By TIOL News Service

NEW DELHI, FEB 28, 2018: THE issue is - Whether AO's decision to allow deduction u/s 80IAB to the assessee, without detailed analysis of available materials and provisions of SEZ Act, is erroneous in law and prejudicial to the interest of Revenue. YES is the verdict.

Facts of the case

The Assessee-company, working as a developer filed its return for the relevant AY and claimed deduction u/s 80IAB of the Act on account of development of a SEZ on the basis of land acquired and allotted to it. The Assessee claimed deduction to the tune of Rs. 5,84,93,80,397/- under such provision. After the assessment proceedings, the AO permitted deduction to the tune of Rs. 5,73,94,33,765/-. However, the CIT by exercising his powers u/s 263 of the Act, issued notice to the Assessee to show cause why the assessment ought not to be interfered with on the ground that the AO had committed an error of law and that the order was prejudicial to the interest of the Revenue. The CIT was of the view that the Assessee had sold bare shell building, which was not a permissible activity and the benefit of Section 80IAB could not be granted towards such sale or transfer.

However, the Assessee contended that the induction of co-developer under the Special Economic Zones Act, 2005 was permissible by reason of Section 3(11). According to the Assessee, the understanding arrived at with the co-developer was in fact notified to the Govt, which granted approval. According to the Assessee, the agreement was for co-development of the entire SEZ and those facts were not withheld but fully disclosed to the relevant authority under the SEZ Act. However, the CIT(A) rejected the Assessee's contentions.

On Assessee's appeal, the Tribunal took note of the letters written by the Board of Approval and the Govt to clarify queries made by the Assessee with respect to the permissibility of the transaction of sale of bare shell building and was of the opinion that in the facts of the case, the AO had conducted sufficient enquiry and invocation of provisions of Section 263 was unwarranted.

After hearing the parties, the High Court held that,

++ the Central Government's clarifications were issued to the assessee, at its request. The AO must have analysed the provisions of the Act, especially, the notifications governing the setting-up of the SEZs and the permissible activities in such zones with their investors (Section 80IAB) and the circumstances of the case, i.e. the agreement entered into with the co-developer, the conditions of lease etc., had to be analysed in detail. Clearly, the AO did not conduct that detailed enquiry. On the other hand, the AO's order merely indicates that the analysis, if at all, it could be characterized as such of the assessee's claimed SEZ activity was in the context of allegations of varied expenses, as is apparent from the AO's order dated 29.12.2010 below, which was clearly inadequate;

++ in the absence of a detailed analysis of the factual narration with respect to the transactions and the documents, having regard to the provisions of the SEZ Act and the purpose for which SEZs are set-up, to ensure that such areas develop in a sustained and consistent manner, with assured infrastructure support on a continuous basis by developers, the CIT(A)'s opinion that the assessment order was erroneous in law and prejudicial to the interest of the Revenue was justified. As a result, it is held that the ITAT erred in interfering with the order of the CIT(A). Consequently, the order needs to be set aside.

(See 2018-TIOL-362-HC-DEL-IT)