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TMI Blog2014 (12) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... idence 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 1315/Del/2013, ITA No. 1316/Del/2013, ITA No. 1475/Del/2013, ITA No. 1467/Del/2013 - - - Dated:- 13-11-2014 - Shri J. Sudhakar Reddy And Shri CM Garg,JJ. For the Petitioner : Mr. R. S. Singhvi, C.A. For the Respondent : Smt.Sudha Kumari, CIT, D.R. ORDER Per J. Sudhakar Reddy, JM These cross-appeals are directed against the order of Ld.CIT(Appeals), Faridabad dt. 27.12.2012 pertaining to the Assessment Year 2009-10. 2. Facts in brief:- The facts of the case are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the particular terms and conditions of lease agreement will not have any bearing on the treatment of income by way of lease rentals/down payment/premium etc. for the purpose of assessment under the prevalent Income Tax Act and rules; and the Assessing Officer will have the right to examine the taxability of these amounts under the Income Tax Act. The AO has, therefore, held that the Board of Approval for SEZ has not considered the income from specified transactions between Developer and Co-developer as exempt from income tax and disallowed entire claim of deduction u/s 80IAB of the Act on the strength of such disclaimer. It was further noted that the profits on sale of bare shell buildings .in SEZ were included in the book profit/deemed total income u/s 115JB of the Act by another group concern, namely, DLF Cyber City Developers Limited in A.Y 2008-09 and not claimed exempt. The income from transfer of assets, which was not stock - in - trade in the books of assessee, for a specific sale consideration to the Co-developer, who became the absolute owner of the bare shells, was income chargeable under the head 'Capital Gain' and not eligible for deduction u/s 80IAB. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Under Secretary and J. S, Ministry ( of Commerce respectively, who were not competent to issue any such clarification as per provision of sec 8(8) of the SEZ Act. 2. That in doing so, the Ld CIT (A) has also failed to appreciate whether Ministry of Commerce can issue clarification regarding approval given by BOA and whether such a clarification issued by an authority other than BOA has any legal sanctity or evidenciary value particularly when relevant activities mentioned in the clarification are not mentioned in the approval given by BOA to the assessee or to its co developer and such a clarification is also in contravention of spirit of SEZ Act. 3. That the Ld CIT(A) is not justified in observing that genuineness of the letter dated 18-1-2011 and 20-1-2011 was not disputed by AO because the legal infirmity as pointed out in above grounds was clearly mentioned in the' remand report dated 04.12.2012. 4. That the Ld CIT (A) has erred in law and on facts of the case in admitting the clarifications referred above as additional evidence by holding that the c1arifjcation have been issued based on evidences already available in the file with BOA, whereas no such materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r deduction u/s 801AB. 9. In doing so, the Ld. CIT (A) has failed to appreciate the spirit of proviso to sec. 80lAB(2) that the moment the co developer transfers the operation maintenance of SEZ to the co-developer, the deduction u/s 80lAB would be available to the co developer for the remaining period in 10 consecutive years meaning thereby right of developer to claim benefits of SEZ would cease on transfer of operation maintenance of SEZ to co-developer. 10. That the Ld CIT (A) has erred in law on facts in holding that AO has no jurisdiction to challenge the validity of approval given by Ministry of Commerce ignoring the fact that approval given by BOA or Ministry of Commerce was not absolute but subject to condition that the treatment of income arising out of transaction of transfer of bare shells by assessee to co-developer would be decided as per relevant provisions of IT Act. 11. That the Ld CIT(A) has erred in law and on facts of the case in accepting rent capitalization method and that too by adopting rent of a property other than the property sold by assessee to its co-developer as basis for determining development consideration of bare shells and thereby holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/Del/2012 has at paras 24 to 44 at pages 24 to 46 held as follows. 24. We are thus of the considered view that the Ld. CIT(A) was not justified in adopting the capitalization sale of 9.5% as against 9% adopted by the assessee. While setting aside this action of the Ld. CIT(A), we direct the AO to accept the approved working of the assessee in this regard and allow the consequential relief. Ground No.2 of the appeal of the assessee is thus allowed. The Ground No. 3 is an alternative ground to Ground No. 2, hence it does not need adjudication. Issue raised in Ground Nos. 11 to 13 of the Revenue is thus decided against the revenue. 25. We find that the issue of allowability of the assessee for claiming deduction u/s 80IAB on the profits earned from transfer of bare shell building by it to its co developers involves 3 more issues namely: (a) As to whether the assessee is carrying out the activities as mentioned in the documents submitted to and the approval accorded by Board of Approval? (b) As to whether the assessee is a developer as per the meaning of Section 80IAB? (c) As to whether the income arising out of the aforesaid operations authorized by Board of Approva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved activities which were assigned to be done by the developer assessee. That is why, the Issue No. (b) arises as to whether assessee is a developer within the meaning of Section 80 IAB for those activities out of the approved activities which were done by the co-developer under a memorandum of understanding arrived at between the assessee and the co-developer DLF Assets Pvt. Ltd vide agreement dated 29/11/2006. Under the said agreement the assessee had sold the bare shell buildings to the Co-developer and had claimed deduction u/s 80IAB on the income earned from the said transfer of bare shell buildings to the co-developer. Thus, a further issue arose as to whether the income arising out of the aforesaid operations was authorized by the Board of Approval to make the assessee eligible for the claimed deduction u/s 80 IAB. While denying the claimed deduction the AO has taken assistance of the disclaimer contained in Clause 3(XVII) of the approval letter dated 1/6/2009 issued by Board of Approval (BOA) , SEZ Section, Deptt of Commerce, Ministry of Commerce and Industry, Govt. of India, which provides that the particular terms and conditions of lease agreement dated 20/3/2008 forming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead as under:- Approval given by BOA for co-developer for particular terms and conditions of lease agreement will not have any bearing on the treatment of the income by way of lease rentals/down payment/premium etc for the purpose of assessment under the prevalent Income-tax Act Rules. The Assessing Officer will have the right to examine the taxability of these amounts under the Income Tax Act. 27. The submission of the Ld. AR remained that the approval granted by the Govt. of India, Ministry of Commerce and Industry to the assessee company as a developer continued and has no such clause therein, as it will be observed from the approval granted to the co-developer earlier (i.e approval dated 14/2/2007, applicable throughout the relevant previous year) did not contain any such para as mentioned in the letter dated 1/6/2009. In that approval the agreement with the co-developer was approved and informed as a part of the approval which permitted the assessee to transfer bare shell building to the co-developer for further development activities. The Clause No. 3 (XVII) of general conditions of the approval dated 1/6/2009 provided with respect to the treatment of income receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 14.02.2007 The DAPL was granted approval as a Codeveloper by the Department of Commerce (SEZ Section), Ministry of Commerce Industry, vide approval letter F.2/124/2005-EPZ for co-development, operation and maintenance of aforesaid SEZ. 8 19.03.2007 The land admeasuring 3.438 hectares owned by the assessee at Nandampakkam Post, Ramapuram Chennai was further notified in the Gazette of India vide Notification No. S.O. 396 (E) dated 19.03.2007. 9 19.06.2007 The authorized operations to be carried out by the DAPL in respect of aforesaid SEZ proposed to be co- developed were approved by the Ministry of Commerce Industry , Department of Commerce (SEZ Section). 29. The relevant clauses of the memorandum of understanding for co-developer agreement dated 29/11/2006 entered into by the assessee with DAPL read as under:- 1. The Developer has agreed to appoint DAPL as a co-developer for developing, operating and maintaining the said SEZ by granting DAPL the exclusive right to execute a part of the Authorized operations and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow use of all or any part of the facilities in the project to any Units or any other persons entitled to use the same in accordance with the SEZ Act, on such terms and conditions as Co-developer may impose. 30. The BOP granted approval to the co-developer (DAPL) vide letter dated 24/2/2007, Clause (2) thereof reads as under:- (2) Your agreement dated 29th November 2006 entered into with the developer of the aforesaid sector specific IT/ITES Special Economic Zone of DLF Info City Developers (Chennai) Ltd for provide infrastructure and other common facilities shall form part of this approval . 31. Thus, we find that there was clear approval to both the assessee and the codeveloper 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Economic Zone Act 2005, provide for the establishment, development and management of the Special Economic Zone for the promotion of exports and other matters connected therewith or incidental thereto. Section 3(3) of the SEZ Act, provides that any person, who intends to set up Special Economic Zone may, after identifying the area at his objection, make a proposal directly to the board for the purpose of setting of the Special Economic Zone. The Board of Approval constituted under Sub Section (1) of Section 8 of the SEZ Act is the itner ministerial statutory authority empowered to approve the proposal subject to such terms and conditions as it may deem it to impossible, or modify or reject the proposal, as provided in Section 3(7) of the said Act. Section 3(1) of SEZ Act provides that on receipt of communication from the Board of Approval, Central Government shall grant, a letter of approval on such terms and conditions and obligations and entitlements as may be approved by the Board, to the developer, being the person or the State Govt. concerned. The word Developer has been defined in Section 2(G) of the SEZ Act, which means a person who, or the State Govt. which, has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee under the SEZ Act. Now we have to examine the issue raised in the additional grounds in the appeal of the Revenue. The AO has disallowed the claimed deduction u/s 80IAB mainly on the ground (1) that the transfer of bare shell buildings by the assessee to the co-developer for a consideration was not an authorized operations as per the list contained in notification dated 27/10/2006 being S.O 1846(E); (2) the Board of Approval while approving the co-developer agreement has given a conditional approval in as much as the AO has been authorized to examine the taxability of lease rentals by way of lease premium/ one time payment etc by virtue of a disclaimer contained in Clause (3) (XVII) of the approval letter dated 1/6/2009 and (3) the Board of Approval for SEZ has not considered the income from specific transaction between developer and co-developer as exempt from income tax for which the Assessing Officer has been authorized to examine the taxability. Section 26(1)(a) to 1(g) of the SEZ Act provide for major tax incentive to a developer or entrepreneur in the SEZ which include exemption from customs duty, excise duties, duty draw back, Central Sales Tax and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed opportunity to the assessee to clarify the matter further. On the contrary the assessee had filed additional evidences after seeking two clarifications from the Board of Approval. The clarification letters dated 18/1/2011 and 20/1/2011were admitted as additional evidence by the Ld. CIT(A). The Ld. CIT(A) has reproduced these clarifications at page no. 125 to 127 of the first appellate order. In these letters besides other it has also been clarified that all lease of land are subjected to the general condition contained in Para 3 (XVII) of letter dated 1/6/2009. It has been further clarified that general condition NO. 3 (XVII) in the codeveloper approval dated 1/6/2009 is applicable to the terms and conditions of the lease agreement only in para no. 6 of the clarification dated 18/1/2011 it has been made clear that the developers business of development of SEZ also envisages transfer and hand over of developed/constructed buildings (in which other form such as bare shell/cold shell) against development charges/development consideration forming part of MOU/agreement approved by BOA. These activities are authorized operations under SEZ Act and the rules as amended. It has also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und raised by the revenue in its appeal. 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 is evident from para 4 of the letter dated 6/5/2009 of the Director CBDT in this Para No. 4 it has been mentioned that the issue regarding transfer of land by developers on an indefinite/land lease which virtually amounts to sale has been brought to the notice of DOC on earlier occasions. After protracted discussion on the issue and also taking into account the advise of Ministry of Law, it was agreed to approve such proposal subject to the inclusion of disclaimer in the letter of approval that the approval will have no bearing on tax treatment of income arising out of such transaction will be decided as per relevant provisions of Income Tax Act 1961. A reference to Para 3 of the letter of the Director, CBDT dated 26/5/2009 reveals that that he was conscious of and examined the arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms integral part of approval letter dated 1/6/2009 issued by BOA. The para No.2 whereof reads that your revised agreement dated 20/3/2008 entered into with the developer of the aforesaid sector specific IT/ITES Special Economic Zone of DLF Info City Developers (Chennai) Ltd for providing infrastructure and other common facilities shall form part of this approval. We also agree with the finding of the Ld. CIT(A) that 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. The objection of the AO that transfer of bare shell is not permitted in the SEZ is again misplaced and unjustified in view of the clarifications dated 18/1/2011 and 20/1/2011 issued by the Ministry of Commerce and Industries. The Development Commissioner of the concerned SEZ is the ex-officio member of the Board of Approval u/s 8(2) (g) of the SEZ Act. The provisions of Rule 11 (5) of the SEZ Rules, 2006 reads as under:- (5) The land or built up space in the processing area or Free Trade and Warehousing Zone shall be given on lease only to the entrepreneurs holding a valid Letter of Approval issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess of law after duly considering and examining all the facts and documents on record in accordance with relevant provisions of SEZ Act and SEZ Rules. Thus, 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. Section 27 of SEZ Act provides for modification of Income Tax Act to the extent of second schedule of SEZ Act which reads as under:- 27. The provisions of the Income Tax Act, 1961, as in force for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule. 37. The second schedule of SEZ Act contends bare text of certain provision including Section 80IAB to be incorporated in the Income Tax Act present to the Section 80IAB (having the same in as mentioned in SEZ Act) has been broadly incorporated into the Income Tax Act. Section 51 of SEZ Act having an overriding effect over any other law, reads as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side the same. 263 order and findings therein being contrary to legal provisions is liable to be quashed. The assessment order being is conformity with SEZ Act, Rules and provisions of Section 80IAB can neither be termed as erroneous or prejudicial to the interest or revenue. Page 28 Para 6.9 Ld. Counsel contends that Ld. CITs proposition to tax it as capital gains is against the basic principle of taxation as large scale real estate business activities continuously carried on by assessee and bare shell buildings declared as stock-in-trade in its books of accounts, as per its objects clause in its Memorandum and Articles of Association can be taxed only under the head Business Income. Page 35 para 6.16 The letter of approval is issued by the Board by a statutory process of law and once it has been issued by the exclusive sanctioning authority, the consequential benefits that are available to a Developer cannot be denied. The Assessing Officer or the Commissioner of Income-tax exercising the power of revision under the Act cannot have any jurisdiction to question the validity of the legality of the authorized operations which have been approved by the Regulatory body of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount as held by CIT in the order of assessing officer allowing deduction u/s 80IAB. 39. We thus find that assessee is a developer under the SEZ Act and is in the business of developing a SEZ, the SEZ has been notified on the first day of April 2005 under the Special Economic Zone Act 2005 ; and the profits have been derived from the business of development, operation and maintenance of SEZ. We thus fully agree with the finding of the Ld. CIT(A) that 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 I.T of the Act. Consequent upon approval granted by the BOA for transfer of bare shell to the co-developer, the profits arising to the assessee froms such an authorized transaction are eligible for deduction u/s 80IAB of the Act. For a ready reference provisions laid down u/s 80IAB (1) of the Act are being reproduced hereunder:- 80IAB( 1)- Where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s 263. The order of CIT was quashed by Hon ble ITAT vide ITA no.2637/Del/2012 dated 2.8.2013 and the benefit of statutory deduction granted by Assessing Officer was restored. Further, the Assessing Officer disputed the claim of deduction in Assessment Year 2008-09 and claim of statutory deduction u/s 80 IAB was accepted by CIT(A) and order of CIT(A) was accepted by Hon ble ITAT vide order dt. 21.2.2014. 9.1. It was further submitted that as per provisions of section 80IAB(1) the benefit is available for 10 consecutive years and accordingly benefit once granted shall be available for ten consecutive years. In this case, as per order of ITAT for Assessment Year 2007- 08 and 2008-09, benefit ahs been granted and the same shall be available for subsequent years within a block of 10 years. 9.2. For this proposition, he relied on the decision of Jurisdictional High Court in the case of CIT vs. Tata Communication Internet Services in ITA 531/2011 judgement dated 8th August,2011. The Ld.CIT, D.R. could not cite any contrary decision. 10. We find that the Hon ble Delhi High Court in the case of CIT vs. Tata Communication Internet Services Ltd. ITA 531/2011 has considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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