessee to co-developer revenue was of the view that 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 - Following the decision in DLF Info City Developers (Chennai) Ltd. Versus Addl. CIT Range-1, Gurgaon 2014 (5) TMI 737 - ITAT DELHI - 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. 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 - Following the decision in DLF Info City Developers (Chennai) Ltd. Versus Addl. CIT Range-1, Gurgaon 2014 (5) TMI 737 - ITAT DELHI - 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 ₹ 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 against revenue.

Summary

Issues Involved:
1. Deduction under Section 80IAB of the Income Tax Act.
2. Approval and authorization of operations under SEZ Act.
3. Validity and jurisdiction of the Assessing Officer's (AO) disallowance.
4. Treatment of income from transfer of bare shell buildings.
5. Applicability of disclaimer clause in approval letters.
6. Determination of fair market value and development consideration.

Detailed Analysis:

1. Deduction under Section 80IAB of the Income Tax Act:
The primary issue revolves around the deduction claimed by the assessee under Section 80IAB for profits derived from the development of a Special Economic Zone (SEZ). The AO disallowed the entire claim, arguing that the profits from the sale of bare shell buildings to the co-developer were not admissible as they were not derived from the operation and maintenance of the SEZ but from the sale of assets.

2. Approval and Authorization of Operations under SEZ Act:
The assessee contended that the operations, including the transfer of bare shell buildings, were authorized under the SEZ Act. The Board of Approval (BOA) had approved the co-developer agreement, which included the transfer of bare shell buildings. The Tribunal found that the BOA's approval covered the transfer of bare shell buildings as an authorized operation, thus qualifying for the deduction under Section 80IAB.

3. Validity and Jurisdiction of the Assessing Officer's (AO) Disallowance:
The AO's jurisdiction to challenge the validity of the BOA's approval was questioned. The Tribunal held that the AO did not have the authority to question the BOA's approval, which was granted following a statutory process. The Tribunal emphasized that the SEZ Act has an overriding effect over other laws, including the Income Tax Act, as per Section 51 of the SEZ Act.

4. Treatment of Income from Transfer of Bare Shell Buildings:
The AO treated the income from the transfer of bare shell buildings as capital gains, arguing that the buildings were not stock-in-trade. However, the Tribunal concluded that the transfer of bare shell buildings was part of the business of developing, operating, and maintaining the SEZ, and thus the income qualified for deduction under Section 80IAB.

5. Applicability of Disclaimer Clause in Approval Letters:
The AO relied on a disclaimer in the BOA's approval letter, which stated that the approval would not affect the tax treatment of income from lease rentals/down payments/premiums. The Tribunal clarified that this disclaimer applied only to the transfer of land and not to the transfer of bare shell buildings. The Ministry of Commerce had issued clarifications supporting this interpretation.

6. Determination of Fair Market Value and Development Consideration:
The Tribunal addressed the determination of the fair market value of the development consideration. The AO had adopted a capitalization rate of 10.5%, while the assessee used a rate of 9%. The Tribunal directed the AO to accept the assessee's approved working and allow the consequential relief, thus resolving the dispute over the fair market value.

Conclusion:
The Tribunal allowed the appeals of the assessee and dismissed the appeals of the Revenue. It upheld the assessee's claim for deduction under Section 80IAB, recognizing the transfer of bare shell buildings as an authorized operation under the SEZ Act. The Tribunal also emphasized that the AO did not have the jurisdiction to challenge the BOA's approval and clarified the limited applicability of the disclaimer clause in the approval letters.