Page 167 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes The Assessing Officer further observed that the assessee company has derived income
only in the form of lease premium on leasing out the lands to three different companies
and the assessee company has not derived any profits and gains as a developer of the SEZ.
According to the Assessing Officer, the income declared by the assessee company has not
been derived from the business of developing SEZ. The reason to come to the above
conclusion is that the assessee company has given the land on a perennial lease of 99 years
with further scope of renewal, which in effect is nothing but a sale. Relying on the decision
of the Hon’ble Supreme Court in the case of R. Palshikar (HUF) v. CIT (172 ITR 311), the
Assessing Officer held that the long term lease of 99 years granted by the assessee company
is nothing but sale of land. He, therefore, held that the income of the assessee company
was in the nature of capital gains arising on sale of land. He accordingly, declined assessee’s
claim of deduction under sec.80-IAB.
Once the Assessing Officer denied the exemption to the assessee company under
sec.80-IAB, he also made certain other additions to the taxable income of the assessee
company. The assessee company has created a provision for project development cost on
the basis of estimates for different works to the extent of ` 24,60,28,194/-. The assessee has
treated an amount of ` 7,88,47,215/- as proportionate project development cost for the
unleased area, from the above total provision. It was accordingly, taken as stock inventory.
The balance provision of ` 16,71,80,979/- has been claimed by the assessee as pertaining to
leased out lands. According to the Assessing Officer, only an amount of ` 3,89,84,177/- was
actually spent on the project in the previous year and even that amount was not taken as
part of the closing stock. On the other hand, it was written off as expenses. The Assessing
Officer therefore, held that the provision should be treated as relating to the development
expenditure of land and, therefore, to be disallowed. Accordingly, the amount of
` 16,71,80,979/- was added to the income. The assessee has made a donation of ` 2 crore in
the previous year and debited the profit and loss account. This amount was also disallowed
by the Assessing Officer and added back to the income. Thus, finally, the Assessing Officer
has determined a total income of ` 89,89,01,282/- in the hands of the assessee company.
The assessment went through different courts and the final verdict reflected that the assessee
is an approved Developer of SEZ. The only activity carried on by the assessee is developing
a sector specific SEZ. It has leased out the developed plots to the entrepreneurs who had
obtained the letter of approval from the competent authority. Sec.80-IAB provides that
setting up of a SEZ is the business of developing SEZ. Therefore, the assessee is not
expected to perform any other activity than developing of a SEZ to qualify for deduction.
In the facts and circumstances of the case, we find that the lower authorities are not
justified in refusing deduction under sec.80-IAB. The claim of deduction made by the
assessee under sec.80-IAB is in accordance with law. The assessing authority is directed to
give the deduction. Other issues raised in this appeal relating to different additions are
only academic for the reason that those items, even if added to the total income of the
assessee, are still part of 100% deduction available under sec.80-IAB; so also is the ground
raised by the assessee on taxing of dividend income. This principle has been upheld by the
Hon’ble Bombay High Court in CIT v. Punit Commercial Ltd. (245 ITR 550).The assessing
authority is therefore, directed to re-do the assessment after giving the assessee deduction
under sec.80-IAB. In result, this appeal filed by the assessee is allowed.
Questions

1. Study and analyse the case.
2. Write down the case facts.
3. What do you infer from it?
Source: http://taxguru.in/income-tax-case-laws/deduction-80iab-sez-developer-allowable-income-lease-
rentals-developed-area.html

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