2016 (7) TMI 315 - AT - Income Tax

Allowability of deduction u/s.80IA - Held that - The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all along been to encourage investment in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that the deduction under sec.80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business risk. The learned counsel for the assessee stated before the Bench that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know how, expertise and financial resources. After the amendment the section 80IA(4) read as (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility, prior to amendment the or between three activities was not there, after the amendment or has been inserted w.e.f.1-4-2002 by Finance Act 2001. Therefore, in the considered view of the Bench, the assessee should not be denied the deduction under sec.80IA of the Act, if the contracts involves design, development, operating & maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction u/s 80IA of the Act. In the opinion of the Bench the contracts which contain above features to be segregated on this deduction u/s.80IA has to be granted and the other agreements which are pure works contracts hit by the explanation to sec.80IA(13), those work are not entitled for deduction u/s.80IA of the Act. The profit from the contracts which involves design, development, operating & maintenance, financial involvement, and defect correction and liability period is to be computed by Assessing Officer on pro-rata basis of turnover. The Assessing Officer is directed to examine the contracts accordingly and grant deduction on eligible turnover as directed above. Disallowance u/s 14A r.w.r. 8D - Held that - 2% of the exempt income is allowed. More so, Rule 8D is not in the statute book in the assessment year 2006- 07 which was introduced w.e.f. 24.3.2008. Being so, we do not find any infirmity in the order of the CIT(Appeals) Addition towards license fee - revenue or capital expenditure - Held that - This issue is squarely covered by the judgment of the Jurisdictional High Court in the case of CIT v. Southern Roadways Ltd. (2007 (6) TMI 193 - MADRAS HIGH COURT ), wherein it was held that the expenses incurred by the assessee for installation of software packages which revolves on the modern communication technology enables the assessee to carry its operation effectively, efficiently, smoothly and profitably and it does not work on a stand alone basis. Such software enhances the efficiency of the operation being an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances productivity or efficiency of the assessee. Hence, it is to be treated as revenue expenditure

Issues Involved:
1. Allowability of deduction under Section 80IA of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D.
3. Treatment of license fee as revenue expenditure.

Issue-wise Detailed Analysis:

1. Allowability of Deduction under Section 80IA:
The primary issue was whether the assessee was eligible for deduction under Section 80IA for profits earned from infrastructure projects. The assessee, engaged in civil construction works, claimed deductions for profits from three projects. The Assessing Officer (AO) disallowed the claim, stating that the assessee did not have a suitable development agreement with the government or statutory body, as required under Section 80IA. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claim, following an earlier Tribunal order in the assessee's favor. The Revenue appealed, citing judgments that differentiated between developing infrastructure and executing works contracts, arguing that the assessee was merely executing works contracts and thus not eligible for the deduction.

The Tribunal considered various judgments, including those from the Gujarat High Court and Mumbai Bench of the Tribunal, which clarified that a works contractor is not eligible for the deduction under Section 80IA. The Tribunal noted that the assessee must fulfill conditions such as developing, operating, and maintaining infrastructure facilities. The Tribunal remitted the issue back to the AO to examine the agreements and determine if the assessee met the criteria for being a developer rather than a mere works contractor.

2. Disallowance under Section 14A read with Rule 8D:
The second issue involved the disallowance of expenses under Section 14A related to earning exempt income. The CIT(A) had restricted the disallowance to 2% of the dividend income earned, which the Revenue challenged. The Tribunal upheld the CIT(A)’s decision, referencing the Madras High Court judgment in Simpson & Co. Ltd. vs. DCIT, which allowed a 2% disallowance. The Tribunal noted that Rule 8D was not applicable for the assessment year in question as it was introduced later.

3. Treatment of License Fee as Revenue Expenditure:
The third issue was whether the license fee for software should be treated as revenue expenditure. The CIT(A) treated it as revenue expenditure, and the Revenue appealed. The Tribunal upheld the CIT(A)’s decision, referencing the Jurisdictional High Court’s judgment in CIT v. Southern Roadways Ltd., which held that software expenses enhancing operational efficiency should be treated as revenue expenditure.

Cross Objections by the Assessee:
The assessee filed cross objections supporting the CIT(A)’s order on the deletion of the addition made under Section 80IA and the restriction of disallowance under Section 14A. The Tribunal allowed the cross objection related to Section 80IA for statistical purposes and dismissed the objection related to Section 14A, as it was already adjudicated in favor of the assessee.

Conclusion:
The Tribunal allowed the Revenue's appeal concerning the Section 80IA deduction for statistical purposes, remitting the issue back to the AO for fresh consideration. The Tribunal upheld the CIT(A)’s decisions on the disallowance under Section 14A and the treatment of the license fee as revenue expenditure. The cross objections by the assessee were partly allowed and partly dismissed.

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