[Cites 20, Cited by 0]
Bombay High Court
The Commissioner Of Income-Tax ... vs M/S. Patel Engg. Ltd. on 11 March, 2026
Author: M. S. Karnik
Bench: M. S. Karnik, S. M. Modak
2026:BHC-OS:6583-DB
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 1146 OF 2004
WITH
INCOME TAX APPEAL NO. 934 OF 2008
The Commissioner of Income Tax Central-II,
Aayakar Bhavan, 4th Floor, M. K. Road,
Mumbai-400 020. ... Appellant
Versus
M/s. Patel Engg. Ltd.,
Patel Estate, S. V. Road,
Jogeshwari (West),
Mumbai-400 102. ... Respondent
__________________________
Mr. N. C. Ranganayakulu for the Appellant.
Mr. Percy Pardiwala, Senior Advocate a/w. Mr. Madhur Agarwal, Mr. Punit
Shah, Mr. Ranjit Shetty, Mr. Rahul Dev and Ms. Avina Karnad i/b Argus
Partners for the Respondent in ITXA 934/08.
Mr. Rafique Dada, Senior Advocate a/w. Mr. Percy Pardiwalla, Senior
Advocate, Mr. Madhur Agrawal, Mr. Ranjit Shetty, Mr. Punit Shah, Mr.
Rahul Dev and Ms. Avina Karnad i/b Argus Partners for the Respondent in
ITXA 1146/04.
__________________________
CORAM : M. S. KARNIK AND
S. M. MODAK, JJ.
JUDGMENT RESERVED ON : 12th FEBRUARY, 2026
JUDGMENT RESERVED ON : 11th MARCH, 2026
JUDGMENT (PER M. S. KARNIK, J.):
1. These are appeals under the provisions of Section 260A of the
Income-Tax Act, 1961 ("the said Act" for short) preferred by the Revenue
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challenging orders dated 22nd June, 2004 and 26th February, 2008 passed
by the Income Tax Appellate Tribunal ("ITAT" for short). The respondent is
an assessee under the provisions of the said Act and the relevant
assessment years are 2000-2001 and 2001-2002.
2. By the impugned orders, the appeals filed by the assessee were
allowed by the ITAT. These appeals were admitted on the following
substantial question of law:-
a) The substantial question of law arises in the present
appeal is regarding the correct interpretation of Section 80IA
(4) of the Income-Tax Act, 1961 and whether in the facts and
circumstances of the case and in law the Hon'ble Tribunal is
right in holding that the assessee is a developer of infrastructure
facilities and eligible for deductions of Rs.80,47,09,510/- under
Section 80-IA (4) in respect of the income derived by the
assessee in respect of the two projects under consideration.
3. Income Tax Appeal No. 1146 of 2004 pertains to the Assessment
Year 2000-2001 and Income Tax Appeal No. 934 of 2008 relates to the
Assessment Year 2001-2002. Since these appeals arise from a similar set of
facts, we have referred the facts only from Income Tax Appeal No. 1146 of
2004 herein below:-
The assessee had filed the return of income for Assessment Year
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2000-01 on 30.11.2000, declaring a total income of Rs.18,52,40,224/-.
During the year under assessment, the assessee was engaged in the activity
of construction of two projects, viz. Srisailam Project in Andhra Pradesh
and Koyna Project in Maharashtra, the work of which was allotted to the
assessee by the respective State Governments. The assessee claimed that
the said two projects were infrastructure projects and the assessee had
developed the same and, therefore, it was entitled to deduction under
Section 80-IA (4) in respect of the profits derived from the execution of the
said projects. For the reasons discussed in the assessment order, the
Assessing Officer came to the conclusion that the assessee fulfilled none of
the conditions mentioned in Section 80-IA for claiming deductions.
4. It is the case of the Revenue that though the assessee is a company
registered in India, it did not own the infrastructure facility of Koyna and
Srisailam for which it claims deductions. The Koyna Project belongs to the
Maharashtra Government and has been funded by the Government of India
through World Bank loan. Similarly, Srisailam Project is owned by the
Andhra Pradesh State Electricity Board which is a Public Sector
undertaking of the Andhra Pradesh Government. It is, therefore, the
opinion of the Assessing Officer that the assessee failed to meet the
conditions stipulated under Section 80-IA (4) of the Act. The Assessing
Officer disallowed the deductions as claimed by the assessee.
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5. The assessment order is dated 13th March, 2003. Being aggrieved by
the assessment order, the assessee preferred its appeal before the
Commissioner of Income Tax-Appeals ("CIT (A)" for short). The CIT (A)
vide its order dated 10th February, 2004 confirmed the order of the
Assessing Officer and dismissed the appeal of the assessee for the reasons
recorded.
6. Being aggrieved by the said order of the CIT(A), the assessee
preferred its appeal before the ITAT. The ITAT vide its impugned order
dated 22nd June, 2004, allowed the appeal of the assessee and dismissed
the cross appeals filed by the Revenue.
Submissions of the Appellant
7. Shri Ranganayakulu, learned counsel for the Revenue invited our
attention to the findings of the CIT(A) and the Assessing Officer to contend
that the orders passed by them correctly interpret the scope and purport of
Section 80-IA(4) of the said Act. It is submitted that the materials on
record clearly demonstrate that the assessee cannot be said to be a
developer of the aforesaid two projects and therefore the Assessing Officer
was justified in disallowing the deductions under Section 80-IA (4), which
was confirmed by the CIT (A).
8. Learned counsel submitted that the ITAT erred in holding that the
assessee fulfills all the requisite conditions prescribed under Section 80-IA
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(4) and thereby erred in deleting the disallowance of deduction of
Rs.80.47 Crores. Learned counsel has emphasised on the fact that the
assessee was merely a contractor and the real developers were the
respective State Governments, who have awarded the contract to the
assessee. He submitted that the deduction under Section 80-IA (4) was
meant to be provided to the developers of infrastructure projects because
the Government did not have sufficient resources to meet the finance of
the infrastructure projects and for further encouraging the participation of
private sector in the development of infrastructure sector. The exemption
under Section 80-IA (4) was provided to the persons who develop
infrastructure projects by mobilizing their own resources. According to the
learned Senior Advocate, the Assessing Officer has rendered clear findings
to the said effect in the Assessment Order that the project of Koyna is
owned by the Maharashtra Government and the Srisailam Project is owned
by the Andhra Pradesh Government.
9. It is submitted that the assessee was paid periodically for the work
executed by it and therefore, the claim of the assessee is not sustainable
since not only the Government of Maharashtra and the Government of
Andhra Pradesh are the real developers in respect of the said two projects
but the projects were even financed by the respective State Governments.
10. In the submission of learned counsel, the CIT(A), in paragraph Nos.
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7.17 to 7.20 has observed that the assessee has not entered into an
agreement with the Government Authorities to develop new infrastructure
facilities as per Section 80-IA (4) and so called development of
infrastructure facilities was not carried out by the assessee on its own for
Section 80-IA (4) to apply.
11. Learned counsel submitted that the Tribunal erred in observing that
the assessee had transferred the facilities provided by it by handing over
the possession thereof to the Government of Maharashtra/APSEB as
required by the agreement, as such handing over can never amount to
transfer of infrastructure facility. It is the contention of the learned Senior
Advocate that the assessee was never in possession of the so called
infrastructure facility or the land on which the infrastructure project was
constructed and that the assessee enterprise had never entered into an
agreement with the Government for transferring the new facility which it
claimed to have developed. Much emphasis is placed by learned counsel to
submit that the term 'handing over' cannot be equated with 'transfer' and
that the ownership of the land was always vested with the Government. It
was further urged that the entire infrastructure facility was not developed
by the assessee but what was developed was only the last stage which was
stage-IV of the development project.
12. Our attention is brought by learned counsel to the invitation for the
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bid by the Government of Maharashtra which refers to the present position
of work. The Executive Engineer clearly stated that some work has already
been carried out departmentally and on LCB contract. Further, the
construction shaft on head race tunnel has been completed departmentally
whereas the work of head race tunnel through construction shaft for 500 m
length was awarded under an LCB contract, i.e. to other parties. Similarly,
the work relating to access tunnel to emergency value tunnel, the adit to
head race tunnel and the inter-adit to pressure shaft was also awarded
under an LCB contract, i.e. given to other parties. According to learned
counsel, this makes it very clear that the assessee is only one among the
other contractors and what the assessee was carrying out was only the civil
works on construction jobs in a small portion of the overall project.
Therefore, the assessee had no control or domain over its areas of work or
the project. The certificate issued by the Chief Engineer only stated that
the water from Shivajinagar lake of Koyna Hydraulic Electric Project is
utilized for water supply, irrigation etc. Learned counsel submitted that
the Tribunal failed to appreciate the observations of the Assessing Officer
in it's order that though the Koyna dam was constructed, it does not mean
that it was constructed by the assessee. It is just that the facility claimed to
have been developed by the assessee was on the last stage of the already
developed project. Learned counsel submits that the Tribunal ought to
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have appreciated that merely handing over a part of the project which the
petitioner had developed in terms of the agreement would not amount to a
transfer within the meaning of Section 80-IA (4). It is urged that it was
always State Government which was in possession of the infrastructure
facilities and the land on which the infrastructure project was constructed.
13. Learned counsel for the appellant in support of his submission relied
upon the decision of the Hon'ble Supreme Court in Commissioner of
Income Tax, Orissa & Ors. Vs. M/s. N. C. Budharaja and Company & Ors.1
Submissions of learned Senior Advocate for the Respondent
14. Shri Rafique Dada and Shri Pardiwala, learned Senior Advocates for
the assessee, on the other hand, invited our attention to the detailed
findings recorded by the ITAT in support of his submission that the view of
the ITAT being completely in consonance with the provisions of Section 80-
IA, the impugned order does not call for any interference. We have
referred to the submissions of learned Senior Advocates in detail while
analysing the rival submissions.
Considerations
15. The assessee is a public limited company engaged in the business of
developing civil engineering projects such as tunnels, water supply
projects, irrigation projects, hydel power projects, dams, bridges, rail
1 1994 Supp (1) SCC 280
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projects etc. The assessee has inter alia claimed deduction under Section
80-IA of the Act, available to developers of such infrastructure facilities
while filing its income tax returns. The returns filed by the assessee were
selected for scrutiny assessment, culminating into assessment orders under
Section 143(3) of the Act for the assessment years in question. The
Assessing Officer, in the assessment orders so passed, disallowed the
deductions claimed by the assessee under Section 80-IA (4) of the Act.
16. For the assessment year in question, the Assessing Officer analysed
various agreements entered into between the assessee and the
Government/ Government authorities/Government corporations/statutory
bodies and disallowed the deduction claimed in the said assessment year
inter alia on the following grounds:-
(1) The assessee is only a civil contractor and not a developer of
the infrastructure. Since the assessee was paid periodically for the
works executed by it and no financial risk was undertaken by the
assessee, the assessee cannot be termed as a developer of the
infrastructure. The various amounts expended by the assessee were
in the nature of expenditure and not investment.
(2) Under Section 80-IA of the Act, the enterprise should own the
infrastructure for which such enterprise should enter into an
agreement with the Central Government or State Government or
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other local authorities.
(3) The infrastructure was not "transferred" to Central
Government or State Government or local authority or any other
statutory body by the assessee.
(4) The assessee had not started operating and maintaining the
infrastructures on or after 1st April, 1995.
(5) The assessee had not developed any infrastructures as defined
under Explanation to Section 80-IA (4) of the Act.
(6) The assessee has only developed a part of the infrastructure
and not the whole of it.
(7) The assessee had merely carried out the works as per
specifications laid down by the concerned Government or local
authority.
17. Before proceeding any further, it would be apposite to refer to the
relevant provisions of the said Act as placed for our consideration by
learned Senior Advocates Shri Dada and Shri Pardiwala. Prior to
amendment vide Finance Act, 1999, Section 80-IA was substituted vide the
Finance Act, 1991, to incentivize the private sector to participate in
infrastructure development and key industrial activities, which were
traditionally dominated by public sector. Initially, as this provisions stood,
it provided deduction for profit and gains derived from any business of an
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industrial undertaking or cold storage or hotel or from operation of ships.
18. Subsequently, vide Finance Act. 1995, the Government introduced
sub-section (4A) to Section 80-IA of the Act as it then stood, providing a
tax holiday in respect of infrastructure development. In the memorandum
explaining the provisions of Finance Bill, 1995, it is recorded that since the
Country is deficient in respect of infrastructure such as expressways,
highways, airports, ports, etc., additional resources would be needed to
fulfill the needs of the Country. With the said intent, the Government
allowed a five-year tax holiday for any enterprise which builds, maintains
and operates any infrastructure facility such as roads, highways or
expressways or new bridges, airports, ports and rapid rail transport
systems on BOT or BOOT or similar other basis. Section 80-IA was
accordingly amended/modified by Finance Act, 1995, with effect from 1 st
April 1996, i.e. from A.Y. 1996-97, and sub-section (4A) was inserted
whereby profit and gains derived from a business for developing,
maintaining and operating any infrastructure facility were also allowed
deduction for a number of years as specified in the section.
19. Till the assessment year 1999-2000, Section 80-IA granted deduction
in respect of percentage of the profits to the assessees who were engaged
in the activity of development, operation and maintenance of an
infrastructure facility ie. doing all the three activities. The deduction was
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not available to assessees who were engaged in only developing or only
operating and maintaining of infrastructure facility.
20. Section 80-IA was substituted vide the Finance Act, 1999 w.e.f. 1 st
April 2000, which provided for a separate and detailed framework for
infrastructure facilities. Under this amendment, section 80-IA was
liberalized to provide that any enterprise carrying on the business of either
(i) developing, (ii) operating and maintaining or (iii) developing,
operating and maintaining an infrastructure facility, would qualify for
deduction under section 80-IA. The section offered deduction at 100% of
the profit for ten consecutive assessment years out of twenty years to be
selected by the assessee.
21. Post the amendment vide the Finance Act, 1999, the extract of
section 80-IA of the Act, insofar as relevant to the present case, reads as
under:-
"Section 80-IA. Deductions in respect of profits and gains from
industrial undertakings or enterprises engaged in infrastructure
development, etc.-
(1) Where the gross total income of an assessee includes any
profits and gains derived from any business of an industrial
undertaking or an enterprise referred to in sub-section (4) (such
business being hereinafter referred to as the eligible business),
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 from such profits and gains of an amount
equal to hundred per cent of profits and gains derived from
such business for the first five assessment years commencing at
any time during the periods as specified in sub-section (2) and
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thereafter, twenty-five per cent of the profits and gains for
further five assessment years.
(4) This section applies to -
(i) any enterprise carrying on the business of (i) developing, (ii)
maintaining and operating or (iii) developing, maintaining and
operating any infrastructure facility which fulfils all the
following conditions, namely -
(a) it is owned by a company registered in India or by a
consortium of such companies;
(b) it has entered into an agreement with the Central
Government or a State Government or a local authority or any
other statutory body for (i) developing, (ii) maintaining and
operating or (iii) developing, maintaining and operating a new
infrastructure facility subject to the condition that such
infrastructure facility shall be transferred to the Central
Government, State Government, local authority or such other
statutory body, as the case may be, within the period stipulated
in the agreement
(c) it has started or starts operating and maintaining the
infrastructure facility on or after the 1st day of April, 1995;
Provided that where an infrastructure facility is transferred on
or after the 1st day of April, 1999 by an enterprise which
developed such infrastructure facility (hereafter referred to in
this section as the transferor enterprise) to another enterprise
(hereafter in this section referred to as the transferee
enterprise) for the purpose of operating and maintaining the
infrastructure facility on its behalf in accordance with the
agreement with the Central Government, State Government,
local authority or statutory body, the provisions of this section
shall apply to the transferee enterprise as if it were the
enterprise to which this clause applies and the deduction from
profits and gains would be available to such transferee
enterprise for the unexpired period during which the transferor
enterprise would have been entitled to the deduction, if the
transfer had not taken place:
Provided further that nothing contained in this section shall apply to
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any enterprise which starts the development or operation and
maintenance of the infrastructure facility on or after the 1st day of
April, 2017.
Explanation- For the purposes of this clause, "infrastructure facility"
means-
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities being an
integral part of the highway project;
(c) a water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste management
System;
(d) a port, airport, inland waterway, inland ports or navigational
channel in the sea;"
22. Thus, vide the aforesaid amendment to section 80-IA, the scope of
the section was widened to include any enterprise which develops, or
maintains and operates, or develops, maintains and operates an
infrastructure facility, subject to satisfaction of all other conditions of the
said section.
23. Simultaneously, section 10(23G) was also amended vide Finance Act
1999 to extend the benefit of exemption to the specified entities in respect
of investment in enterprises wholly engaged in either (i) developing, (ii)
maintaining and operating or (iii) developing, maintaining and operating
an infrastructure facility.
24. The Central Board of Direct Taxes ("CBDT") in its Circular No. 779
dated 14th September 1999 (in paragraph 11.2 thereof) also clarified the
following in respect of amendment to section 10(23G):-
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"The Act amends this clause to enhance the scope of the nature
of infrastructure activities eligible for exemption under this
clause. It provides that enterprises wholly engaged in either (1)
developing, (iii) maintaining and operating an infrastructure
facility would now be eligible for the exemption. With this
amendment, it is made clear that any enterprise engaged in
developing, maintaining and operating the infrastructure
facility or maintaining and operating the infrastructure facility
or only developing the infrastructure facility would also be
eligible for exemption under this clause"
25. The purpose of the amendment to section 80-IA of the Act,
therefore, was to also allow deduction to any enterprise that only develops
an infrastructure facility.
26. Section 80-IA(1) of the Act was further amended by Finance Act,
2001, extending the deduction under sub-section (4) of section 80-IA of
the Act to hundred percent of the profit earned by an assessee for a period
of ten consecutive years instead of deduction of twenty-five percent of the
profits for the subsequent five years. The section, therefore, read as under:
"Where the gross total income of an assessee includes any
profits and gains derived by an undertaking or an enterprise
from any business referred to in sub-section (4) (such business
being hereinafter referred to as the eligible business). 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 hundred per cent
of the profits and gains derived from such business for ten
consecutive assessment years"
27. Section 80-IA(4)(i) was also amended by the Finance Act, 2001 by
substituting, the following words:
"of (1) developing or (ii) operating and maintaining or (iii)
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developing, operating and maintaining in place of the words
"of (i) developing, (ii) maintaining and operating or (iii)
developing, maintaining and operating." (See relevant extract
of Finance Act 2001 at Sr. No. 33 of COD)
28. The above amendment was carried out to make it amply clear that a
person who only develops but does not operate or maintain the facility is
also eligible for deduction under section 80-IA of the Act. The insertion of
"or" after each of the activities was clearly clarificatory in nature with an
intent to avoid any confusion in this regard. The same is clarificatory in
nature also because, the memorandum explaining the provisions of
Finance Bill, 1999 itself, in the explanation with respect to modification of
section 10(23G) of the Act, states that the exemption under the said
section is sought to extend the benefit to enterprises engaged in (i)
developing, maintaining and operating or (ii) developing, or (iii)
maintaining and operating an infrastructure facility would now be eligible
for the benefit. Clearly, therefore, by virtue of this amendment vide Finance
Act 2001, the intention of the legislature was further fortified to the extent
that any enterprise which is engaged only in development of an
infrastructure facility is also eligible for deduction under section 80-IA of
the Act.
29. Thereafter, vide Finance Act 2007 (with retrospective effect from 1 st
April 2000), an Explanation to section 80-IA of the Act was inserted to the
effect that the deduction under section 80-IA of the Act would not be
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available to a person who executes a "works contract" entered into with the
undertaking or enterprise. The Explanation read as follows:
"For the removal of doubts, it is hereby declared that nothing
contained in this section shall apply to a person who executes a
works contract entered into with the undertaking or enterprise,
as the case may be."
(See relevant extract of Finance Act 2007 at Sr. No. 34 of COD)
30. In the memorandum explaining the provisions of Finance Bill, 2007,
the intent behind introducing the said Explanation has been stated. The
memorandum explains that the tax benefit under section 80-IA of the Act
was introduced for the reason that industrial modernization requires a
massive expansion of, and qualitative improvement in, infrastructure
(expressways, highways, airports, ports etc.) which was lacking in our
country, and 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.
They further clarify that in a case where a person makes the investment
and himself executes 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.
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31. Thereafter, vide Finance Act, 2009 (with retrospective effect from 1
April 2000), the above Explanation was substituted as follows:
"For the removal of doubts, it is hereby declared that nothing
contained this section shall apply in relation to a business
referred to in subsection (4) which is in the nature of a works
contract awarded by any person (including the Central or State
Government) and executed by the undertaking or enterprise
referred to in sub-section (1)."
32. We find substance in the submission of Shri Dada that the
Explanation inserted by the amendment made vide Finance Act, 2007
as well as Finance Act, 2009 is not applicable in the case where the
assessee executes the work by shouldering investment & technical risk
by employing team of technically & administratively qualified persons
and where it is also liable for liquidated damages if it fails to fulfil the
obligation laid down in the agreement.
33. Dealing with the submission of the Revenue that the assessee is
a contractor and not a developer for the purpose of Section 80-IA, it is
seen that during the assessment year, the assessee was essentially
engaged in the business of activity of development of construction of
two projects i.e., Koyna Project executed pursuant to the agreement
with the Government of Maharashtra, and Srisailam Project executed
pursuant to the agreement with the Government of Andhra Pradesh.
The Koyna dam was constructed with the purpose of irrigation and
water supply in Konkan region and also with the intent to generate
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hydro-electricity. The Srisailam Project situated on Krishna river, is a
multi-purpose project developed for the purpose of water supply,
irrigation and generation of hydro-electric power.
34. Shri Dada submitted that the meaning of term "developer"
means a person carrying out the action of development. We therefore
find force in the submission of Shri Dada that development by its
intrinsic nature means bringing something into existence by way of
scientific structural planning, technical expertise and precise
execution. As against that, a works contract means a contract
executed as per the planning, design and direction of some other
person. The primary point of distinction between a developer and a
contractor, as rightly submitted by Shri Dada, is essentially to be
determined based on the terms of the contract, and by applying two
primary factors to the facts of the case, them being (i) whether the
financial, operational and other executional risks were borne by the
assessee or not, and (ii) whether the planning, development and
design has been carried out by the assessee or it is merely
executing/performing specific actions as per the directions of the
Government.
35. Shri Dada further apprised this Court of the role played by the
Assessee in the execution of the two projects. Insofar as the Srisailam
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Project is concerned, learned Senior Advocate submitted that the
project is a multipurpose project intended to harness the potential of
River Krishna for generating 900 MW of power through an
underground powerhouse. It was stated that the Assessee was
required to develop an underground tunnel connecting the river to the
underground powerhouse so as to facilitate the inlet of river water
into the powerhouse turbines and that the said tunnel was about 347
meters in length and 16.1 meters in height. Learned counsel further
submitted that the Assessee was also required to develop underground
structures such as surge chambers, draft tube tunnels and tail race
tunnels, which were designed to regulate the velocity of water for
irrigation purposes, thereby enabling the generation of approximately
60,000 million cubic feet of water for irrigation in the State of Andhra
Pradesh. These tunnels were stated to extend to about 2323 meters in
length and 16.1 meters in height. It was also submitted that for
executing the said works, the Assessee engaged around 40 engineers
and consultants, about 30 subcontractors, more than 800 skilled
workers and over 1000 semi-skilled and unskilled workers. The
Assessee also deployed various machinery and equipment, including
10 excavators, 20 trucks, 80 tippers, 10 dumpers, around 100 drilling
machines, 11 concrete pumps, as well as stone crushers and
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compressors. The total value of the machinery and assets deployed for
the project was stated to be approximately Rs.30 crores, including
machinery worth about Rs.20 crores purchased specifically for
executing the project.
36. With regard to the Koyna Project, learned counsel submitted that the
Assessee was entrusted with the construction of the inlet tunnel up to the
point of the powerhouse as part of a multipurpose project. It was
submitted that the Assessee carried out a specialized underwater blasting
operation, stated to be the first of its kind in Asia, and incurred substantial
expenditure in acquiring the necessary technology for its execution in
India. Learned counsel further submitted that the project was technical in
nature and that the design, layout and execution methodology were
prepared by the Assessee and provided to the Government of Maharashtra.
It is stated that for the execution of the said project, the Assessee deployed
approximately 25 engineers, 50 supervisory staff, about 250 skilled
workers and around 750 unskilled workers and labourers. The Assessee
also deployed several assets, including 6 excavators, 2 EOT cranes,
crushing plants, pumps, blowers and control laboratory apparatus. The
value of the machinery and assets deployed for the project was stated to be
approximately Rs.10 crores, including machinery worth about Rs.4 crores
purchased specifically for executing the project.
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37. Further, it is pointed out that the assessee has borne and undertaken
all the development risks, geological risks and investment risks. There is
no serious dispute on these factual aspects. We therefore find substance in
the submission of Shri Dada that the assessee is a developer of the projects
and not merely a works contractor. The assessee, as can be seen from the
work performed by the assessee as described above, was not involved in
merely executing any specific direction given by the authorities. The
assessee was involved in complete development of the project from
designing the project as per the specification provided in the tender,
deciding the assets to be deployed on its choice and discretion, amount and
resources to be invested, costing the same out, bearing the financial and
operational risk and ultimately executing the project. Insofar as both these
projects are concerned, the government had expressed its vision. The
submission of Shri Dada that so far as the projects are concerned, the
aspect of how to develop, how to plan, as well as how to execute the same
were all at the discretion and commercial decision of the assessee appeals
to us. There is no contra material on record to dispute this fact.
38. Further, if the argument of Revenue is accepted, then no assessee
will ever be construed to be a developer where Government awards these
contracts. If that makes the Government a developer and not the assessee
who is actually developing the project, then no assessee can be called a
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"developer" for the purpose of Section 80-IA of the Act.
39. At this juncture, it is pertinent to refer to the decision of this Court in
CIT Vs. ABG Heavy Industries Ltd. 2. The assessee therein was awarded a
contract for leasing of Container Handling Cranes at the Jawaharlal Nehru
Port Trust (JNPT). Revenue alleged that the assessee therein is not a
developer of the facility but had only supplied and installed the Container
Handling Cranes at JNPT and is therefore not eligible for deduction under
Section 80-IA of the Act. This Court noted the legislative intent of the
provision which was private participation in infrastructural development of
the nation. After perusing the order of the Tribunal and the facts of the
case of the assessee, this Court, at para 18, came to the conclusion that the
obligations which have been assumed by the assessee under the terms of
the contract are obligations involving the development of an infrastructure
facility. Further, it was the argument of the Revenue that the assessee
therein was not operating and maintaining the facility and was therefore
not eligible for deduction under Section 80-IA of the Act. This Court in
para 24 held that upon harmoniously reading the provisions, along with
the law as amended by Finance Act, 2001, it can be concluded that
deduction is available to an assessee who either (i) develops; or (ii)
operates and maintains; or (iii) develops, maintains and operates that
infrastructure facility. Therefore, we find favour with the submission of the
2 (2010) 322 ITR 323 (Bombay HC)
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assessee that the condition of operating and maintaining the infrastructure
facility is not necessary in order to be eligible for deduction under Section
80-IA of the Act, and an assessee engaged only in development of
infrastructural facility is also eligible for deduction under Section 80-IA of
the Act.
40. It is also profitable to note the decision of the Gujarat High Court in
PCIT Vs. Montecarlo Construction Ltd., Ahmedabad 3. The assessee therein
was engaged by the State Government bodies for construction and
infrastructure projects. The allegation of the Revenue was that the
assessee was merely a contractor and not a developer of the infrastructure
project. The CIT (A) as well as the ITAT, after perusing the nature and
scope of work done by the assessee from designing to executing the
project, the risks borne by the assessee, and the terms of agreement of the
assessee therein with the government bodies, came to the conclusion that
the assessee was a developer of the infrastructure facility and not merely a
contractor, and was therefore eligible for deduction under Section 80-IA of
the Act. The argument of the insertion of Explanation by Finance Act,
2009 with retrospective effect from April, 01, 2000 was also considered by
the Gujarat High Court. The Court came to the conclusion that the
assessee is a developer and not a contractor, and is therefore eligible for
3 (2024) 161 taxmann.com 222 (Gujarat High Court)
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deduction under Section 80-IA of the Act. In PCIT Vs. Montecarlo Ltd.4,
Gujarat High Court followed its earlier order in case of PCIT Vs.
Montecarlo Construction Ltd., Ahmedabad (supra), and held that the
assessee was a developer of the infrastructure facility and not a contractor,
and was thus eligible for deduction under Section 80-IA of the Act. The
Revenue filed a Special Leave Petition against this order of the Gujarat
High Court. The Hon'ble Supreme Court in PCIT Vs. Montecarlo Ltd.,5
dismissed the SLP filed by the Revenue on there being a delay as well as on
merits. The Hon'ble Supreme Court also observed that the original order
of the Gujarat High Court in PCIT Vs. Montecarlo Construction Ltd.,
Ahmedabad (supra) was not challenged before the Supreme Court and had
thus attained finality.
41. The facts of the present case, in terms of the agreement, terms of
payments, risks undertaken by the assessee are quite close to the facts in
PCIT Vs. Montecarlo Construction Ltd., Ahmedabad (supra).
42. The assessee also placed reliance on the decision of the Gujarat High
Court in PCIT Vs. N.C.C. M.S.K.E.L (JV)6 wherein the assessee was
developing the airport, in terms of the contract awarded for the
development of the airport, and the assessee therein was alleged to have
been undertaking a works contract and not being a developer and was
4 (2025) 475 IR 143 (Gujarat High Court)
5 Special leave Petition (Civil) Diary No.(S). 41220/2025, dated January 09, 2026
6 (2024) 168 taxmann.com 596 (Gujarat High Court)
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therefore held to be ineligible for deduction under section 80-IA of the Act.
The Court held that the assessee had undertaken the financial and
entrepreneurial risk to qualify as a developer and is therefore eligible for
deduction under Section 80-IA of the Act.
43. Let us deal with the next submission of Shri Dada. That the
deduction claimed by the assessee is in line with the legislative intent. The
legislative intent of introducing the provision of Section 80-IA of the Act
was to address the deficiency faced by the country in respect of
infrastructure such as expressways, highways, airports, ports, etc., which
needed additional resources. With that intent, a five-year tax holiday was
originally introduced by Finance Act, 1995 to any enterprise which builds,
maintains and operates any infrastructure facility such as roads, highways
or expressways or new bridges, airports, ports and rapid rail transport
systems on BOT or BOOT or similar other basis, as is explained in
Memorandum explaining the provisions of Finance Bill, 1995. The
Government, upon realizing that a lot of assessees could actually have
expertise only either in developing the infrastructure project, or only in
operating and maintaining an infrastructure project, amended and
substituted Section 80-IA of the Act by introducing Finance Act, 1999,
granting deduction to enterprises engaged in only developing of
infrastructural facility as well. The Government, even in the Memorandum
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explaining the provisions of Finance Bill, 2007, wherein the Explanation
regarding works contractor being non-eligible was introduced, reiterated
that the tax benefit under Section 80-IA of the Act was introduced for the
reason that industrial modernization requires a massive expansion of, and
qualitative improvement in, infrastructure (expressways, highways,
airports, ports etc.) which was lacking in our country, and 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.
44. In line with the legislative intent of the provisions of Section 80-IA of
the Act, the assessee entered into contracts with the Government of
Maharashtra and Government of Andhra Pradesh for development of
Koyna Project and Sarsailam Project respectively. The contention of the
Revenue that the assessee was not eligible for deduction under Section 80-
IA of the Act on the allegation that the assessee is a works contractor and
not a developer, is completely contrary to the legislative intent of the
provision, which was to provide tax holiday to achieve private participation
in infrastructural development of the country.
45. The said intent has also been relied on by this Court in CIT Vs. ABG
Heavy Industries Ltd. (supra), wherein the Court has, in paragraphs 8 to
10 (ITR Volume 322, page 328 to 330) explained the legislative intent of
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introducing the provisions of Setion 80-IA of the Act.
46. Further, we find substance in the submission of Shri Dada that the
said provision of the Act should be interpreted in a manner as to make it
workable. If the contention of the Revenue is accepted that the assessee is
not a developer and is therefore not eligible for deduction under Section
80-IA of the Act, it leads to absurdity. This is because if the interpretation
is accepted, no assessee would ever be able to claim deduction under
Section 80-IA of the Act. In case of every public project where the
Government has sought private participation for which it has granted the
tax holiday, it will be the case of the Revenue that the entity executing the
project is merely a works contractor and not a developer and, is therefore,
not entitled to deduction under Section 80-IA of the Act. Further, the
Government, in the tenders, is bound to specify the specifications of the
project and also the payment terms, particularly when the entity is merely
developing the project. If, just because the Government specifies its needs
from the particular project and provides for a periodic payment, the
assessee is treated as a contractor instead of a developer, then no assessee
would ever be able to claim the deduction under Section 80-IA of the Act.
47. In our considered opinion, the argument of the Revenue that the
project belongs to the Government and, therefore, the assessee is not a
developer, also leads to an absurd result, because no public project,
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especially like roads, expressways, dams,etc. could belong to a private
participant and are bound to be a part of the Government's initiative. This
contention of the Revenue does not appeal to us because the Section itself
mandates that the deduction is available to an assessee only if it has
entered into an agreement with the Central Government or a State
Government or a local authority or any other statutory body for (i)
developing or (ii) operating and maintaining or (iii) developing, operating
and maintaining a new infrastructure.
48. The Hon'ble Supreme Court in CIT Vs. J. H. Gotla7 has held that the
provisions of the Act should be read rationally in order to make the same
workable.
49. This Court in Narang Overseas (P.) Ltd. Vs. ITAT8 has held that if a
strict and literal construction of the statute leads to an absurd result, i.e., a
result not intended to be subserved by the object of the legislation
ascertained from the scheme of the legislation, and, if another construction
is possible apart from the strict/literal construction, then, that construction
should be preferred to the strict/literal construction. So also, where the
plain literal interpretation of a statutory provision produces a manifestly
unjust result which could never have been intended by the Legislature, the
Court might fine tune the language used by the Legislature so as to achieve
7 (1985) 156 ITR 323 (SC)
8 (2007) 295 ITR 22 (Bombay High Court)
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the intention of the Legislature and produce a rational construction.
50. The Hon'ble Supreme Court in Government of Kerala Vs. Mother
Superior Adoration Convent9 in interpreting the exemption provision
contained in Section 3(1)(b) of the Kerala Building Tax Act, 1975, held
that in order to give full effect to the beneficial provisions of the Act, in
interpreting an exemption provision, a literal formalistic interpretation is to
be eschewed, and it is to be understood as to what is the object sought to
be achieved by the provision, and construe the statute in accordance with
such object. The Supreme Court further held that assuming any ambiguity
arises in such construction, such ambiguity must be construed in favour of
that which is exempted.
51. We, therefore, find force in the submission of Shri Dada that the
interpretation adopted by the Revenue to hold the assessee to be ineligible
for deduction under Section 80-IA of the Act renders the Section
unworkable for any assessee to ever be eligible for deduction under Section
80-IA of the Act.
52. The next question is whether the receipt of periodic payment
disqualifies the assessee from the benefit of deduction. It is the contention
of the Revenue that there is no financial involvement of the assessee in the
two projects as the assessee was paid at each stage of work executed by it.
9 (2021) 126 taxmann.com 68 (SC)
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It is also contended by the Revenue that the assessee has been paid
periodically and it can therefore be construed to be works contract and not
development by the assessee.
53. It is further submission of the assessee that the test of periodicity of
payment cannot be relevant to determine as to whether it is a works
contract or project as a developer. We find that the distinction between
works contract and a developer is quite significant. A useful reference
could be made to the decision of this Court in CIT Vs. Glenmark
Pharmaceuticals Ltd.10 which determine the distinction as to whether a
particular contract is a works contract or a contract of sale. This Court, in
the context of TDS applicability on works contract under Section 194C,
drew reference from Section 5 of the Sale of Goods At, 1930. This Court
observed that the distinction between contract of sale and works contract is
elucidated by the Sale of Goods Act, 1930, where under Section 5(1)
thereof, the contract may provide for immediate delivery of the goods or
immediate payment of the price or postponement of delivery or payment of
the price by installments. The decision of this Court in CIT Vs. Glenmark
Pharmacuticals Ltd. (supra) was also relied upon by the Gujarat High
Court in CIT Vs. Radhe Developers11 while determining whether the
assessee executing the projects was works contractor or was a developer
10 (2010) 324 ITR 199 (Bombay High Court)
11 (2012) 341 ITR 403 (Gujarat High Court)
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for the purpose of deduction under Section 80-IB (10) of the Act.
Therefore, the mere fact that the assessee was receiving periodic payments
as and when a particular stage of the project was completed, does not
make the assessee a works contractor. The periodic payments are merely a
part of the agreement between the assessee and the Government. The
person who would bid for a project by incorporating the finance cost that
would be incurred in the said project, and while doing so, an assessee is
bound to take into consideration the fact of periodic payments that were to
be received. The same does not make it a works contract.
54. The facts of the case would reveal that the assessee had deployed
machines worth Rs.30 Crores in Srisailam project, including machines
costing about Rs.22 Crores bought specifically for the said project. Further,
the assessee had machines worth about Rs.10 Crores in Koyna project,
including machines costing about Rs.4 Crores purchased specifically for
executing the said project. It is the submission of Shri Dada that the
assessee was the first one to have performed a highly specialized
underwater blast for the first time in Asia, while executing the Koyna
project. Therefore, the submission of Shri Dada that the assessee had
undertaken financial risk and exposure in the said projects merits
consideration.
55. Shri Dada further submitted that the Revenue's contention that the
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assessee is ineligible for deduction under section 80-IA of the Act on the
ground that it is not the owner of the infrastructural facility is
misconceived. He relied on the decision of the Gujarat High Court in PCIT
v. Montecarlo Construction Ltd., Ahmedabad (supra), wherein the Court,
affirming the orders of the CIT(A) and the ITAT, recognized the distinction
between a mere contractor and a developer. It was observed that a
developer undertakes the overall responsibility for development of the
project, including managerial and financial obligations, and exercises
control over the project during the development period, even though the
ownership of the underlying land remains with the Government. The Court
also clarified that merely describing the assessee as a "contractor" in the
agreement or the deduction of TDS under the relevant provisions would
not determine its status, and that ownership of the infrastructural facility is
not a requirement for claiming deduction under section 80-IA.
56. Shri Dada further contended that the Revenue's argument that the
assessee is not eligible for deduction because it developed only a part of
the projects and not the projects in their entirety is equally untenable. In
this regard, reliance was placed on the judgment of the Bombay High
Court in CIT v. ABG Heavy Industries Ltd. (supra), wherein the Court held
that an assessee need not develop the entire infrastructure facility to
qualify for deduction under section 80-IA. It was recognized that even
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where the assessee undertakes specific components of an infrastructure
facility, such as installation, commissioning, operation, and maintenance of
port equipment, it would still qualify as a developer eligible for the
deduction.
57. Let us deal with the submission of learned counsel for the Revenue
that there is no transfer of infrastructure by the developer to the respective
State Governments to satisfy the requirement of Section 80-IA. The
Revenue contended that since the land on which the infrastructure facility
has been developed always belonged to the Government and the assessee
has already been paid for construction work, there is no question of
transfer of infrastructure facility by assessee. In our opinon, the term
"transfer" has to be understood in the factual context of the present case.
There is no dispute that the land was handed over to the assessee for
carrying out the development work. After completion of the development
activity, the same was handed back to the State Government. This would
constitute a transfer within the meaning of Section 80-IA (4) 1B which
requires development of infrastructure facility and in view of the material
on record, it can be safely concluded that the assessee has transferred the
infrastructure facility developed by him by handing over the possesssion
thereof to the Government as required under the agreement. The land
involved in the infrastructure facility always belongs to the Government
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whether it would be a case of BOT, BOOT, Build-Transfer (BT) and is
handed over by the Government to the developer for development of
infrastructure facility/project. In the present case, the project was in the
nature of build and transfer being merely a development project and did
not involve "operate" aspect of the same. Consequently once the
infrastructure facility was developed, the same was to be handed over to
the Government on its completion which would amount to a transfer
within the meaning of Section 80-IA (4).
58. We have carefully perused the findings recorded by the Assessing
Officer as confirmed by the CIT(A) in favour of the Revenue. We have also
perused the findings of fact recorded by the ITAT. In the light of the
aforementioned discussion and having regard to the well considered
findings of the ITAT, we find ourselves to be in agreement with the findings
recorded by the ITAT. We, therefore, do not find any merit in these
appeals. Therefore, the said appeals are dismissed. Substantial question of
law is hence answered against the Revenue and in favour of the assessee.
(S. M. MODAK, J.) (M. S. KARNIK, J.)
