Is there any news on decision of Mumbai High court on B T patil on 80 IA (4)?

[prashantmaharishi]

Is there any news on Mumbia High court on B T patil  on 80 IA (4)?

[JB]

Pune Tribunal in case of Laxmi Enginnering has held that Tribunal larger bench decison of B.T.Patil is not a good law in view of Bomaby HC in case of ABG Heavy Industries (322 ITR 323). Kindly check if it is applicable in your case?

[pawansingla]

2011-TIOL-518-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'I' MUMBAI

ITA No.5172/ Mum/2008
Assessment Year: 2004-05

THE INDIAN HUME PIPE CO LTD
CONSTRUCTION HOUSE, 2nd FLOOR
5 WALACHAND HIRACHAND MARG
BALLARD ESTATE, MUMBAI-01
PAN NO:AAACT4063D

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-22, AAYAKAR BHAVAN
M K ROAD, MUMBAI

R V Easwar, President and Pramod Kumar, AM

Dated: July 29, 2011

Appellant Rep by: H P Mahajani
Respondent Rep by: Sanjeev Dutt

Income Tax - Section 80(IA) - Whether composite water supply which includes manufacturing, supplying, laying, joining of pipeline and includes construction of pump house, delivery, commissioning of turbine pump sets, installation of booster mains, branch mains and elevator reservoirs can be termed as development of infrastructure facility as defined in explanation (c) to Section 80IA(4) - Whether, for claiming benefit of section 80IA(4), twin conditions that is investment in eligible project and execution of the project by itself, are required to be satisfied.

.

Assessee's appeal dismissed

ORDER

Per: Pramod Kumar:

1. By way of this appeal, the assessee has challenged correctness of CIT(A)'s order dated 9th July, 2008, in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2004-05.

2. In the first ground of appeal, the assessee has raised the following grievance:

"1.a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the view of the ld AO that the appellant was not entitled to deduction u/s.80-IA of the Income tax Act, 1961. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the view of the ld AO that the appellant was a works contractor and not a developer of infrastructure projects claimed by it.

b. The ld CIT(A) erred in deciding the above issue de hors the facts of the case and the submissions made by the appellant, in particular on the scope of the retrospective amendment to section 80-IA and on the subject of investments made and risks assumed by the appellant while developing the eligible infrastructure projects;

c. The ld AO be directed to accept the claim of the appellant for deduction u/s.80IA as retrospectively amended.

3. Briefly stated, the relevant material facts are like this. The assessee is engaged in the business of manufacture of Hume pipes and execution of civil projects. During the relevant previous year, the assessee had business income earned from execution of projects relevant to development of infrastructure facility such as water supply and sewerage projects – composite, and part of composite, projects. The claim of the assessee was that composite water supply projects mean undertaking water supply projects from source to distribution system, which includes manufacturing, supplying, laying, joining of pipeline and includes construction of pump house, delivery, commissioning of turbine pump sets, installation of booster mains, branch mains and elevator reservoirs etc. With this explanation of activity, it was contended that the assessee was engaged in development of infrastructure facility as defined in explanation (c) to Section 80IA(4). The assessee, on these facts and relying upon Tribunal's decision in the case of Patel Engineering Ltd (84 TTJ 646), claimed a deduction of Rs.11,39,42,000 u/s. 80IA of the Act. The Assessing Officer, however, did not accept the said claim. He was of the view that the assessee was a contractor and not developer. Relying upon Hon'ble Supreme Court's judgment in the case of CIT vs. N.C.Budhiraja & Co. (204 ITR 412) = (2002-TIOL-632-SC-IT), the Assessing officer concluded that the assessee cannot be termed as developer of a project merely because assessee has executed the project for actual developer of infrastructure facility, i.e. Government or Semigovernment body concerned, and that the assessee company cannot be construed as an enterprise carrying on business of developing, operating and maintaining of any infrastructure facility. As regards decision of a coordinate bench in the case of Patel Engineering (supra), the Assessing Officer observed that the decision has been challenged before Hon'ble Bombay High Court and does not thus give finality to the dispute. The Assessing Officer thus declined the deduction u/s. 80IA, amounting to Rs.11,39,42,000 to the assessee. Aggrieved, assessee carried the matter in appeal but without any success. Learned CIT(A) upheld the stand of the Assessing Officer and, inter alia, observed as follows:

'9. I have considered the submissions put forth on behalf of the appellant by the learned AR. The filters and parameters of viewing the eligibility of an assessee for a claim under section 80IA(4) of the Act, have been materially altered by virtue of an amendment, inserted by way of an Explanation in Section 80IA, by the Finance Act, 2007, with retrospective effect from 1st April, 2000; a matter which has been ignored by the appellant in its detailed submissions. The omission of the appellant to discuss the eligibility of its claim from the perspectives of the said amendment, is indeed conspicuous by the absence. The said explanation, which has an overriding impact in the matter of the appellant's eligibility of its claim for a deduction u/s.80IA(4) of the Act, is reproduced below:-

"Explanation-for removal of doubts, it is hereby declared that nothing contained in this section shall apply to a person who executes a work contract, entered into with the undertaking or enterprise, as the case may be."

10. This amendment is of recent vintage. In the 'MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL 2007', its purpose and ambit has been discussed as under:-

'Clarification regarding developer with reference to infrastructure facility, industrial park etc. for the purposes of Section 80IA interalia, provides for a ten year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, industrial parks and special economic zones.

The tax benefit was introduced for the reason that industrial modernization requires a massive expansion of and qualitative improvement in infrastructure (viz. expressways, highways, airports, ports and rapid urban rail transport systems) which was lacking in our country. The purpose of the tax benefit has all along been for encouraging private sector participation by way of investment in development of the infrastructure sector and not for the persons who merely execute the civil construction work or any other works contract.

Accordingly it is proposed to clarify that the provisions of section 80-IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the said section. Thus in a case where a person makes the investment and himself carries out the development work i.e. carries out the civil construction work, he will be eligible for tax benefit under section 80-IA. In contrast to this a person who enters into a contract with another person [i.e. undertaking or enterprise referred to in section 80-IA] for executing works contract, will not be eligible for the tax benefit under section 80-IA.

This amendment will take retrospective effect from 1st April, 2000 and will accordingly apply in relation to the assessment year 2000-2001 and subsequent years.

11. It is clear fro the above amendment that an assessee can claim a deduction under section 80IA(4) only if, it makes the investment in the eligible project and itself executes the development work. An assessee will be denied a deduction u/s.80IA(4) if it enters into a contract with another person, for executing a works contract. While those who participate in an eligible project as per the impugned section by way of investment are entitled to seek a deduction u/s.80IA(4), on the other hand those assesses who merely execute a civil construction work or other works contract are not entitled to claim such a deduction. It is pertinent here to discuss the meaning of a works contract for this purpose. A works contract has not been defined in section 80IA of the Act. A works contract is a contract for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building the developer pays for the cast, which includes the cost of building material, labour and other services offered by the contractor. The Supreme Court while laying down the judicial ratio in the case of HAL Ltd. v. State of Orissa, 55 STC 327 observed that in a contract for work, the person producing has 'no property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property earlier. The Apex Court further stated in the case of state of Tamilnadu v. Anandam Vishwanathan (1989) 1 SCC 613 that the nature of contract can be found only when the intentions of the parties are found out. The fact that in the execution of works contract some materials are used and the property in the goods so used, passes to the other party, the contractor undertaking the work will not necessarily be deemed on that account to sell the materials. Primary difference between a contract of work or service and a contract of sale is that in the former, there is the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. When the finished product supplied to a particular customer is not commercial commodity in the sense that it cannot be sold in the market to any other person (other than who commissioned the contractor), the transaction is only a works contract. It was held by the SC, in the case of State of Gujarat v. Variety Body Builders AIR 1976 SC 2108 that where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work.

12. This has been reaffirmed and reiterated by the Supreme Court, in a recent judgment pronounced in the case of State of Andhra Pradesh v. Kone Elevators (India) Ltd., 3 SCC 389 (2005) = (2005-TIOL-30-SC-CT-LB), where it was stated as under :-

"it can be treated as well settled that there is no standard formula by which oe can distinguish a "contract for sale" from a "work contract". The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged there under and the surrounding circumstances. If the intention to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a "contract of sale", the main object is the transfer of property and delivery of possession of the property, whereas the main object in a "contract for work" is not the transfer of the property but it is one for work and labour. Another test often to be applied is: when and how the property of the dealer in such a transaction passes to the customer is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale", if it is the latter, it is a "works contracts". Therefore, in judging whether the contract is for a "sale" or for "work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale, or a "work contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contracts. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a "sale" of a work contract. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties."

13. The contracts executed by the appellant, pursuant to which it has claimed a deduction u/s.80IA(4) must therefore, be measured from the above metrics laid down by the Supreme Court in the matter of works contract. I have perused the copies of the agreements with various undertakings which were executed by the appellant for executing the impugned contracts, which are claimed to fall within the domain of section 80IA(4). It is clear from them that the underlying statues of the appellant in each of them is that of a contractor, who has been engaged in a works contract.

14. It is clear from the above that the appellant had executed a works contract in respect of each of the projects for which it has claimed a deduction u/s.80IA(4) of the Act. the appellant has also been unable to establish as to how did it make an investment in the project, part from not being able to prove that it had not executed a works contract as is evident above. In view of the foregoing, I find no merit in the claim of the appellant for a deduction u/s.80IA of the Act and thus reject this ground of appeal."

4. The assessee is not satisfied by stand so taken by the CIT(A) and is in further appeal before us.

5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

6. We find that there is no dispute about the fact that as the law stands now in the light of retrospective insertion of Explanation below to Section 80IA(13), the assessee is not eligible for deduction u/s. 80IA(4). This Explanation, introduced by Finance Act, 2009 with retrospective effect from 1st April, 2000, provides that "(f)or the removal of doubts, it is hereby declared that nothing contained in this Section (i.e. 80-IA) shall apply in relation to a business referred to in sub-section(4) which is in the nature of works contract awarded by any person (including Central or State Government) and executed by the undertaking or enterprise referred to in subsection (1)". Such being the legal position, and the assessee having merely executed the works contract for infrastructure development as awarded to him, we are of the considered view that authorities below rightly declined the deduction u/s. 80IA to the assessee. We approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.

7. We may mention that while learned counsel does not dispute that issue stands concluded against the assessee by Explanation inserted by Finance Act, 2009, he submits that the decision of a larger bench of this Tribunal,. In the case of BT Patil & Sons Belgaun Constructions Pvt Ltd. vs ACIT [35 SOT 171] = (2009-TIOL-692-ITAT-MUM-LB), which holds that even without the benefit of the aforesaid amendment, is no longer good in law in the light of Hon'ble Bombay High Court's judgment in the case of CIT vs. ABG Heavy Industries Ltd [322 ITR 323] = (2010-TIOL-151-HC-MUM-IT). He takes us through the observations made by Hon'ble Bombay High court, which, according to him, impliedly overrule to the stand taken by larger bench in BT Patil's case (supra). Learned counsel further submits that this aspect of the matter is very important since retrospectively of amendment by Finance Act, 2009 is under challenge before Hon'ble Bombay High Court in the case of Patel Engineering (supra), and in case challenge to retrospectively is upheld, the assessee's claim to deduction will have to be upheld too. Learned Departmental Representative, on the other hand, oppose these contentions and submits that, as held by larger bench in BT Patil's case (supra), even without the benefit 2009 amendment, assessee is not eligible for deduction u/s. 80IA. In our considered view, however, this aspect of the matter is wholly academic at this stage and it does not really call for any adjudication by us. Once it is an admitted position that in view of the law as it is stand now, the assessee is not entitled to deduction u/s. 80IA, it is wholly academic as to what will be the status of the claim if Explanation inserted below Section 80IA(13) is held to be applicable only with prospective effect and not retrospective effect as has been expressly done by the legislature. We need not address ourselves to such hypothetical arguments. As regards the contentions that certain observations made in BT Patil's case (supra) do not hold good law any longer because of the law laid down by Hon'ble Bombay High Court in ABG Heavy Industries Ltd (supra), it is only elementary that once Their Lordships of High Courts expressed view of any subject contrary views of the courts below ceases to hold good in law but then in the present case, it is not really necessary to address ourselves to this aspect of the matter because that aspect of the matter is, at present, wholly academic. We, therefore, see no need to adjudicate upon the arguments which deal with certain hypothetical situation and not the present legal situation. This aspect of the matter is wholly academic and infructuous.