Katira Construction Ltd. v. UOI & Ors.

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The Tax Publishers2013 TaxPub(DT) 1285 (Guj-HC) : (2013) 051 (I) ITCL 0555 : (2013) 352 ITR 0513 : (2013) 258 CTR 0337 : (2013) 214 TAXMAN 0599 : (2013) 086 DTR 0001 INCOME TAX ACT, 1961 --Deduction under section 80-IA--Allowability Constitutional validity of Explanation to section 80-IA(4) with retrospective effect--Assessee was engaged in development infrastructure. Till introduction of Explanation to sub-section (4) to section 80-IA by Finance (No. 2) Act, 2009, with respect effective from 1-4-2000, deductions were available to all undertakings and enterprises executing infrastructure development projects and it was not insisted that assessee itself must develop such infrastructure facilities by investing its own funds. Such Explanation thus changes very complexion of deductioned which were made for years together and thus creates a levy with retrospective effect. Assessee challenged the vires of such Explanation on various grounds. In particular, grievance was against operation of such amendment. *Held:* From inception, deduction was envisaged for development of infrastructure facilities with private participation. Of course, post-2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split into developing or operating and maintaining or developing, operating and maintaining infrastructure facility. Revenue could, therefore, legitimately contend that no such deduction was envisaged for mere execution of works contract. Parliament has power not only to legislate with respect to the subject matter on hand, but also with retrospective effect, if so found necessary. So much so was not even seriously disputed. It is also now sufficiently clear that in the field of taxation, the Parliament enjoys considerable latitude in framing and implementing the policies. It is often stated that the wisdom of the Parliament in enacting a statute cannot be questioned in a court of law. With this background in mind, court may consider the contentions of the petitioners. [Para 17] Ordinarily, legislation uses an Explanation for filling up a gap in statute or removing some ambiguity or making explicit which was otherwise implicit. However, it is an accepted proposition that if the language of the Explanation is plain and suggests departure from the above conventional usage of an Explanation, full effect to the contents of the Explanation would be given as would emerge from the plain language of the provision. [Para 26] In the present case, therefore, from both the angles, namely, whether the Explanation aims to expand the prevailing provision and whether being in the nature of a tax statute, such change can be permitted with retrospective effect, it would be crucial to discern the true effect of such Explanation. In this context, court may recall that the impugned Explanation below sub-section (13) to section 80-IA starts with an expression 'for the removal of doubts, it is hereby declared that' and provides that nothing contained in this section shall apply to in relation to a business referred to in sub-section (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). Thus, the Explanation in question was introduced for the removal of doubts and it declared that nothing containing in sub-section (4) would apply to a business in the nature of works contract. Court may recall that sub-section (4) of section 80-IA even after amendment of 2002, envisaged deduction in case of any enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Thus, Legislature by way of the impugned amendment distinguished between the cases of developing/operating and maintaining/developing, operating and maintaining any infrastructure facility from the works contract awarded by any person, be it the Central or the State Government, executed by the undertaking or enterprise seeking such an exemption. That there is an intrinsic difference between developing an infrastructure facility and executing a works contract, can hardly be disputed. [Para 27] What the Explanation aims to achieve is to clarify that deduction under section 80-IA(4) would not be available in case of execution of works contract. The fact that such interpretation of the existing provisions of sub-section (4) of section 80-IA, even without the aid of the explanation was possible, is not disputable. Sub-section (4) of section 80-IA even after the amendment in the year 2002 envisaged deduction in case of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Even without the aid of the Explanation, it was possible to contend that such expression did not include an enterprise executing a works contract. Particularly, bearing in mind the observations made by this Court in the case of Radhe Developers, there would certainly be a demarcation between developing the facility and execution of works contract awarded by an agency engaged in developing such facility. [Para 29] At the very first stage, i.e, from 1-4-1956 deduction was made available to draw additional resources for fulfilling the requirements of the country of rapid improvement in infrastructure such as, expressways, highways, airports, ports, etc., in which areas development was found to be deficient. Adopting the module of BOT or BOOT utilized by several other countries in developing infrastructure facilities, deduction was introduced. The principal idea behind granting deduction was to achieve rapid growth in infrastructure development with private participation. Specific period was also stipulated which must form part of the agreement between the undertaking and the Government within which the infrastructure facilities so developed would be transferred. It was explained that the tax holiday was in respect of the income derived in use of the infrastructure facilities developed by them. [Para 30] From the inception, thus, the concept of development of infrastructure through private participation was clearly discernible. Principal purpose was to infuse private investment in such projects to speed up infrastructure development which required massive expansion. Even after bifurcation of section 80-IA into section 80-IA and section 80-IB, with effect from 1-4-2000, this fundamental concept was not discarded. Sub-section (4) which formed part of the recast section 80-IA did not carry any material changes from the earlier provisions of sub-section (4A) of section 80-IA which existed prior to 1-4-2000. [Para 31] It is true that with effect from 1-4-2002 some significant changes were made in the said provisions. Such changes were : (i), that sub-section (4) of section 80-IA now required the enterprise to carry on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. This was in contrast to the previous requirement of all three conditions being cumulatively satisfied; (ii) that the Explanation of the term 'infrastructure facility' was changed to besides others, a road including toll road, instead of hitherto existing expression 'road' and (iii) that the requirement of transferring the infrastructural facilities developed by the enterprise to the Central or the State Government or the local authority within the time stipulated in the agreement was done away with. [Para 32] These changes, however, would not alter the situation vis-a-vis the impugned amendment. These legislative changes did enlarge the scope of the deduction and in a sense, made it available to certain assessees who would not have been, but for the changes eligible for such deduction. Nevertheless, the basic requirement of the enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining infrastructure facility was not done away with. In other words, even the amended section 80-IA(4) with effect from 1-4-2002 could be construed as not including execution of works contract as one of the eligible activities for claiming deduction. Court may, once again, fall back on the explanatory memorandum explaining such legislative amendments. It was explained that investment in infrastructure has to compete with the investment in other sectors and must, therefore be attractive. There is, therefore, in particular a need to encourage investment in the area of surface transport, water supply, water treatment system, irrigation project, sanitation and sewerage system or solid waste management systems. The Bill, therefore, proposed to relax the existing system to provide for a ten year tax holiday. Significantly, it was stated that keeping in view the capital intensive nature, the higher allowances of depreciation in the initial years in such enterprise and the need for improved cash flows, it is further proposed that for an infrastructure facility in the nature of a road including a toll road, bridge, rail system, highway project, water supply project, sanitation, sewerage and solid waste management system in place of two-tier tax holiday, a ten years tax holiday may be availed consecutively out of twenty years beginning from the year in which the undertaking begins operating the infrastructure facility. In the case of other infrastructure, namely, for airport, port, inland port and inland waterways, it is also proposed to relax the existing two tier fiscal incentive. The Bill proposed an identical ten year tax holiday that may be availed in a block of fifteen years. It is also proposed to do away with the mandatory requirement that such infrastructure facility shall be transferred to the Central Government, State Government, local authority or any other statutory authority. [Para 33] Clearly, thus, post 1-4-2002 also, the involvement of the enterprise in developing infrastructure facility when the claim was covered under such expression was essential. In the same context, one must understand the expression 'developing or operating and maintaining or developing, operating and maintaining'. Keeping in mind the new areas where such private participation would be required and therefore had to be encouraged and keeping in mind that such areas such as, surface transport, water supply, water treatment system, irrigation project, etc., would necessarily be highly investment intensive, the Legislature provided for a tax break of 10 consecutive years out of a total of 20 years period and also proposed to do away with the requirement of such infrastructure facility being transferred to the Central or the State Government or the local authority. [Para 34] In 2007, the Explanation below sub-section (13) of section 80-IA came to be added which clarified that nothing contained in the said section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case may be. In clear terms, this Explanation targeted the second level works contractor who might have been employed by the enterprise developing the infrastructure facility. However, this was not found to be sufficient Explanation clearing doubts with respect to the exclusion of the enterprise engaged in execution of a works contract. It was, therefore, that the impugned Explanation came to be introduced substituting the existing Explanation below sub-section (13) to section 80-IA. The Explanatory Memorandum recorded that profit linked deductions were prone to considerable misuse. With a view to preventing such misuse of the tax holiday under section 80-IA, it was proposed to amend the Explanation to the said section to clarify that nothing contained in the section shall apply in relation to a business which is in the nature of a works contract executed by an undertaking. [Para 35] From the inception, deduction was envisaged for development of infrastructure facilities with private participation. Of course, post-2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split into developing or operating and maintaining or developing, operating and maintaining infrastructure facility. The Revenue could therefore, legitimately contend that no such deduction was envisaged for mere execution of works contract. If this was the position, what the Explanation, did was to clarify a statutory provision which was at best possible of a confusion. If that be so, the Explanation must be seen as one being in the nature of plain and simple Explanation and not either adding or subtracting anything to the existing statutory provision. When the impugned Explanation was purely explanatory in nature and did not mend the existing statutory provisions, the question of levying any tax with retrospective effect would not arise. If court agrees with the submission of the counsel for the petitioners that such Explanation restricted or aimed to restrict the provisions of deduction, certainly a question of reasonableness in the context of retrospective operation would arise. In the present case, however, court has come to the conclusion that the Explanation only supplied clarity where, at best confusion was possible in the unamended provision. In that view of the matter, this cannot be seen as a retrospective levy even if court were to accept that withdrawal of a deduction would amount to a fresh levy. [Para 36] In that view of the matter, challenge to the vires of the Explanation must fail. In the result, all the petitions are dismissed. Rule is discharged. Interim relief is vacated. [Para 38] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1285 (Guj-HC) : (2013) 051 (I) ITCL 0555 : (2013) 352 ITR 0513 : (2013) 258 CTR 0337 : (2013) 214 TAXMAN 0599 : (2013) 086 DTR 0001

INCOME TAX ACT, 1961

--Deduction under section 80-IA--Allowability Constitutional validity of Explanation to section 80-IA(4) with retrospective effect--Assessee was engaged in development infrastructure. Till introduction of Explanation to sub-section (4) to section 80-IA by Finance (No. 2) Act, 2009, with respect effective from 1-4-2000, deductions were available to all undertakings and enterprises executing infrastructure development projects and it was not insisted that assessee itself must develop such infrastructure facilities by investing its own funds. Such Explanation thus changes very complexion of deductioned which were made for years together and thus creates a levy with retrospective effect. Assessee challenged the vires of such Explanation on various grounds. In particular, grievance was against operation of such amendment. Held: From inception, deduction was envisaged for development of infrastructure facilities with private participation. Of course, post-2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split into developing or operating and maintaining or developing, operating and maintaining infrastructure facility. Revenue could, therefore, legitimately contend that no such deduction was envisaged for mere execution of works contract.

Parliament has power not only to legislate with respect to the subject matter on hand, but also with retrospective effect, if so found necessary. So much so was not even seriously disputed. It is also now sufficiently clear that in the field of taxation, the Parliament enjoys considerable latitude in framing and implementing the policies. It is often stated that the wisdom of the Parliament in enacting a statute cannot be questioned in a court of law. With this background in mind, court may consider the contentions of the petitioners. [Para 17] Ordinarily, legislation uses an Explanation for filling up a gap in statute or removing some ambiguity or making explicit which was otherwise implicit. However, it is an accepted proposition that if the language of the Explanation is plain and suggests departure from the above conventional usage of an Explanation, full effect to the contents of the Explanation would be given as would emerge from the plain language of the provision. [Para 26] In the present case, therefore, from both the angles, namely, whether the Explanation aims to expand the prevailing provision and whether being in the nature of a tax statute, such change can be permitted with retrospective effect, it would be crucial to discern the true effect of such Explanation. In this context, court may recall that the impugned Explanation below sub-section (13) to section 80-IA starts with an expression 'for the removal of doubts, it is hereby declared that' and provides that nothing contained in this section shall apply to in relation to a business referred to in sub-section (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). Thus, the Explanation in question was introduced for the removal of doubts and it declared that nothing containing in sub-section (4) would apply to a business in the nature of works contract. Court may recall that sub-section (4) of section 80-IA even after amendment of 2002, envisaged deduction in case of any enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Thus, Legislature by way of the impugned amendment distinguished between the cases of developing/operating and maintaining/developing, operating and maintaining any infrastructure facility from the works contract awarded by any person, be it the Central or the State Government, executed by the undertaking or enterprise seeking such an exemption. That there is an intrinsic difference between developing an infrastructure facility and executing a works contract, can hardly be disputed. [Para 27] What the Explanation aims to achieve is to clarify that deduction under section 80-IA(4) would not be available in case of execution of works contract. The fact that such interpretation of the existing provisions of sub-section (4) of section 80-IA, even without the aid of the explanation was possible, is not disputable. Sub-section (4) of section 80-IA even after the amendment in the year 2002 envisaged deduction in case of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Even without the aid of the Explanation, it was possible to contend that such expression did not include an enterprise executing a works contract. Particularly, bearing in mind the observations made by this Court in the case of Radhe Developers, there would certainly be a demarcation between developing the facility and execution of works contract awarded by an agency engaged in developing such facility. [Para 29] At the very first stage, i.e, from 1-4-1956 deduction was made available to draw additional resources for fulfilling the requirements of the country of rapid improvement in infrastructure such as, expressways, highways, airports, ports, etc., in which areas development was found to be deficient. Adopting the module of BOT or BOOT utilized by several other countries in developing infrastructure facilities, deduction was introduced. The principal idea behind granting deduction was to achieve rapid growth in infrastructure development with private participation. Specific period was also stipulated which must form part of the agreement between the undertaking and the Government within which the infrastructure facilities so developed would be transferred. It was explained that the tax holiday was in respect of the income derived in use of the infrastructure facilities developed by them. [Para 30] From the inception, thus, the concept of development of infrastructure through private participation was clearly discernible. Principal purpose was to infuse private investment in such projects to speed up infrastructure development which required massive expansion. Even after bifurcation of section 80-IA into section 80-IA and section 80-IB, with effect from 1-4-2000, this fundamental concept was not discarded. Sub-section (4) which formed part of the recast section 80-IA did not carry any material changes from the earlier provisions of sub-section (4A) of section 80-IA which existed prior to 1-4-2000. [Para 31] It is true that with effect from 1-4-2002 some significant changes were made in the said provisions. Such changes were : (i), that sub-section (4) of section 80-IA now required the enterprise to carry on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. This was in contrast to the previous requirement of all three conditions being cumulatively satisfied; (ii) that the Explanation of the term 'infrastructure facility' was changed to besides others, a road including toll road, instead of hitherto existing expression 'road' and (iii) that the requirement of transferring the infrastructural facilities developed by the enterprise to the Central or the State Government or the local authority within the time stipulated in the agreement was done away with. [Para 32] These changes, however, would not alter the situation vis-a-vis the impugned amendment. These legislative changes did enlarge the scope of the deduction and in a sense, made it available to certain assessees who would not have been, but for the changes eligible for such deduction. Nevertheless, the basic requirement of the enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining infrastructure facility was not done away with. In other words, even the amended section 80-IA(4) with effect from 1-4-2002 could be construed as not including execution of works contract as one of the eligible activities for claiming deduction. Court may, once again, fall back on the explanatory memorandum explaining such legislative amendments. It was explained that investment in infrastructure has to compete with the investment in other sectors and must, therefore be attractive. There is, therefore, in particular a need to encourage investment in the area of surface transport, water supply, water treatment system, irrigation project, sanitation and sewerage system or solid waste management systems. The Bill, therefore, proposed to relax the existing system to provide for a ten year tax holiday. Significantly, it was stated that keeping in view the capital intensive nature, the higher allowances of depreciation in the initial years in such enterprise and the need for improved cash flows, it is further proposed that for an infrastructure facility in the nature of a road including a toll road, bridge, rail system, highway project, water supply project, sanitation, sewerage and solid waste management system in place of two-tier tax holiday, a ten years tax holiday may be availed consecutively out of twenty years beginning from the year in which the undertaking begins operating the infrastructure facility. In the case of other infrastructure, namely, for airport, port, inland port and inland waterways, it is also proposed to relax the existing two tier fiscal incentive. The Bill proposed an identical ten year tax holiday that may be availed in a block of fifteen years. It is also proposed to do away with the mandatory requirement that such infrastructure facility shall be transferred to the Central Government, State Government, local authority or any other statutory authority. [Para 33] Clearly, thus, post 1-4-2002 also, the involvement of the enterprise in developing infrastructure facility when the claim was covered under such expression was essential. In the same context, one must understand the expression 'developing or operating and maintaining or developing, operating and maintaining'. Keeping in mind the new areas where such private participation would be required and therefore had to be encouraged and keeping in mind that such areas such as, surface transport, water supply, water treatment system, irrigation project, etc., would necessarily be highly investment intensive, the Legislature provided for a tax break of 10 consecutive years out of a total of 20 years period and also proposed to do away with the requirement of such infrastructure facility being transferred to the Central or the State Government or the local authority. [Para 34] In 2007, the Explanation below sub-section (13) of section 80-IA came to be added which clarified that nothing contained in the said section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case may be. In clear terms, this Explanation targeted the second level works contractor who might have been employed by the enterprise developing the infrastructure facility. However, this was not found to be sufficient Explanation clearing doubts with respect to the exclusion of the enterprise engaged in execution of a works contract. It was, therefore, that the impugned Explanation came to be introduced substituting the existing Explanation below sub-section (13) to section 80-IA. The Explanatory Memorandum recorded that profit linked deductions were prone to considerable misuse. With a view to preventing such misuse of the tax holiday under section 80-IA, it was proposed to amend the Explanation to the said section to clarify that nothing contained in the section shall apply in relation to a business which is in the nature of a works contract executed by an undertaking. [Para 35] From the inception, deduction was envisaged for development of infrastructure facilities with private participation. Of course, post-2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split into developing or operating and maintaining or developing, operating and maintaining infrastructure facility. The Revenue could therefore, legitimately contend that no such deduction was envisaged for mere execution of works contract. If this was the position, what the Explanation, did was to clarify a statutory provision which was at best possible of a confusion. If that be so, the Explanation must be seen as one being in the nature of plain and simple Explanation and not either adding or subtracting anything to the existing statutory provision. When the impugned Explanation was purely explanatory in nature and did not mend the existing statutory provisions, the question of levying any tax with retrospective effect would not arise. If court agrees with the submission of the counsel for the petitioners that such Explanation restricted or aimed to restrict the provisions of deduction, certainly a question of reasonableness in the context of retrospective operation would arise. In the present case, however, court has come to the conclusion that the Explanation only supplied clarity where, at best confusion was possible in the unamended provision. In that view of the matter, this cannot be seen as a retrospective levy even if court were to accept that withdrawal of a deduction would amount to a fresh levy. [Para 36] In that view of the matter, challenge to the vires of the Explanation must fail. In the result, all the petitions are dismissed. Rule is discharged. Interim relief is vacated. [Para 38]