Wednesday, October 9, 2013

Receipts on transfer of building in SEZ to AEs eligible for sec. 80-IAB relief as it was an authorized activity

IT: Where assessee had transferred a building constructed by it in Special Economic Zone on long-term lease to an associate concern, which was authorized activity, assessee was eligible for deduction under section 80-IAB in respect of profit derived from transfer of said building
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[2013] 37 taxmann.com 311 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'F'
DLF Info city Developers (Chennai) Ltd.
v.
Assistant Commissioner of Income-tax, Gurgaon*
R.P. TOLANI, JUDICIAL MEMBER 
AND T.S. KAPOOR, ACCOUNTANT MEMBER
IT APPEAL NO. 2637 (DELHI) OF 2012
[ASSESSMENT YEAR 2007-08]
AUGUST  2, 2013 
Section 80-IAB, read with section 263, of the Income-tax Act, 1961 - Deductions - Special Economic zones, development of [Authorised activities] - Assessment year 2007-08 - Assessee-company was engaged in business of real estate development and leasing of constructed properties - It submitted a proposal for development of a sector in Special Economic Zone [SEZ] - Board of approval [BOA] granted such approval - It also granted approval of authorized activities -Thereafter assessee as per SEZ Act, 2005 entered into co developer agreement and transferred 'B' building constructed by it in SEZ on long-term lease to an associate concern - This exercise was carried out as per scheme, policy, procedure and approvals of Ministry of Commerce and Industry and BOA - Assessee claimed deduction under section 80-IAB in respect of profit derived from transfer of 'B' building -Assessing Officer completed assessment under section 143(3) and allowed claim of deduction under section 80-IAB - Whether since there was enough material on record to hold that transfer of 'B' building to associate concern constituted authorized activity, there was no error in order of Assessing Officer allowing deduction under section 80-IAB - Held, yes [Paras 9,9.3 & 9.6] [In favour of assessee]
Circulars and Notifications : Circular No. 4/2007, dated 15-6-2007
FACTS
 
 The assessee-company was engaged in the business of real estate development and leasing of constructed properties. It submitted a proposal on 13-6-2005 for development of a sector in Special Economic Zone [SEZ]. The Board of Approval [BOA] granted the approval mentioning various general conditions. Thereafter the assessee sought approval of authorized activities. The BOA listed out the same. Thereafter the assessee as per the SEZ Act, 2005 entered into a co developer agreement and transferred a building, namely, 'B' building constructed by it in the SEZ on long-term lease to an associate concern, namely, 'D'. This exercise was discreetly carried out as per the scheme, policy, procedure and approvals of the Ministry of Commerce and Industry [MCI] and BOA, which approved the co developer agreement and transfer to be authorized activities. In the return of income for the assessment year 2007-08, the assessee claimed deduction under section 80-IAB in respect of the profit derived from the transfer of 'B' building.
 The Assessing Officer completed the assessment under section 143(3) and allowed the claim of deduction under section 80-IAB. He held that the assessee had got approval from the MCI for development of a sector in SEZ. After going through all the particulars of the case, the income as returned by the assessee was accepted.
 Thereafter, the Commissioner issued on the assessee a notice under section 263 on 27-6-2011 proposing that the assessment order passed by the Assessing Officer was erroneous insofar as it was prejudicial to the interests of the revenue. He rejected the objections raised by the assessee and passed the order under section 263 on 29-3-2012. He held that in terms of notification dated 27-10-2006 issued by the MCI, transfer of 'B' building was not an authorized operation of the SEZ. The claim for deduction under section 80-IAB was allowed by the Assessing Officer without conducting proper enquiries and examination of its eligibility as envisaged in the approval of the BOA. The claim of the assessee required careful and detailed examination and opinion of the Assessing Officer which was not possible in the few days available between last submission received from the assessee on 28-3-2012 and close of the financial year on 31-3-2012. Therefore, the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of revenue. He, therefore, cancelled the assessment order and directed the Assessing Officer to make a fresh assessment after careful and comprehensive examination of the claim of the assessee for deduction under section 80-IAB.
 On appeal to Tribunal:
HELD
 
 Apropos the issue that no inquiries were conducted by the Assessing Officer, one is unable to agree with the revenue inasmuch as the Assessing Officer asked for justification of deduction under section 80-IAB, which is duly responded by the assessee. The assessment record means the proceeding sheet, material available on record and the replies of the assessee. Considering these aspects it emerges that all the required documents were filed and considered by Assessing Officer and on being satisfied deduction under section 80-IAB was allowed. Thus the case before the Bench is not of lack of inquiry and the condition mentioned in Notification dated 27-10-2006 issued by the MCI giving to the Assessing Officer the right to examine the taxability of deduction claimed under section 80-IAB in the spirit of SEZ provision stands vindicated. Besides this rider appears to be made while approving the co developer agreement. This is possibly applicable to co developer and not the assessee, as the condition was put during the course of approval of the agreement between the assessee and the co developer. Be that as it may, in any case, the Assessing Officer having considered all these pleading and submissions, it cannot be held that he did not examine the allowability of the claim by proper inquiry. Therefore, there is no substance in this finding. Thus the assessment order neither suffers from the lack of inquiry, nor any error on this count. [Para 9]
 In any case this is not a case of lack of inquiry. The order does not become erroneous only because the Commissioner in his view holds that inadequate inquiries were conducted. [Para 9.1]
 Apropos lack of time, it is observed that there was no fault attributable to the assessee for causing hiatus to the proceedings. The assessee's detailed reply covering all the aspects was filed as back as on 25-7-2011, i.e., eight months prior to the proceedings. The Commissioner himself called the Assessing Officer in hearing and asked him to submit a report and ensure that the report is filed. Non seeking of Assessing Officer's remand report also is not attributable to the assessee. [Para 9.2]
 In the instant case, the issue is limited, i.e., whether claim for deduction under section 80-IAB was considered by the Assessing Officer or not. It clearly emerges from the assessment record that relevant queries were raised by Assessing Officer, detailed submissions, developers and co developers agreements were filed, justification for deduction under section 80-IAB was provided by the assessee and the nature of debts owed by 'D' consequent to such transfer was also asked for by the Assessing Officer. [Para 9.3]
 It clearly emerges that by the end of the hearing the Commissioner brushed aside the consideration of issue by holding that he has no sufficient time to go into the material, therefore, the assessment is set aside to the Assessing Officer, who will carry out detailed inquiry. The Commissioner failed to discharge his statutory duty and instead of taking a clear call and demonstrating errors made by Assessing Officer and prejudice caused to the revenue, the buck has been passed on to the Assessing Officer by setting aside assessment order, which is against the letter and spirit of provisions of section 263. [Para 9.4]
 Apropos the issue of transfer of 'B' building being authorized activity, it is amply clear that under the SEZ Act authorizes activities include construction of 'B' building and transfer thereof. BOA has approved it and clarified the same. There is enough material on the record to hold that the transfer of 'B' building to the associate concern constitute authorized activity. Thus, there is no error on any count as held by Commissioner in the order of Assessing Officer allowing deduction under section 80-IAB. [Para 9.5]
 Even if the worst is assumed against the Assessing Officer, his allowability of claim under section 80-IAB to assessee may be held to be a possible and plausible view. In such eventuality also, merely because the Commissioner in his perception held another possible view about claim under section 80-IAB, the assessment order does neither become erroneous nor prejudicial to the interests of revenue. Therefore, the assessment order is neither erroneous nor prejudicial to the interests of revenue. Therefore, the Commissioner's order under section 263 deserved to be quashed. [Para 9.6]
CASE REVIEW
 
CIT v. Nagesh Knitwears (P.) Ltd[2012] 345 ITR 135/210 Taxman 145 (Mag.)/22 taxmann.com 309 (Delhi) (para 9.3), CIT v. DLF Power Ltd.[2012] 345 ITR 446/211 Taxman 123 (Mag.)/17 taxmann.com 269 (Delhi) (para 9.3) and CIT v. Harsh J. Punjabi [2012] 345 ITR 451/27 taxmann.com 175 (Delhi) (para 9.3) distinguished.
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 9.6) and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 9.6) followed.
CASES REFERRED TO
 
CIT v. Sutlej Cotton Mills Supply Agency Ltd[1975] 100 ITR 706 (SC) (para 6.6), Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC) (para 6.6), Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC) (para 6.6), Fidelity Advisor Series VIII, In re [2004] 271 ITR 1/[2005] 142 Taxman 111 (AAR - New Delhi) (para 6.6), CIT v. Associated Industrial Development Co. (P.) Ltd[1971] 82 ITR 586 (SC)(para 6.7), CIT v. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC) (para 6.7), Fidelity North star Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR - New Delhi) (para 6.7), Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 6.11), CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) (para 6.11), CIT v. Arvind Jewellers [2003] 259 ITR 502/[2002] 124 Taxman 615 (Guj.) (para 6.11), CIT v. DLF Power Ltd[2010] 329 ITR 289/[2009] 185 Taxman 356 (Delhi) (para 6.11), CIT v. Sunbeam Auto Ltd[2011] 332 ITR 167/[2010] 189 Taxman 436 (Delhi)CIT v. Honda Siel Power Products Ltd[2011] 333 ITR 547/[2010] 194 Taxman 175 (Delhi) (para 6.12),CIT v. Anil Kumar Sharma [2011] 335 ITR 83/[2010] 194 Taxman 504 (Delhi) (para 6.12), Vodafone Essar South Ltd. v. CIT [2012] 51 SOT 57 (URO)/[2011] 12 taxmann.com 233 (Delhi) (para 6.12), Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) (para 6.17), Malayala Manorama Co. Ltd. v. CIT [2008] 300 ITR 251/169 Taxman 471 (SC) (para 6.17), CIT v. HCL Comnet Systems & Services Ltd[2008] 305 ITR 409/174 Taxman 118 (SC) (para 6.17), Marmo Classic v. Commissioner of Customs 2002 (143) ELT 153 (Tri - Mum.) (para 6.17), Marmo Classic v. Commissioner 2003 152 (ELT) 785 (SC) (para 6.17), Lokash Chemical Works v. M.S. Mehta, Collector of Customs 1981 (8) ELT 235 (Bom.) (para 6.17), Tital Medical Systems (P.) Ltd. v. Collector of Customs 2003 (151) ELT 254 (SC) (para 6.17), Hico Enterprises v.Commissioner of Customs 2005 (189) ELT 135 (Tri - Mum.)(LB) (para 6.17), Commissioner of Customs (Imports) v. Hico Enterprises 2008 (228) ELT 161 (SC) (para 6.17), Atul Commodities (P.) Ltd. v. Commissioner of Customs 2009 (235) ELT 385 (SC) (para 6.17), M.J. Exports Ltd. v. CEGAT 1992 (60) ELT 161 (SC) (para 6.17), CIT v. Nagesh Knitwears (P.) Ltd. [2012] 345 ITR 135/210 Taxman 145 (Mag.)/22 taxmann.com 309 (Delhi) (para 7.1), CIT v. DLF Power Ltd[2012] 345 ITR 446/211 Taxman 123 (Mag.)/17 taxmann.com 269 (Delhi) (para 7.1),CIT v. Haresh J. Punjabi [2012] 345 ITR 451/27 taxmann.com 175 (Delhi) (para 7.1), CIT v. Vikas Polymers [2012] 341 ITR 537/[2010] 194 Taxman 57 (Delhi) (para 8), ACG Associated Capsules (P.) Ltd. v. CIT [2012] 343 ITR 89/205 Taxman 136 (Mag.)/18 taxmann.com 137 (SC)(para 9.3), CIT v. Kalpataru Colours & Chemicals [2010] 328 ITR 451/192 Taxman 435 (Bom.) (para 9.3) and Topman Exports v. CIT [2012] 342 ITR 49/205 Taxman 119/18 taxmann.com 120 (SC) (para 9.3).
R.S. Singhvi for the Appellant. Dr. Sudha Kumari for the Respondent.
ORDER
 
R. P. Tolani, Judicial Member - This is assessee's appeal against order dated 29-03-2012 passed by the Commissioner of Income-tax, Faridabad u/s 263 of the Income-tax Act, 1961, setting aside the assessment due to allowance of assessee's u/s 80-IAB by the assessing officer, in relation to A.Y. 2007-08; holding it to be erroneous and prejudicial to the interest of the revenue.
2. The assessee has taken various grounds in this behalf, following is the brief summary thereof:
(i) The order of ACIT Gurgaon Circle, Gurgaon is neither erroneous nor prejudicial to the interest of revenue.
(ii) CIT erred in misinterpreting the observations of Board of Approval ("BOA") while granting approval under the SEZ Act and holding the assessee's activity of transfer of bare shell building as an unauthorized operation under the SEZ Act.
(iii) CIT failed to appreciate that admittedly Chennai SEZ was approved by the BOA and was duly notified in the gazette of India.
(iv) While exercising revisionary power, CIT cannot sit over the judgment of the Competent Authority i.e. BOA disregarding it's approval and ordering the re-examination thereof.
(v) CIT failed to appreciate that his objections related to lease of land only and is not related to any other unauthorized operation including handing over and transfer of bare shell buildings. The land has not been transferred by the appellant.
(vi) CIT erred in holding that assessing officer granted deduction u/s 80-IAB without proper examination of the BOA approval in the co-developer agreement between the assessee and the co-developer.
(vii) CIT erred in law in holding that the assessment order passed u/s 143(3) by assessing officer was erroneous as assessing officer allowed the claim u/s 80-IAB without any examination.
(viii) CIT erred in law in passing 263 order without waiting for a remand report from which was called by him from assessing officer during the course of hearing on 6-3-2012.
(ix) CIT erred in law in passing the order without considering the material, applying his mind and passing 263 order by admitting that he was short of time.
(x) Setting aside the assessment to AO by holding that issue required careful and detailed examination which was not possible in few days available between submissions received from the assessee on 28-3-2012 and close of the F.Y. on 31-3-2012. The correct fact is that assessee has filed information well in time which is on the record. CIT cannot set aside the assessment merely because he does not have time to examine the explanation of the assessee. Thus the 263 action is liable to be quashed.
(xi) 263 jurisdiction cannot be invoked and exercised by CIT merely because on a tentative information he holds a different opinion than AO on the issue and then without considering the explanations to show cause notice setting aside the assessment.
3. Brief facts are: For infrastructural development of the country, Govt. of India among various other measures and legislations, enacted SEZ ACT 2005, offering slew of benefits to developers of various SEZ's in India. The legislation has overriding effect over all other legislations or instruments, by virtue of specific provisions of sec. 51(1) of SEZ Act which reads as under:
"51. (1)The provisions of this Act shall have effect notwithstanding anything inconsistent contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act."
3.1 The SEZ Act is a comprehensive legislation, by sec 8(1) a regulatory body called as "Board Of Approval" ( for short BOA) is created conferring wide powers on it which are enshrined in SEZ Act placed on record.
3.2 Provisions of sec 8(9) further empower the BOA and reads as under:
"9. (1) Subject to the provisions of this Act, the Board shall have the duty to promote and ensure orderly development of the Special Economic Zones. Duties, powers and functions of Board.
(2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Board shall include -
(a) granting of approval or rejecting proposal or 11 modifying such proposals for establishment of the Special Economic Zones;
(b) granting approval of authorised operations to be carried out in the Special Economic Zones by the Developer;
(c) granting of approval to the Developers or Units (other than the Developers or the Units which are exempt from obtaining approval under any law or by the Central Government) for foreign collaborations and foreign direct investments, (including investments by a person resident outside India), in the Special Economic Zone for its development, operation and maintenance;
(d) granting of approval or rejecting of proposal for providing infrastructure facilities in a Special Economic Zone or modifying such proposals;
(e) granting, notwithstanding anything contained in the Industries (Development and Regulation) Act, 1951, a licence to an industrial undertaking referred to in clause (d) of section 3 of that Act, if such undertaking is established, as a whole or part thereof, or proposed to be established, in a Special Economic Zone;
(f) suspension of the letter of approval granted to a Developer and appointment of an Administrator under subsection (1) of section 10;
(g) disposing of appeals preferred under sub-section(4) of section 15;
(h) disposing of appeals preferred under sub-section (4) of section 16;
(i) performing such other functions as may be assigned to it by the Central Government."
3.3 Assessee submitted a proposal for Development of an SEZ at villages-Manapakkam and Mylivakkam in Sriperumbur Taluka, Kancheepuram; Tamil Nadu (called Chennai Project) on 13-06-2005. The approval was granted by BOA mentioning various general conditions. Thereafter assessee by letter dated. 12-07-2006 sought approval of authorized activities. BOA vide letter dtd 29-08-2006 listed out the same.
3.4 Thereafter assessee as per the SEZ Act entered into co developers agreement which was approved by BOA. Consequent to the approval the Bare shell building constructed by assessee in this SEZ were transferred on long term lease to an associate concern DLF Assets Ltd. This exercise was discreetly carried out as per the scheme, policy, procedure and approvals of MCI & BOA which approved the co developer agreement and transfer to be authorized activities. By SEZ Act sec 80IAB was introduced in I T Act prescribing that the profits derived from authorized activities at approved SEZ were eligible for deduction u/s 80IAB. Assessee filed its return of income accordingly claiming the deduction of income from such transfer i.e. Rs. 3,80,99,45,760/- u/s 80IAB.
3.5 The assessee's assessment for A.Y. 2007-08 was completed u/s 143(3) on 31-12-2009 by AO, allowing its claim u/s 80IAB amounting to Rs. by following observations:
"(1) The assessee e-filed its return of income in Ward-1, Gurgaon on 31-10-2007 showing NIL income. Notice under section 143(2) was issued to the assessee on 17-11-2008 asking the assessee to appear on 28-11-2008. The case was subsequently transferred to this Circle. The case was represented by Sh. A.K. Srivastava. On 19-11-2009, 1-12-2009, 10-12-2009, 14-12-2009, 18-12-2009, 24-12-2009 and 29-12-2009, hearings were attended and submissions were made. During the course of assessment proceedings, the books of accounts were produced and test checked. The case was discussed.
(2) The assessee is in the business of real estate development and leasing of constructed properties.
(3) The assessee is an SEZ claiming eligibility u/s 80IAB which has been verified. The company has got approval from the Ministry of Commerce and Industry, Department of Commerce (EPZ section) vide letter dated 22-06-2006 bearing no. F2/124/2005-EPZ for development, operation of Sector Specific Economic Zone for IT/ITES at Chennai, being developed by the company in terms of Special Economic Zone Act, 2005 and Special Economic Zone rules, 2006. Vide another notification issued by the Ministry of Commerce and Industry dated 16-11-2006, an additional area of 34,384 hectors was notified and included as a part of Special Economic Zone.
(4) After going through all the particulars of the case, the income as returned by the assessee is accepted.
 Interest u/s 234A, B,C & D is being charged in the ITNS which is part of this assessment order. Credit for prepaid taxes if any is being allowed. Requisite documents are being issued."
3.6 Thereafter, the CIT issued a notice u/s 263 dated 17-6-2011 proposing that in his view this assessment order passed by ACIT Gurgaon was erroneous insofar as it was prejudicial to the interests of the revenue, the same is placed on PB 56-57. CIT proposed the assessment order suffers from following errors:
(i) The assessee has wrongly claimed deduction u/s 80IAB on sale of bare shell buildings as such sales cannot be equated with the activity of developing and maintaining the SEZ.
(ii) Sale of Bare shell building is not an authorized operation.
(iii) While approving the co developers agreement the revenues representative had pointed out that such transfer was against the spirit of SEZ Act. The BOA approval was made subject to right of AO to examine the taxability of such amounts under I T Act.
(iv) The sale of bare shell buildings to co developer is nothing but sale of capital assets because by such agreement assessee had relinquished all rights over the building. Accordingly the income from sale of bare shell buildings was capital gains on sale of buildings.
3.7 It was proposed that AO's order was erroneous and prejudicial to the interest of revenue, therefore, why it should not be accordingly revised u/s 263.
3.8 Assessee attended the 263 proceedings, filed detailed written submission, correspondence with MCI & BOA, copies of agreements, notifications. Details of compliance during the course of assessment proceedings including the proceeding sheet of assessments. It was claimed that their was neither error in the order of AO nor it was prejudicial to the interest of revenue, therefore, it was not justifiable to revise such an order which was passed after considering the complete material on record, conducting of appropriate enquiries, application of proper mind and legal provisions. The written submissions, compliance and clarifications are part of the paper book filed on the record.
3.9 The CIT however passed order u/s 263 dated 29-3-2012 holding the assessment order to be erroneous and prejudicial to the interests of revenue, by following observations:
'3. A careful perusal of assessment records reveals that this claim for deduction u/s 80-IAB was in respect of receipts on account of ale of bare shell buildings, constructed on SEZ land to M/s DLF Assets Ltd., a group company, with whom the assessee had entered into a co-developer agreement.
4. When the aid co-developer agreement between the assessee and its group company, namely, M/s DLF Assets Pvt. Ltd. had come up for consideration by the SEZ Board of Approval (BOA), the representative of the Department of Revenue (DOR) had pointed out that "the co-developer agreement refers to transfer and hand over (of) the deeds which states that co-developer shall be the owner of the SEZ building on payment of development consideration, which is against the spirit of SEZ Act and Rules." Taking this into consideration, the BOA approval was made subject to right of the assessing officer to examine the taxability of these amounts under the Income Tax Act, 1961, The relevant portion of approval of the BOA conveyed through letter dated 01-06-2009 of the Director (SEZ Section), Department of Commerce, Ministry of Commerce and Industry (para xvii) is as follows:
"Approval given by BOA for co-developers for particular terms and conditions of lese agreement will not have any bearing on the treatment of the income by way of lease rental/ down payment/ premium etc. for purposes of assessment under the prevalent income tax Act and rules. The assessing officer will have the right to examine the taxability of these amounts under the income tax".
5. While section 80-IAB provides for deduction in respect of profits and gains from activities of developing, operating and maintaining SEZs, the assessee had claimed deduction under the said section on the receipt of sale proceeds of bare shell buildings and such sale cannot be equated with the activity of developing, operating and maintaining the SEZ. As a matter of fact, in terms of notification dated 27-10-2006 issued by the Ministry of Commerce and Industry, Govt. of India, sale of buildings, including bare shells, was not an authorized operation of the SEZ.
6. It is also seen that t he above observations of the BOA were omitted to be reckoned by the assessee in asserting its claim for deduction under section 80 IAB of the Income tax Act, 1961, before the assessing officer (para 8 of note on claim, along with letter dated 29-12-2009).
"The company being an eligible Developer of notified SEZ, has delivered income from business of development of the SEZ as described in section 80 IAB above. The company has opted to claim the deduction under section 80 IAB in AY 2007-08.It satisfies all the conditions prescribed in the Act and the Rules. In the return of income filed by the company, deduction I respect of income derived from the SEZ has been claimed., A certificate dated 31-10-2007 in Form No. 10CCB, as required in terms of statutory provision was obtained from an accountant M/s Walker Chandiok & Co. Chartered Accountants. A copy of the same has been filed and is on record. For sake of convenience another copy is filed herein - Annexure IV"
7. As evident from the assessment order (para 3, reproduced above) In my considered view, the above said assessment under section 143(3) dated 31.12.2010 was erroneous because the claim for deduction under section 80lAB of the IT Act, tp61 was allowed without any examination of this claim, as stipulated In the BOA approval of the co-developer agreement between the assessee and its group company, Further, because of wrong allowance of deduction of Rs 3,80,99,45,760/- under section 80lAB of the IT Act, 1961, the said assessment order was prejudicial to revenue.
8. Accordingly, a show cause under section 263 of the IT Act, 1961 was issued on 17.06.11 and tile assessee was required to represent its case on 15.07.2011. There was no response on the said date, but on 25.07.11, Sh VK Choudhary, senior VP, Taxation and Sh Sandeep Dinodla, CA appeared and made written submissions-dated 25-07-2011 and after discussions and- as desired by the assessee, the hearing was re-scheduled for 24.08.11. There was no response on this date, but on 24.10.11 a request was received from the assessee to re-schedule the hearing, and as agreed by the assessee, the hearing was fixed for 21.11.11. Yet again, while there was no response on 24.10.11, on 10.01.12 the assessee made a request for another adjournment and the hearing was scheduled for 02.02.12.
9. Eventually, on 06.03-12 the representatives of the assessee appeared and made written submissions dated 06.03.12, and the hearing was adjourned 13.03.2012, after seeking some more details. The representatives of the assessee appeared and made partial submissions. Accordingly, the hearing was adjourned to 20.03.12, on which date the assessee made further submissions. Once again, fresh submissions dated 28.03.1.2 were received 011 28.03.12, and these included an opinion from Justice VN Khare (former CJI, India), apparently supporting claim of the assessee.' '
10. In short, after the initial submissions-dated 25.07.11 there was a long hiatus in the proceedings due to several adjournments sought by the assessee from time to time. Only in recent weeks the assessee appeared and made detailed written submissions on several occasions, Including the last submission-dated28.03.12,-received on the same day. As these proceedings are getting time barred -bV3ioii2~there is little time to seek opinion of the assessing officer and take a considered view in the matter.
11. At the same time, I am satisfied that the assessment order dated 31.12.2009 for Asstt. Year 2007-08 is erroneous because the claim for deduction under section 80 IAB of the Income Tax Act, 1961 was allowed without any examination of its eligibility as envisaged in the approval of the Board of Approval (OOA), and this assessment order is prejudicial to revenue because the incorrect claim of Rs. 380,99,45,760/- has been allowed. Further, the claim of the assessee requires careful and detailed examination, which is not possible in the few days available between last submission received from the assessee on 28-03-2012 and close of the financial year on 31-03-2012.
12. In given circumstances, the above said assessment order dated 31-12-2009 is cancelled and the assessing officer is directed to make a fresh assessment after careful and comprehensive examination of the claim of the assessee for deduction under section 80IAB of the Income Tax Act, 1961.'
Aggrieved the assessee is before us challenging the impugned 263 order on various counts.
4. Wrong allegation by CIT that assessee delayed the 263proceedings
4.1 Ld. Counsel for the assessee at the outset vehemently contends that the observations of the CIT given in paras 8 & 9 of his order attributing delay/hiatus of hearing of 263 proceedings to assessee are based on appreciation of facts. The initial show cause notice u/s 263 was issued on 17-6-2011. The assessee appeared on 25-7-2011 along with his representative and Sr. V.P. (Taxation) and filed a 64 pages detailed written submission dated 25-7-2011 which is admitted by CIT in his order and is placed on PB pages 58 to 122. The written submissions are comprehensive, self explanatory and deal with each and every aspect of the facts including case laws. Ld. CIT wanted to go through the same and adjourned the hearing to 24-8-2011.
4.1.1 Thereafter the assessee appeared from time to time before the CIT between 25-7-2011 to 6-3-2012. No further query on submissions were asked or communicated by CIT. On some occasion it was informed that CIT has not been able to go through the assessee's written submissions and hearings were adjourned, few of them are at assessee's request also, however, while seeking adjournment no queries were asked to be supplied on next hearing. In these circumstances the delay cannot be solely attributed to the assessee in this behalf. Having filed comprehensive submissions with all the enclosures there was nothing left for assessee to do unless CIT desired more information or raised specific queries. Thereafter the CIT fixed the date of hearing on 6-3-2012 and asked the assessee to file a gist of written submissions and called the concerned assessing officer Shri D.S. Kalyan also for hearing.
4.2 On 6-3-2012 the assessee's representative and Sr. V.P. Taxation appeared before the CIT and filed the required gist of submissions. The assessing officer Shri D.S. Kalyan ACIT (OSD) Range-I, Gurgaon was also present. CIT asked him to file a report on the submissions of the assessee. The assessee was asked to give following documents:
(i) Minutes of Board meeting, approving the sale of bare shell buildings;
(ii) The techno financial basis for calculation of sale price. Hearing was then fixed for 13-3-2012 as the next date of hearing.
4.3 On 13-3-2012 the assessee's representative filed submissions as desired vide letter dated 13-3-2012. Only the minutes of the Board meeting could not be produced. The assessee was again asked to make further submissions, if any, by the CIT and the case was fixed on 20-3-2012.
4.4 On 20-3-2012 the assessee's representative appeared and filed written submissions. The case was again adjourned to 26-3-2012 on CIT's instance.
4.5 On 26-3-2012 also the assessee attended. The CIT on his own directed to appear on the next day i.e. 27-3-2012.
4.6 On 27-3-2012 again assessee attended and CIT directed to come on 28-3-2012.
4.7 On 28-3-2012 assessee attended and again filed a gist of written submissions.
4.8 On 29-3-2012 the order u/s 263 was passed alleging that there was no time left to call for assessing officer's report and consideration of submissions filed by assessee. It was arbitrarily held that the assessee was responsible for hiatus in the hearing of proceedings. Thus, the assessment was set aside.
4.9 Ld. Counsel contends that the CIT has not appreciated the facts properly. It is wrong to say that he could not go through the submissions because of the hiatus created by the assessee and there was no time to seek opinion of the assessing officer and take a considered view in the matter. Thus, the CIT's observations in this behalf are untenable on following grounds:
(i) There was no fault on the part of the assessee for alleged hiatus. The detailed submissions were filed way back on 25-7-2011 i.e. 8 months prior to proceedings getting the time barred.
(ii) The adjournments, if any, mostly were at the instance of the CIT as he could not go through the submissions.
(iii) The assessing officer Shri D.S. Kalyan who is subordinate officer was called by the CIT on his own accord on 6-3-2012 and asked to file his report on assessee's submissions. The late calling of the officer is not attributable to assessee. The CIT could have given time bound order to AO to submit his report in time, which was not done. Consequently, assessee has no role to play in the alleged hiatus.
(iv) CIT's non consideration of assessing officer's report which was called by him on his own motion and wisdom is a serious aberration and non filing is wrongly attributed to assessee. Exercise of 263 powers cannot be taken so casually and routinely by the Ld. Commissioner as it is a guarded statutory exercise subject to judicial review. It reflects the predetermined mind of the CIT to revise the order without applying mind and even waiting for the assessing officers report.
(v) There is no justification for the CIT to hold that there is little time to seek opinion of the assessing officer and take a considered view in the matter. Section 263 casts a statutory obligation on the part of CIT to take a considered view in the matter. Section 263 does not postulates that CIT can take a view that the order passed by assessing officer as erroneous and prejudicial to the interests of revenue, without considering assessee's replies in response to his show cause notice. This action of the CIT while exercising power u/s 263 amounts to violation of the statutory provisions of revisionary power and on this count the CIT's 263 order deserves to be quashed.
(vi) All the record was available with the CIT and there is no justification in giving a specious plea that the assessee's claim required careful and detailed examination which is not possible in few days available between last submissions received from the assessee on 28-3-2012. The plea is an eye wash, assessee expeditiously submitted all details which is evident from the letter dated 28-3-2012 itself. The same refers to earlier submissions dated 25-7-2011, 6-3-2012, 13-3-2012 and 28-3-2012. Therefore, the CIT has cleverly taken the final gist filed by the assessee to be the only submission filed before him in order to wrongly justify his untenable action u/s 263 and set aside the assessment.
(vii) Ld. Counsel contends that the order u/s 263 is admittedly passed without considering the report of the assessing officer, without considering the detailed explanations and Govt. approvals. Under these circumstances, the order passed by the ld. CIT becomes untenable based on misrepresentation of facts and runs contrary to the letter and spirit of the provisions of section 263. Consequently the purported order deserves to be quashed on these counts also.
5. The provisions, significance and overriding effect of SEZ Act 2005:
5.1 Ld. counsel pleads that SEZ Act was enacted as an umbrella legislation to boost the infrastructural development of India and various SEZ's were sanctioned in the deferent parts of the country. The Act comes under the aegis of Ministry of commerce and Industry (MCI) and the implementation of the Act, Rules and other aspects are entrusted by the SEZ Act to a powerful body known as Board Of Approvals (BOA). Sec 80IAB of was not introduced by Income Tax Act but by SEZ Act 2005. It also amended various other laws, relevant Income Tax related amendments are provided in sec 27 of SEZ Act which reads as under:
"Sec. 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 entrepreneur for carrying on the authorised operations in a Special Economic Zone or Unit subject to the modifications specified in the Second Schedule."
5.2 The second schedule in clause 13 amends a host of laws who have bearing on the development of SEZ's in India. It also incorporates insertion of sec. 80IAB in the I T Act (without amending the Finance Act) as under :
'"THE SECOND SCHEDULE"
(13) nothing contained in this section shall apply to any Special Economic Zones notified on or after the 1st day of April, 2005 in accordance with the scheme referred to in sub clause (iii) of clause (c) of sub-section (4)".
(f) after section 80-IA, the following section shall be inserted, namely:-
Deductions in "80-I AB. (1) Where the gross total income of an assessee,
(13) nothing contained in this section shall apply to any Special Economic Zones notified on or after the 1st day of April, 2005 in accordance with the scheme referred to in sub clause (iii) of clause (c) of sub-section (4)".
(f) after section 80-IA, the following section shall be inserted, namely:-
Deductions in "80-I AB. (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 1st day of April, 2005 under the Special Economic Zone Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent, of the profits and gains derived from such business for ten consecutive assessment years."
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government:
Provided that where in computing the total income of any undertaking, being a Developer for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (13) of section 80-1A, the undertaking being the Developer shall be entitled to deduction referred to in this section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in sub-section (1) or sub-section (2) as the case may be:
Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer.'
5.3 The SEZ Act 2005, as well as, Income Tax Act, 1961 have placed 'Developer' and the 'Co-Developer at the same level i.e. for Development (creating infrastructure facilities), maintenance and operations. It was in this context that SEZ BOA, under the aegis of Ministry of Commerce, approved conversion of 'bare shell' into 'warm shell by the Co-Developer as 'Authorised Operations', The SEZ 'BOA' is the only competent authority (to the exclusion of other authorities) conferred with necessary powers to determine whether an operation constitutes "Authorised Operations" or not within the meaning of Section 2 (C) of the SEZ Act. The decision of Competent Authority is binding on the other authority including Income-tax authorities.
Duties, powers and functions of Board Of Approval:
5.4 Section 9 of the SEZ Act, 2005 deals with them, clause (b) of sub-section 2 of section 9 reads, "granting approval of authorized operations to be carried out in the special economic zone by the Developer. In other words, no other authority can sit in judgment over power of 'BOA' to prescribe what are "Authorized Operation" for the purpose of SEZ Act. Thus by legislative scheme, SEZ Act empowers only BOA as competent authority and no other correlated agency providing any benefit, including Income Tax Department, to have any power to determine what is Authorized Operation or review the determination of BOA in this behalf. The role of Income Tax Authorities / Department is limited to provide benefit prescribed by sec 80IAB to eligible assesses on operations authorized by the BOA. The CIT by 263 order endeavors to redefine and review the operations held as Authorized by BOA. Thus in the garb of 263 order a new process of futile roving and fishing enquiries is attempted to be legitimized.
5.5 Sub rule (5) of rule 11 of SEZ Rules reads "The land or built up space in the processing area or free trade and warehousing zone shall be given on lease only to the entrepreneur holding a valid Letter of Approval issued under rule 19 and……" This implies that the SEZ Act bars transfer of built up space to the ultimate user to whom only lease of such space is permitted. On the other hand, the SEZ Act, by allowing the Co-Developer to enter into a project, recognizes and treat the Co-Developer at par with 'Developer' for all intent and purpose. If this be the case, i.e., the developer and co-developer are at par and have same status in SEZ Act and Income Tax Act, then any transaction, of any nature, between the two would be an 'Authorized Operation'. This contention is further strengthened from the fact that the sub-rule (5) of rule 11 of SEZ rules 2006 only imposes "a bar" on transfer /sale of built up space to a approved entrepreneur but no such stipulation has been stipulated in regard to Developer and Co-Developer. It automatically follows that the framers of the SEZ Act realized and envisaged that the Developer and the Co-developer may undertake joint operations for development of infrastructural facilities. It is in this context that the assessee, developer, and (DAPL), Co-developer, decided to jointly facilitate early and expeditious development of office space by sharing responsibilities i.e. one building bare shell and other converting it into warm shell and the Co-developer agreeing to pay development charges for bare shell to the developer.
Role Of Developers And Co developers in SEZ Act
5.6 It is relevant to examine "What is the role of the Developer in the SEZ" as envisaged under the SEZ Act, 2005. The developer is the focal and integral part of SEZ and his role, responsibility and involvement is continuous, i.e. ongoing as long as the SEZ exists and is in operation. He is primarily responsible for development of infrastructural facilities and, thereafter, maintenance and operation of the same. In the present case, it needs to be appreciated that the 'Developer', the assessee, did not walk away after the construction of bare shell (office space) but also created other infrastructural facilities like internal roads, security post, compound wall, diesel storage area, sewerage treatment plant, electricity poles, water treatment plant, if any, horticulture, landscaping, security etc, which are being regularly operated and maintained by the developer
5.7 In Para (5) of the 263 show cause notice SEZ BOA approval dated 1st June, 2009 vis-à-vis clause (XVII) of the general conditions has been held to be contravened and not inquired by AO properly. The proposition is wrong in as much as
5.8 Firstly, the said clause would be applicable, for the A.Y.2010-11 and not for any earlier A.Y. like 2008-09 and that too in the case of Co-developer and not developer i.e. assessee.
5.9 Secondly, it does not any way adversely impacts the case as the assessee has conducted only "Authorized Operations" as approved by SEZ BOA.
5.10 Thirdly, the said stipulation, clause (xvii), only relates to 'Lease agreements'.
5.11 Fourthly, the development considerations received on transfer of bare shell buildings would be part of the business of development of SEZ and would therefore constitute business income, on which deduction under section 80IAB of the Act would be admissible.
5.12 Fifthly the record of assessment, proceeding sheet, compliance, questionnaire and oral arguments before AO demonstrates that AO inquired the same and recorded his satisfaction in the Assessment order. A clear finding about considering the material and eligibility of deduction u/s 80IAB has been recorded.
Clarifications by Board Of Approval
5.13 After a prolonged assessment proceedings and order u/s 143(3), the assessee was shocked to receive a notice u/s 263 proposing the allowability of claim to be erroneous and prejudicial to the interest of revenue. Consequently assessee reverted back to the Board of Approval under SEZ Act and sought specific clarifications in this behalf.
5.14 By letter dated 10.01.2011 and 18.01.2011 assessee sought these regarding long term lease of land by Developer to Co-Developer; transfer and handover of bare shell/cold shell buildings to co-developer for converting the same into warm shell; leasing of warm shells to approved units by co-developer etc to be authorized activities are not?
5.15 Assessee received clarification from BOA/Government of India, Ministry of Commerce and Industry, Department of Commerce (SEZ Section), Udyog Bhawan, New Delhi dated 18.01.2011& 20.01.2011 BOA in exercise of its statutory powers approved business model of the Assessee clarified that under Rule 11(9) 'sale of land' is not permissible in a SEZ. However Co-developer can take land on lease from Developer for definite period. Further SEZ buildings i.e. bare shell/cold shell can be transferred and handed over to the Co-developer on payment of consideration to Developer, this transfer is permissible and authorized as per SEZ Act and Rules. The correspondence with the SEZ Authorities on this issue is placed on the P.B. at pages 122 to 130 and its contents are referred to by the ld. Counsel. Thus as per specific clarifications by BOA the transfer of bare shell building on long term lease to approved co developer are authorized activities under SEZ ACT & Rules. Thus these clarifications also dispel the findings of CIT revising the assessment order and setting aside the same. 263 order and findings therein being contrary to legal provisions is liable to be quashed. The assessment order being in conformity with SEZ Act, Rules and provisions of sec 80IAb can neither be termed as erroneous or prejudicial to the interest or revenue.
5.16 Assessee claimed the exemption in respect of income from this authorized activity u/s 80-IAB as per law in it's return of income for A.Y. 2007-08.
5.17 According to the assessee during the course of assessment the requisite record, agreements, BOA approvals etc. were filed before AO during the course of assessment u/s 143(3) who considered the material available on assessment record and on being satisfied, allowed the claim u/s 80IAB by giving clear findings in this behalf recording the perusal of record, agreement and satisfaction about allowability of assesses claim u/s 80IB.
5.18 This is evident from para 3 of the assessment order, where the assessing officer refers to the SEZ approval letters, SEZ Act, 2005, SEZ Rules 2006 and notifications issued by the Ministry of Commerce and Industry dated 16-11-2006 notifying additional area of 34384 hectares as a part of SEZ. Thus, Assessing officer on the basis of BOA orders accepted the claim of the assessee u/s 80IAB as in law.
5.19 Ld CIT alleged following errors in the order of assessing officer, which are prejudicial to the interests of revenue:
'(i) Section 80-IAB provides for deduction in respects of profits and gains from activities of developing, operating and maintaining SEZ whereas the assessee has claimed deduction on sale proceeds of bare shell buildings. Such sale cannot be equated with the activity of developing, operating and maintaining of SEZ. The notification dated 27-10-2006 issued by the Ministry of Commerce & Industries, Govt. of India contemplates that this is not an authorized operation of the SEZ.
(ii) BOA approval dated 1-6-2009 was conditional in following terms:
 "Approval given by BOA for co-developers for particular terms and conditions of lese agreement will not have any bearing on the treatment of the income by way of lease rental/ down payment/ premium etc. for purposes of assessment under the prevalent income tax Act and rules. The assessing officer will have the right to examine the taxability of these amounts under the income tax".
 The assessing officer has allowed the claim u/s 80-IAB without any examination thereof as stipulated in BOA approval and the co-developer agreement.
(iii) Adverse inference has been drawn on the alleged hiatus proceedings which is not attributable to the assessee in actual terms.'
5.20 On these points the assessment order has been vaguely held to be erroneous and prejudicial to the interest of revenue and as the CIT could not apply his mind the assessment has been set aside for detailed enquiry.
6. Ld. counsel for the assessee adverted to copy of the AO's assessment proceedings sheets which is placed on PB 18 to 22. A perusal thereof clearly demonstrates that the hearing took place on several occasions and assessing officer asked question on each and every aspect of the assessment including the eligibility of claim u/s 80-IAB. Particularly by entry dated 24-12-2009, assessing officer required the assessee to provide the justification in law for allow ability of claim u/s 80-IAB. Besides, other queries were also raised vide questionnaire dated 1-12-2009 issued u/s 142(1). by point no. 14 thereof the assessee was asked to submit all documents in support of deduction u/s 80-IAB. By point no. 20 the purpose of debts outstanding against co-developer DLF Assets was also asked. Assessee filed detailed reply to questionnaire by letter dated 29-12-2009 in which a detailed note about allow ability of claim u/s 80-IAB was enclosed which is available at pages 28 to 31 of the PB along with various documents. The assessee in all has furnished following documents before assessing officer during the course of assessment proceedings.
(i) Copy of Letter dated 22nd June, 2006 issued by Govt. of India, Ministry of Commerce and Industry Department of Commerce (EPZ section) Udyog Bhawan, New Delhi being the approval for setting up a sector specific Special Economic Zone for IT/ITES sector at Ramapuram, Chennai. (copy enclosed at paper book pages 1-47.
(ii) Copy of Letter dated 29th Aug, 2006 issued by Govt. of India, Ministry of Commerce and Industry Department of Commerce (SEZ section) Udyog Bhawan, New Delhi being the approval of authorized operations of the developer. (copy enclosed at paper book pages 5-8)
(iii) Copy of Notification dated 16th Nov, 2006 and 19th Mar, 2007 issued by Ministry of Commerce and Industry department of Commerce notifying the land for development of SEZ at Ramapuram, Chennai. (copy enclosed at paper book pages 9-12)
(iv) Copy of Memorandum of Understanding with the Co-Developer M/s DLF Assets Pvt. Ltd. dated 29th Nov, 2006. (copy enclosed at paper book pages 21-48)
(v) Copy of Letter dated 14th Feb, 2007 issued by Govt. of India, Ministry of Commerce and Industry Department of Commerce (SEZ section) Udyog Bhawan, New Delhi to M/s DLF Assets Pvt. Ltd., as a Co-Developer approving the MOU. (copy enclosed at paper book pages 54-57)
(vi) Copy of Letter dated 19th June, 2007 issued by Govt. of India, Ministry of Commerce and Industry Department of Commerce (SEZ section) Udyog Bhawan, New Delhi being the approval of authorized operations of the Co-Developer. (copy enclosed at paper book pages 58-59)
(vii) Copy of definitive Co-Developer Agreement dated 20th Mar, 2008. (copy enclosed at paper book pages 60-117)
(viii) Copy of Letter dated 1st June, 2009 issued by Govt. of India, Ministry of Commerce and Industry Department of Commerce (SEZ section) Udyog Bhawan, New Delhi being the approval to the Co-Developer Agreement. (copy enclosed at paper book pages 118-121)
6.1 These documents contain following agreements placed before the Board of Approval while considering & approving the operations of assessee:—
(a) Co-Developer Agreement both Memorandum for Co-Developer agreement with M/s DLF Assets Pvt. Ltd. as well as the final Co-Developer Agreement incorporating all modifications which contained the details for transfer of cold/bare shell by the assessee to the notified co-developer;
(b) Agreement for lease of land to the Co-Developer, and
(c) Format for Transfer and handing over of deeds.
6.2 The conditionalties are with respect to the lease agreement only by which the land was leased out by the assessee to the co-developer and no such conditions were imposed upon the assessee on transfer of cold/bare shell by the assessee to the notified co-developer.
6.3 The SEZ Act being an overriding beneficial legislation, it over-rides all other laws for the time being in force in India. Section 51 of the SEZ Act actually states so. It reads as under:—
"51. The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act."
6.4 It is, therefore, manifest that no conditionality can be read into the operation of the SEZ Act and the Board of Approval constituted under it and as far as the lease of cold/bare shell by the assessee to the co-developer is concerned, there was no conditionality imposed by the Board of Approval of the Government of India under the SEZ Act.
6.5 The Assessing Officer, during the course of assessment proceedings has duly considered the accounting policy adopted by the assessee for the revenue recognition and after due examination & verification reached at a conclusion that the development income i.e. the income derived from SEZ Project was in the nature of Profits and Gains of Business as the same has been derived during the normal course of conduct of approved business of the assessee. As such, there is no error in the order passed by the Assessing Officer in treating the same as business income.
6.6 Ld CIT in his show cause notice u/s 263 proposed that the transactions between assessee and co-developers is taxable as capital gains. The proposition is fundamentally erroneous, as the assessee undoubtedly holds the bare shell buildings as stock in trade, income from its transfer cannot be treated under the head capital gains only on a vague plea that rights are to be relinquished by assessee. Rights are to be relinquished whether it is a sale of stock in trade or it is transfer of a capital asset, criterion of relinquishment of rights is not decisive to convert the nature of transfer of business stock in trade into capital gains. Reliance is placed on following judgments:
- CIT v. Sutlej Cotton Mills Supply Agency Ltd[1975] 100 ITR 706 (SC);
- Raja Bahadur Visheshwara Singh v. CIT 
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