Page 176 - DCOM508_CORPORATE_TAX_PLANNING

Unit 7: Deductions: For Special Conditions

Notes
built up area by the end of the previous year relevant to the assessment year under appeal.

The Assessing Officer accordingly, pointed out a case of breach of one condition stipulated
in the approval granted to the assessee as a SEZ. The assessing authority has observed in

page 10 of his order that “It is apparent from the details filed that this condition has not

been fulfilled by the assessee in order to qualify for the deduction”.
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 crores 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 Offi cer
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 justifi ed
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.

Contd...

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