DCIT 2(2), MUMBAI V. LARSEN & TOUBRO LTD, MUMBAI

ITA 6972/MUM/2013

AI Insights

The case involves cross appeals by the Deputy Commissioner of Income Tax and M/s. Larsen & Toubro Limited concerning various disallowances and adjustments made during the assessment year 2005-06. The primary issues revolved around the nature of ESOP expenses, the eligibility for deductions under section 80IA for infrastructure projects, and the application of section 14A regarding disallowances of interest and other expenses. The Tribunal examined each issue in detail, considering statutory provisions, judicial precedents, and the specific facts of the case.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315863 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2025
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2005-2006
• Other Referred Cases: DCIT vs. Biocon Ltd, Hon'ble Special Bench of Bangalore Tribunal, Hon'ble Karnataka High Court, Hon'ble Delhi High Court, Hon'ble Supreme Court, Hon'ble Gujarat High Court, Hon'ble Bombay High Court, Hon'ble Mumbai Tribunal
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J. D. MISTRI; MADHUR AGRAWAL; MAKING AN
• Assessee Lawyers: NEENA JEPH; SALES TAX
• Keywords: Set aside; Business income; Capital asset; Opportunity of being heard; Revised return; Revenue expenditure; Transfer pricing; International transaction; Retrospective amendment; Reassessment proceedings; Business expenditure; Question of law; Depreciation; Fair market value; Onus to prove; Capital receipt; Capital expenditure; Valuation report; Earning of tax free income; Competent authority; Double taxation relief; Permanent establishment; Rule 8D; Residential status; CHAPTER IV; Bogus
• Section: 145; 28; 92; 14A; 43B; 80HHC; 37(1); 40(a)(ia); 260A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER) AND SHRI PRABHASH SHANKAR (ACCOUNTANT MEMBER) I.T.A. No. 6972/Mum/2013 Assessment Year: 2005-06 Deputy Commissioner of Income Tax-2(2) Office of the DCIT-2(2), R.No. 545, Aayakar Bhavan, M.K. Road, Mumbai-400020 Vs. M/s. Larsen & Toubro Limited L&T House, N.M. Marg, Ballard Estate, Mumbai-400001 PAN:AAACL0140P (Appellant) (Respondent) & I.T.A. No. 7223/Mum/2013 Assessment Year: 2005-06 M/s. Larsen & Toubro Limited Larsen & Tuobro Limited, Taxation Department, L&T House, N.M. Marg, Ballard Estate, Mumbai-400001 PAN:AAACL0140P Vs. Deputy Commissioner of Income Tax-2(2) Office of the DCIT- 2(2), R.No. 545, Aayakar Bhavan, M.K. Road, Mumbai- 400020 (Appellant) (Respondent) Appellant by Shri J.D. Mistri, Madhur Agrawal Respondent by Ms. Neena Jeph CIT D.R. Date of Hearing 27.03.2025 Date of Pronouncement 14.05.2025 2 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited ORDER Per Bench: Present cross appeals preferred by the assessee as well as revenue arises out of order dated 18/09/2013 passed by Ld. CIT(A)-15, Mumbai for assessment year 2005-06 on following grounds of appeal: Assessee’s Appeal: “1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [\"CIT(A)\"] erred in confirming the disallowance of Rs.82,58,21,274/- in relation to the ESOPs expenses by treating the same as capital in nature. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs.25,30,41,150/- on account of unutilized Cenvat credit and sales tax set off to the value of closing stock. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance on account of provision for foreseeable loss of Rs.41,04,38,960/-. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 3,05,46,972/- made by treating the gain on repayment of deferred sales tax loan liability as income chargeable u/s. 28 of the Act. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of interest and other expenses under section 14A of the Act. While doing so, the CIT(A) has followed the methodology prescribed under Rule 8D of Income-tax Rules 3 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited in spite of agreeing to the stand of appellant that the said rule is not applicable for the assessment year under consideration. 6. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs. 8,75,40,755/- being commission paid to certain parties during the previous year. 7. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance made u/s 40A(9) for contribution to Utmal Employees Welfare Fund of Rs. 1,25,000/-. 8. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the following additions made by way of adjustment to the arms' length price of the international transactions entered in to by the appellant with its associated enterprises by invoking the provisions of section 92CA(3) of the Act: − Rendering of Engineering, Design and Project Management Services to Larsen & Toubro (Oman) LLC, Oman - Rs. 3,51,34,944/- − Sale of shares of Larsen & Toubro (Oman) LLC to L&T International FZE, UAE - Rs. 8,41,92,956/- The learned CIT(A) erred in confirming the additions ignoring the following: − TPO has disregarded the valuation report submitted by the appellant and applied his own valuation principles, − TPO erred in not giving the appellant an opportunity of being heard /show cause notice before making the additions. 9. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of Rs. 11,43,00,000/- the provision for Sales Tax / Excise Duty by treating the same as contingent liability. 10. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of deduction claimed 4 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited u/s. 801A amounting to Rs.29,42,48,539/- for development of the infrastructure facility by concluding that development activity of the appellant was akin to works contract 11. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of expenditure on estate maintenance of Rs. 1,61,60,447/- as capital expenditure. 12. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the non-granting of double tax relief of Rs.2,59,97,267/- claimed during the assessment proceedings. 13. The appellant company craves leave to add to, to amend, to alter or modify any or all the aforesaid grounds of appeal.” Revenues appeal: “1. The order of the CIT(A) is opposed to law and facts of the case 2. \"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs.61,83,300/- made by the Assessing Officer on account of payment made to club towards Entrance/Life Membership fees being capital expenditure without appreciating that the same is not allowable as business expenditure under the IT Act as held in by the High Court of Kerla in the case of M/s Framatone Connector OEN Ltd. Vs. DCIT (2007) 294 ITR 559 read with decision of Apex Court in the case of Punjab Estate Industrial Development Corporation Ltd. vs CIT(1997) 225 ITR 792.\" 3. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and, that of the AO restored.” Brief facts of the case are as under: 2. The assessee is a public limited company engaged in various business activities including manufacturing, trading, 5 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited engineering, Electrical and Electronics and allied products, manufacture of glass, construction and other diversified business activities of marketing of construction and earthmoving machinery, welding electrodes, valves and related products etc. It filed its return of income for years under consideration on 28/10/2005 declaring total income of ₹729,06,67,610/-. Subsequently, revised return was filed by the assessee reducing the disallowance under section 43B and section 40(a)(ia) of the act. Assessee also revised the claim of double taxation relief. 2.1.The original return of income was processed under section 143(1) on 30/03/2006 and revised return was processed under section 143(1) of the act on 07/03/2007, determining total income of assessee and ₹716,93,46,750/-. As a consequence refund of ₹48,29,25,320 was issued. Subsequently, notice under section 143(2) of the act was issued on 01/06/2006. He was also issued notice under section 142 (1) calling upon the deals in respect of various claims made by the assessee in the return of income more specifically relating to deduction under section 10A, 80IA, Aesop expenses claimed by the assessee, send bad credit claimed, disallowance under section 14A etc. 2.2. The assessee in response to the notice furnished details substantiate the claims. However, the Ld.AO after considering the same rejected the contention is of the assessee. The Ld.AR made addition/disallowance is in the hands of the assessee on following issues: 1. Disallowance of ESOP expenses amounting to ₹82,58,21,274/- by treating it to be capital in nature; 6 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 2. Addition in respect of unutilised CENVAT credit (₹25,09,46,927/-) and sales tax set off (Rs.20,94,223/-) to the value of closing stock; 3. Disallowance of provision for foreseeable loss in relation to construction jobs amounting to ₹41,04,38,960/-; 4. Treating extinguishment of sales tax deferred loan liability as revenue receipt amounting to ₹3,05,46,792/- 5. Disallowance under section 14A amounting to ₹10,50,22,203/-; 6. Disallowance of commission paid to certain parties amounting to ₹8,75,40,755/-; 7. Addition under section 40A(9) towards contribution to employ welfare fund amounting to ₹1,50,000/-; 8. Adjustment under section 92 CA (3) on account of provision of services to AE amounting to ₹3,51,34,944/-; 9. Adjustment under section 92 CA 3 on account of sale of shares to a amounting to ₹11,93,27,900/- 10. Disallowance of provision for sales tax and excise duty into ₹11,43,00,000/-; 11. Denial of deduction under section 80IA(4) in respect of development of infrastructure facility amounting to ₹29,42,48,359/-; 12. Disallowance of expenditure on estate maintenance, routine maintenance such as excavation, ground levelling et cetera treated as capital expenditure amounting to ₹1,61,60,447/- 13. Denial of double taxation relief amounting to ₹2,59,97,267/- 14. Disallowance of ₹61,83,300/- made towards club expenditure/membership fees as capital expenditure. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A). 3. The Ld.CIT(A) upheld all additions made by the Ld.AO, however granted relief to the assessee by deleting the 7 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited disallowance in respect of payment made towards club expenditure/membership fees. Aggrieved by the order of the Ld.CIT(A), assessee as well as revenue are in appeal before this Tribunal. Revenues appeal: 4. It is submitted that the issue contested by the revenue in its appeal pertain to expenditure allowed in the hands of the assessee towards club membership fees by the Ld. CIT(A). 4.1. Admittedly this issue is covered in favour of assessee by the decision of coordinate the Tribunal in assessee’s own case from assessment years 1994-95 to 2001-02. The Ld.Sr.Counsel relied on the decisions in the case law paper book from pages 1-374. 4.2. We find that this issue has been considered by coordinate bench of this Tribunal by way of a consolidated order for assessment years 2001-02 and 2002-03 in ITA No.6098/MUM/2012 and 2117/MUM/2013 vide order dated 29/04/2022 by observing as under: “49. The first ground in this appeal pertains to disallowance of expenditure relating to club membership. We find that this issue issquarely covered by the decision of the co-ordinate bench in assessee's own case for A.Y. 1997-98 in ITA Nos. 2891/M/2001 & 4299/M/2001 and the Tribunal vide order dated 08/10/2013 held as under:- \"Ground no.1 relates to the club membership expenses at Rs.69,70,827/-. This issue has been considered by the Assessing Officer at para 8 on page 5 of his order. The CrT(A) has considered this grievance of the assessee at para 5 on page 3 of order. Similar issue was considered by the Tribunal in assessee's own case in ITA No.2863/Mum/2000 at para 36 & 37 on page 12 and 13 of its order, wherein the Tribunal has followed its earlier decision in the assessee's own case in FTA Nos. 4265 8 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited &4892/Mum/98. As no distinguishing facts have been brought on record before us, respectfully following the decision of the Tribunal in the assessee's own case/ we do any justifiable reason to interfere with the findings of the dT(A). Ground is accordingly dismissed.\" Consistent with the above order of the co-ordinate bench, we dismiss the ground raised by the Revenue.” Respectfully following the above,we do not find any merit in the ground raised by the revenue. Accordingly, this ground raised by the revenue stands dismissed. Assessee’s appeal 5. Ground No.1 raised by the assessee is in respect of the disallowance of ESOP expenses incurred by the assessee amounting to ₹ 82,58,21,274/-. The submitted that assessee filed application for admission of additional ground dated 10/07/2024, in respect of ESOP expenses that reads as under: On the facts and circumstances of the case and in love, the assessing officer be directed to have allowed deduction of ESOP expenses being the difference between the market value of the share as on the date of exercise issued to the employees under the ESOP and the market value of such shares as and the deed of grant of the ESOP. 5.1. It is further submitted that,additional ground is purely legal issue, for which facts are already on record. It is also submitted that the issue is squarely covered by the decision of Hon’ble Special Bench of Bangalore Tribunal in case of DCIT vs.Biocon Ltd reported in (2013) 35 taxmann.com 335, thatis upheld by Hon’ble Karnataka High Court reported in 430 ITR 151. 9 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 5.2. The Ld.DR, did not object to the submissions of the assessee, however did not support admission of additional ground. We have perused the submissions advanced by both sides in the light of records placed before us. 6. On perusal of the additional ground, it is found that, these are directly connected with the validity of reassessment proceedings, and no new facts needs to be investigated to adjudicate the same. Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Respectfully following the above, we admit the additional grounds raised by assessee in both the years under consideration. Accordingly, the additional grounds filed by assessee stand admitted. 7. The Ld.Sr.Council submitted that, assessee granted ESOP under various schemes viz., ESOP-2000, ESOP-2002, and ESOP- 2003 during the years 2000, 2002, and 2003, respectively. These were framed following the guidelines issued by the Securities and Exchange Board of India(SEBI). It is submitted that the ESOP granted was to be vested at 25% of the ground each year, commencing from the date of the grant. He submitted that the ESOPs were granted at the market price prevailing as on the date of grant, and there was no ESOP discount charged in the 10 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited accounts during the respective financial year is till financial year 2003-04. 7.1. The Ld.Sr.Council submitted that, during the financial year relevant assessment year under consideration, cement business of the assessee demerged into separate company, and the existing ESOP grantees did not get any ESOP in the resulting new company. He further submitted that, due to demerger the equity capital of the assessee was restructured andface value of the shares reduced from Rs.10 to ₹2 per equity share. It was submitted that, as a consequence, the exercise price of the stock option was recomputed to compensate the grantees for the loss to the ESOP grantees as they did not get shares in the demerged company. 7.2. The Ld.Sr.Counsel submitted that employees had to be compensated for the loss of value since ESOP is a committed liability, and the loss of value was made good by reducing the grant price and offering a discount. It was submitted that the reduction in the excise price resulted in the ESOP discount, which was recorded in the accounts of the assessee during the year under consideration. He submitted that SEBI guidelines require charging of the ESOP discount to the profit and loss account, and the amount of discount is required to be amortised ona straight-line basis over the vesting period. The Ld.Sr.Counsel submitted that the pricing of the stock option post demerger was charged in the books of accounts for the year under consideration to the 11 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited accumulated general reserve/profit and loss account/deferred revenue expenditure, depending on the completion of/balance vesting period as the case may be. The Ld.Sr.Council submitted that, the charge to the profit and loss account is net of the reversal in case the option lapsesbythe employee not conforming to the vesting condition or the expiry of exercise period. 7.3. The Ld.Sr.Council submitted that, entire amount of ESOP discount arose during the year under consideration, claimed by the assessee while computing the total income. 7.4. The Ld.DR on the contrary supported the observations of the authorities below and submitted as under: 2.1 Issue 1: Disallowance of expenses claimed for Employee Stock Option Plan (ESOP). The crux of the assessee's argument is that the expenses pertains to the difference between the market value of shares on the date of exercise and the grant date of the ESOP, amortized over the vesting period. However, it is submitted that this claim lacks merit, both in fact and in law, and the nature of this amount does not qualify as a deductible expense under the Section 37(1) of the Income Tax Act, 1961. 2.2 The demerger of L&T Cement from Larsen & Toubro Limited (L&T) and its subsequent acquisition by Grasim Industries Limited (Grasim) marked a significant restructuring event in the Indian cement industry. The ESOP expense in question arose as a consequence of capital reduction consequent to corporate restructuringtriggered by the demerger of the assessee's cement business into UltraTech Cement Limited in order to avoid a hostile takeover. This restructuring, as detailed in the Directors' Report and Management's Discussion & Analysis for AY 2004-05, involved a comprehensive reorganization of the company's share capital by the way of reduction of face value of the shares as well as cancellation of ESOP’s which were granted but hadn’t vested. 2.3 The Directors' Report (Page 1) mentions that during the year, the company demerged its cement business, and Grasim Industries Limited acquired management control of UltraTech Cement Limited. The share capital reorganization(Management's Discussion & Analysis, Page 2) included a reduction in the face value of shares from Rs. 10 to Re. 1 12 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited and a subsequent consolidation into Rs. 2 per share and has been reproduced herein under for the sake of ready reference “Capital Reorganization The Company has restructured its equity capital as under during the year pursuant to the Scheme of Arrangement sanctioned by the High Court of Judicature, Bombay on 22 nd April, 2004: a) The authorized capital of the Company is reorganized into 162,50,00,000 equity shares of Rs.2/- each. b) The subscribed and paid-up share capital of the Company has been reduced by Rs.223.86 crore being no longer represented by assets of the Company consequent to cement business demerger and by Rs.0.06 crore in respect of shares issued after the effective date of demerger. c ) The above reduction was effected by reducing the face value of the equity shares of the Company from Rs.10/- perequity share to Re.1/- per equity share. d) Simultaneously, with the above reduction of share capital, 24,88,03,591 equity shares of face value of Re.1/- have been consolidated into 12,44,01,796 equity shares of Rs.2/- each, fully paid”. 2.4 The Director's Report (Page 9) further clarifies the adjustment to ESOPs: \"Consequent to the demerger of the Cement Business of the Company, the Share Capital has been reorganized into 12,44,01,796 equity shares of the face value of Rs. 2/- each. Since the Stock Options were given for the shares of the composite Company, adjustment in price and number of Options was required to be done to reflect the value loss due to the demerger as also to be in line with the restructured capital.\" 2.5 From the above mentioned series of events it can be clearly seen that the \"expense\" arising from the readjustment of options was not incurred due to the issue of fresh ESOPs (as claimed by the assesse), but rather due to the reworking of ESOP value consequent to the reduction of share capital pursuant to a demerger. 2.6 In Punjab State Industrial Development Corp vs CIT [(1997) 10 SCC 184], the Hon’ble Supreme court delineated tests for distinguishing capital from revenue expenditure. Notably, when an expenditure aims at creating an enduring benefit for the trade, it is deemed capital, unless special circumstances dictate otherwise. The case illustrates that expenditure connected to capital enhancement, even if incidental to business, qualifies as capital expenditure.The restructuring in question, aimed at protecting the company from a takeover and involving significant capital adjustments, clearly falls under this category. 2.7 As has been held by various other judicial decisions, any increase in the authorized share capital has an enduring benefit to the assessee and therefore the converse should also true i.e. the expenditure for reduction in of equity share capital of the company has also an enduring benefit to the assessee. Therefore, the expenditure is of 13 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited capital rather than that of revenue, and hence is not allowable u/s 37(1) 2.8 Without prejudice to the above, it is respectfully submitted that, subsequent to the demerger of the cement business, the company underwent a significant restructuring of its share capital. Specifically, the face value of the shares was initially reduced from Rs. 10 to Re. 1, followed by a consolidation to Rs. 2 per share. This reduction of share capital substantially affected the rights of shareholders, particularly with respect to their voting power and dividend entitlements. As a result, holders of Employee Stock Options (ESOPs), whose options were tied to these shares, experienced a proportional diminution in their ownership and voting rights, tantamount to a reduction in their equity interest in the company. 2.9 Consequently, it is contended that the amount claimed by the assessee as an \"expense\" actually constitutes as \"consideration\" granted to existing ESOP holders for “transfer” of shares effected by abandoning or surrendering their shares by the way of write off. This consideration, provided in the form of a discount, was intended to incentivise ESOP holders,to acquire additional shares at a reduced valuation, thereby also ensuring further investment in the company. This was purportedly offered in exchange for the diminution of their shareholder rights consequent to the demerger. 2.10 Reference is made to the case of Kartikeya v. Sarabhai v. Commr. of Income-tax [1997 (7) SCC 524] wherein the Hon’ble Supreme Court while discussing reduction of preference shares by a company has opined that “Further, referring to the provisions of the Companies Act, it held that the reduction of preference shares by a company was a sale and would squarely come within the phrase \"sale, exchange or relinquishment\" of an asset under s. 2(47) of the Act. It was also held that the definition of word \"transfer\" under s. 2(47) of the Act was not an exhaustive definition and that sub-s. (1) of cl. (47) of s. 2 implies that parting with any capital asset for gain would be taxable under s. 45 of the Act. In this connection, it was noted that when preference shares are redeemed by the company, the shareholder has to abandon or surrender the shares, in order to get the amount of money in lieu thereof.” 2.11 Thus, it is contended that the repriced ESOPs, offered at a discount were designed to compensate for the diminution in share value, voting rights, and dividend rights. These adjustments are posited as a form of compensation to the ESOP holders for agreeing to a reduction in their capital interest, effected through the mechanism of a write-off and thus such amount does ought not to represent or qualify as a “expense” under the Section 37(1) of the Income Tax Act, 1961. 2.12 In conclusion, it is respectfully urged that the Hon'ble ITAT should in the present case consider the intricacies of the demerger process and the specific context in which the ESOP “expenses” were incurred. Unlike in regular course of business, where ESOP expenses are treated as revenue expenditures for employee retention, the present case 14 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited involves expenses that are inherently linked to a significant capital restructuring event aimed at safeguarding the company during the demerger and acquisition process. Given the enduring benefits these restructuring efforts aimed to secure, such expenses align more closely with capital expenditures. Additionally, the contingent nature of the reissued ESOPs further differentiates this case from a regular issue of ESOP (i.e The option to avail the restructured ESOPs at a discounted rates was only given to the employees to whom such shares had “vested”, and the options which were granted but had not vested yet were deemed ineligible for the reissue and subsequently cancelled) reinforcing the argument that these expenses should not be deductible as revenue expenses under Section 37(1). Thus, based on the facts, circumstances, and relevant legal precedents, the ESOP expenses should be treated as capital in nature and warrant disallowance. 7.5. In rejoinder, the Ld.Sr.Counsel submitted that, the grant price agreed is based on the intrinsic value of the ESOP and the remuneration it intends to offer to the employees. He submitted that any restructuring of the assessee cannot change the agreed commitment towards the remuneration. The Ld.Sr.Counsel submitted that, in the present case, the grant price of the option is readjusted to compensate the loss of value to the employees by offering a discount. It is submitted that this does not change the nature of the issuance of ESOP. He submitted that the grant price was adjusted to cover the committed remuneration, which all the more means that the discount is like employee cost that needs to be allowed asbusiness expenditure. He submitted that it is not a new ESOP and assessee would be eligible for deduction when there is a discount on ESOPs. 7.6. The Ld.Sr.Counsel responding to the submissions of the Ld.DR submitted that, expenses cannot be treated to be notional as assessee is issuing shares ata discount 15 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited asremuneration for the employees. He submitted that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object is to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period and not to raise share capital. He submitted that such discount is to be construed by the employee and the assessee as a part of package of remuneration and is a substitute giving direct incentive in cash for availing the services of the employees. 7.7. The Ld.Sr.Counsel referred to the erstwhile fringe benefit tax provisions and submitted that, allotment or transfer of any specified security or sweat equity shares directly or indirectly by the employer free of cost or at concessional rate to its employees considered as consideration for employment under section 115 WB of the act and is made liable to fringe benefits tax with effect from April 2008. He thus submitted that, the act itself provide for the fair value of the shares issued to the employees as consideration for the employment and the employees and taxed as fringe benefit. 7.8. The Ld.Sr.Council, emphasised on the additional ground filed by the assessee and submitted that, the authorities ought to allowthe deduction of ESOP expenses being the difference between market value of the shares issued to the employees as on the date of exercise and the market value as on the date of grant of ESOP. 16 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited We have perused the submissions advanced by both sides in the light of the records placed before us. 8. It is noted that, this issue is settled by the decision of Hon’ble Bangalore Special Bench in case of DCIT vs. Biocon Ltd (supra). The observation of Hon’ble Special Bench on this issue held as under: 10.5 From the above discussion it is lucid that at the event of granting options, the company does not incur any obligation to issue the shares at discounted premium. Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In other words, it is a stage of realization of income earned during the vesting period. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the employees compensation liability which it incurred over the vesting period by obtaining their services. From the above it is apparent that the company incurs liability to issue shares at the discounted premium only during the vesting period. The liability is neither incurred at the stage of the grant of options nor when such options are exercised. 10.6 Let us consider the facts of the case of S.S.I. Ltd. (supra), which has been strongly relied by the ld. AR in support of his claim for deduction of discount during the years of vesting of options. In that case the vesting period was three years and the assessment order was passed u/s 143(3), inter alia, allowing deduction of Rs. 66.82 lakh under the head \"Staff welfare expenses\" on account of amortization of discounted value of option over a period of three years. The CIT revised such order by directing the A.O. to disallow ESOP expenditure of Rs. 66.82 lakh. When the matter came up before the Tribunal, it was held that the expenditure in that behalf was an ascertained liability and not contingent upon happening of certain events. It was further noticed that the assessee claimed deduction of such discount on ESOP by following the SEBI Guidelines. As the expenditure itself was an ascertained liability, the Tribunal held that the same to be deductible. 10.7 Before proceeding further it would be befitting to take stock of the nutshell of the SEBI Guidelines in this regard. These Guidelines provide 17 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited for granting of deduction on account of discount on issue of options during the vesting period. It has been so explained with the help of an example in Schedule I to the Guidelines. For the sake of simplicity, we are taking an instance under which an option of share with face value of Rs. 10 is given under ESOP to employees at the option price of Rs. 10 as against the market price of such shares at Rs. 110 on that date. Further suppose that the vesting period is four years with equal vesting @ 25% at the end of each year. Total discount comes to Rs. 100 (Rs. 110 - Rs. 10). These Guidelines provide for claiming deduction in the accounts for a total discount of Rs. 100 divided over the vesting period of four years on straight line basis at the rate of Rs. 25 each. The case of S.S.I. Ltd. (supra) deals with a controversy relating to one of the vesting years. The tribunal entitled the assessee to proportionate deduction. Thus it is evident that the view taken by the tribunal in that case not only matches with the SEBI Guidelines but also the 'accrual concept' in the mercantile system of accounting, thereby allowing deduction at the stage of incurring of liability. 10.8 Reverting to the questions of 'when' and 'how much' of deduction for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd. case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 8.1. We also note that, requirement of accounting second type of discount was examined by Hon’ble Special Bench in paragraphs 11.2.8 and 11.2.9 of its order. It is also observed by the Hon’ble Special Bench that SEBI guidelines did not discuss about the accounting of second type of discount. Hon’ble Special Bench thus held the deduction of additional discount has to be allowed as per taxation principles. For the sake of convenience, paragraphs 11.2.8, 11.2.9 and 11.3 of the order passed by the Hon’ble Special Bench is reproduced as under: \"11.2.8. The plea now raised before us by the ld. AR, relying on the case of Challapalli Sugars Ltd.'s case, was also taken up before the Hon'ble Supreme Court in the case of Tuticorin Alkalis (supra). Dealing with the same, the Hon'ble Supreme Court held that : \"The question in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC) was about computation of depreciation and development 18 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited rebate under the Indian Income-tax Act, 1922. In order to calculate depreciation and development rebate it was necessary to find out \"the actual cost\" of the plant and machinery purchased by the company. This court held that \"cost\" is a word of wider connotation than \"price\". There was a difference between the price of a machinery and its cost. This court thereafter pointed out that the expression \"actual cost\" had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. The judgment in Challapalli's case [1975] 98 ITR 167 (SC), goes to show that the court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants.\" From the above observations there is not even an iota of doubt in our minds that there can be no question of following the accounting principle or Guidance notes etc. in the matter of determination of total income. 11.2.9. The trump card of the ld. AR to bolster his submission for assigning the status of binding force to the SEBI Guidelines is the order in the case of SSI Limited (supra) which came to be affirmed by the Hon'ble Madras High Court in PVP Ventures (supra). We have noticed above that the said case dealt a situation falling within one of the three years of the vesting period, in which it was held that one third of the total amount of discount computed on the basis of the market price of the shares at the time of grant of option, is deductible. It is evident from the SEBI Guidelines that these deal with the deductibility of discount in the hands of company during the years of vesting period. These Guidelines are silent on the position emanating from variation in the market price of the shares at the time of exercise of option by the employees vis-a-vis the market price at the time of grant of option. In other words, the SEBI Guidelines prescribe accounting treatment only in respect of the period of vesting of the options and the situation arising out of unvested options or vested options lapsing. The very reference by the Chennai Bench of the Tribunal in SSI Limited (supra) to the SEBI Guidelines is indicative of the fact that it dealt with a year during which the options were vesting with the employees and the company claimed discount during the vesting period. The Hon'ble Madras High Court in the case of PVP Ventures (supra) has upheld the view taken by the Chennai Bench in the case of SSI Limited (supra). The granting of the binding force to the SEBI Guidelines by the Hon'ble Madras High Court should be viewed in the context of the issue before it, which was about the deductibility of discount during one of the vesting years. In the earlier part of this order, we have held that the deductibility of discount during the vesting period, as prescribed under the SEBI Guidelines, matches with the treatment under the mercantile system of accounting. To that extent, we also hold that the SEBI guidelines are applicable in the matter of deduction of discount. Neither there was any issue before the Hon'ble Madras High Court 19 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited nor it dealt with a situation in which the market price of the shares at the time of exercise of option is more or less than the market price at the time of grant of option. It is a situation which has also not been dealt withby the Guidelines. Accordingly, the afore noted taxation principle of granting deduction for the additional discount and reversing deduction for the short amount of discount at the time of exercise of option, needs to be scrupulously followed 11.3. We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession'. \" (emphasis supplied) 8.2. The Ld.Sr.Counsel filed before this Tribunaldetails of the ESOP exercised during the year under consideration. However, this needs to be verified based on the observation of Hon’ble Special Bench. We accordingly direct the Ld.AO to consider the claim of assesseefollowing the observations of Hon’ble Special Benchreproduced hereinabove. The assessee is directed to furnish the amount of discount claimed as deduction in the earlier years in respect of vesting/lapsed options that was reversed at the relevant time and the adjustment to the income made, based on the difference in the amount of discount calculated having regard to the market price at the time of grant of option and the market price at the time of exercise of option. 20 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Needless to say, the assessee must be granted proper opportunity of being heard. Accordingly, additional ground raised by the assessee stands allowed and Ground No.1 raised by the assessee becomes academic at this stage. 9. Ground No.2 raised by the assessee is in respect of the addition towards unutilised CENVAT credit amounting to ₹25,09,46,927 and sales tax set off amounting to ₹6,20,94,223 to the value of closing stock. 9.1. Ld.Sr.Counsel submitted that during the year under consideration assessee claimed CENVAT credit amounting to ₹25,09,46,927 and sales tax set off amounting to ₹ 620,94,223 to the value of closing stock by walking provisions of section 145A of the Act. He submitted that the assessee demonstrated in the documents filed along with tax audit report that the method of accounting consistently followed did not have any impact on the profits of the assessee. The Ld.Sr.Counsel submitted that assessee did not claim any deduction of unutilised CENVAT credit, because, payment of excise duty and service tax was not payable during the year under consideration. 9.2. The Ld.Sr.Counsel submitted that, assessee followed exclusive method of evaluation of purchases, sales and inventory which is in line with mandate to require of accounting standard 2 issued by Institute of chartered accountants of India. He argued that section 145A of the act, provides for an inclusive method of accounting wherein the inventory, purchase and sales should be valued at gross. He submitted that unutilised CENVAT credit is nothing but duty paid in advance and the same is adjustable 21 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited against the excise liability of assessee upon sale of manufactured of goods. He submitted that over. It is submitted that such duty paid in advance does not have any impact on the P&L account as it gets paid over the period completely. The Ld.Sr.Counsel emphasised that, the revenue is not prejudiced by following either of the method, the closing stock of one year becomes opening stock of the following year and therefore any adjustment made only to the closing stock in the current assessment year will result in the taxation. Reliance is placed on following decisions: Decision of Hon’ble Supreme Court in case of Commissioner of Income- tax v.Indo Nippon Chemicals Co. Ltd. 261 ITR 275 Decision of Hon’ble Bombay High Court in case of Commissioner of Income-tax-6 v. Diamond Dye Chem Ltd. 396 ITR 536. Decision of Hon’ble Mumbai Tribunal in case of Mahindra & Mahindra Ltd. v. DCIT reported in 180 ITD 776 Decision of Hon’ble Mumbai Tribunal in case of Aditya Birla Nuvo Ltd. v. ACIT, reported in 68 SOT 403 9.3. Alternatively,Ld.Sr.Counsel submitted that, if closing value of inventory is adjusted, similar adjustment should be made to all items to show the movement in the CENVAT credit,and adjustment will always result in nil effect. He also referred to page 144 of the paper book wherein, in the tax audit report working of exclusive method of valuation is provided that does not have any impact on the profit and loss for the year under consideration. 9.4. On the contrary the Ld.DR submitted that, the method of valuation of both opening and closing stock must be uniform and 22 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited that it is essential to clarify that the why consistency is preferable, the exclusive method adopted by the assessee is not in accordance the Law. She referred to section 145A and relied on decisions referred in the written submission filed and reproduced herein below: 3.3. The decision in Himson Textile Engineering Industries (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle – 1, (2013 35 taxmann.com 528 (Guj)) andM/s. The West Coast Paper Mills Ltd. (I.T.A. Nos. 3187 & 3750/M/03) supports this contention, wherein the court upheld the statutory mandate of section 145A, emphasizing the need for inclusive valuation methodology. 3.4. The appellant further contends that adjustments to closing stock would lead to double taxation. However, it is humbly submitted that adherence to section 145A is essential to avoid such unintended consequences. Double taxation can be avoided by correctly applying the provisions of the Income Tax Act for each assessment year. 3.5. The decision in Croydon Chemical Works Ltd. vs. Assistant Commissioner of Income Tax, Circle 6(2), Mumbai ([2007 ]11SOT 295) by the Hon'ble ITAT Mumbai reinforces the requirement to include taxes, duties, etc., in closing stock valuation by applying the inclusive method per section 145A. Further, the decision of the \"J\" Bench of Hon’ble ITAT, Mumbai in the case of M/s. The West Coast Paper Mills Ltd. (I.T.A. Nos. 3187 & 3750/M/03) reinforces the legislative intent behind section 145A. The judgment elucidates that while the transition to the inclusive valuation method may impact the year of implementation, it achieves tax neutrality over subsequent years. 3.6. The appellant further argues that the use of exclusive method of valuation will not impact the year's profit. However, this assertion is erroneous. It is humbly submitted that adhering to section 145A may result in an increase in profit for the assessment year, as the unutilized CENVAT credit and sales tax set-off available at the end of the financial year may exceed those available at the beginning, thus affecting the profit calculation. 3.7. Further, the appellant claims to follow an exclusive method of accounting and relies on AS – 2 to justify the same. However, statutory provisions take precedence over accounting practices. Section 145A mandates the inclusion of taxes, duties, etc., in closing stock valuation for tax purposes, irrespective of the accounting method employed. The decisions in Melmould Corporation Vs. Commissioner of Income Tax (202 ITR 789) by the Hon’ble Bombay High Court affirms the argument that statutory requirement take precedence over accounting practices. 3.8. In conclusion, it is evident from the legal precedents and statutory provisions cited that the AO's actions were in accordance with the law. 23 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited The appellant's contentions are untenable in light of the clear statutory mandate of section 145A. We have perused the submissions advanced by both sides in the light of the records placed before us. 10. It is worthwhile to note that the Memorandum and CBDT Circular explaining the provisions of section 145A inserted by the Finance (No. 2) Act, 1998 states as follows: 'Computation of value of inventory : The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which Modvat credit is available has been the matter of considerable litigation. In order to ensure that the value of opening and closing stock (bold for emphasis) reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will, accordingly, apply in relation to assessment year 1986-87 and subsequent years. [Clause 45]' Circular No. 772, dated 23-12-1998 issued by the CBDT refers to the method of accounting and in Para 52.1 thereof, it is mentioned that whether the value of the closing stock of the inputs must necessarily include the element for which Modvat credit is available, has been a matter of considerable litigation over the years. Para 52.2, which reads as under:— '52.2 consistent with the other provisions of the Act, with a view to put end to this point of litigation and in order to ensure that the 24 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited value of opening and closing stock reflect the correct value, a new section 145A is inserted. This section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed by the assessee and such valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.' 10.1. Identical issue was considered by Hon’ble Supreme Court in case of CIT versus Indo Nippon chemicals Co Ltd reported in (2003) 130 tax man 179. Hon’ble Supreme Court while considering identical similar issue, observed as under: Upon appeal to the High Court under section 260A of the Act, the High Court addressed itself to the issue as to whether the value of the closing stock of the duty paid inputs, work-in-progress and finished goods most necessarily include the element of Modvat credit available. The High Court took the view that unless the Assessing Officer acted under circumstances indicated in section 145 of the Act, the Assessing Officer is bound to adopt the method of computation of income regularly employed by the assessee. However, if he comes to the conclusion that the method of accounting employed by the assessee makes it impossible to correctly compute the income, then the Assessing Officer is entitled to adopt any other suitable accounting method. We may add that, whatever method the Assessing Officer adopts, the method has to be consistent with the accepted principles of accountancy. It is not open to the Assessing Officer to treat outgoings as income under section 145 of the Act. 3. The High Court has taken the several illustrations in the charts placed before it by both sides and demonstrated that there are two possible methods of valuation of stock. The first would be the \"gross method\", in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted, then the unconsumed stock also must necessarily be valued in the same manner. The other method is the \"net method\", in which the raw material purchased is valued at the actual cost, that is the actual purchase price and, on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same. 25 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 4. We are unable to accept the view of the Assessing Officer that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act. 5. Mr. P.J. Pardiwala, learned counsel for the respondent in C.A. No. 2161 of 2002 and 2164-2165 of 2002, points out that the assessees have all uniformly adopted the \"net method\", namely, valuing the raw materials at the purchase price minus Modvat credit. This method was also adopted by them while valuing the unconsumed raw materials and the work-in-progress at the end of the year. We, therefore, do not think that their method of valuation was wrong. The Assessing Officer adopted the \"gross method\" at the time of purchase, and the \"net method\" of valuation at the time of valuation of the stock on hand. By this method, which is wholly erroneous in our view, he assumed that the income, to the extent of the Modvat credit on the unconsumed raw material, was generated, which was not reflected in the accounts and attempted to bring it to charge under the Act. 6. Learned counsel for the Revenue referred us to the judgment of this Court in CCE v. Dai Ichi Karkaria Ltd. [1999] 7 SCC 448 and, particularly, the observations in para 25 to the following effect : \"25. We think it is appropriate that the cost of the excisable product for the purposes of assessment of excise duty under section 4(1)(b) of the Act, read with rule 6 of the Valuation Rules should be reckoned as it would be reckoned by a man of commerce. We think that such realism must inform the meaning that the courts give to words of a commercial nature, like cost, which are not defined in the statutes which use them. A man of commerce would, in our view, look at the matter thus : 'I paid Rs. 100 to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs. 10 as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the Modvat Scheme, I have become entitled to the credit of Rs. 10 with the excise authorities and can utilise this credit when I pay excise duty on my finished product. The real cost of the raw material (exclsive of freight, insurance and the like) to me is, therefore, Rs. 90. In reckoning the cost of the final product I would include Rs. 90 on this account.' This, in real terms, is the cost of the raw material (exclusive of freight, insurane and the like) and it is this, in our view, which should properly be included in computing the cost of the excisable product.\" (p. 461) 7. Learned counsel emphaised these observations to support his case. In our view, these observations have been misunderstood. This Court pointed out in the said judgment that a manufacturer who manufactures the goods would reckon the cost of the raw material as exclusive of the Modvat credit in reckoning the cost of the \"final product\". These observations do not deal with the manner of valuation 26 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited of the unconsumed raw material or work-in-progress in hand. We have also been referred to the judgment in Eicher Motors Ltd. v. Union of India [1999] 106 ELT 3 (SC). In our view, this judgment does not support the Revenue's case. 10.2. Relianceis placed on the decision of Hon’ble Bombay High Court in case of CIT vs. Mahalakshmi Glass Works Pvt.Ltd., reported in (2009) 318 ITR 116,when it is held that, section 145A of the act provides for adjustment not only with respect to closing stocks but also with respect to opening stock purchases and sales, and directed the assessing officer to recompute the profits of the assessing after making adjustment in the opening stock purchases and sales as well. He submitted that Hon’ble Bombay High Court relied on the decision of Hon’ble Delhi High Court in case of CIT vs Mahavir Alluminium Ltd., reported in (2008) 297 ITR 77, wherein an identical question concerning the valuation of inventory as contemplated under section 145A of the act was considered. 10.3. On careful perusal of section 145A, CBDT circular explaining the provisions of section 145A and decision of Hon’ble Supreme Court in case of Indo Nippon(supra), and decision of Hon’ble Bombay High Court in case of CIT vs. Mahalakshmi Glass Works Pvt.Ltd (supra) and in case of CIT vs. Mahalakshmi Glass Works Pvt.Ltd., (supra), we note that any adjustments made in the valuation of inventories will affect both the opening and closing stock. And thus whatever adjustment is made in the valuation of closing stock, the same will have to be reflected in the opening stock, irrespective of any consequences on the computation of income for tax purposes. 27 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 10.4. We further note that section 145A is a non-obstante clause. Therefore, to give effect to section 145A, the opening stock as on 1stday of immediately subsequent financial year will have to be increased by any tax, duty, cess or fee stock if the same has not been added for the purpose of valuation in the accounts. We therefore do not find any assistance from the decisions cited by the Ld.DR in her written submission as are distinguishable on facts. The Ld.AO is therefore directed to give the effect of section 145A as per above discussion. Accordingly ground No.2 raised by the assessee stands allowed. 11. Ground number 3 raised by the assessee is regardingdisallowance of provision for foreseeable losses in relation to construction jobs amounting to ₹ 41,04,38,960/-. 11.1. The Ld.AO noted that, assessee made provision for foreseeable losses as an expense in the year under consideration. The Ld.AOnoted that, assessee reserved in anticipation of potential liabilities that might arise from future events. Assessee was thus called upon to explain as to why, the losses should not be disallowed. In response to the same, the assessee relied on Accounting Standards 7, and submitted that, the provision was made in accordance with mandatory accounting standards for construction contract,and thus was charged to the profit and loss account. 11.2. The Ld.AO disallowed the claim as assessee failed to furnish any documentary evidences confirming the actual occurrence of the expenses during the specified year and also 28 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited failed to demonstrate the foreseeable losses for each year separately. 11.3. On an appeal the Ld. CIT(A), the disallowance made by the Ld.AO was confirmed. 11.5. Before the Tribunal the Ld.Sr.Counsel submitted that the computation of foreseeable laws is merely a balancing figure. It was submitted that assessee estimates the loss of any project to the extent of the project is yet to be completed. It is submitted that the actual loss claimed by the assessee has not been disputed by the revenue and therefore amount of foreseeable laws also cannot be doubted. 11.6. He submitted that identical issue was considered by coordinate of the Tribunal in assessee’s case for assessment in 2004-05 in principal,accepted the contention of the Assessee that deduction for foreseeable losses estimated on a reasonable basis could be allowed. He submitted that the assessing officer was directed to verify the details/documents and to restrict disallowance to the projects which was not completed and the projectsthat were completed but revenue is not for tax. He also relied on following decisions: Decision of Hon’ble Supreme Court in case of Metal Box Company of India Ltd. v. Their Workmen [1968] 73 ITR 53 Decision of Hon’ble Mumbai Tribunal in case of Mazgaon Dock Ltd. v. JCIT 29 SOT 356 Jacobs Engineering India Pvt. Ltd v. ACIT reported in AIT-2009-285- ITAT Decision of this Tribunal in case of ITD Cementation India Ltd., in ITA No. 3669/Mum/2011 29 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 11.7. On the contrary, the Ld.DR at the outset and the written submission submitted as under: 4.3. It is contended that as per the order in the assesee’s own case concerning assessment year 2004-05, the issue was directed to be returned to the Assessing Officer's file for the purpose of quantifying and calculating the loss. This directive stemmed from the absence of conclusive proof of quantification concerning 26 projects. The assessee had only furnished data for four projects, wherein a sample working for foreseeable losses was provided to substantiate the entire claim. 4.4. During the course of the present proceedings, when the assessee was asked to produce evidence regarding expenses that had actually been incurred, they failed to do so. Therefore, in accordance with legal precedent cited in the CIT(A) order and the Hon’ble ITAT’s order in the assessee’s own case concerning Assessment Year 2004-05, allowing complete deductions based on a limited presentation of proof ought to be deemed unacceptable. 4.5. It is further pleaded that out of the cases that the assessee wishes to place reliance on, namely “ITD Cement India Limited”does not correspond with the citation (i.e. I.T.A No.3669/Mum/2011) that the assesseehasmentioned.Further, the in the case of Mazgaon Docks Ltd. V JCIT, Jacobs Engineering India Pvt. Ltd. Vs ACIT or Metal Box Company of India v Their Workman the question of law wasn’t w.r.t “presentation/accepting of sample working for foreseeable lossesto substantiate the entire claim” and are hence distinguishable. 4.6. In light of the foregoing arguments and observations, it is respectfully submitted that the disallowance on account of provision for foreseeable losses is justified and in accordance with established legal principles and precedents. We have perused the submissions advanced by both sides in the light of the records placed before us. 12. It is noted that, identical issue has been considered by coordinate of the Tribunal in assessee’s case for assessment 2004-05 in ITA number 6589/MUM/2013 vide order dated 11/12/2023. Admittedly, the facts and circumstances are similar in the year under consideration and the Ld.DR in paragraph 4 of her written submission reproduced herein above, accepted the 30 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited findings of this Tribunal for assessment a 2004-05 that reads as under: “27. Being aggrieved, the Appellant carried the issue in appeal before us. 28. During the course of hearing the Ld. Sr. Counsel appearing for the Appellant submitted that the provision for foreseeable losses is an allowable deduction. As per AS-7, the Appellant was under obligation to recognize the amount of foreseeable loss as an expense immediately in the relevant assessment year. In this regard, reliance was placed on the judicial precedents which have been taken into 12 consideration. In the case of Mazgaon Dock Ltd. Vs. JointYONI MINISTRY OME YRA APPELLATE Commissioner of Income, Spl. Range, Mumbai :[2009] 29 SOT 356 (Mumbai), deduction for foreseeable losses was allowed by the Tribunal holding as under: \"9. We have considered the rival submissions and perused the record of the case. The short dispute is whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of AS-7, is to be allowed in the year in which the contract has been entered into or it is to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in- progress is concerned, it cannot be disputed that in view of mandatory requirements of AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by Comptroller & Auditor General of India. Therefore, at the very outset, we may observe that the observation of Ld. CIT(A) that the assessee had booked bogus loss is not correct. As far as the basis of estimation is concerned the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it cannot be said that the estimated loss was not allowable. It is not disputed that the department in earlier years has allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in 31 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited principle, it is not disputed that the estimated loss under the present and circumstances is an allowable deduction. However, merely because the change in method of accounting is bona fide, it would not lead to the inference that the income is also deducible properly under the Income-tax Act. This aspect is very evident from 1st proviso to section 145 as it stood prior to amendment 1995 with effect from 1-4-1997 which reads as under:- \"Method of accounting-(1) Income chargeable under the head \"Profits and gains of business or profession\" or \"Income from other sources\" shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine.\" Therefore, it is to be examined whether income is properly deducible or not. In our opinion, it cannot be disputed that from the method adopted by the assessee, assessee's Income cannot be deduced properly in the year in which the loss has been anticipated. As a matter of fact this aspect is not disputed by the Assessing Officer also. He seems to have swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting is not of much significance in the present context because if the loss has been properly estimated in the year in which the contract has been entered into then it has to be allowed in that very year and cannot be spread over the period of contract. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the present case, the effect of valuation of WIP will automatically affect the profits of subsequent years accordingly. We, accordingly, do not find any 32 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited reason for not accepting in principle the assessee's claim as being allowable. However, in view of discrepancies pointed out by Ld. CIT(A) for correct estimation of loss, we restore the matter to the file of the Assessing Officer to examine the correctness of amount claimed. This ground is, accordingly, treated as allowed for statistical purposes.\" (Emphasis Supplied) 29. Similarly, in the case of Jacobs Engineering India Pvt. Ltd. Vs. Assistant Commissioner of Income Tax: [2011] 14 taxmann.com 186 (Mumbai) [26-05-2009] cited on behalf of the Appellant, it was held as under: \"11. Having regard to the above legal and factual discussions, and following the decision of the ITAT in the case of Mazagon Dock Ltd. ( supra) and Metal Box Co. of India Ltd. (supra) and decision of the Hon'ble Delhi High Court in the case of Woodward Governor India (P.) Ltd. (supra) the contention of the assessee regarding allowability of foreseeable loss is accepted in principle. However, the issue is restored to the file of A.O., for the purpose of quantification and calculation of the said loss in terms of Accounting Standard - 7, as the same has not been done. The A.O. is, further, directed to afford reasonable and proper opportunity to the assessee for the purpose of calculation and quantification of the said foreseeable losses. It is, 18 further, made clear that the similar ground has been raised by the assessee for the A.Y. 2003-04, vide ground No.2. As the issue is identical expect the assessment year and the amount of foreseeable losses at Rs. 5,83,038/-, the findings given in respect of A.Y. 2002-03is also applicable for the A.Y. 2003-04. Therefore, ground No. 1 of A.Y. 2002-03, and Ground No.2 of A.Y. 2003-04 of the assessee are allowed.\" (Emphasis Supplied) 33 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30. On perusal of above, it was clear that while in principle the Tribunal had accepted the contention of the Assessee in the above cases that deduction for foreseeable losses estimated on a reasonable basis could be allowed as deduction. However, in both the cases, the issue is remanded back to the file of Assessing Officer for computation and quantification. In the case of Mazgaon Dock Ltd. (supra) though the Tribunal noted that estimation was done on technical basis, in view of the discrepancies pointed out by the First Appellant Authority for correct estimation of loss, the issue was restored to the file of Assessing Officer for examining correctness of the claim. Whereas in the case of Jacobs Engineering India Pvt. Ltd (supra) the Tribunal noted that quantification and calculation of foreseeable losses in terms of AS-7 had not been done by the Assessing Officer.” 12.1. Respectively following the above, we direct the Ld.AO to verify the details and documents submitted by the assessee and to restrict the disallowance on account of unforeseeable losses about the projects which have not been completed till date, and the projects thatare completed but the entire revenue is not been offered to tax till date. Assessee is also directed to furnish the details of the entire 82 projects to carry out necessary verification. Accordingly, ground number 3 raised by the assessee stands archaeological statistical purposes. 13. Ground number 4 raised by the assessee’s is against the addition made towards extinguishment of sales tax deferred loan liability as revenue receipt amounting to ₹ 3,05,46,792/-. 13.1. During assessment proceeding, the Ld.AO noted that, the assessee did not offere gain arising from premature payment of 34 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited deferred sales tax. The assessee was thus called upon to explain as to why, the amounts should not be taxed. In response, the assessee submitted that, it is qualified for entitlement of sales tax incentive schemes of various state government and the sales tax liability data mined in assessment order under the sales tax act and central sales tax act shall be deferred, which shall be payable in equal instalments after the expiry of the period of difference. 13.2. The assessee submitted that, it was entitled to use the sales tax collection without any liability towards interest and it partakes the character of an interest-free loan from the state government to the assessee. For such reason assessee deferred and included the unsecured loans in balance sheet and separately disclosed under the head sales tax deferment loan. The assessee further submitted that, during the year under consideration, the assesse opted to pay the amount of unsecured loan as per the scheme providing for repayment at the net present value, and the resultant differential amount between the actual liability and its net present value was credited to the profit and loss account in the “Schedule L” under the head “gain on relinquishment of debts”. 13.3. The Ld.AO did not accept the submissions of the assessee and was of the opinion that, the assessee derived profits on account of the sales tax, which was converted into loan by scheme of Government, does not mean that, the payment is on capital account. The Ld.AO was of the opinion that, once the sales tax liabilitywas deducted as business expenditure, it cannot be said that the profit derived from the payment of such deferred 35 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited tax liability is capital in nature. Ld.AO relied on following decision in support of his view: decicion of Hon’ble Supreme Court in case of Empire Jute Company Ltd vs CIT reported 124 ITR 1: decision of Hon’ble Supreme Court in case of CIT vs Bokaro steel Ltd reported to 36 ITR 315: the decision of Hon’ble Bombay High Court in case of Mahindra and Mahindra Ltd vs CIT reported in 261 ITR 501 13.4. The Ld.AO and thus made addition of ₹ 3,05,46,972 (being the difference between deferred sales tax liability and amount paid against the same) under section 28 as business receipt chargeable to tax. Aggrieved by the order of the Ld.AR, assessee preferred appeal before the Ld. CIT(A). 13.5. The Ld. CIT(A) upheld the addition by relying on the orders of his predecessor. Aggrieved by the order of the Ld. CIT(A), assessee is on appeal before the Tribunal. 13.6. The Ld.Sr.Counsel submitted that, identical issue was considered by coordinate of this Tribunal in assessee’s own case for assessment years 2000-01, 2001-02, 2002-03 and 2004-05. The relevant orders passed by the coordinate bench of this Tribunal is pleased in the paper book filed before us. He also placed reliance on following decisions: Decision of Hon’ble Supreme Court in case of Balkrishna Industries Ltd. reported in (2017) 88 taxmann.com 273 Decision of Hon’ble Supreme Court in case of SI Group India Ltd. reported in (2016) 379 ITR 326 Decision of Hon’ble Supreme Court in case of Mahindra & Mahindra Ltd. reported in (2018) 93 taxmann.com 32 Decision of Hon’ble Bombay High Court in case of Grasim Industires Ltd. reported in (2014) 49 taxmann.com 250 36 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Decision of Hon’ble Bombay High Court in case of Sulzer India Ltd. in case of (2014) 369 ITR 717 Decision of coordinate bench of this Tribunal in case of Cable Corporation of India Ltd., reported in (2019) 106 Taxmann.com 194 13.7. On the contrary the Ld.DR in written submission submitted as under: 5.2. It is the argument of the revenue that, In the present case, the difference between the NPV and the actual liability constitutes a benefit obtained by the assessee through the remission or cessation of the trading liability. This benefit falls within the purview of Section 41(1) and is thus taxable as income. Section 41(1) deals with profits chargeable to tax and stipulates that if an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure, or trading liability, and subsequently, the assessee obtains any amount or benefit in respect thereof by way of remission or cessation, such amount or benefit shall be deemed to be profits and gains of business or profession. 5.3. Further reference is made to Section 28(iv), which specifies that the value of any benefit or perquisite arising from business activities is chargeable to income tax. This includes benefits that may not be directly convertible into money. Base on the abovementioned understanding of section it is humbly submitted that the benefit derived by the assessee from settling the deferred sales tax loan liability at a lower NPV qualifies as a benefit arising from business activities. Though not directly convertible into money, this benefit has an economic value and contributes to the profitability of the business, making it subject to taxation under Section 28(iv). 5.4. Reference is made to the following case laws to highlight treatment of benefits received from the government which are incidental to carrying out business. i. Sahney Steel & Press Works Ltd. v. CIT ([1997] 7 SCC 764): This case establishes that incentives received from the state government, incidental to carrying out business, are to be treated as revenue receipts. The one-time settlement scheme in our case constitutes such an incentive and should be treated as a revenue receipt. ii. Kesoram Industries and Cotton Mills Ltd v. Commissioner of Income Tax[MANU / WB / 0116 / 1989]: This case supports the treatmentof subsidies received as part of state government schemes as revenue receipts. The one-time settlement scheme aligns with the principles laid down in this case. iii. Schenectady Specialities Asia Pvt. Ltd. v. Assistant Commissioner of Income-tax [[2010] 35 SOT 16 (Mumbai)]: This case directly addresses the issue of settlement of deferred liabilities and its tax implications. The tribunal's decision in this case 37 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited reinforces our argument that the difference arising from the settlement of such liabilities should be treated as taxable income under Section 41(1) of the Income Tax Act. 5.5. In light of the foregoing legal provisions and precedents, it is respectfully submitted that the difference between the NPV and the actual liability should be treated as taxable income for the assessee. The application of Section 41(1) and Section 28(iv), along with the support of relevant case laws, strengthens this contention. We have perused the submissions advanced by both sides in the light of the records placed before us. 14. The Ld.Sr.Counsel drew our attention to the order for assessment in 2004-05 (supra) wherein consolidated order passed by this Tribunalfor assessment in 2001-02 and 2002-03 vide order dated 11/04/2022 in ITA number 06/09/2008 and 6878/MUM/2012, 2017 and 2284/MUM/2013 was followed. The relevant extract of the observations of this Tribunal for assessment in 2004-05 (supra) are as under: “58. We have perused the above decision of the Tribunal. The relevant extract of the common order, dated 11/04/2022, of the Coordinate Bench of the Tribunal in the case of the Appellant for the Assessment Years 2001-02 and 2002-03 [ITA No. 6908 & 6878/Mum/2012, 2117 & 2284/Mum/2013] capturing the factual background and the issue under consideration reads as under: \"27. Ground 7 pertains to treatment of extinguishment of sales- tax deferred loan liability as revenue receipt (Rs.50, 17,98,460/-). 28. This ground also covered by the decision of the co-ordinate bench for assessment year 2000-01. The co-ordinate bench, after deliberating upon the issue in detail has come to the following conclusions:- 38 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited \"37. After hearing both the parties and perusing the material available on record, the undisputed facts coming out are that the sales tax was collected by the assessee from the customers under Sales Tax deferral Incentive Scheme. As per the said scheme the payment of said sale tax was to be deferred for specified number of years subject to the fulfillment of certain special conditions as specified in the scheme. Such deferment of sale tax was to be treated as loan to the assessee by sales tax department to be paid after a specified number of years. During the year the assessee deferred the sales tax amounting to Rs. 71. crores which the assessee has assigned to another company at a net present value of Rs. 19.73 crores. In other words, the assessee has pald an amount of Rs. 19.73 crores in assignment in consideration for taking over the said obligation for repaying for Rs. 71.34 crores on future date to another company. The differential amount of Rs.51.61 Crores was credited to the P&L account, however while computing the income the assessee, the same was reduced in the computation of income by treating the same as capital receipt not chargeable to tax. According to the A.O., the said liability has ceased to exist in the books of the assessee as the same was taken over by another entity. In coming to this conclusion, the A.O relied on the decision of CIT vs. Sunderam Iyengar & Sons Ltd. (supra). wherein the assessee used to receive deposits in the course ofits trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. wherein the order of the Supreme Court has held that liability needs to be treated as income of the assessee u/s 41(1) of the Act. The Id. CIT(A) in the appellate proceeding affirmed the order of AO by holding that the said takeover of deferred sales tax liability to be paid in future is taxable u/s 28(iv) of the Act, by relying on the decision of CIT(A) Vs. Sundaram Iyangar & Sons Ltd., (supra) and also 39 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the decision of the Jurisdiction High Court in the case of Solid Container Ltd., Vs. DCIT (supra) In this case, we note that the A.O made addition u/s 41(1) of the Act, while in the appellate proceeding, Id. CIT(A) upheld the said addition u/s 28(iv) of the Act and not u/s 41(1) of the Act. The arguments of the Ld. counsel before us are that the said assignment of sales tax liability by the assessee is neither income u/s 41(1) of the Act nor benefit or perqs 28(iv) of the Act. In defense of his arguments the Ld. CIT(A) relied on the decision of Cable Corporation of India Ltd., Vs. DCIT(supra). In the present case, we find that provisions of Sec. 41(1) of the Act are not applicable as the necessary conditions as envisaged in the said section are not fulfilled namely the assessee has (i) not obtained any amount in respect of loss or expenditure; (ii) nor any benefit in respect of trading liability by way of remission or cessation. The first 36 condition of obtaining an amount is obviously not applicable as the assessee has paid an amount for discharge of a future liability while the issue as to the applicability of the second condition of obtaining a 'benefit' is now settled by the decision of the Apex Court in the case of CIT vs. Balkrishna Industries Ltd. 88 taxmann.com 273 (SC) wherein the Supreme Court has affirmed the decision of the Hon'ble Bombay High Court in the case of CIT vs. Sulzer India Ltd., 369 ITR 717(Bom) holding that when an assessee discharges the present value of future obligation, it would not be a case of any 'benefit' accruing to the assessee, as the assessee has discharged the full liability at the present value. Therefore, as there is no 'benefit' obtained by or accruing to the assessee, the question of applicability of section 41(1) of the Act does not arise. In both the Supreme Court and the High Court decisions were concerned with pre-payment of sales tax liability at net present value to the Sales tax Department, but the same principle would equally be applicable 40 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited to the present case of assignment of the sales-tax deferred loan liability at the netpresent value. We find merits in the case of the assessee that the provisions of section 41(1) of the Act are not applicable, as there is no remission or cessation of 37 the liability. The remission or cessation of liability contemplates a discharge or partial discharge of a liability coupled with no obligation to discharge the balance liability and thus, it would not cover the facts of the present case, where the Appellant has assigned its obligation, although at the present value. The liability has been discharged by the Appellant by making an immediate payment at the present value and therefore it cannot be said that there is a remission or cessation of the liability. Further there is no remission or cessation of the liability for the reason that the assignment of the liability is to a third party whereas qua the Sales-Tax Department the assessee continues to be liable to pay the said amount and thus as for as the Sales- Tax Department is concerned, there is no remission or cessation of a liability. The case of the assessee finds support from the decision of the Apex Court in CIT vs. S.I. Group India Ltd., (Supra) wherein the Apex Court held that when the Sales-tax Department has not accepted the pre-payment, it cannot be a case of cessation or remission of a liability. In the present case also, the assignment has not been accepted by the Sales-tax Department and, therefore, there is no question of cessation or remission of the liability. Besides the 38 deemed loan from the Sales-tax Department is not a loss or expenditure or a trading liability and, therefore, the provision of section 41(1) of the Act is not applicable. The sales-tax originally collected by the assessee was an expenditure which has been allowed to the assessee by treating it as a deemed loan. Once the said amount has been treated as a loan, it loses its characteristic of sale-tax liability. Such deemed loan is not a loss or expenditure or a trading 41 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited liability and, hence, does not come within the ambit of section 41(1) of the Act. 38. Similarly the difference of Rs. 51.61 Crores arising out of assignment of sales tax liability of Rs.71.34 Crores to be paid in future date at its present value of Rs. 19.73 Crores has not resulted in any benefit or perquisites and thus not covered by the provisions of section 28(iv) of the Act as section 28(iv) proposes to tax 'benefit' or 'perquisite' arising from business of the assessee. In the present case the pre-payment of a deferred sales-tax loan liability at the net present value, does not result in any 'benefit' to the assessee. Besides the case of the assessee is squarely covered by the decision of the coordinate bench inCable Corporation of India Ltd. 39 vs. Deputy Commissioner of Incometax(supra) wherein on identical facts, the Tribunal has concluded that the assignment of such liability, at the net present value, cannot be charged to tax either under section 41(1) of the Act or under section 28(iv) of the Act. The provisions of section 28(iv) of the Act are not applicable to the facts of the present case as monetary benefit is not covered by the said section. Section 28(iv) of the Act uses the phrase 'whether convertible into money or not, which would mean that cash benefits are not covered by the said section. This Issue is covered in favour of the assessee by the decision of the Apex Court in the case of CIT vs. Mahindra & Mahindra Ltd.93 taxmann.com 32(SC) wherein the Apex Court has held that waiver of loan is a monetary benefit and, hence, it does not come within the ambit of section 28(iv) of the Act. Therefore, the amount of Rs.51,60,87,976/- is to be regarded as capital receipt which is not chargeable to tax. 39. We have also perused the decision relied upon by the revenue to support the orders of the authorities below but find that the same are distinguishable on facts or reversed or not a good law 40 in view of the subsequent decisions. In the case of CIT vs. Sunderam Iyengar & Sons Ltd. 42 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited (supra), the assessee used to receive deposits in the course of its trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. During the relevant year, such deposits outstanding for a number of years were transferred by the assessee to the Profit & Loss Account as no longer payable to the said customers. On these facts, the Apex Court held that the amount was received by the assessee in the course of trading transaction and the same is chargeable to tax as trading receipts when the said amount becomes the assessee's own money. The Apex Court further held that because of the trading transaction, the assessee has become richer to the extent of the amount transferred to Profit & Loss Account and, hence, the amount so transferred is to be treated as income of the assessee. In the present facts are distinguishable and, therefore, the decision of the Apex Court is not applicable as the Supreme Court was neither concerned with section 28(iv) or section 41(1) of the Act, but with the issue of whether the amount received by an assessee in the course of a trading transaction, should be treated as income of the assessee or not. In the present case, the 41 allegation of the Assessing Officer and the Commissioner of Incometax(Appeals) is that the provision of section 41(1) or section 28(iv) of the Act is applicable which issue is not there before the Hon'ble Supreme Court. Further, the Supreme Court has held that the amount is treated as income of the assessee as the assessee had become richer by the amount which is transferred to the Profit & Loss Account. In the present case, the assessee has discharged its complete obligation by paying the net present value of the obligation and, therefore, there is no question of the assessee either becoming richer or poorer on such transaction. The Apex Court in the cases of Balkrishna Industries Ltd. (supra) and Mahindra & Mahindra Ltd. (supra) has specifically dealt with the provisions of section 43 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 41(1) and section 28(iv) of the Act and, therefore, the said decisions are applicable to the case of the Appellant. So far as the decision in Solid Containers Ltd. v DCIT (supra) is concerned, the counsel of the assessee submitted that the finding in this decision by the Bombay High Court is contrary to the decision of the Apex Court in Mahindra & Mahindra Ltd. (supra) and. therefore, the said decision is no longer good law. The finding by the High Court that the provision of section 28(iv) of the 42 Act is applicable to a waiver of loan is contrary to the decision of Mahindra & Mahindra Ltd. (supra) wherein the Apex Court has held that waiver of loan being a monetary benefit is not covered under section 28(iv) of the Act. Even for applicability of section 41(1) of the Act, the Apex Court has held that waiver of loan amounts to cessation of a liability other than a trading liability, for which no deduction has been claimed in earlier years and, therefore, does not come within the ambit of section 41(1) of the Act. Thus the decision of the Bombay High Court in Solid Containers Ltd. (supra) which had taken a contrary view, is no longer good law. Further the decision of Solid Containers Ltd. (supra) is further not applicable to the present case as in the present case, the Appellant has discharged the full liability at net present value which cannot be said to be a case of either waiver or cessation of the liability, which was the fact before the High Court. The decision in the case of CIT vs. Ramaniyam Homes Pvt. Ltd., (supra) relied upon by the Id DR has been reversed by the Apex Court by the common judgment dated 24th April 2018 in Mahindra & Mahindra Ltd. (supra). Therefore, the reliance on the decision of the Madras High Court by the Revenue is wholly misplaced and completely 43 unjustified. The facts in the case of CIT vs. Aries Advertising Pvt. Ltd. (supra) are altogether different vis a visthe facts in the present case as in the case before the High Court, there was actual write off credit 44 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited balance (trading liabilities) and, accordingly, the High Court held that the assessee therein had received a benefit in respect of a trading liability which came within the ambit of section 41(1) of the Act whereas in the present case, there is no question of any benefit being received by the Appellant as the appellant has discharged the net present value of a future liability not can the present case be said to be of remission or cession of the Ilability. Therefore, this decision is clearly inapplicable to the facts of the present case. In the case of CIT vs. ICC India Pvt. Ltd. (supra), the Hon'ble High Court has held that share application amount was a capital receipt and was never received towards trading purpose and, therefore, the question of applicability of section 41(1) does not arise. The High Court has, therefore, dismissed the appeal of the Revenue. Although the High Court has noted that if the loan was received for trading purposes, the provision of section 41(1) of the Act may be applicable; however, as the fact in the present case was not a case of receipt of loan towards 44 the trading purposes, the High Court has not considered whether other conditions of section 41(1) are fulfilled or not. In the case of Indian Seamless Steels & Alloys Ltd. vs. ITO (supra). The Tribunal in paragraph 16 of the order has noted that the assessee therein has transferred its deferral sales-tax loan to third party for a consideration which is higher than the amount payable to the Sales-tax Deptt. The Tribunal has further noted that the assessee therein has sold its 'sales-tax incentive' and what it has received is not sales-tax benefit but sale consideration on transfer of its entitlement and such sale consideration is a benefit directly arising from business and is, therefore, revenue receipt. In the present case of the Appellant, the Appellant has, in fact, paid a consideration to the other Company for taking over its obligation, which amount is lesser than the amount payable to the Sales-tax Department. The facts 45 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited in this case are different is further clear from the reliance by the Tribunal on decision of Sun & Sand Hotels Pvt. Ltd. vs. DCIT (ITA No.7125/MUM/2007) wherein also it was a case of transfer of sales-tax entitlement for a consideration which was held as revenue receipt. Therefore, the Appellant submits that the said decision is clearly inapplicable on the facts of the present case. Even otherwise, the Appellant submits that the decision of the Tribunal being contrary to the decisions inBalkrishna Industries Ltd. (supra) and Mahindra & Mahindra Ltd. (supra), is not applicable to the Appellant. In view of these facts and decisions as discussed above we are inclined to set aside the order of CIT(A) on this issue by holding that Rs.51.61 Crores is a capital in nature. The AO is directed accordingly. The ground of the assessee is allowed.\" 29. The facts and circumstances are stated to be identical. Therefore, consistent with the earlier orders of the co-ordinate bench of this Tribunal, we allow the ground raised by the assessee.\" 59.Respectfully following the above decision of the Tribunal in the case of the Appellant, we delete the addition of INR 4,25,44,104/- made by the Assessing Officer on account of extinguishment of debt being sales tax deferred loan liability. Thus, Ground No. 7 raised by the Appellant is allowed.” 14.1. We note that, coordinate of this Tribunal dealt with impact of section 41(1) and section 28(iv) of the act, on identical facts based on the decisions of Hon’ble Supreme Court.We therefore find the decisions relied by the Ld.DR hereinabove are distinguishable and does not support the contentions of the revenue. 46 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 14.2. Respectfully following the above view we direct the Ld.AO to delete the addition made on account of extinguishment of debt being sales tax-deferred loan liability. Accordingly ground number 4 raised by the stands allowed. 15. Ground No.5 raised by the assessee is against the disallowance under section 14A of the act of piece 10,50,22,203/-. 15.1. The Ld.AO noted that, assessee earned income by way of dividends on shares and mutual funds and interest on tax-free bonds amounting to ₹72,93,53,652/- that was claimed under section 10(34) and 10(35) of the act respectively. It was also noted that the assessee also claimed long-term capital gain of ₹11,02,69,184/- to be exempt under section 10 (38) of the Act. 15.2. The Ld.AO called upon the assessee to explain as to why, this disallowance under section 14A should not be made as per Rule 8D of the Act. In response, the assessee submitted that the entire investments in shares, bonds, and units of little funds were made out of companies own funds, and not out of any borrowed funds. Reliance was placed on the decision of Hon’ble Supreme Court in case of Rajasthan State warehousing Corporation vs CIT reported in 242 ITR 450. It was also submitted that provisions of subsection (2) and (3) of section 14A will not apply which are prospective in nature and therefore computation of disallowance under Rule 8D cannot be made for the year under consideration. 47 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 15.3. The Ld.AO rejected the submissions of the assessee by holding the provisions of rule 8D to be retrospective nature and computed disallowance at ₹10,50,22,203/-. Aggrieved by the order of the Ld.AR, see preferred appeal before the Ld.CIT(A). 15.4. The Ld.CIT(A) upheld the addition made by the Ld.AO. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before the Tribunal. 15.5. Before this Tribunal Ld.Sr.Counselsubmitted that, out of the total exempt income,₹72.94 cross was earnedas dividends on shares and mutual funds and interest on tax-free bonds, and ₹71.46 crores was earned as dividends from subsidiary and associate companies. He submitted that, there was no investment made during the year under consideration and hence there was no expense attributable to the earning of this income. 15.6. The Ld.Sr.Counsel submitted that, out of the balance exempt income of ₹ 1.48 cross, 0.5% of the exempt income can be at the most disallowed under section 14A of the act. However, Rule 8D still will not apply to the year under consideration, as it is prospective in nature as per the settled legal position by the decision of Hon’ble Supreme Court in case of Godrej and Boyce Manufacturing Company Ltd vs DCIT reported in (2017) 81 taxman.com 111. He also relied on following decisions: Decision of Hon’ble Supreme Court in case of Rajasthan State Warehousing Corporation Vs CIT reported in 242 ITR 450 Decision of Hon’ble Supreme Court in case of South Indian Bank Ltd., vs CIT reported in (2021) 130 taxmann.com 178 48 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Decision of Hon’ble Bombay HighCourt in case of South Indian Bank led vs CIT reported in (2021) 130 taxmann.com 178 Decision of Hon’ble Bombay High Court in case of HDFC Bank Ltd reported in 383 ITR 529 Decision of Hon’ble Bombay High Court in case of Reliance Utilities & Power Ltd reported in 178 taxmann.com 135 Decision of coordinate bench of this Tribunal in case of TATA Unisys Ltd reported in 447 TTJ 8 15.7. On the contrary, the Ld.DR relied on orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us. 16. The Ld.Sr.Counsel furnished chart showing investments of the assessee in its subsidiary and associate companies from where it received majority of dividend, the details of which are as under: Statement giving details of Dividend Income for the year ending March 31, 2005 Particulars Amount (Rs.) Amount (Rs.) Subsidiary and Associate companies HPL Cogeneration Limited Larsen & Toubro Infotech Limited L&T Finance Ltd Ewac Alloys Limited Audco India Limited Other Investments (Equity Shares) Mutual Funds 19.69 22.50 13.87 3.40 7.20 71,46 1.13 0.20 Total 72.79 49 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Statement giving details of Shares held by Subsidiary and Associate companies for the year ending March 31, 2005 Particulars No. of Shares Refer Pg No. of Compilation AY 2005-06 AY 2004-05 L&T Finance Ltd Larsen & Toubro Infotech Limited HPLCogeneration Limited Ewac Alloys Limited Audco India Limited 8.66 3.00 3.12 0.04 0.09 8.66 3.00 3.12 0.04 0.09 15 15 16 16 16 Total 14.91 14.91 16.1. It was fair on the part of Ld.Sr.Counsel to submit that, if at all any disallowance to be made, will be concerningbalance 1.48 crores of exempt income for which a disallowance of 0.5% could be made under section 14A of the Act. Be that as it may, it is relevant to consider the own funds available with the assessee as per the profit and loss account. 16.2. We note that, the assessee has substantial own fund exceeding approximately Rs.3350. It is noted that the assessee maintains mixed funds, the investment must be considered to have been made out of the interest free fund as the assessee has sufficient own funds. In such scenario no disallowance could be made, as there is no evidence of any interest-bearing funds having deployed for the investments against which assessee earned exempt income of ₹1.48 cross. 16.3. On identical issue, Hon’ble Supreme Court in case of South Indian Bank Ltd vs CIT reported in (2021) 438 ITR 1 observed as under: 17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has 50 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of 2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion. 18. In the above context, it would be apposite to refer to a similar decision in CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC), where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds. 19. In HDFC Bank Ltd. v. Dy. CIT [2016] 67 taxmann.com 42/383 ITR 529 (Bom.), the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee's case for a different Assessment Year) that, if assessee possesses sufficient interest free funds as against investment in tax- free securities then, there is a presumption that investment which has been made in tax-free securities, has come out of interest free funds available with assessee. In such situation section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CIT v. Suzlon Energy Ltd. [2013] 33 taxmann.com 157/215 Taxman 272/354 ITR 630 (Guj.), CIT v. Microlabs Ltd. [2017] 79 taxmann.com 365/[2016] 383 ITR 490 (Kar.) and CIT v. Max India Ltd. [2016] 75 taxmann.com 268/388 ITR 81 (Punj. & Har.). Mr. S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of section 14A of the Act in their decisions favouring the assessees. 20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than 51 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made. 16.4. Coordinate Bench of this Tribunal in assessee’s own case for assessment year 2004-05(supra) granted relief to the assessee on identical facts in respect of interest expenditure by observing as under: “We have heard the rival submission and perused the material on record. It emerges that the Appellant had claimed exemption in respect of income earned from investment in equity shares, mutual funds and tax free bonds during the relevant previous year. The Assessing Officer noticed that the Appellant had borrowed fund of INR 1,324.35 Crores out of which INR 921.27 Crores were borrowed for specific projects while INR 142.32 Crores were borrowed for general corporate purpose. Further, the Appellant had incurred interest expenditure of INR 27.60 Crores in respect of funds borrowed for general corporate purpose. The Assessing Officer was of the view that the interest bearing funds for general corporate purpose were utilized for making investment yielding exempt income during the relevant previous year. Therefore, the Assessing Officer made a disallowance of INR 3.18 Crore. The CIT(A) enhanced the disallowance to INR 12.24 Crores. While arriving at the enhanced amount of disallowance the CIT(A) has borrowed the computation mechanism prescribed in Rule 8D of the Rules as a reasonable basis even though the aforesaid Rule 8D did not apply to the Assessment Year 2004-05. On perusal of paragraph 13.2 of the order impugned, we note that the CIT(A) has recorded that (a) Total Owned Funds of the 'Appellant were INR 2,775.04 Crores, (b) General Purpose Borrowed Funds available with the Appellant were INR 142.32 Crores (c) Total Common Pool Funds were INR 2917.36 Crores (INR 2,775.04 Crores + INR 142.32 Crores) and (d) Total Investments made by the Appellant were INR 335.73 Crores. Thus, it is admitted position that the own funds of the Appellant were much more than the investments. Therefore, as per the judgment of the Hon'ble Bombay High Court in the case of In HDFC Bank Ltd. v. DCIT:383 ITR 529 no disallowance can be made under Section 14A of the Act, (by applying the provisions contained in Rule 8D of the Income Tax Rules). Therefore, the basis on which the CIT(A) has computed the disallowance cannot be regarded as reasonable. Further, while making the disallowance the Assessing Officer has observed that the burden was on the Appellant to show that the investment were made from own funds. The reasoning 52 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited given by the CIT(A) is contrary to the judgment of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. Vs Commissioner of Income Tax: [2021] 438 ITR 1 (SC) given the facts of the present case noted hereinabove, it would bepresumed that investments were made out of own funds and therefore, proportionate disallowance of interest expenses under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained by Appellant for investments and other expenditure incurred for earning tax-free income. Accordingly, we delete the addition/disallowance made by the Assessing Officer and the CIT(A). Disallowance of INR 12.24 Crores made under Section 14A of the Act is deleted. Ground No. 6 raised by the Appellant is allowed.” Respectfully following the above view we direct the Ld.AO to delete the addition made under section 14A of the Act. Accordingly, ground number 5 raised by the stands allowed. 17. Ground No.6 raised by the assessee is against disallowance of Commission paid to certain parties amounting to Rs.8,75,40,755/-. 17.1. During the assessment proceedings, Ld.AO noticed that assessee claimed expenses on the contracts awarded by the government and government undertaking at ₹8,75,40,755/-. Ld.AO thus called upon assessee to substantiate its claim, as to why, the deduction should not be disallowed as per explanation to section 37 (1) of the act. 17.2. The assessee vide its submission dated 18/03/2008 submitted that the commission is paid to various parties in lieu of the services rendered. The Ld.AO, however, disallowed the claim as the assessee failed to prove the services rendered by the parties in whose name the expenses were claimed by the assessee. 53 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Aggrieved by the order of the Ld.AR, C preferred appeal before the Ld. CIT(A). 17.3. The Ld. CIT(A) upheld the disallowance made by the Ld.AO by relying on the decision of his predecessor for assessment year 2003-04 in assessee’s own case and the decision of the coordinate of this Tribunal in assessee’s own case for assessment year 1995-96 to 1996-1997. Aggrieved by the order of the Ld.CIT(A), assessee is an appeal before the Tribunal. 18. Admittedly, the issue has been decided by this Tribunal against assessee in all the preceding assessment years. We refer to the decision of coordinate of this Tribunal for assessment in 2004-05 in assessee’s own case (supra), wherein the issue is decided against the assessee by observing as under: “12. We have considered the rival submissions and perused the material on record. We find that the identical issue stands decided against the Appellant by the Tribunal in Appellant's own case pertaining to Assessment Years 1990-1991 to 2002-03, inter alia, on the ground that the Appellant had failed to explain the nature of services and substantiate the claim for deduction for commission expenses. The relevant extract of decision of the Tribunal of the Appellant for theAssessment Year 1994-95 (ITA No. 4265/Mum/1998, dated 30/09/2009 reads as under: \"55. Ground No. 9 raised by the assessee in its appeal is as under: 9. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding the disallowance of Rs 71,63,687 being the expenditure towards payment of commission to certain parties. 56. This ground is directed against the disallowance of expenditure incurred towards payment of commission to certain parties. From the perusal of records, we find that similar issue raised by the assessee company in its appeal In ITA No.987/Mum/1998 relating to Assessment Year 1990-91, wherein the Tribunal after deliberated upon the issue a length and following the decisions of the Tribunal in assessee's own case 54 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited relating to Years 1988-89 held that The assessee company should explain without any shadow of doubt, the nature of such services. In the present case, no such explanations or details have come from the side of the assessee company. Without knowing the exact nature of the services rendered by those parties, it is not possible for us to decide whether the commission payable by the assessee company was a legitimate expenditure permitted by law, and therefore, to be allowed. If such detail: are not coming, such payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light o the proviso to Sect 37 of the IT Act. This position is confirmed by the order o the Tribunal in assessee's own case for the Assessment Year 1989-90. Accordingly, we reject the contention of the assessee and confirm the disallowance made by the CIT (A). Respectfully following the decision of the co-ordinate bench in assessee's own case, we confirm the orders of the authorities below and dismiss the ground of appeal raised by the assessee.\" 13. During the course of hearing both the sides agreed that there is nochange in the facts and circumstances during the Assessment Year 2004-05 as compared to the preceding Assessment Years (i.e., Assessment Years 1990-1991 to 2002-03). Therefore, consistent with the view taken by the Coordinate Bench of the Tribunal in the case of the Appellant for the earlier assessment years, we confirmed the order passed by the CIT(A) and dismiss Ground No. 1 raised by the Appellant” 18.1.As there is no change in the facts and circumstances the year under consideration vis-à-vis the preceding assessment years, respectfully following the consistent view we confirm the order passed by the Ld. CIT(A). Accordingly ground number 6 is by the assesse stands dismissed. 19. Ground No.7 raised by the assessee is against the addition under section 40A(9) towards the contribution to the Utmal employee's welfare fund amounting to ₹1,50,000/-. 55 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 19.1. During the course of assessment proceedings, the Ld.AO mooted that the assessee contributed ₹ 125,000 to the welfare fund. The assesse was called upon to explain as to why the same should not be disallowed under section 40A(9) of the Act. 19.2. The assist in response submitted that it has to give contribution for a sum of ₹ 125,000 to the Utmal employees' welfare fund paid by Kansbahal Worksunder an agreement signed between the employees’s ofKansbahal Works. It is submitted that, these are negotiated payments and are not voluntary contributions. The assessee has also submitted that the payment is made in pursuance of a settlement under section 18 of the Industrial Disputes Act, 1947, and therefore it falls within the exception under section 40A(9) of the Act, as the same was made under law for the time being in force. 19.3. The Ld.AO rejected the submissions of the assessee and disallowed 1,25,000 as not allowable expenditure as per section 40A(9) of the act. Aggrieved by the order of the Ld.AR, the preferred appeal before the Ld.CIT(A). 19.4. The Ld.CIT(A) following the decision of his predecessor for assessment year 1995-96 and 1996-97 and 2003-04 upheld the disallowance made by the Ld.AO. Aggrieved by the order of the Ld.CIT(A), assessee is on appeal before the Tribunal. 20. The Ld. Sr.Council submitted that, the payment was made in pursuance to a settlement signed with the workmen of 1 of its factories at Kansbahal under section 18 of the Industrial Disputes Act. He submitted that, since the settlement is legally 56 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited enforceable under the Industrial Dispute Act, any payments made under such settlements would be covered by the exception provided under section 40A(9) of the act, “the payment required to be made under any law for the time being in force”. 20.1. The Ld. Sr.counsel submitted that, in view of the facts the contribution was not voluntary nature and was neither set up by the assessee nor controlled by it,and therefore was out of the purview of section 40A(9) of the Act. The Ld. Sr.Counsel placed reliance on the decision of coordinate of this Tribunal in assessee’s own case for (supra) wherein, on similar facts and circumstances this issue was decided in favour of assessee. 20.2. On the contrary the Ld.DR in her written submissions submitted as under: 8.2. The Appellant contends that the said payment falls within the exception provided under Section 40A(9) of the Act, being \"made under the law for the time being in force.\" However, the Assessing Officer rejected this contention and disallowed the deduction, invoking the provision of Section 40A(9) of the Act. 8.3. For understanding the legal issue involved refrence is made to the case law of Commissioner Of Income Tax vs Hindustan Zinc Ltd [(2005)194CTR(RAJ)121], wherein the Rajasthan High Court emphasized the critical distinction between expenses and contributions under Section 40A(9) of the Act. The court emphasized that not all expenses incurred for the benefit of workmen by entrepreneurs automatically qualify as contributions to funds outlined in the said provision. The expression used in Section 40A(9) specifically refers to 'contribution made by the employer,' which necessitates a meticulous examination of whether the expenditure constitutes a contribution or a business expense. 8.4. Furthermore, the Hon’ble Tribunal's decision in the assessee’s own case for AY 2004-05 appears to have overlooked this crucial distinction and failed to adequately apply relevant legal principles. It treated all activities referred to by the assessee as employees' welfare activities without delving into the true nature of the expenditure. Each expenditure must be independently examined to ascertain whether it qualifies as a contribution or an expense, considering the diverse purposes and involvement of various entities. 57 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 8.5. Moreover, reference is made to the case of CIT v. British Paints India Ltd [1991] 188 ITR 44, wherein the Hon’ble Supreme Court underscored the principle that each assessment year is a self-contained unit, and past allowances should not dictate the allowance of claims in subsequent years if they are not legally permissible. This principle reinforces the necessity to scrutinize the legality of claims on an annual basis. 8.6. In conclusion, the case law cited elucidates the importance of distinguishing between expenses and contributions under Section 40A(9) of the Act. 8.7. In light of the foregoing, it is imperative that the matter be remitted back to the AO for a fresh determination. This would enable a detailed assessment of each expenditure claimed by the assessee as a deduction and a reasoned finding on whether it constitutes a contribution or a business expense. We have used the submissions advanced by both sides in the light of the records placed before us. 21. It is noted that identical issue was considered by coordinate of this Tribunal in assessee’s own case for assessment year 2004- 05 (supra), wherein the view taken by this Tribunal in the preceding assessment year 1999-2000 was followed. We have also produced the decision of Hon’ble Rajasthan High Court in case of CIT vs Hindustan zinc Ltd (supra) relied by the Ld.DR. Hon’ble Rajasthan High Court categorically observed that, there is a vital difference between a contribution to the funds made by an employer and an expenses incurred wholly and exclusively for the purpose of its business by an entrepreneur. Hon’ble Rajasthan High Court had remanded the issue back to the Tribunal to decide as to whether, the expenses incurred was towards contribution by the employer, or was it an expenses incurred wholly and exclusively for the purpose of the business.Based on the observations of Hon’ble Rajasthan High Court, it is necessary to analyse whether, the payment made by the assessee is towards 58 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited contribution or an expenditure incurred exclusively for the purpose of its business. 21.2. In the present facts of the case, the contention of the assessee that the payment was made pursuant to a settlement signed between the workmen of one of its factories under section 18 of IndustrialDisputes Act, and it was a compulsory payment incurred by the assessee. Thus the payment made by the assessee cannot be treated to be voluntary in nature. 40A. Expenses or payments not deductible in certain circumstances ………….. (9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force. 21.3. A plain reading of the 1st to limb of section 40A(9) would show that what is disallowed under the provision is, payments made by an assessee as an employer. The very core ingredient to attract the jurisdiction of the provision is that the payment ought to have been made by the assessee in the capacity of an employer. The payments that are disallowed under section 40A are payments made towards setting up, forming or contributing to any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, but in every case, in the capacity as an employer. 21.4. On perusal of the facts and the amount in the preceding assessment years,it is noted that, there is no fixed amount for such contributions/expenditure incurred by the assessee 59 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited towards the welfare of its workmen. And therefore, the provisions of section 40 A (9) cannot be applied to the expenditure incurred herein. 21.5. The 2nd limb of section 40 A (9) is in respect of expenditure not covered by Section 30 to Section 36, and expenditure made for purposes of business shall be allowed under Section 37(1) of the ct. In any event, under section 37,the expenses incurred by the assessee will not be disallowed as there is a commercial linkage with the expenditure incurred by the assessee to its business. We are therefore of the opinion that the expenditure incurred by the assessee is an allowable deduction under section 37 of the act. Accordingly ground No.7 raised by the assessee stands allowed. 22. Ground No.8 raised by the assessee in respect of the transfer pricing adjustments onfollowing two issues: (a) adjustment on account of provision of services to AE amounting to ₹3,51,34,944/- (b) adjustment on account of sale of shares to AE amounting to ₹11,93,27,900/-. Facts in respect of Issue (a) 22.1. The assessee submitted that it rendered engineering design and project management services to L & T (Oman) LLC, during the year under consideration. It was submitted that L&T (Oman) LLC is an entity registered in Oman, and is a joint venture between the assessee and Zubair Corporation, Oman. The fees charged by the assessee were determined after mutual discussion between the joint-venture partners, based on operations carried 60 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited out by the assessee and the sustainability of the project, the details of which are as under: Year Remarks 1994 & 1995 Fees were charged at 4% since these were the initial stages of operations 1996, 1997, 1998 & 1999 Total fees of OMR 2,30,000 spread over a period of four years considering the increase in the volume of operations of the company 2000 & 2001 Due to adverse business cycle, the JV company suffered losses and hence no technical fees were charged 2002, 2003 & 2004 There was a turnaround in the operations of the company and the fees have been charged @ 2.5% of the sales subject to overall limit of OMR 2,00,000 p.a. It was also mutually agreed, verbally, to review the fees after achieving the turnover of around OMR 15 million. 2005 The overall limit of fee was increased to OMR 5,00,000 p.a. 22.2. It was submitted that, the services to be rendered by the assessee included identifying and placing personnel for managing the company, providing various prequalification requirements to enable the company to coat and provide manpower during the tendering stage, and subsequently to provide required manpower, technical and commercial support for executing the projects. It was submitted that the assessee charged the technical fees as a joint-venture partner. The Ld. TPO noted that, for the year under consideration, the fees charged have not increased, despite an increase in turnover and profit of the joint-venture partner in Oman. 22.3. The Ld. TPO also noted that the technical fees received by assesse were supposed to be revised once the joint-venture partner in Oman reaches a turnover of OMR 10 lakh/15 lakh, and/or the cap of OMR 2 lakh was to be revised to OMR 5 lakh, 61 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited which was not implemented. Thus, the cap of OMR 2 lakh was proposed to be enhanced and proposed to be at ALP before the Ld.TPO. In support of its claim, the assessee submitted various evidence. 22.4. The Ld. TPO, after considering the same, benchmarked the transaction and calculated the arms-length price of the transaction by adopting 2.5% of the sales, thus proposing an adjustment of OMR 3,11,480. 22.5. On an appeal before the Ld. CIT(A), the adjustment was upheld. Aggrieved by the order of the Ld. CIT(A), assessee is an appeal before the Tribunal. 22.6. The Ld.Sr.Council submitted that the Ld. TPO did not follow any method for benchmarking the transaction, and the chance adjustment proposed cannot be sustained in the eyes of the law. He relied on the following decisions in support of this contention: a) decision of Hon’ble Bombay High Court in case of Kodak India Private Limited reported in 228 CTR 46 b) decision of Hon’ble Bombay High Court in case of Merck Ltd reported in 289 ITR 70; c) decision of Hon’ble Bombay High Court in case of Johnson & Johnson Limited reported in 297 CTR 480 22.7. The Ld.Sr.Counsel submitted that, technical fees at 2.5% on sales subject to the cap of OMR 2 lakh was a pure business decision, taking into consideration the volatile geopolitical environment in the Middle East region and the sentiments of long-term business associates. It was submitted that during the year under consideration, the Middle East underwent a 62 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited depressed business environment and thus continued with the cap of OMR 2 lakh on the services provided by the assessee as per the functional analysis. He brought to the attention of this bench that the Ld.TPO admitted service charges at 2.5% of sales as ALP of the economic region, in respect of the associated enterprise of the assessee located in Saudi Arabia. Hence, the rates charged by the assessee to its AE were held to be comparable to those of Oman. 22.8. The Ld.Sr.Counsel further submitted that, for assessment 2002-03, under the existing arrangement, charging service at 2.5% of the sales with a cap of OMR 2 lack was accepted by the Ld.TPO during the transfer pricing assessment preceding. 22.9. On the contrary, the Ld.DR submitted as under: 9.2.1. Disqualification of CUP Methodology It is submitted that the CUP methodology used by the assessee lacks evidentiary support and fails to qualify as a valid benchmark in this case. A true CUP requires identification of comparable uncontrolled prices in similar circumstances. In the present case, however, the assessee has not provided any instance of an independent price for similar services rendered under similar conditions. The department, therefore, challenges the applicability of the CUP method in this transaction.The lack of a valid CUP leaves the department no choice but to calculate the ALP independently. Accordingly, the TPO considered the original technical fee rate of 2.5% as proposed by the assessee but determined that the artificial cap of RO 2,00,000 contradicted both market conditions and arm's length principles. 9.2.2. IncreasingTurnover, Inflexible Fees, and Impact on ALP Analysis of LTO’s turnover from 2002 to 2005 demonstrates a nearly threefold increase in revenue alongside significant profit growth. However, technical fee receipts from the assessee remained capped at RO 2,00,000 annually. This inconsistency undermines ALP principles and is prejudicial to Indian Revenue interests. There was a reasonable basis for defreezing the RO 2,00,000 cap given the considerable turnover and profit growth of LTO. As turnover surged, the assessee’s involvement should have correspondingly increased, justifying a higher technical fee.Additionally, the continued adherence to the cap suggests artificial constraints, thereby limiting the assessee’s remuneration and leading to underreported income. Given this disconnect between LTO’s 63 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited increased operations and the stagnant technical fee, maintaining a fixed cap contradicts the arm’s length principles, ultimately undervaluing the technical services provided. 9.2.3. Artificial Ceiling and Subsequent Amendments to the Agreement The department also disputes the assessee's argument that an RO 2,00,000 ceiling was justified by a \"verbal agreement\" that the threshold would be reviewed only after achieving a turnover of RO 15,00,000, as opposed to the original threshold of RO 10,00,000. This verbal agreement lacks documentary evidence and appears to be a post hoc justification to support a reduced fee. The artificial cap on the fees, maintained despite significant growth in L&T Oman’s turnover, contravenes the fundamental ALP principles. This artificial restriction on revenue deprives the Indian revenue authority of its fair share of income tax by undervaluing the transaction.Additionally, the TPO’s findings highlight that both L&T Oman's turnover and profits had significantly increased, demonstrating that the assessee's involvement was critical to this growth. The failure to adjust the cap in tandem with rising turnover is clearly not at arm's length, given that similar services in Saudi Arabia were charged at a higher rate. 9.2.4. Comparable Rates charged to other AE’s Notably, the assessee charges a 4% of sales rate for similar technical services rendered to an associated enterprise (LTSA) in Saudi Arabia. Saudi Arabia and Oman fall within the same economic region, making this rate a relevant comparator. Even if services in Saudi Arabia involved greater operational demands, the remuneration rate in Oman should reasonably be close to 2.5%, which the assessee has already acknowledged as arm’s length.The additional clauses introduced post facto, reducing the fee via undocumented agreements, undermine ALP principles, suggesting an afterthought devised to justify the reduced fee and cap retention. Consequently, these modifications lack substance and do not align with arm’s length requirements. 9.2.5. The TPO therefore rightly considered this rate for determining the ALP and concluded that the artificial RO 2,00,000 ceiling imposed by the assessee did not reflect the fair market value. 22.10 In the rejoinder, the Ld. Sr.Counsel submitted that the transaction was analysed by using comparable uncontrolled price (CUP) based on the fact that the consultancy fee received by the assessee was negotiated between the assessee and the joint- venture partner in Oman, who is not an associated enterprise(AE) of the assessee. He further brought to the attention of this bench 64 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited that the overall limit was increased in the next year, and the same is brought to OMR 5 lakhs. We have perused the submissions advanced by both sides in the light of the records placed before us. 23. It is noted that the assesse used internal CUP to bench mark the transaction. Whereas, the Ld.TPO on adhoc basis treated 2.5% to be the ALP. It is noted that, no fault was found in the CUP method applied by the assesse. Neither did the Ld.AO reject the CUP method adopted by the assesse. Reliance in placed on the decision of Coordinate bench of this Tribunal in case of ACIT vs. Koch Chemical Technology Group(India)Ltd., reported in (2015) 64 taxmann.com 464. The APL thus determined by the assesse on an adhoc basis is not one of the prescribed method under the provisions of the Act applicable to the relevant assessment year under consideration. We therefor uphold the ALP determined by the assesse. Facts leading to adjustment in issue (b) 24. The Ld. TPO noted that the assessee had sold investments to its associated enterprises, namely Larsen and Toubro International FZE, amounting to ₹81,127,012, and the transaction was benchmarked by using CUP as the most appropriate method. The details of the shares sold by the assessee are as under: Description of shares Number of shares sold Amount in Rs. Value per share asper Valuation Method Remark 65 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Report (US$) 1. L&T, ECC Constructio n (M) SDN, BHD 2,24,998 97,152 0.01 NAV Recurre nt losses leading to erosion of net wealth - negative NAV 2. L&T Saudi Arabia LLC 1,960 7,208 0.10 -do- -do- 3. Larsen & Toubro (Oman) LLC 2,26,786 7,67,50,488 7.41 Simple average of results of NAV, PECV and DCF method s. 4. Larsen & Toubro Qatar LLC 98 12,12,788 283.29 NAV No operatio n during the year - Value of shares taken as cost of investm ent 5.L&T Overseas Projects Nigeria Ltd 99,99,998 30,59,377 0.007 NAV -do- Total 8,11,27,013 24.1. As there was no instance of sale of shares to any 3rd party as well as any independent comparable uncontrolled transaction 66 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited to support the assessee's contention, the assessee was called upon to explain the benchmarking of the transaction. The assessee furnished explanation regarding the same. 24.2. The assessee submitted that the transfer of the investments was effected at the share value determined by an independent valuer, and the method adopted by the valuer was the average of the 3 methods, being the net asset method, price- earnings capacity value method, and discounted cash flow method. After considering the submissions by the assessee, the Ld. TPO accepted the valuation of shares of most of the transactions except for the valuation of shares of Larsen and Toubro (Oman) LLC. It’s concerning the valuation of the prize of shares of Larsen and Toubro (Oman) LLC, the assessee is submitting the following details: (i) L&T (Appellant's) Board had approved the sale of these shares in the meeting held on 23.12.2004 (ii) Applications for RBI approval were made on 27.12.2004, according to Board Approval. (iii) Application was made along with a valuation report. (iv) The valuation reports from M/s. Sharp & Tannan, Chartered Accountants, were received by the assessee on 22.12.2004. (v) The Process of divestment was initiated during the calendar year 2004, and hence the valuations of shares of the companies were done considering the audited accounts as at 31.12.2003. 67 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited • The entire process of disinvestment of shares pertaining to L&T (Oman) LLC was completed on 15.02.2005, i.e. on receipt of sale proceeds. • Accounts of Larsen & Toubro (Oman) LLC for the year 2004 got adopted in the Board meeting of the company held on 22.02.2005 24.1. The Ld. TPO, after considering the documents observed and held as under: a. That the valuation is based on the financials of 31/12/2003 and not 31/12/2004, even though the shares were sold in February 2005. b. The Ld. TPO rejected the DCF method of valuation adopted by the assessee by holding that, the valuation is required to be done as per guidelines issued by the erstwhile controller of capital issued in 1991. The Ld. TPO held that the PECV method is the best method as it has only one assumption, and that is the past performance of profit-making is repeated in the future. c. The Ld. TPO rejected the basis of valuation adopted by the valuer for determining the value as per the PECV method by holding that the appellant has not considered the result of 31/12/2004. d. The Ld. TPO recomputed the value based on the PECV method by including the result for the year ending 31/12/2004. Further, the Ld. TPOassigns the weights by giving maximum weightage to the result of 31/12/2004 and lesser weights to earlier years. e. The Ld. TPO further held that the assessee used realistically high capitalization rate of 21.5% whereas the capitalization rate should be taken its 17.5%. The Ld. TPO thus proposed adjustment of ₹8,41,92,956/-, by computing the value per share at ₹ 873.72/-. 24.6. On an appeal before the Ld. CIT(A), the proposed adjustment was upheld. 68 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Aggrieved by the order of the Ld. CIT(A) assessee is an appeal before the Tribunal. 24.7.The Ld.Sr.Counsel submitted that the valuation of the company was carried out considering the latest audited accounts available as on the date of valuation and after complying with all legal requirements. Hesubmitted that assessee’s board approved the sale of shares in the meeting held on 23.12.2004 and applications for RBI approval were filed on 27.12.2004, along with valuation report from M/s. Sharp & Tannan, Chartered Accountants, which was received by the assesse on 22.12.2004. It was thus submitted that, when all the aforesaid events took place before 31st December 2004, there is no justification for the Ld.TPO to suggest that the results of 31st December 2004 should be considered to determine value of shares transferred by the assessee. 24.8. The Ld.Sr.Counsel submitted that, the value of the share should be determined based on the value as existing on the date of the valuation report or when the application is made to RBI for seeking its approval. Merely because the actual transfer of shares took place after the approval from the RBI in February 2005, financials for year ending 31/12/2004 cannot be considered. 24.9. The Ld.Sr.Counsel submits that the valuation of the fair market value of the shares was based on third party valuation report. It was submitted that, if the Ld. TPO wanted to challenge the third-party valuation report provided by the assessee, he should have referred to the DVO to recompute the value of the shares on the valuation date. 69 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 24.10.It is submitted that instead, the Ld.TPO sought to pick and choose the arbitrary basis of assumptions and arrived at a result. The Ld.Sr.Counsel submitted that, it is not open to the Ld. TPO to disregard the valuation based on valuation report without obtaining a fresh valuation report from an approved DVO and, therefore, the addition made by the Ld. TPO was not justified. In support he placed reliance on the following decisions, that the Ld. TPO cannot disregard the valuation report without referring the matter to the DVO: a. decision of Hon’ble Bombay High Court in case of Vodafone M-Pesa Ltd reported in 256 Taxman 240; b. decision of coordinate bench of this Tribunal in case of Sodexo Facilities Management Services in ITA No. 2945/Mum/2022 24.11. The Ld.Sr.Counsel submitted that the Ld. TPO did not agree with the assumptions used in the valuation by the DCF method and made its own assumptions about the capitalisation rate and arrived at an independent valuation. He submitted that Ld.TPO preferred PECV method and arbitrarily applied weights to profits, including the profits for the year ending 31.12.2004. It was submitted that Ld. TPO arrived at the valuation by applying weights to the value derived as per NAV method and market- based value, and completely ignoring DCF method. 24.12. The Ld.Sr.Counsel submitted that, the Ld. TPO did not accept the benchmarking of the assessee on the basis of CUP on the ground that, there is no instance of these shares being sold to any third party. It is also submitted that the Ld. TPO alsodid not provide any alternate benchmarking method to substantiate 70 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited these international transactions under the Indian Transfer Pricing provisions. 24.12. The Ld.Sr.Counsel submitted that the Ld. TPO erred in rejecting the NAV and DCF method for determining the value of shares sold by the assesse,which are well-accepted methods for determining the value of shares of a company. He thus submitted that in the absence of an unassailable method adopted by the Ld. TPO and not seeking another third-party valuation report, the contentions of the assessee be considered and that the value adopted as per the valuation report of M/s Sharp & Tannan, Chartered Accountants be allowed. 24.13. On the contrary, the Ld.DR submitted as under: 9.3.1. The present submission addresses the transfer pricing dispute regarding the assessee’s sale of shares in L&T Oman LLC (LTO) to L&T International FZE, UAE. The department has examined the transaction and asserts that the sale price of shares, calculated using the Discounted Cash Flow (DCF) method, does not reflect the Arm's Length Price (ALP) due to several faulty assumptions and significant deviations from recognized valuation standards. 9.3.2. The TPO raised concerns about the valuation method adopted by the assessee, which deviated from the prescribed valuation guidelines, and noted that the share price arrived at using DCF did not appropriately represent the market realities of LTO. Instead, the TPO applied the Price Earnings Capitalization Value (PECV) method as a more reliable approach, based on the facts and consistent profitability of LTO. The Department further challenges the following actions of the Assesse while valuing the shares. 9.3.3. The department challenges the assumptions underlying the DCF method, which include an inflated weighted average cost of capital (WACC) of 21.5%, a high beta factor of 1.75, and an unwarranted equity risk premium of 2.5% due to alleged “instability” in the Omani region. These assumptions significantly distort the valuation of LTO shares. a. Inaccurate Risk Premium and Stability Factors The TPO noted that attributing a high risk premium due to perceived “instability” in Oman is factually incorrect and inconsistent with the economic reality of the region. Oman has a 71 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited stable political environment, simple tax regulations, and a low- risk investment climate with no history of nationalization or foreign business takeovers. Therefore, the inclusion of a high risk premium does not align with the market conditions, making the DCF valuation fundamentally flawed. b. Excessive Beta Factor The high beta factor of 1.75, as used in the DCF method, is unsupported by objective analysis. This inflated beta exaggerates the perceived risk and unfairly discounts the value of shares. Given that LTO has been consistently profitable, with a growth in turnover from 12 million to 33.8 million Omani Rials between 2003 and 2005, the inflated beta fails to represent the economic resilience and performance of the company. 9.3.4. Rejection of DCF Method Based on SEBI and RBI Guidelines: The department also disputes the application of the DCF method on procedural grounds. The Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) guidelines specify that stock valuations for regulatory purposes should use the Net Asset Value (NAV) and PECV methods, which are based on actual performance rather than speculative projections. Given that DCF is not a recognized or acceptable method under Indian regulatory guidelines, the TPO’s decision to reject this approach is both procedurally correct and justified. 9.3.5. Suitability of PECV Method as Applied by the TPO: The TPO adopted the PECV method to benchmark the transaction. This method, which projects past profit performance as indicative of future stability, is particularly suitable for a consistently profit- making entity like LTO. LTO has shown a stable profit after tax of approximately 4% year-over-year, with increasing revenues and consistent growth, making PECV the most representative method. 9.3.6. The valuation report itself provided share price values derived from three methods: DCF, NAV, and PECV. The TPO correctly excluded DCF and took the average of NAV and PECV, in line with the best practices, thereby arriving at a fair and justifiable ALP for the sale transaction. 9.3.7. In light of the above, the department submits that the ALP determined by the TPO, based on PECV and NAV, is the correct representation of the share value. The DCF method used by the assessee is unsubstantiated, speculative, and fails to reflect both regulatory standards and the economic reality of LTO’s performance. The CIT(A)’s endorsement of the TPO’s findings should thus be upheld, ensuring that the sale of shares accurately reflects the arm’s length value. We have to roost the submissions advanced both sides of the light of the records placed before us. 72 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 25. It is noted that, the assesse valued the shares by taking average of results of NAV, PECV and DCF methods and the Ld.TPO took average results based on NAV and PECV method.Neither the assesse not the Ld.TPO adopted one of the method to determine the ALP of the transaction prescribed under the statute applicable for relevant assessment year.Merely because the Ld.TPO accepted ALP of the transaction in respect of other companies, will not ipso facto lead to the conclusion that that the method adopted by the assesse to value shares of LTO is to be accepted. 25.1. We therefore remand this issue to the Ld.TPO to refer the valuation to the DVO and to determine the ALP of the transaction in accordance with the law. Needless to say the proper opportunity of being heard must be granted to the assesse. Accordingly ground no.8 raised by the assesse stands partly allowed for statistical purposes. 26.Ground No.9 raised by the assessee is against the Sullivans of provision for sales tax and excise duty amounting to ₹11,43,00,000/- 26.1. The Ld.AO noted that assessee debited provision of ₹ 11.33 crores on account of sales tax, and 10 lakh on account of excise duty in the profit and loss account, claiming them as deductible expenses. The Ld.AO was of the opinion that these provisions cannot be allowed as deductions as they are contingent, falling under the purview of Section 43B and Section 37(1) of the Income Tax Act. 73 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A). 26.2. The Ld.CIT(A) upheld the addition made by the Ld.AO. Aggrieved by the order of the Ld. CIT(A) assessee is on appeal before the Tribunal. 26.3. The Ld.Sr.Counsel submitted that the assessee made provision of sales tax/excise duty amounting to Rs 11.43 crores. It is submitted that, the provision for sales tax is on the differential sales tax liability on account of non-collection of declaration forms for the prior 5 years. He submitted that, the provision for excise duty represents the differential duty liability that is expected to materialize in respect of a matter in appeal. 26.4. The Ld.Sr.Counsel submitted that the provisions will either be reversed or materialised in subsequent years. It is submitted that, if they are reversed, the same is offered to tax in the subsequent year,and if they materialize, and not allowed in the relevant year, then it will have to be allowed in the year they materialize. He submitted that this issue is only on the timing difference and therefore, no disallowance is warranted. 26.5. On the contrary the Ld.DR submitted as under: 10.2. Sales Tax Provision: During the relevant assessment year, the Assessee provisioned for sales tax amounting to Rs. 11.43 crores, primarily due to the non-collection of declaration forms, resulting in a differential sales tax liability. The Assessee asserts that these provisions are not contingent liabilities but represent expected liabilities, hence eligible for deduction. 10.3. In this regard it is humbly submitted by the revenue that the judgment by the Hon’ble ITAT Mumbai in Hindustan Lever Ltd. Vs. Inspecting Assistant Commissioner[1996]58ITD555(MUM)]clearly establishes that provisions made for sales tax constitute contingent 74 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited liabilities. No statutory liability arises until the furnishing of declaration forms during assessment proceedings. 10.4. The Supreme Court's rulings in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973 AIR 376] and Sinclair Murray & Co. (P.) Ltd. v. [CIT1975 AIR 198] affirm that sales tax provisions must be backed by actual payment to the government for deduction. Furnishing bank guarantees or making fixed deposits does not meet this requirement. 10.5. The decisions of the Hon'ble ITAT Ahmedabad in Krishna Textiles[1996]59ITD523(AHD),further reinforce the fact that actual payment to the government account is necessary for claiming deduction under Section 43B. 10.6. Excise Duty Provision: The provision for excise duty amounting to Rs. 10 lakh represents the expected differential duty liability in respect of a matter in appeal. The Assessee contends that this provision is not contingent and should be allowed as a deduction. 10.7. In this regard the revenue wishes to place reliance on the case law of Indian Metal and Ferro Alloys Ltd. v. Commissioner of Income- tax[[1995]211ITR35(ORISSA)]wherein the Hon’ble High Court of Orrisa has held that depositing sums in a no-lien/escrow account does not constitute 'actual payment' under Section 43B. The Assessee retains control over the amount, making it contingent on the disposal of litigation 10.8. The decisions of the Hon'ble ITAT Ahmedabad in Krishna Textiles, Purolator India Ltd., and Dunlop India Ltd. Cases further strengthens this stance of the revenue, emphasizing that furnishing bank guarantees or making deposits as security does not qualify as actual payment for claiming deduction under Section 43B. 10.9. Therefore, it is pleaded that the Assessee's contention with respect to provisions for sales tax and excise duty, not being contingent in nature do not hold ground in light of legal precedents. The requirement for deduction under Section 43B mandates actual payment to the government account, which in this case the Assessee has not fulfilled. We have perused the submissions advanced by both sides in the light of the records placed before us. 27. It is well settled principle that the profits of the business which are charged to income-tax should be real and true profits and they have to be ascertained on ordinary principle of commercial trading and commercial accounting. Under the Act, expenditures incurred by an assesse in the normal course of its business is allowable under section 31 to 36 of the Act, However, Section 43B, allows certain payments only upon actual payment. 75 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited We are of the opinion that the assesse may be granted benefit in the year of payment. Accordingly, this ground raised by the assesse stands dismissed. 28. Ground No.10 raised by the assessee is against the denial of deduction claimed under section 80IA(4) of the Act, amounting to Rs. 29,42,48,359/-, by treating the assessee to be a contractor as against a developer. 28.1 It is submitted that the assessee is engaged in the business of EPC projects, Hi-Tech manufacturing, & Other businesses. It is submitted that the assessee has an Engineering, Construction and Contracts business Division (“the ECC”) mainly engaged in the activity of construction and development of Infrastructure Projects such as roads, bridges, water supply & sewerage facilities, irrigation projects, etc., for various government authorities. For the year under consideration, the assessee claimed deduction under section 80IA of the Act amounting to Rs. 29,42,48,588/-. The details of the projects undertaken by the ECC division of the assesse during the year under consideration are as under: Project Nature of the work Deduction claimed u/s 80-IA (Rs.) 1.Allahabad Bridge over Ganga Project Bridge 1,60,59,185 2. Satara-Kolhapur Road Construction of Road 9,67,34,955 3. Hiriyur Bellari Road Project Construction of Road 5,95,07,023 4. Approach road from Dwarika to NH-8 Construction of Road 2,87,75,070 5. Jharkhand road project Construction of Road 43,89,639 6. Thirupur Water Water supply scheme 4,75,83,374 76 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Supply Project 7. BWSSB-FW Water supply scheme 2,99,89,005 8. RWSP Nalgonda Phase-III Water supply scheme 39,77,003 9. Adoni WSIS-HUDCO Phase-III Water supply scheme 40,40,260 10. WSS Gulburg City Package II Water supply scheme 8,66,805 11. WSS for Puttur Town Water supply scheme 15,61,213 12. Clear water transmission, Mangalore Water supply scheme 7,65,056 Total 29,42,48,588 28.2 Admittedly, along with the return of income, the assessee filed audit report in Form 10CCB with respect to each of the 12 projects/contracts undertaken by the Appellant, which were eligible for deduction under section 80IA of the Act.It was submitted that the assesseeenters into an agreement with the Central Government, the State Government, or the Local authority, or any statutory Bodies, as the case may be, for developing, maintaining, and operating new infrastructure facilities on Build and Transfer basis(BT basis). 28.3 During the assessment proceedings, as called by the Ld.AO the assessee filed agreements concerning 5 projects being, Allahabad Bridge over Ganga(Bridge Project), Construction of approach road from Dwaraka to NH-8, Bangalore Water supply & Sewerage Project(Water supply project), Hiriyur Bellari Road Project, and BWSSB-FW Bangalore Water supplier and Sewage Board. The assessee submitted before the Ld.AO that other contracts are similar to the 5 contract documents submitted, and, therefore, as the contract documents were voluminous, for 77 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the sake of brevity, contract documents for the balance contracts were not filed. 28.9 It was submitted that the provisions of section 80IA do not require the assessee to necessarily operate the infrastructure facility, but to develop a facility on BOT basis is also covered by the definition of the act under sub-clause 4 of section 80IA. 28.10 The Ld.AO, after perusing the submissions advanced by the assesse, held that: (i) That, the assessee merely constructed the project based on the work contracts undertaken from different authorities. (ii) The contract entered into by the assessee does not amount to entering into an agreement for developing, maintaining, and operating a new infrastructure facility as prescribed in section 80IA(4)(i)(b) of the Act, which is evident from the fact that even though the assessee was repeatedly asked to produce copy of such agreement entered about the project, on which deduction under section 80IA of the Act has been claimed, the assessee failed to furnish such agreement. The Ld. AO further observed that the 5 contracts/agreements submitted by the assessee indicate that the assessee entered into work contracts, which do not come within the ambit of section 80IA of the Act. (iii) The Ld.AO held that there was no agreement with the government for the development of an infrastructure 78 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited facility, and the agreement submitted by the assessee is for carrying out the construction work on contract, for which investment is made by the Government. (iv) The Ld.AO noted that the assessee admitted that all other agreements are similar. Thereafter, the Ld.AO thus held that as per Notification No. 240 dated 6/09/2002, the assessee, was required to file copies of agreements of the enterprise with the Central Government or the State Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating or maintaining along with audit report in Form 10CCB. Whatever agreements are produced are merely contract agreements and not the agreements as envisaged under the provisions of the section. (v) It was noted by the Ld.AO that the assessee failed to furnish such agreements with the Central Government or the State Government or the local authority for carrying on the business of developing or operating and maintaining, or developing, operating, or maintainingthat could establish the assesse to be a developer. It was noted that such agreements were not furnished with the report in Form 10CCB along with the return of income, and also failed to furnish such agreements during assessment proceedings. The Ld.AO thus held that the assessee is a contractor and not the developer for infrastructure facility. The Ld.AO held that even if the assessee is treated as a developer, then deduction can 79 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited only be allowed when the assessee maintains and operates the infrastructure facility. Aggrieved by the order of the Ld.AO, assesse preferred appeal before the Ld.CIT(A). 28.11 The Ld.CIT(A), after considering the submissions of the assessee held that: (i) The agreements, produced before the Ld.AO was merely a contract, and the assessee was only a contractor and not a developer of an infrastructure facility. (ii) The Ld. CIT(A) relied upon the Explanation to section 80IA of the Act, substituted by the Finance (No. 2) Act, 2009 retrospectively with effect from 1.04/2000. He held that the said Explanation makes it clear that there is no scope for any interpretation since no deduction is available to an assessee who is rendering service like work contracts. The Ld. CIT(A) held that the assessee was awarded the contract, and except for the expenses relating to carrying out contractual obligations, the entire expenditure has been made by the agency awarding the contract. The Ld.CIT(A) thus upheld the disallowance made by the Ld.AO. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal. 28.12 The Ld.Sr.Counsel submitted that, authorities below denied deduction only on the ground that, the assesse is not a developer of the infrastructure project, but the work performed 80 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited is akin to a works contract and in view of Explanation inserted by the Finance Act, 2009, which is retrospective and therefore is not eligible for deduction under section 80IA of the Act. Ld.Sr.Counsel thus submitted that, primarily, it needs to be determined as to whether the contracts entered into by the assessee with various authorities are like work contracts or not. 28.13 The submissions of Ld. Sr.Counselon this aspect as per the written submissionsfiled in the open court on 27/03/2025are reproduced as under: (i) The contracts entered into by the Appellant with various authorities are not in the nature of contracts and the Appellant is acting as a developer with respect to the development of the infrastructure facility with respect to the said contracts. (ii) The Appellant submits it cannot be disputed that section 80IA of the Act has been amended by the Finance Act, 2001 with effect from 1.4.2002 to provide that an enterprise, which is merely carrying on the business of developing an infrastructure facility, would be eligible for deduction under the said section and maintaining and operating the infrastructure facility was no longer a requirement for claiming deduction. (iii) The Appellant submits that the development activity, which the Appellant is carrying out, is apparent from the fact that the terms of the contracts with various Government authorities would show that the scope of work performed by the Appellant is much more than the activity performed by a work contractor. (iv) The Appellant submits that the work contract is a contract, under which the contractor is merely employing his labour or effort. Under a work contract, the contractee provides material and other requisites necessary to carry out the desired work to the contractor, who, by employing his labour to the said material, turns material into a desired product. In the present case, the Appellant is admittedly engaged in the following activities: (a) The Appellant is undertaking the detailed designing of the infrastructure facility. The fact that the design is required to be approved by the authority would not make a difference to the claim of the Appellant as the authority awarding the contract would always want to certify and approve the design of the infrastructure project. 81 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited (b) The Appellant is using its own plant and machinery for the purpose of the development of the infrastructure facility. (c) The Appellant is deciding upon, sourcing and procuring the material which would be required for the development of the infrastructure facility. (d) The Appellant is responsible for any damage during the course of development of the infrastructure facility and is also liable to repair any damages during the defect liability period at its own cost. (e) The Appellant is utilizing its financial resources for the purpose of the aforesaid work as the Appellant is required to make significant financial arrangement for procuring the plant and machinery as well as for the material and labour till the appellant receives consideration for development carried out by it from the authority. (f) The Appellant is taking financial and entrepreneur risks as the contract is a fixed price contract and not a cost-plus contract. The Appellant has no recourse to the customer in respect of cost overruns and hence has to bear the same. Further, the Appellant paid earnest money, security deposits, retention money, furnished bank guarantees during the development period. (g) Further, if the contract is not completed within the specified period, the Appellant would be responsible for liquidated damages & penalties, etc., the levy and recovery of which would in no way relieve the appellant from its responsibility of development of the infrastructure. (h) The appellant is required to conform in all respects with the provisions of any National or State Statute, Ordinance or other law and the rules and regulations therein during the development activity. And is also responsible to keep the government authorities indemnified against all penalties and liability of every kind for breach of any such provisions. (i) The appellant is responsible for the insurance of works, plant & machinery, damage to persons and property against all loss or damage from the start of the work till completion of the work. The appellant is also responsible to take all reasonable steps to protect the environment on and of the site. 28.14 The Ld.Sr.Counsel submitted that, the assessee is not merely acting as a work contractor, but is a developer of infrastructure facility and, hence, eligible for deduction under section 80IA of the Act. The Ld.Sr.Counsel in support placed reliance on the following decisions: A) Decision of Hon’ble Gujrat High Court in case of Montecarlo Constructions Ltd. in ITA No.786 of 2023 wherein Hon’ble 82 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited High Court affirmed that the assessee was a “Developer” by observing as under: “ 3.14. The CIT (Appeal) has further examined as to whether the project assigned to the assessee was in capacity of a contractor or the same was executed as a developer with respect to the canal projects, agreements were entered into by the assessee was analysed and tendered documents containing the terms and conditions of the project were taken into consideration with respect to the following aspects as to the entire investment in the project was to be made by the assessee. Interim payment to the tune of estimated contract value in respect of the development work done for each month after retention and other adjustments were to be made, security deposit was to be paid by the assessee, there was a penalty for delay, procurement of the material was the responsibility of the assessee, procurement of land for camp, for shop, labour camp etc. also the employment of qualified engineers, action and compensation in respect of bad work, defect liability of the accidents to persons in relation to Workman Compensation Act, indemnity insurance of the workmen employed. The CIT (Appeal) and the Tribunal considering such aspects of the tendered agreement, concurrently held that the assessee has entered into a development of infrastructure facility agreement and not the works contract.” B) Decision of Hon’ble Bombay High Court in case of ABG Heavy Industries Ltd., reported in 322 ITR 323 held that: “10. As noted earlier, sub-clause (4A) of section 80-IA of the Act as it originally stood, stated that the section applied to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility, which fulfils certain conditions. With effect from 1-4-2000, by the Finance Act of 1999, certain changes were brought about. Section 80-IA and section 80-IB were substituted for section 80-IA. Sub-section (4) of section 80-IA of the Act provided that the section shall apply to any enterprise carrying on the business of (i) developing, (ii) maintaining and operating, or (iii) developing, maintaining and operating an infrastructure facility which fulfils certain conditions. The conditions provided for the ownership of the enterprise by a Company or by a consortium of Companies, registered in India and stipulated a requirement of an agreement with the Central and State Governments, a local authority or any other statutory body; the agreement being required to envisage the transfer of the facility after the period stipulated in the agreement. Subsequently, the requirement for the transfer of the 83 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited facility to the Central or State Governments, or as the case may be to the local authority or a statutory body came to be deleted. ……………….. 17. The obligations which have been assumed by the assessee under the terms of the contract are obligations involving the development of an infrastructure facility. Section 80-IA of the Act essentially contemplated a deduction in a situation where an enterprise carried on the business of developing, maintaining and operating an infrastructure facility. 3expression infrastructure facility. A Port was defined to be included within the purview of the expression infrastructure facility. The obligations, which the assessee assumed under the terms of the contract were not merely for supply and installation of the cranes, but involved a continuous obligation right from the supply of the cranes to the installation, testing, commissioning, operation and maintenance of the cranes for a term of ten years after which the cranes were to vest in JNPT free of cost. An assessee did not have to develop the entire port in order to qualify for a deduction under section 80-IA. Parliament did not legislate a condition impossible of compliance. A port is defined to be an infrastructure facility and the circular of the Board clarified that a structure for loading, unloading, storage etc., at a port would qualify for deduction under section 80-IA. The condition of a certificate from the Port Authority was fulfilled and JNPT certified that the facility provided by the assessee was an integral part of the port. The assesse developed the facility on a BOLT basis under the contract with JNPT. On the fulfilment of the lease of ten years, there was a vesting in the JNPT free of cost. ……………. 21 This was perhaps a practical realisaion of the fact a developer may not possess the wherewithal, expertise or resources to operate a facility, once constructed. Parliament eventually stepped in to clarify that it was not invariably necessary for a developer to operate and maintain the facility. Parliament when it amended the law was obviously aware of the administrative practice resulting in the circulars of CBDT. The fact that in such a Scheme, an enterprise would not operate the facility itself was not regarded as being a statutory bar to the entitlement to a deduction under section 80-IA of the Act.” C) Decision of coordinate bench of this Tribunal in case of Patel Engineering Ltd. Reported in (2005) 94 ITD 411, wherein this Tribunal held that for availing deduction u/s 80IA, the infrastructure facility need not necessarily be owned by the assessee and “it” refers to “Enterprise”. 84 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited “49. We have considered the rival contentions as also the relevant material on record. However, we find substance in the contentions of the learned Authorised Representative of assessee. In our considered opinion, it should hardly take any time for one to understand that the word 'it' in sub-clauses (a), (b ) and (c) of clause (i) of sub-section (4) of section 80-IA has been used to denote 'enterprise'. A plain reading of the said clause (i) makes it clear, without any ambiguity, that it is 'any enterprise' that should fulfil the condition of carrying on the particular type of business narrated/specified in the main part of clause (i); and so also it is 'any enterprise' that has to fulfil the other conditions specified further in sub-clauses (a), (b ) and (c) of clause (i) of sub- section (4) of section 80-IA. The word 'it' in the said sub-clauses (a), (b) and (c ) qualifies the word 'enterprise' used in the main part of clause (i) of sub-section (4). 50. Besides, if we were to compare sub-section (4A) of section 80- IA, which stands replaced by sub-section (4) of section 80-IA by the Finance Act, 1999, we f ind that in clauses (i), (ii) and (iii ) of the earlier sub-section (4A), the word \"enterprise\" was used, but in the replaced (new) sub-section (4) in the corresponding sub- clauses (a), (b) and (c ) the word \"enterprise\" has been replaced by the word \"it\". Obvious as it is, reading in the above context, it is amply clear that in sub-section (4), as amended by the Finance Act, 1999, the word \"it\" needs appropriately be interpreted to mean \"enterprise\". Moreover, if the interpretation canvassed by the Assessing OAicer, that the word \"it\" represents the 'infrastructure facility', is accepted, it will lead to an absurd result, because, sub-clause (b) of clause (i) of sub-section (4) provides that : \"it has entered into and agreement with Central Government.......\" and thus 'it' as used in sub-clause (b) has to be someone who/which has entered into an agreement with the Government, etc. Obviously, the infrastructure facility cannot be such an entrant as it cannot enter into an agreement with the Central Government or with anybody else. Understandably, it is only the 'enterprise', which can enter into an agreement with the Central Government or State Government or any other person. As such, viewed as above also, the word \"it\" denotes \"the enterprise\" and not \"the infrastructure facility. 51. Accordingly, the conclusion drawn by learned CIT(A) on this count, that is on the count as to what is required to be owned in subclause (a) of clause (i) of sub section (4) of section 80-IA, whether 'infrastructure facility' or 'the enterprise' is found to have rightly been drawn and quite justified, and the same need not be interfered with.” 28.15 The Ld.DR vide written submissions dated 12/11/2024 & 13/02/2025, submitted as under. She 85 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited summarized her oral arguments made in the open court vide these submissions. WS dated 12/22/2024: 11.1. The crux of the dispute lies in the interpretation and application of Section 80IA concerning the eligibility of the assessee for deductions related to infrastructure development. As per the Chairmans Statement for FY 2005-06 the assessee is a company engaged in Engineering & Construction.The Assessing Officer contends that the nature of the assessee's activities aligns with a works contract, thus disqualifying them from claiming benefits under Section 80IA. 11.2. It is pleaded by the revenue that the case law of B.T. Patil & Sons Belgaum Construction (P.) Ltd. v. ACIT [ITAT – Mumbai, Larger Bench][34 taxmann.com 97], is instructive in discerning the legislative intent behind Section 80IA. The judgment emphasizes that the intent of the legislature is to limit the application of Section 80IA to entities directly involved in the comprehensive development of infrastructure, rather than those engaged in partial activities such as civil construction. This precedent underscores the importance of a holistic approach to infrastructure development in order to qualify for Section 80IA benefits. 11.3. Further, the insertion and subsequent substitution of the Explanation below section 80-IA(13) by the Finance Act, 2007 and 2009, respectively, with retrospective effect from 1-4-2000, are pivotal in understanding the legislative stance on works contracts vis-à-vis Section 80IA. These amendments unequivocally clarify that the benefits under Section 80IA are not extended to entities engaged in executing works contracts with eligible enterprises. The legislative intent, as elucidated in the accompanying notes, emphasizes the importance of entities directly involved in infrastructure development over contractors executing works contracts. 11.4. Drawing parallels to the facts of the present case, it is evident that the Assessee's activities, as delineated by the AO, closely resemble those of a works contract, as opposed to comprehensive infrastructure development. The Assessee's assertion of meeting all conditions under Section 80IA is contradicted by the clear language of the statute and the precedent set by B.T. Patil & Sons Belgaum Construction (P.) Ltd. v. ACIT [ITAT – Mumbai, Larger Bench]. 11.5. Moreover, as per the paper book submitted by the Assessee, it can be seen that the contract which the Assessee has entered into itself has been described as a works contract. This aligns with the revenue's contention regarding the nature of the Assessee's activities. 11.6. The Assessee's plea for a liberal interpretation of the explanation fails to hold ground in light of established legal principles emphasizing strict construction of tax statutes. The assessee’s contentions made by relying upon the case law of P.R. Prabhakar v. CIT, is also rendered 86 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited moot by the fact that the Assessee fails to meet the basic eligibility criteria for Section 80IA benefits. 11.7.In conclusion, the revenue humbly submits that the Assessee's activities do not align with the intended scope of Section 80IA, as clarified by legislative amendments and judicial precedents. Therefore, the disallowance under Section 80IA is justified, and the revenue urges this Hon'ble Tribunal to uphold the same. 28.16 Submission dated 13/02/2025, filed by the revenue contains various submissions and decisions that did not form part of her argument on the final date of hearing. Hence, the appeal was fixed for clarification calling upon assessee to furnish its reply. Vide submissions dated 13/02/2025 the assesse submitted as under : This submission is being made in furtherance of the written submission submitted by the Departmental Representative, KBench on 12.11.2024 and the arguments presented during the oral hearing conducted on 05.02.2025. The present submission seeks to elaborate upon and reinforce the department’s position, particularly in light of the assessee’s interpretation of Section 80-IA(4)(i) and the statutory conditions that must be satisfied to claim deduction under the said provision. Given the specific facts of the case and the legislative framework governing deductions under Chapter VI-A, it is the department’s humble submission that the assessee has failed to meet the eligibility conditions prescribed under Section 80-IA(4)(i), and accordingly, the disallowance made by the Assessing Officer and upheld by the CIT(A) merits confirmation by this Hon’ble Tribunal. Before delving into the legal arguments, it is crucial to first outline the facts leading to the present dispute to ensure clarity on the issue at hand. 2.1 The present matter pertains to Assessment Year 2005-06, wherein the assessee entered into contracts with various authorities/bodies for carrying out construction activities and repair work related to infrastructure projects, as defined under the Explanation to Section 80- IA(4)(i). 87 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 2.2 The assessee filed its return of income on 28.10.2005, wherein it claimed deductions amounting to Rs.29,42,48,539/- under Section 80- IA(4)(i). The return was accompanied by the audit reports required for claiming deductions under Section 80-IA, along with Form 10CCB as prescribed under the Income Tax Rules, however the assesse did not submit copies of Agreement as contemplated under rule 18BBB(3) during the time of filing of returns. 2.3. As per para 17(ii), page 37 of the AO’s order, the assessee was repeatedly asked to produce copies of agreements in furtherance of Rule 18BBB(3) to substantiate its claim for deduction. However, the assessee only furnished contract agreements for five projects, despite having claimed deductions for twelve projects in total. 2.4. Given the failure of the assessee to provide agreements for all projects, the Assessing Officer was dissatisfied with the substantiation of the claim. Consequently, the AO denied the deduction claimed under Section 80-I[A(4)(). 2.5. During appellate proceedings, it was the assessee’s own submission that all twelve contracts were similar in nature to the five contracts that had been furnished. Based on this admission by the assessee, the CIT(A) upheld the disallowance, as the assessee had failed to substantiate its claim in accordance with Rule 18BBB(3) and the statutory mandate of Section 80-IA(4). 2.6. The matter has now escalated to the Hon’ble ITAT, Mumbai, where the department seeks to defend the denial of deduction on the grounds of the assessee’s non-compliance with statutory requirements, failure to furnish agreements, and misapplication of Section 80-IA(4). 3. Argument in Brief: 3.1 The assessee is ineligible to claim deduction under Section 80-IA(4). 3.2. The assessee has failed to comply with the mandatory procedural requirements under the prescribed rules and forms. 3.3. The assessee is a mere contractor, not a developer, and is therefore expressly excluded from the ambit of this provision. 88 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited ………. 28.17 The Ld. DR further expanded her submissions on the above three issues and emphasized on the term ‘enterprise’ in section 80IA(4),that is eligible to claim exemption under this section. Various decisions has also were relied on in respect of the same. 28.18 The Ld.Sr.Counsel responded to the WS of the revenue dated 13/02/2025, placing reliance on various decisions and provisions of section 80IA in support of the claim. The Ld.Sr.Counsel submitted WS on 27.03.2025 in reply to the submissions of the revenue. We have perused the submissions advanced by both sides in light of the records placed before us. 29. It is noted that during the assessment proceedings, the assessee furnished only 5 agreements. The Ld. AO based on these five agreements held that, the assessee is not eligible to claim deduction under section 80 IA (4), as it is carrying out works contract and does not satisfy the requirements specified under the section. 29.1 Before this Tribunal, the Ld.DR submitted that, the assessee did not furnish entire details before the Ld.AO. The assessee was thus called upon to furnish copies of all the agreements under which the development activities were carried out by the assessee for the year under consideration. It is noted that the disallowance of the deduction by Ld.AO is not because the assessee failed to furnish all the agreements. We also note that, the Ld.AO did not issue any show cause notice to the assessee calling upon to furnish further details/or other 89 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited agreements and there is no iota of any verification carried out by the Ld.AO in this respect. We therefore reject this objection raised by the Ld.DR. 30. Be that as it may, the Ld.DR, was furnished with all the agreements at the direction of this Tribunal.After going through the voluminous paper books filed by the assessee, the Objections raised by the revenue are broadly on two aspects: I. The assesse does not satisfy the requirements as per provisions of section 80 IA and its applicability to an enterprise envisaged under subsection (4). It is thus submitted that the assesse is not eligible to claim deduction under section80 IA(4). II. The agreements entered by the assesse are in the nature of works contract and thus the construction carried out by the assesse do not qualify as infrastructure facility. The revenue also submits that the assesse is a works contractor as pet sub section 13 of section 80 IA of the Act. 30.I Eligibility criteria of the assessee to claimdeductionunder section 80 IA of the Act. A. Along with paragraph 11 to 11.7 of revenue’s submissions dated 12/11/2024 reproduced herein above WS dated 13/02/2025 by revenue are being considered. A.1Paragraph nos.10 to 19 of the WS dated 13/02/2025 the revenue contends as under: 90 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 10. At this juncture, we wish to draw attention to the language and structure of Section 80-IA of the Income Tax Act, with particular emphasis on the heading of the section and the wording of Subsection (1). The heading of the section itself makes it abundantly clear that the provisions of Section 80-IA are intended to apply to an \"enterprise\" or an \"undertaking,\" not to the \"assessee\" directly. This distinction is of paramount importance as it reflects the ae clear legislative intent. 11. Subsection (1) further strengthens this argument by explicitly limiting the scope of the deduction to profits and gains derived from an \"enterprise or undertaking.\" This provision effectively excludes the assessee from directly qualifying for such a deduction. To further buttress this argument, we respectfully submit that a careful reading of Subsection (4) also supports the position that the section applies to \"an enterprise\" or \"an undertaking.\" All sub clauses to Subsection (4) begin with the phrases “an enterprise,\" \"an undertaking,\" or \"any undertaking,\" reinforcing that the legislative intent is to apply the provisions of Section 80 IA specifically to these entities, and not to the assesse directly. 12. It is significant to note that while the words \"business\" and \"assessee \" are acknowledged and used in Subsection (1), the legislature has deliberately chosen to exclude these terms from Subsection (4), opting instead for the specific reference to \"enterprise\" or \"undertaking.\" This deliberate choice indicates that the scope of the deduction is confined to entities that meet the conditions prescribed under the statute, rather than extending automatically to the broader category of \"“assessee. 13. The judiciary was undoubtedly aware of the broader usage of the word \"assessee,” as evidenced by its inclusion in Subsection (1), yet it has deliberately restricted the application of the deduction in Subsection (4) to \"enterprise\" or \"undertaking, \" clearly signaling that eligibility for the deduction hinges on the nature of the entity rather than the status of the assessee. This distinction further solidifies the argument that only an eligible enterprise or undertaking may claim the deduction under Section 80-IA, and not the assessee in isolation. 14. It is crucial to understand that the terms \"business,\" \"undertaking,\" and \"assessee\" each carry distinct and specific scope under Section 80-IA(1), read in conjunction with Section 80-IA(4). These terms serve a particular and deliberate purpose within the scope of this provision. The “assesse”, in this context, is the owner of the “undertaking”, and it is the undertaking that actively engages in the “business”’. AS the owner of the enterprise, the assessee derives income as a natural consequence of their complete or partial ownership. However, it is important to emphasize that the eligibility for deductions under Section 80 IA arises only when the business conducted by the enterprise qualifies as an \"eligible business\" under the section. This is explicitly made clear by the words, “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)”’ used in subsection (1). 15. Only when the business meets the necessary criteria to be classified as an eligible business does the enterprise, as a whole, become an eligible 91 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited enterprise under Section 80-IA(4). It is then, and only then, that the assessee becomes entitled to claim deductions with respect to the income attributable to the eligible enterprise as per-section 80-IA(1). This distinction between the ownership of the enterprise, its business activities, and the eligibility for deductions is fundamental to understanding the application of Section 80-IA(4)(i), which is the applicable clause in the present scenario. 16. At this juncture, before proceeding to the primary issue under Section 80- IA(4)(i), it is essential to summarize the key arguments advanced by the revenue thus far: 16.1 Section 80-IA operates as a self-contained code, governing the computation of special deductions under the Income Tax Act. 16.2 Chapter VI-A, within which Section 80-IA falls, prescribes a distinct methodology for computing deductions, separate from the general computation of business income. 16.3 Section 80-IA(1) explicitly applies to an \"enterprise\" or an \"undertaking,\" rather than directly to the assessee, thereby reinforcing the legislative intent that deductions are linked to the income generated by an eligible enterprise. 16.4 The statutory framework mandates a specific triangular nexus for income to qualify for deduction: 16.4.1 The income must originate from an enterprise owned by the assessee; 16.4.2 This enterprise must be engaged in an eligible business, as defined under Section 80-IA; and 16.4.3 There must be a direct and demonstrable link between the income accruing to the assessee and the eligible business activities of the owned enterprise. 17. In light of the aforementioned legal principles, the department now proceeds to advance its arguments under Section 80-IA(4)(i), which forms the core issue in the present dispute. During the course of the hearing, it was observed that the assessee’s interpretation of Section 80-IA(4)(i) suffers from a fundamental lacuna. To clarify the statutory intent, the relevant portion of the provision is reproduced below for ready reference: (4) This section applies to— (i ) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining 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 or by an authority or a board or a corpora-tion or any other body established or constituted under any Central or State Act; (b) it has entered into _an_agreement with the Central_Government_or_a_ State Government or a local 92 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility; (c) it has started or starts operating and maintaining the infrastructure facility on or after the Ist day of April, 1995;” 18. It is the humble submission of the department that the language of Section 80-IA(4)(j), particularly sub-clauses (a), (b), and (c), unequivocally establishes that the term \"it\" refers to the enterprise owned by the assessee, rather than the infrastructure facility itself. This distinction is of critical importance in determining eligibility for deduction under this provision. The line “(4) This section applies to, any enterprise carrying on the business of” — denotes that only an enterprise is eligible to claim deductions under this section, and to qualify as an eligible “enterprise” it has to satisfy all the conditions required under sub clause a,b and c of sub-section (4). Which have been reproduced hereunder, “(a) it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act: (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 or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility; (c) it has started or starts operating and maintaining the infrastructure facility on or after the Ist day of April, 1995:” A.2 In respect of the above the Ld. Sr.Council in vide reply dated 27/03/2025 submitted as under: The provision of section 80IA of the Act applies to an “enterprise” or an “undertaking” which should be “owned by” the assessee and, hence, the enterprise should be a separate legal entity, for the assessee to be eligible for deduction under section 80IA of the Act. Reliance is placed on various decisions to submit that the phrase “owned by” carries a specific statutory meaning and imposes ownership requirement between the assessee and the eligible enterprise and such ownership can only be by legal title (generally in the form of JV / consortium / SPV). It is further alleged that, according to the Revenue, the assessee may execute the actual work but the legal entity on record is the enterprise which enters into a contract with the statutory authority. A.3Further in paragraph 19.1 and it’s subparas, the revenue contends that the assessee does not own the ECC division as it claims and thus, do not satisfy the 1st condition of eligibility under section 80 IA (4) (i) (a) of the Act the Ld.DR submitted that 93 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the section mandates the ownership of the “enterprise” by the assessee. She submitted that, the assessee’s role is limited to the execution of the contract awarded by the employer and not to undertake any development activity as contemplated under section 80IA (4) (i). A.4 The revenue also contends that the 2nd eligibility condition also does not meet as the activities carried out by the assessee, does not involveany “development”, “operating and maintaining”, or “developing, operating and maintaining”, of infrastructure facility under the section. A.5 In the rejoinder, the Ld.Sr. Council in para 4 of submission dated 27/03/2025 submitted that, there are contradictory observations and wrong appreciation of facts by revenue based on the disclosures made in form 10 CCB. We have considered the above objection raised by the revenue as well as the rejoinder filed by the assessee. A.6 As rightly observed by the Ld.DR, section 80 IA constitutes a separate code in itself to compute deduction available to an assessee who fulfils the relevant criteria as mentioned therein. In fact the title of section 80 IA read as, “Deduction in respect of profits and gains from industrial undertaking or enterprise engaged in infrastructure development, etc”sub clause 1 of the section states that, “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 subsection (4)…….”. Thus it is clear that the “enterprise” or “an undertaking” involved in the infrastructure development activities must be part of the 94 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited assessee. This is further clear from the proviso to subsection 2 of section 80IA that reads as under: “Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (small a) or clause (small B) or clause (small c) of the explanation to clause (i) of subsection (4), the provisions of this subsection shall have effect as if for the words “twenty years” Subsection 4 of section 80IA is already been reproduced hereinabove and therefore the same is reproduced at the cost of repetitionherein. A.7 On bare reading of the above, it is clear that the for computing business income of an assessee that owns an enterprise carrying out development etc; of infrastructure facility, deduction under section 80 IA is based on the income of such enterprise/undertakingand forms part of the total income under the head, “Business Income” of such assessee.Such income of the enterprise/undertaking is eligible for exemption under section 80 IA in the hands of the assessee upon satisfying necessary requirement under sub section 4. A.8 Admittedly, the engineering, construction, and contracts business division (hereinafter referred to as ECC division) is a part of the assessee as a company, engaged in the activity of construction and development of infrastructure projects. The Ld.DR attempted to establish that, the provisions require the enterprise/undertaking to be a separate legal entity that is eligible to claim exemption under section 80 IA (4) of the act. Such interpretation in our opinion is not the legislative intent as envisaged under the section. As noted hereinabove, the 95 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited undertaking must be owned by the assessee and the income of such undertaking becomes part of the total income of the assessee and is eligible to claim deduction under section 80 IA (4) by the assessee. And while computing deduction under chapter VIA, such income of the undertaking/enterprise stands excluded by way of deduction in the hands of the assessee. (emphasis supplied) A.9 It is further noted that the Ld.DRin para 19.1.23 submitted on technicalities of form 10 CCB red with Rule 18BBB to submit that, the assessee failed to disclose the name of the enterprise to be “L&T ECC”,where as reference to only the ECC division is made in serial numbers 5& 6 of form 10 CCB. The Ld.DR placed reliance on the Form 10 CCB furnished by the assessee in respect of the same. A.10 On this aspect, we note that though this was not the case of the Ld.AO to deny exemption, however considering the fact that opportunity was granted to the assessee to submit on these aspects, the same is considered and dealt with as under. The requirement of filing the agreements along with form 10 CCB as per rule 18BBB is a procedural requirement. The Ld.Sr.Counsel submitted that, it should be treated as full filled, when the assessee furnishes agreements before the Ld.AO during the assessment proceedings. We note that in the present facts of the case the assessing officer did not call for any further details in respect of the agreement that was furnished during the assessment proceedings, as well as other agreements based on which the assessee claimed deduction. The Ld.Sr.Councilplaced reliance on the following decision to support this contention: 96 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited ACIT Vs Hi Tech Systems & Services Limited (Kolkata) ITA 1318/KOL/2024 b. Sanjay Kukreja Vs. ACIT (Delhi ITAT) ITA No. 652/Del/2023 c. CIT vs Contimeters Electricals (P.) Ltd (Delhi) [2009] 178 Taxman 422 d. ACIT vs Gurjargravures (P.) Ltd [1978] 111 ITR 1 (SC) e. IT vs S.A. Builders Ltd. [2013] 38 taxmann.com 255 (Punjab & Haryana) f. Anand Prasad vs CIT [1981] 128 ITR 388 (Delhi) A.11 We have herein above the noted that the ECC is division of assessee, and assessee entered into agreement with government agencies for carrying out development or operation and Maintainance of infrastructure facility as the case may be. Further with u/ Rule 18BBB nor u/s. 80IA(7) there is a mandate to compulsorily file agreements with each 10CCB form. These provisions only require the assessee to file form 10CCB along with ROI. We therefore do not find any merit in the submissions of the Ld.DR in para 10 to 19.1.20 of the written submission dated 13/02/2025. B. In paragraph 19.2 and sub paragraphs therein, the revenue canvassed that the “eligible enterprise/undertaking” must have entered into the agreement directly with statutory bodies for carrying out the infrastructure facilities as required under rule 18 BBB (3). It is emphasised that the agreement has to be entered into by the eligible enterprise/undertaking and the actual work is to be undertaken by the assessee and its partners through the eligible enterprise. Such argument was canvassed by the Ld.DR because of the word, “it” used in sub-clause (a) of subsection (4) of section 80 IA. B.1 The rejoinder to this argument is submitted by the assessee is in para 6 of the written submission dated 27/03/2025. The assessee placed reliance on the decision of Hon’ble Supreme Court in case of Mrs. Bacha F Guzdar v CIT reported in27 ITR 1 and in 97 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the case of Salomon vs. A. Salomon & Co. Ltd., reported in(1897) AC 22to submit that, “If there is a separate legal entity, then the assessee can only own the shares of the entity and the assessee does not become the owner of the assets (enterprise) of the separate entity” B.2 The assessee further submitted as under: An enterprise or a branch or a division of a company, which is executing a specified contract, is certainly ‘owned by’ the said company and by no stretch of imagination, it can be said that the branch or division is not owned by the Company. The Company would have absolute and unqualified title of the said branch or division. The same is clear from the fact that it is open to the Company to sell or otherwise dealt with the said division or branch. In fact, section 2(19AA) provides for demerger of such branch or division. It is completely illogical to say that the term “owned by” would always mean a separate company or a legal entity because an undertaking or an enterprise is as much an asset of a company as a building or a car. It certainly cannot be said that a company does not own the car or a building unless it is owned through a separate legal entity. The purpose of referring to an ‘undertaking’ or an ‘enterprise’ in section 80IA of the Act is to restrict the deduction under the said section only with reference to that part of the activity of an assessee which is engaged in developing the infrastructure facility. Like in the present case, where the Appellant has multiple activities, the deduction would only be available with respect to the activity of infrastructure development which should be separately identified as an undertaking or an enterprise. If the enterprise is sought to be a separate legal entity, then there can be no question of any profit of that enterprise being included in the profit of the Appellant because whatever profit is earned by that enterprise would be taxable in the hands of that enterprise and never be regarded as profit of the Appellant. We have perused the submissions of both sides. B.3 We agree with the arguments advanced by the Ld.Sr.counsel that if the enterprise is a separate legal entity, then there can be no question of the profits of such enterprise to be included in the total income of the assessee for claiming deduction under section 98 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 80 IA of the act. The enterprise itself will be eligible to claim the deduction under the section. B.4 In the present facts of the case the enterprise being the ECC division, is an integral part of the assessee. The profits of the enterprise has to be included while computing the total income in the hands of the assessee.Thus, the exemption under section 80 IA can be claimed by the assessee while computing deductions under chapter VIA. B.5 It is noted that, the revenue in paragraph 19.1.9, relied on the decision of the Coordinate Bench of this Tribunal in case of Patel Engineering vs. DCIT reported him (2005) 94 ITD 411 to submit that, the enterprise should be owned by a company registered in India or a consortium of such companies. B.5.1TheLd.Sr.Counsel submitted that the said decision may kindly be applied to the present facts of the case, as on identical facts like that of the assessee, the Coordinate Bench held that the assessee therein is carrying on the business of developing infrastructure facility. The Ld.Sr.Counsel further submitted that, even in the said case, the assessee therein carried on with development of infrastructure facility, and there was no separate enterprise that entered into contract. B.5.2We have perused the decisionin case of Patel Engineering vs. DCIT(supra) and note following categorical observations by this Tribunal: “48. Now we proceed to consider the second issue, which is whether the infrastructure facility or the enterprise developing the infrastructure facility, is to be owned by the company registered in India? The learned CIT/Departmental Representative contended that the infrastructure facility should be owned by the company registered in India. Ground No. 1 of the Revenue's cross-objection is also to this effect. He 99 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited contended that in this case, both the infrastructure facilities were not owned by the assessee-company, but by the Government of Maharashtra/APSEB; therefore, the assessee is not entitled to deduction under section 80-IA(4). The learned counsel for assessee, on the other hand, contended that the requirement is that the enterprise developing the infrastructure facility should be owned by an Indian company. 49. We have considered the rival contentions as also the relevant material on record. However, we find substance in the contentions of the learned Authorised Representative of assessee. In our considered opinion, it should hardly take any time for one to understand that the word 'it' in sub-clauses (a), (b ) and (c) of clause (i) of sub-section (4) of section 80-IA has been used to denote 'enterprise'. A plain reading of the said clause (i) makes it clear, without any ambiguity, that it is 'any enterprise' that should fulfil the condition of carrying on the particular type of business narrated/specified in the main part of clause (i); and so also it is 'any enterprise' that has to fulfil the other conditions specified further in sub-clauses (a), (b ) and (c) of clause (i) of sub- section (4) of section 80-IA. The word 'it' in the said sub-clauses (a), (b) and (c ) qualifies the word 'enterprise' used in the main part of clause (i) of sub-section (4). 50. Besides, if we were to compare sub-section (4A) of section 80-IA, which stands replaced by sub-section (4) of section 80-IA by the Finance Act, 1999, we find that in clauses (i), (ii) and (iii ) of the earlier sub-section (4A), the word \"enterprise\" was used, but in the replaced (new) sub-section (4) in the corresponding sub-clauses (a), (b) and (c ) the word \"enterprise\" has been replaced by the word \"it\". Obvious as it is, reading in the above context, it is amply clear that in sub-section (4), as amended by the Finance Act, 1999, the word \"it\" needs appropriately be interpreted to mean \"enterprise\". Moreover, if the interpretation canvassed by the Assessing Officer, that the word \"it\" represents the 'infrastructure facility', is accepted, it will lead to an absurd result, because, sub-clause (b) of clause (i) of sub-section (4) provides that : \"it has entered into and agreement with Central Government.......\" and thus 'it' as used in sub-clause (b) has to be someone who/which has entered into an agreement with the Government, etc. Obviously, the infrastructure facility cannot be such an entrant as it cannot enter into an agreement with the Central Government or with anybody else. Understandably, it is only the 'enterprise', which can enter into an agreement with the Central Government or State Government or any other person. As such, viewed as above also, the word \"it\" denotes \"the enterprise\" and not \"the infrastructure facility\". 51. Accordingly, the conclusion drawn by learned CIT(A) on this count, that is on the count as to what is required to be owned in sub-clause (a) of clause (i) of sub-section (4) of section 80-IA, whether 'infrastructure facility' or 'the enterprise' is found to have rightly been drawn and quite justified, and the same need not be interfered with. 100 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 52. As seen above, we have held that 'the enterprise' should be owned by a company registered in India. In the instant case, the assessee is a company registered in India, which owns the enterprise and which developed the infrastructure facility. We, therefore, hold that the second condition for eligibility of deduction under section 80-IA(4) is also fulfilled by the assessee and ground No. 1 of the Revenue's cross- objection having no merit fails.” B.5.3 The above observations by this Tribunalmore specifically in paragraphs 49 & 51 further clarifies that the enterprise has to fulfil the conditions of carrying on the particular type of business as per subclauses, (a), (b), (c) of subsection (4) of section 80 IA and the world “it” in these subclauses qualifies the word “enterprise” used in the main part of clause (i) of subsection (4). B.5.4 It is further noted that the provision does not distinguish between an assessee and its enterprise.As such, the enterprise is treated to be a part of the assessee or owned by the assessee. This can be better understood by reading sub-section 1, proviso to sub-section 2, sub-section 4 of section 80 IA of the act. (emphasis supplied) B.5.5 In support, we refer to our observations on the analysis of provisions of section 80 IA in paragraph A.6 to A.8 hereinabove.It is also important to note that, Legislature amended section 80 IA(4) (i)(b) vide Finance Act 2007 with retrospective effect. After the amendment, section 80 IA(4) (i)(b) reads as, “it has entered into an agreement with the central government or state government or a local authorities or any other statutory body 101 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited for (i) developing or (ii) operating and maintaining or (iii) developing operating and maintaining a new infrastructure facility”. We note that the world “it” means, undertaking, and the world “developed” is independent of operating and maintaining or developing operating and maintaining. B.5.6 At this juncture we note that, the submission of revenue in para 19.2.2 is uncalled for. Revenue is trying to make out a case that the ECC division of the assessee is a paper entity through which the assesseecarries out infrastructure operations. We do not accept such kind of submissions as it leads to the conclusion that the Central Government/State Government and other statutory bodies agreed with the assessee with an arrangement to carry development infrastructure facility through a paper entity. These submissions are legally not tenable and are therefore rejected at the threshold. Therefore the assessee cannot be denied the claim of deduction under section 80 IA (4) based on such technically untenable interpretation by the revenue. Based on the above discussions, we do not find any force in the submissions advanced by the revenue in paragraphs 19.2 along with sub-paragraphs, and the same is rejected. C. The Ld.DR in paragraph 19.3 along with subparagraphs submitted that assessee feel to satisfy the requirement under subclause (b) & (c ) in subsection (i) in section (4) of section 80 IA. It was submitted that the enterpriseis not engaged in developing, operating and maintaining the infrastructure facility and therefore it does not qualify to claim deduction under the 102 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited provision. Consequently, it is submitted that the assessee's claim for deduction under Section 80-IA(4) is legally unsustainable and must be disallowed. C.1 In reply, the Ld.Sr.Counsel relied on the decision of Hon’ble Bombay High Court in the case of ABG Heavy Industries Ltd reported in (2010) 189 Taxman 54. He submitted that,Hon’ble Bombay High Court held that, the condition of clause (c) of section 80IA(4) of operation and maintenance does not apply to an assessee, which is engaged only in development of the infrastructure facility; as otherwise, it will lead to an absurd position wherein a developer would never be eligible for deduction under section 80IA of the Act. He referred to following paragraph of the decision in the case of ABG Heavy Industries Ltd (supra): “22. Another submission which was urged on behalf of the revenue is that under clause (iii) of sub-section (4A) of section 80-IA, one of the conditions imposed was that the enterprise must start operating and maintaining the infrastructure facility on or after 1-4-1995. The same requirement is embodied in sub-clause (c) of clause (i) of sub-section (4) of the amended provisions of section 80-IA. On this basis, it was urged that since the assessee was not operating and maintaining the facility, he did not fulfil the condition. This submission is fallacious both in fact and in law. As a matter of fact, the Tribunal has entered a finding that the assessee was operating the facility and this finding has been confirmed earlier in this judgment. That the assessee was maintaining the facility is not in dispute. The facility was commenced after 1-4- 1995. Therefore, the requirement was met in fact. Moreover, as a matter of law, what the condition essentially means is that the infrastructure facility should have been operational after 1-4-1995. After section 80-IA was amended by the Finance Act of 2001, the section applies to an enterprise carrying on the business of (i) developing; or (ii) operating and maintaining; or (iii) developing, operating and maintaining any infrastructure facility which fulfils certain conditions. Those conditions are : (i) Ownership of the enterprise by a Company registered in India or by a consortium; (ii) An agreement with the Central or State Government, local authority or statutory body; and (iii) The start of operation and maintenance of the infrastructure facility on or after 1- 4- 1995. The requirement that the operation and maintenance of the infrastructure facility should commence after 1-4-1995 has to be 103 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited harmoniously construed with the main provision under which a deduction is available to an assessee who develops; or operates and maintains; or develops, operates and maintains an infrastructure facility. Unless both the provisions are harmoniously construed, the object and intent underlying the amendment of the provision by the Finance Act of 2001 would be defeated. A harmonious reading of the provision in its entirety would lead to the conclusion that the deduction is available to an enterprise which (i) develops; or (ii) operates and maintains; or (iii) develops, maintains and operates that infrastructure facility. However, the commencement of the operation and maintenance of the infrastructure facility should be after 1-4-1995. In the present case, the assessee clearly fulfilled this condition.” C.2 He also referred to the decisions of Hon’ble MumbaiTribunal in case of B.T.Patil& Sons Belgaum Construction Pvt.Ltd., reported in 35 SOT 171. It is submitted this Tribunal referred to the decision of Hon’ble Bombay High Court in case of CIT vs ABG heavy industries Ltd reported in(2010) 189 Taxmann 54, laid down following parameters for contractors to be eligible for deduction u/s. 80 IA (4): a) Undertakes financial risk by making investment b) shouldering technical risk c) liable for liquidated damages d) employment of technical and administrative qualified team We have perused the submissions of both sides. C.3 On perusal of various terms of agreements, it is noted that the obligations of the assessee involvedevelopment of theinfrastructure facility in certain agreements and in a few assessee undertakes operationing and maintaining the infrastructure facility. Section 80-IA of the Act contemplates deduction where an enterprise carries on with the business of “developing” or “operating and maintaining” or “developing, operating and maintaining” infrastructure facility. 104 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited C.3.1 In the present facts of the case the infrastructure facilities developed by the assessee is transferred to the Government and always belonged to the Government being Central or State or the local authorities. All the agreements in the present case is based on build and transfer and payment of the cost has to be by the respective authority under the State government or central government or local authority in a periodically or the payment is made as the development work is in progress and in some cases when the work under the agreement is completed. We are therefore of the opinion that the enterprise of the assessee satisfied the required criteria’s under sub clause (b) and (c) of subsection (i) under section 80 IA(4) We therefore do not find any force in the submissions advanced by the revenue in para 19.3 and its subparagraphs, and the same is rejected. 30. II.Analysis of the agreements entered by the assessee/enterprise for providing infrastructure facilities: D. It is noted that the assessee claimed deduction of ₹29,42,48,518/-in respect of infrastructure facilities developed during the year. The assessee submitted all agreements entered by it to providing the infrastructure facilities, with the Central Government, State Government or local authority or any other statutory body constituted under the State Government. D.1 It is submitted that, in respect of all contracts, the Government Agencies awarded the works in packages to assessee, wherein the assessee undertook entrepreneurial risk & responsibilities and financial risk, right from design to 105 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited completion of defect liability period in respect of developed infrastructure facility. The following chart is furnished by the assessee giving details of the authority with whom the agreement was entered into by the assessee: Sr No Name of the Project Infrastructure facility Deduction claimed u/s 80IA Authority with whom agreement entered 1 Allahabad Bridge over Ganga Bridge 1,60,59,185 NHAI - Central Government 2 Approach road from Dwarka to NH8 Road 2,87,75,070 Delhi Development Authority - Statutory Body 3 BWSSB-UFW Water Supply 2,99,89,005* Bangalore Water Supply & Sewerage Board - Government of Karnataka 4 Upgradation of road from Hiriyur to Bellary Road 5,95,07,023* Government of Karnataka 5 V-B NH-2 GTRIP/7 – Jharkhand Road 43,89,639 NHAI - Central Government 6 RWSP Nalgonda Phase III, Package IV Water Supply 39,77,003 Government of Andra Pradesh 7 Satara Kolhapur Road Package IV Road 9,67,34,955 Maharashtra State Road Development Corporation Ltd - Government of Maharashtra 8 Adoni WSIS - HUDCO Phase Water Supply & Irrigation Project 40,40,260 Government of Andra 106 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited III Pradesh 9 WSS to Gulbarga City Gulbarga Package II Water Supply 8,66,805** Karnataka Urban Water Supply and Drainage Board - Government of Karnataka 10 Tirupur Water Supply Water Supply & Sewerage Facility 4,75,83,374* New Tirupur Area Development Corporation Ltd Statutory Body 11 Rehabilitation of WSS for Puttur Town Water Supply & Sewerage Facility 15,61,213 Mangalore City Corporation - Government of Karnataka 12 Clear Water Transmission for Mangalore - Reach I Water Supply 7,65,056* Mangalore City Corporation - Government of Karnataka Total 29,42,48,588 The Ld.DR from para 21 onwardsraised various objections in respect of the above agreements and the infrastructure facility projects undertaken by the assessee. 30.1. Tirpur Water Supply Project: 30.1.1 Revenue contends that, in the said agreement, the project was executedbetween IL& FS through its special purpose vehicle (SPV) along with new TIRPUR Area Development Corporation Ltd (NTADCL). She submitted that this project is not eligible for exemption as it is not entered into with government or any statutory body. 107 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30.1.2 In reply, the assessee submitted that NTADCL is the special purpose vehicle set up by theGovernment of Tamil Nadu,IL &FS and Tirpur exporters Association,toprovidewatersupply and sewage, and sanitation facilities exclusively toTirpur municipality, on the waysaid village areas in Erode and the Tirpur District and Industries in the service area. 30.1.3 It is submitted that under concession agreement dated 11/02/2000, entered into between the assesse, government of Tamil Nadu and Tirpur municipality, the services undertaken by NTADCL assumes responsibilities under article 243G and 243W, under the 6th schedule of the Constitution of India. It is submitted that NTADCL is thus an instrument or agency of the state and is a statutory body, as per Article 12 of the Constitution of India. 30.1.4 On the other hand, the Ld. Sr.Councilsubmitted that, functions and powers of NTADCL indicates that it is acting as an extended arm of the State Government in establishing water supply system in the district of the Tirpur and is functioning as agency of the State government. He placed reliance on the decision of Hon’ble Madras High Court in case of NTADCL vs State of Tamil Nadu and Ors., reported in (2010) 04 MAD CK 0145and submitted that in the context of RTI act 2005, NTADCL was hailed as a public authority within the meaning of section 2 (h) (d) of the said act, in respect of the public funding and Government control. 30.1.5 It is submitted that, Mahindra Reality and Infrastructure Developers Ltd., jointly and severally with assessee 108 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited entered into agreement with NTADCL for design, engineering, procurement, construction, commissioning, testing of water supply facility and sewerage facility in the district of Tirpur at an agreed cost. The Ld.Sr Council thus emphasised that the assessee is eligible for deduction under section 80 IA (4) of the act in respect of the infrastructure facility developed under this agreement. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunalin respect of this project. 30.1.6 A concession agreement is a contract where a Government authority grants to a private entity exclusive rights to carry out necessary works in respect of specific business or facility within a defined area for a set period. This agreement allows the private entity to build/ or operate/ and or maintain the facility, in exchange for fees or revenues generated from the business. 30.1.7 The Ld.Sr.Council relied on the decision of Hon’ble Gujarat High Court in case of CIT vs Ranjit Projects Pvt.Ltd., reported in (2018) 94 taxman.com 320, wherein, identical argument of the revenue was considered and it was held that, Gujarat State Road Development Corporation, being an agent of the State Government, controlled by the State Government of Gujrat, and therefore the claim of deduction under section 80 IA could not be rejected on such ground. The assessee has also filed a chart showing various clauses under the agreement describing the responsibilities of the assessee under the contract. Wherein the respective work was to be completed within a period of 36 109 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited months. On perusal of clauses under this agreement the assessee satisfies necessary criterias necessary to claim deduction u/s.80 IA(4) as observed by Hon’ble Bombay High Court in case of ABG Heavy Industries Ltd. (supra). In the present facts, there is no doubt that NTADCL represents the Government of Tamil Nadu.Respectfully following the decision of Hon’ble Gujarat High Court (supra)the objection raised by the Ld.DR does not have any legs to stand.We thus hold that, the assessee satisfies the requirement under section 80 IA (4) (i) (b) of the Act. 30.2. Approach road from Dwaraka to NH-8 30.2.1 The revenue submits that the contract pertains to construction of a grade separator which is a form of insertion where conflicting movements are segregated. Flyovers, railway over bridges, under passes and subways all qualify as grade separators. It is submitted that section 80 IA (4) does not recognise grade separators as infrastructure facilities and consequently the project do not satisfy the statutory requirement of an eligible infrastructure facility. 30.2.2 In response the assessee submitted that a grade separator is an elevated bridge in the form of a road that allows the movement of traffic smoothly. It is submitted that, grade separators are crucial parts of National Highways, State Highways, where traffic management is essential to ensure safety, speed, efficiency, and eliminate congestion. The Ld.Sr.Counsel placed reliance on the manual of grade separators and elevated structures published by the Indian Road Congress, which states fly over as one of the great separators. He also relied 110 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited on the CBDT notification No.11269 dated 14/03/2000, wherein the board clubbed flyovers with roads, and notified flyovers as a similar nature of infrastructure facility. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunal in respect of this project. 30.2.3. We have perused the agreement and noted that, the said project was awarded on turnkey basis by Delhi Development Authority (DDA) for design and construction of grade separator from Dwarka Dwar in sector 1 and 7 to ROB on Rewari Railway Line including ramps at bothends and footbridges, rectification etc. The assessee has filed photographs of the grade separator constructed on the coastal road at Mumbai in order to show that, the one constructed under the agreement is not just a flyover but a complicated piece of structure to ease the traffic and to accommodate speedy movement of maximum vehicles. 30.2.4 We have perused the CBDT notification No.11269 (supra) wherein the CBDTcategorised similar nature of infrastructure facility to be eligible for the purposes of exemption under section 80 IA that includes, intra-urban/semi-urban roads like ring roads/and Urban bypasses/flyovers. The assessee filed a chart showing various clauses under the agreement describing the responsibilities of the assessee under the contract wherein the work awarded is to be completed within a period of 30 months. 30.2.5 It is noted from the chart that assessee is cast with defect liability if any and has to make good the defect appearing in the work done within 12 months from the date of completion. 111 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited It is also noted that the assessee also indemnified the Government against any failure in structure of the bearings expansion joints or reinforced earthworks, for a period of 10 years, and undertook to rectify the same at its own cost. 30.2.6 It is further noted that,the assessee is liable to pay a penalty for delayed the project completion which can lead to revenue loss. The clauses under the agreement is clear that the entire risk of the project lies on the assessee. 30.2.7.Based on various clause and obligations of the assessee under the agreement and having regard to the decision relied by the assessee in case of ABG Heavy industries Ltd. (supra)hereinabove, we do not hesitate to hold that assessee fulfils conditions stipulated under section 80 IA (4) in respect of the agreement considered herein. We thus reject the objection raised by the revenue. 3-5Upgradation of road from Hiriyur to Bellary, NH-2 GTRIPI 7(Jharkhand Road), & Satara- Kolhapur Road Package IV 30.3.1 In respect of all the 3 agreements considered herein, revenue contends that, preliminary examination of the agreement suggests that, the assessee carried out repairs and under took regular upkeep. She placed reliance on Circular 4/2010 dated 18/05/2010, wherein, re-laying or repairing of roads does not qualify as a new infrastructure facility under section 80 IA (4). She submitted that repairs to the existing road cannot qualify as developing an infrastructure facility for the purposes of claiming deduction and therefore assessee does not fulfil the requirements in respect of this agreement. 112 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30.3.2 In response, the assessee submitted the scope of work in these road projects that include widening wherein additional lanes along with reconstruction of existing lanes was carried out. It is submitted that, such upgradation, improvement and rehabilitation involving reconstruction of existing road and increasing the strength and improved dimensions of the road, cater to large volumes of traffic and increase the life of the infrastructure facility. It is submitted that the work carried out by the assessee in these three projects are not in the nature of simply relaying or repairs or up keeping. The Ld.Sr.Counsel placed reliance on: a) CBDT Circular No.4/2010 dated 18/05/2010, b) Decision of Hon’ble Gujarat High Court in case of PCI to vs Montecarlo Constructions Ltd reported in (2024) 161 taxman.com 222, c) Decision of Hon’ble Hyderabad Tribunal in case of GVPR Engineers Ltd versus ACIT reported in (2012) 21 taxman.com 25, d) Decision of Hon’ble Kolkotta Tribunal in case of Ho Hump Simplex JV reported in (2018) 92 taxman.com 106 and decision of coordinate of this Tribunal in case of DCIT vs. Patil Construction and Infrastructure Ltd in ITA No.4940/MU M/2024. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunal in respect of this project. 30.4. We note that in CBDCircular No.4/2010 (supra) relied by the assessee clarifies that widening of an existing road is development of infrastructure facility. In the present facts, the assessee constructed additional lanes as a part of five-year project constitutingit to be development of a new infrastructure facility for deduction under section 80 IA of the act. Further, the 113 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited circular only restricts considering of simple re-laying of an existing facility to be classified as a new infrastructure facility. 30.4.1 We note that, in all the three projects, the assessee is carrying out road widening, upgradation, improvement, and rehabilitation. The assessee placed reliance on the charts in respect of each of these projects, specifying the particulars of its activities carried out therein. 30.5. It is noted that, investment of the funds and financial risk is born by the assessee and responsibility of procuring materials for the project is also to be carried out by the assessee.Further it is noted that, the assessee shall throughout the execution and completion of the work, will have full regard for the safety of all persons entitled to be upon the site and keep the site and the work in an orderly manner to avoid any danger. It is also submitted that, the assessee is responsible for the insurance of the work, plant and machinery, damages to persons and property against all laws or damage from the start of the work,up to the issue of the taking-over certificate. 30.5.1 It is also noted that, the assessee provided performance security being 10% of the contract price, and additional security towards unbalanced bids.It is noted that, the defect liability. Period under these agreements, is up to 365 days from the date of completion of the work being certified. It is also noted that, the assessee will be penalized for delayed project completion under the agreements, which can cause financial risk and loss of revenue to the assessee. 114 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Identical were the obligations of the assessee in the decisions relied by the Ld.Sr.Counsel referred to herein above and the assesse’s were granted deduction under section 80 IA(4). 30.5.2.Based on the various clauses under the three agreements and the obligations / responsibilities of the assessee, having regard to the ratios in the decisions relied by the assessee hereinabove, we do not hesitate to hold that assessee has fulfilled all conditions stipulated under section 80 IA (4) in respect of all 3 agreements considered herein. We thus reject the objection raised by the Ld.DR in respect of all three road Projects. 30.6. Adoni WSIS HUDCO Phase III: 30.6.1 The revenue contends that this contract pertains to the construction of a summer storage tank for Adoni city. The Ld. DR submitted that the act recognises water supply projects and water treatment systems as eligible infrastructure facilities, but not the construction ofa storage tank. 30.6.2 On the contrary, assessee submitted that, it had entered into agreement with Public Health and Municipal Engineering Department, Government of Andhra Pradesh, vide Letter of Acceptance (hereinafter referred to as LOA) number 52/2004-05 dated 23/09/2004, for development of 3110 ML capacity of summer storage tank at Basapuram Adoni City, Kurnool district in state of Andhra Pradesh. 30.6.3 It is submitted that, this water supply project aims to provide water by the government to the community. It is submitted that, the purpose of developing a storage tank isto provide water to the citizens of Adoni City for 6 months during 115 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited the channel closure period. It is submitted that partial development of the contract was awarded by the Government to agencies in packages, and thus to the extent of work carried out by the enterprise of the assessee, the assessee is eligible to claim deduction under section 80 IA (4) of the Act. 30.6.4 The Ld.Sr.Counsel placed reliance on the decision of Hon’ble Hyderabad Tribunal in case of NCC HES JV versus ACI in ITA No.682/Hyd/2024,wherein, similar objection raised by the revenue with respect to, for construction of “Venkatadri reservoir bund”. Hon’ble Tribunal held that, construction of bund was an infrastructure facility and allowed the deduction to the assessee. 30.6.5 He also placed reliance on the decision of Hon’ble Bombay High Court in case of CIT versus ABG Heavy Industries Ltd (supra), wherein, it was held that, the assessee do not have to develop the entire project in order to qualify for deduction under section 80 IA (4) of the act and the Parliament did not legislate any condition impossible of compliance. We have perused the LOA and objections of the Ld.DR, having regard to the climatic conditions that causes water scarcity and responsibilities/ obligations to be carried out/fulfilled by the assessee under the LOA. 30.6.6 On perusal of the LOA it is noted that, the construction of summer water storage tank is not mere construction of a tank as it is involves carrying out activities like, jungle clearance of 1,87,000 m² till the final development of the reservoir from where the water was to be made available to the citizens of the city. It is submitted that, main source of water for the city is Tungabhadra project, a low-level canal, that passes the 116 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited city at about 8 km from the town, and runs for 6 months in a year. It is submitted that, during summer season, for 6 months storage tank at Ramjala and another at SS Tank at Basapuram Adoni City ,are being utilised, thereby causing scarcity for the remaining 6 months. 30.6.7 The LOA and experience certificate issued by the government are placed at pages 1111 to 1114, of the additional contract documents paper book. It is noted that, the assessee is required to carry out, earth excavation work, conduct water permeability tests, supply materials, and deploy the required key and critical types of equipment. The Assessee is also required to establish a quality control lab at the site before starting the work. The LOA mentions that the payment for the work be released, based on the availability of funds with the Department.This means that the assesseehas to deploy its funds for working capital requirements. The assesseeplaced reliance on Form 10 CCB placed at page 194 of the paper book, wherein, funds deployed by the assesseeare approximately Rs.9.67 crores, as on the end of the financial year, relevant to the assessment year under consideration, towards deployment of the project. 30.6.8 Based on the above clauses in LOA and various responsibilities cast on the assessee therein, it cannot be said that, the assessee did not undertake any financial risk entrepreneurin the given facts and circumstances from beginning till the end the thus assessee cannot be considered to be a simple works contractor in respect of this project as it fulfils all relevant requirement under section 80IA(4) of the act as noted by Hon’ble Bombay High Court in case of ABG Heavy Industries Ltd. (supra). 117 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30.7. Rehabilitation of WSS for Puttur Town: 30.7.1 The Ld.DR contends that no relevant documents were submitted in support of the claim in respect of this project. She submitted that, it is impossible to ascertain whether the project meets statutory requirements under the section, and the burden of proof lies with the assessee to establish its eligibility, and any failure to produce necessary documents renders the claim under this agreement untenable. 30.7.2 On the contrary, Ld. Sr.Counsel submitted that assessee entered into agreement, with the Mangalore Municipal Corporation (hereinafter referred to as MCC)’s vide agreement dated 27/03/2003. He stated that, along with the return of income,it is submitted that the assessee duly filed an audit report issued by the auditors in respect of the project. Further, additionally, as per the directions of this Tribunal, assessee furnished relevant documents such as agreement copy, tender document containing detailed terms and conditions of the contract, etc., to the Ld.DR during the course of hearing. He submitted that the Government agency (MCC) also awarded the contract related to clear water transmission for Bangalore (Reach 1). 30.7.3 The Ld.Sr.Counsel submitted that, MCC had to rehabilitate the existing components of water supply system and sewage treatment plants of Bangalore including all civil works, constructing, rectify, direction, testing, commissioning, trial run and maintaining for 12 months, with performance guarantee.It was submitted that, the intention to rehabilitate the existing water retaining structure was to restore and increase the 118 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited structural strength and to improve the hydraulic performance and capacity of the units. He relied on page 1966 of the additional contract documents paper book. 30.7.4 He also referred to pages 1954 to 1962 of the additional contract documents paper book wherein, the scope of the contract has been categorically mentioned to me as under: A. development of water supply system: i) head works at Thumbe ii) water treatment plant at Ramalkatte, Panambur, Kulur and required transmission pipelines and service reservoirs to cater to the plant. B. Development of sewage treatment plants at Jeepinamogaru, Kvoor. 30.7.5 He submitted that the above works undertaken by the assessee is not merely of the nature of repair and maintenance, as it is rehabilitating the existing supply system and treatment plants to increase the strength and improve performance of the units. 30.8. Clear Water Transmission for Mangalore (Reach 1) 30.8.1 The revenue contends that activities undertaken by the assessee under this agreement do not involve “development” of a new infrastructure facility but is involved in rehabilitation and upgrading of existing infrastructure. The Ld.AR submitted that this project does not qualify for the deduction. 30.8.2 On the contrary, the assessee submitted that it entered into an agreement with Mangalore City Corporation on 18/08/2003 for the development of a water supply project in 119 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Mangalore city for “clear water transmission. It is submitted that due to the passage of time, the assessee could not trace the stamped agreement and tender documents of the contract. However theassessee submitted LOA and completion certificate issued by Mangalore Municipal Corporation,placed at page 2422 of the additional paper book. 30.8.3 Ld. Sr.Counsel submitted that, the LOA requires assessee to furnish performance security of 10% of the contract and to furnish additional performance security is of 0.05 crores within 28 days of the LOA. It is further submitted that the LOA also requires assessee to submit proof of insurance of the project. 30.8.4 The Ld. Sr.Counsel drew our attention to page number 304 of paper book wherein, the audited balance sheet along with Form 10CCB reveals that, the assessee utilised its finances for the purpose of development of the facility. We have perused the submissions of both sides based on the agreement placed in the additional paper book along with the chart(in case of Puttur Project) filed by the assessee listing out various obligations and responsibilities of the assessee under this agreement. 30.8.5 It is noted that assessee is required to operate and maintain the project post commissioning for 3 months and it is also required to supervise operation and maintenance for 12 months during the defect liability if any. The assessee is fully responsible to ensure that the whole of the works including each individual component to be designed and constructed in the manner so that the plant as a whole operates as a fully integrated system and is capable of achieving the required output in an 120 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited efficient and economic manner. Further, it is noted that the assessee is responsible for procuring and delivery of major materials, plants and quarry materials for incorporation in the work. 30.8.6 We also note that, The assessee is liable for any defects noticed within a period of 365 days from the date of completion as certified by the completion certificate. It is further noted that, there is penalty for delayed the project completion levied upon assessee at 0.1% of the contract price per day for each delay subject to a maximum of 10%. Assessee is also to ensure the project site from the beginning of the project till the end of the defect liability. 30.8.7 We refer to the decision of Hon’ble Kolkotta Tribunal in case of ACIT vs Simplex Infrastructure Ltd in ITA No.1572- 1573/Kol/2017,vide order dated 1/03/2019, wherein based on the various obligations carried out by the assessee, Hon’ble Tribunal noted that in a contract if the responsibilities are fully assigned to the assessee for execution on completion of work, and the assessee demonstrates various risks undertaken by it, in such circumstances the assessee cannot be denied the benefits under section 80IA(4) of the act who is engaged in developing the infrastructure facility. In the present facts, the assessee is developing, operating & maintaining the project for the stipulated time. 30.8.8 We therefore hold that the assessee has developed the infrastructure facility under both contracts considered herein and the projects satisfy the required criteria is as observed by the 121 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited decisions referred to herein above. We therefore hold that these projects qualify for deduction under section 80 IA (4) of the act. 30.9. RWSP Nalgonda Phase III, Package IV 30.9.1 The revenue contends that only tender document were submitted and therefore, it is not possible to ascertain whether the work was even allotted to the assessee. The Ld.DR thus submitted that,the assessee did not comply with the requirement of entering into an agreement with the government authority of statutory body. She submitted that in the absence of a valid agreement, the project fails to meet necessary conditions under section 80 IA (4) (b) of the act. 30.9.2 On the contrary Ld.Sr.Counsel submitted that, due to passage of time, assessee is not able to trace the stamped agreement copy. He however submitted that, the tender document contains the detailed terms and conditions of the contract. He also placedreliance on the completion certificate dated 01/07/2005 issued by the Panchayat Raj Department, government of Andhra Pradesh,wherein there is clear mention of the project description, reference details of the agreement and activities undertaken by the assessee in the development of the water supply project. 30.9.3 The Ld.Sr.counsel submitted that, assessee entered into agreement with the Panchayat Raj Department, Government of Andhra Pradesh on 06/01/2003, for construction of Sump at head works, pumping mean from head works to GLBR on Annaeshwaraswamy Gutta, transmission lines between GLBR Goplaipallyagutta to Sump at Sunkenapally, OHBRAs and Sump 122 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited etc. for Nalgonda rural drinking water supply project, phase 3, package IV in Nalgonda district for a total value of ₹ 5.5 to cross. 30.9.4 He submitted that, relevant clauses describing the nature of activity carried on by the assessee under this project is at pages 2426 to 2458 of the additional paper book. Referring to various clauses of the tender documents,he submitted that the assesse undertook development of a new infrastructure facilityvide this agreement and is therefore eligible for exemption under section 80 IA (4) of the act. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunalin respect of this project. 30.9.5 It is noted that the scope of work and responsibilitiesof the assessee for this project is in development, operating and maintenance of the infrastructure. The assessee is required to prepare the designs for execution of the project, which is subject to approval of the engineer of the Panchayat Raj Department, before it is implemented. It is further noted that, the responsibility to procure materials for the project is on the assessee, and the assessee shall also furnish test certificates from the manufacturer or supplier of the materials along with each batch of material. Clause 56.1 of the tender document shows that the assessee isheld liable for any defect in 24 months from the date of commissioning and is also charged with penalty for delay in project completion. Further clause 8 reveals that the assessee is liable to make compensation to his own staff and 123 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited labour arrangements, local or other and for their payment, housing feeding and transport. 30.9.6 It is thus clear from the above that the assessee is undertaking investment risk, entrepreneurial risk and also takes the risk of additional cost and loss of revenue in case of any defect. Thus, in our view, the assessee satisfies the requirement under section 80IA(4)(b) of the act. 30.10. WSS to Gulbarga Package II 30.10.1 The revenue contends that, only document submitted by the assessee is the tender document, letter of acceptance(LOA) and completion certificate. It is submitted that, these documents cannot be equated to a valid agreement as mandated by rule 18BBB and therefore assessee having not met with the conditions prescribed under section 80 IA (4), this project cannot be held to be eligible for exemption. 30.10.2 On the contrary the Ld.Sr.Counsel submitted that, due to the passage of time,the assessee is un able to trace the stamped agreement of the contract. However from the tender document all the details about the works carried out by the assessee is a ascertainable.He submitted that, the letter of acceptance and the completion certificate issued by Karnataka Urban Water Supply and drainage Board describes the project description, reference details of the letter of acceptance and agreement at page 2865 of the additional document paper book. From the completion certificate it is clear that he had entered into agreement with the government and executed the development of water supply project. 124 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited We have perused the submissions advanced by both sides in the light of the document that has been filed in respect of this project in the additional paper book. 30.10.3 It is noted from the completion certificate that the assessee entered into an agreement with Karnataka Urban Water Supply and Drainage Board on 31/03/2001 for the construction of Balancing reservoir, head tanks, Sump booster pumping stations and providing free domains and distribution networks in Gulbarga city at a cost of ₹ 18.70 cross. 30.10.4 It is an admitted fact that the LOA is issued to the successful bidder ata stage before the execution of the agreement and is executed between the successful bidder and the government agency. At page 2863 of the additional paper book, the assessee's bid submitted on 15/09/2001 was accepted by the Karnataka Urban Water Supply and drainage Board. The LOA also mentions about entering into formal agreement. It is also noted that the completion certificate issued by the government agency indicates the agreement concluded vide number KWB/EEC-1/remodelling/2001/16 dated 31/10/2001. 30.10.4 Under such circumstances, we do not find any reason to disbelieve that the project was undertaken by the assessee under an agreement with the government agency thereby satisfying the requirement under section 80IA (4) (b) of the act. 30.10.5 From the LOA and certificate of completion placed at page 2863 and 2865. it is noted that, the works carried out under this project was divided into package I and II for speedy implementation of the scheme. It is noted that assessee was carrying out the work under package II includes, 125 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited • construction of 66 lakh L mother tank and ground-level service reservoir in treatment plant yard near Shorgumbaz, • construction of 14 lakh L capacity balancing reservoir at old filter bed prices, • supply, laying, testing, commissioning and maintenance of pipeline for 12 months from the date of commissioning, • construction of 4 booster pumping station. 30.10.6.It is also submitted that the works under package I was also awarded to asesseevide LOA dated 05/10/2001. It is further noted that assessee was required to take due care and allegiance, to make design, execute and complete the work and remedy any defects therein. Assessee was also to be held for defect liability within 365 days from the date of completion, in case of any defect, and is was also to pay penalty for delayed project completion. 30.10.7. It is noted that, the assessee also gave performance guarantee or 6% of the contract value in the form of a bank guarantee within 28 days from receipt of the letter of acceptance. From the above it is abundantly clear that assessee was carrying out development of new infrastructure facility under this project and thus is eligible to claim exemption under section 80 IA (4) of the act. 30.11. Bangalore water supply and sewerage project: 30.11.1 The revenue contends that, the documents in respect of this project reveals that the assessee do not meet the eligibility conditions prescribed under section 80 IA(4)(i) of the act. The Ld.DR submitted that, the contractual framework, execution methodology and financial structure of the project clearly 126 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited indicates that the assessee acted as a mere contractor engaged in the works contract, rather than a developer responsible for the ownership, investment, operation and maintenance of the infrastructure facility. 30.11.2 She submitted that presence of foreign entity in the consortium and the projects' external funding through the Japan Bank for International Cooperation, reinforceassesse’s ineligibility for deduction under section 80 IA(4)(i) of the Act. 30.11.3 The Ld. DR submitted that the scope of work of the assessee under this project involves activities such as leak detection, leak repairs, etc., which are not in the nature of development activity. She submitted that the complete scope of work to be carried on by the assessee. 30.11.4 In reply, the Ld.Sr.Counsel submitted that, M/s.Thame Water Pte. Ltd., was registered with the Registrar of Companies (ROC) with foreign company registration number F 02398, that is evident from the Ministry of Corporate Affairs, foreign company database. He placed on record the extract of the company registration certificate with the ROC Delhi in support of the argument. He submitted that Thames Water Asia PTE Ltd., and the assessee participated in the tender floated by Bangalore Water Supply and Sewerage Board (hereinafter referred to as BWSSB) and formaed of an unregistered consortium wherein both partners were jointly and severally involved for the execution of the project. He also submitted that Thames Water Asia PTE Ltd. was the lead partner in the consortium as it had prior experience in UFW reduction and control. 127 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30.11.5. The Ld. Sr.Counselsubmitted that, the total scope of work under the project executed by the consortium was survey, GIS updation, network modelling, design and establishment of DMA’s, establishing baseline leakage levels leakage detection using acoustic equipment, attending leaks, leakage reduction to target levels and rehabilitation strategy and rehabilitation work during Phase I. Under Phase II, monitoring of UFW and leakage levels and maintaining within the target levels, and training the client staff and workmen regarding the operation and maintenance of the system. 30.11.6 He submitted that, the UFW reduction and control portion (Bill item I& II) was executed by Thames Water Asia PTE Ltd., and development of the water distribution system (bill item III &IV) was executed by the assessee. 30.11.7 In respect of the funding from Japan Bank for International Cooperation, the Ld.Sr.Counselsubmitted that, Government of India (hereinafter referred to as GOI) received loan of 28,452 million Japanese yen from said bank towards the cost of the BWSSB Project. On receipt of the funding from the GOI, a tender was floated by BWSSB. The Ld.Sr.Counsel submitted that, in any event,funds secured from an international bank by GOI for the project will not have any relevance to analyse the claim of the assessee under section 80 IA of the act for the simple reason that the assessee did not have any direct arrangement with the said bank. He submitted that the payments received from the international bank will be made only at the request of BWSSB upon approval by the bank. 128 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 30.11.8 The Ld. Sr.Counselplaced reliance on decisions of Hon’ble Mumbai Tribunal in cases of Patel Engineering Ltd vs DCIT reported in (2004) 4 SOT 1 and ACIT vs Bharat Udyog Ltd reported in (2008) 24 SOT 412 to submit that, a person who enters into agreement with the government would be a contractor but cannot derogate it from being a developer. 30.11.9 The Ld. Sr.Counselsubmitted that, the assessee had to arrange for the funding of the working capital requirement of the project. Relying on the audited balance sheet at page 194 of the paper book, he submitted that the assessee had deployed funds of approximatelyRs 17.12 crores as on 31/03/2005 towards the development of the project. He submitted that the payments are received from the government based on the completion of the milestones, which shows the financial risk undertaken by the assessee towards the said project. In support he placed reliance on the decision of Hon’ble Kolkotta Tribunal in case of ACIT vs Ho Hump Simplex JV (supra)GVPREngineers Ltd vs ACIT (supra). 30.11.10 The Ld. Sr.Counsel submitted that, the assessee qualifies to claim a deduction under this project as it was involved in development of new infrastructure facility. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunal in respect of this project. 30.11.11 The assessee summarised a chart with relevant clauses of the agreement in respect of this project which is annexed as Annexure A to this order. From the chart, it is noted that, the entire work under the project of operating and maintenance was to be carried out by the consortium that 129 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited includes the assessee and Thames Water Asia PTE Ltd. It is noted that all the necessary responsibilities/obligations to construe the assessee to be a developer are cast upon this consortium jointly and severally. 30.11.12.No doubt that the assessee carried out the work with the support and help of its partner in the consortium. Further, it cannot be overlooked that, GOI received huge funds from the international bank reveals that the project is not a mere repair of the water supply pipeline or Sewerage lines running through the city of Bangalore. 30.11.13. It is further noted that the consortium was not involved in developing the new infrastructure facility but was involved in operating and maintaining of the intra-infrastructure facility. The assessment year under consideration being 2005-06, as per the post amended provision by Finance act 2001, the assessee would be entitled for claim under section 80 IA (4) (i), even if it carry out functions of operating and maintaining of the infrastructure facility that fulfils the relevant conditions under subclass (a) and (b) of the act. At the cost of repetition, we do not wish to reproduce the relevant portion as same as been reproduced in the forgoing paragraphs of this order in respect of the same. 30.11.14. Admittedly in the present facts of the case, the consortium is involved in operating and maintaining of the infrastructure facility in respect of water supply and sewerage pipelines laid down in the city of Bangalore which was completed by the consortium in various stages. We therefore, cannot agree with the Ld.DR that the assessee is not carrying out any 130 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited development activities under this project anddo not qualify to claimexemption under section 80 IA (4) (i) of the act 30.11.15. The objection of the Ld.DR in respect of Foreign bank having funded the project is of no relevance as the assessee is not the one received the funding. It is the GOI who received the funds from the foreign bank for this project, which was released to the consortium members through BWSSB upon completion of milestones as required under the contract by the assessee. It is noted that Thames water Asia Pte Ltd also raised separate invoices against in respect of the work carried out by it. However, the claim of assessee under this project shall be restricted to the money received by it, which is an admitted fact as per the submissions of the assessee. We are therefore satisfied that the assessee was carrying out development of new infrastructure facility under this project and thus is eligible to claim exemption under section 80 IA (4) of the act. 30.11.16. However, In the interest of justice, we direct the assessee to furnish the bills in respect of this project claimed by it from BWSSB to determine the exact claim of deduction under section 80 IA (4). 30.12. Allahabad bridge over Ganga. 30.12.1 The revenue submitted that, assessee’s role under this project was strictly limited to that of a contractor executing works contract, rather than a developer, engaged in infrastructure facility, operation or maintenance. It is submitted that, the National Highways Authority of India (hereinafter referred to as 131 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited NHAI) retained full ownership and control of the project, while the assessee was bound by the explicit instructions, milestones based payments and supervising of employer and its engineers. The Ld. DR submitted that the contract explicitly refers assesse asa contractor rather than developer and the payments were tied to the completion of predefined tasks rather than revenue generated from the project. 30.12.2 She submitted that, the contract contains strict provisions restricting assessee’s independence, requiring all designs, modifications and subcontracting decisions to be approved by the engineer, further reinforcing that assessee did not operate as a developer. 30.12.3 The Ld. DR emphasised that, since ownership of the bridge remained with NHAI, the assessee did not bear any financial or operational risk, and there was no contractual obligation on the assessee to operate or maintain the infrastructure facility post completion. She thus submitted that the assessee fails to meet the statutory conditions prescribed under section 80 IA(4)(i) of the act. 30.12.4 On the contrary, the Ld.Sr.Counsel submitted that, Allahabad bypass project is a construction of bridge across the River Ganga and forms part of National Highway 2 between Delhi and Calcutta. He submitted that over aperiod of time, due to increase in traffic on National Highway 2 because of merging of 4 major roads being an National Highway 27 connecting Rewa, State Highway 7 connecting Jaunpur, state Highway 9 connecting Lucknow and state Highway 47 connecting Mirzapur 132 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited into the city of Allahabad, a bypass road had to be created across the River Ganga. 30.12.5 He submitted that,the assessee was awarded the 1st package that involved construction of 1 km bridge across the River Ganga and the agreement was executed in August 2003. Subsequently in December 2003 two more major construction work was awarded to the assessee for construction of the carriage ABP/02 for 39 kilometres and ABP/03 for 44.7 km. Thus the scope of the work under this project involved construction of the bridge across the Ganga from 163.280 km to 164.300 km. Which was to be completed within 30 months from the date of commencement. 30.12.6. The Ld.Sr.Counsel referred to page 1175 of the additional paper book wherein detailed scope of work to be completed by the assessee under the agreement has been given and the same has been reproduced as under: “Scope of Works The work comprises the construction of a four-lane concrete bridge, the work shall inter alia include the following as specified or as directed: • Site clearance and dismantling obstructions, etc., before commencement of the works. • True and proper setting and layout of the works, providing location marks, benchmarks, preparation of report and plans. • Providing well foundation of bridge piers, abutments. • Providing pier sub-structure. • Providing abutments and retaining walls. • Providing prestressed concrete superstructure (Precast segmental). • Providing footways, railings, crash barriers, drainage spouts. • Providing modular strip seal expansion joints. • Providing bearings. • Providing Shock Transmission Units (STUs). • Providing bituminous wearing coat. • Providing transverse guide stoppers. 133 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited • Providing temporary longitudinal fixity arrangements, if required. • Providing road markings and road signs. • Providing backfill and filter behind abutments. • Providing instrumentation for bridge. • Providing illumination and fixtures for electrification. • Any other item of the work as may be required to be carried out for the completion of the bridge, including all incidental works in all respects in accordance with the provisions of the contract and/or to ensure the structural stability and safety of the bridge.\"” 30.12.7. From the above he submitted that the work comprises of development of 4 lane concrete bridge over River Ganga and other ancillary activities which are essential in development of the bridge over River Ganga. The Ld.Sr.Counsel submitted that the work executive by the assessee under this agreement was not simply a civil contract work, but it involved development of works right from the site clearance, design stage to fully develop infrastructure facility. He thus submitted that assessee cannot be denied the claim under this project. We have perused the submissions advanced by both sides in the light of the documents filed in the paper book before the Tribunalin respect of this project. 30.12.8. It is noted from the scope of work that the assessee is to development of the bridge over the river Ganga. The assessee is required to prepare the designs for the execution of the project which is subject to approval from NHAI, before it is implemented. It is further noted that the responsibility to procure materials for the project is on the assessee, and the assessee shall also furnish test certificates from the manufacturer or supplier of the materials along with each batch of material. Clause 49.1 of the tender document shows that assessee is held liable for any defect 134 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited in 365 days from the date of commissioning and is also charged with penalty under clause 47.1 for delay in project completion. Further clause 34.1 reveals that the assessee is liable to make compensation to his own staff and labour arrangements, local or other and for their payment, housing feeding and transport. It is noted that the GOI?NHAI did not provide any material to the assessee and the assessee has to utilize its own funds, its expertise and labourers for developing the infrastructure facility. 30.12.9. It is thus clear from the above that the assessee undertook investment risk, entrepreneurial risk and also takes the risk of additional cost and loss of revenue in case of any defect. Thus, in our view, the assessee satisfies the requirement under section 80IA(4)(b) of the act. 30.12.10. In respect of the objection of the Ld.DR regarding the terms used for assessee to be a contractor instead of developer, it is noted that the Government through NHAI, handed over the premises to the assessee for construction of the Bridge over River Ganga. The assessee was to construct the same and transfer the infrastructure to NHAI. It is noted that the assessee undertook this project on a Build and Transfer (BOT) basis. 30.12.8 We therefore cannot agree with the objection of the Ld.DR that the assessee is not carrying out any development activities under the project,to claim exemption under section 80 IA(4)(i) of the act. 30.12.9.We refer to the decision of the Hon’ble Hydrabad Tribunal, in case of GVPR Engineers Ltd & Ors. Vs.ACIT & Ors reported in (2012) 21 taxmann.com 25. It is noted that Hon’ble Hydrabad Tribunal considered similar arguments raised before 135 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited us. The observation and analysis of the provisions of Section 80IA(4) by Hon’ble Tribunal is as under: 15. According to the authorised representative, all the contracts of the site which was handed over by the Government to the assessee for development of the infrastructure facility and on completion, in few cases after operation for certain period, the entire site with the infrastructure facility developed to the owner. He submitted that the lower authorities wrongly relied on the order of the Tribunal in the case of Patel Engineering Limited ( 94 ITD 411) wherein the Tribunal has not considered the retrospective amendment by Finance Act, 2007. According to the authorised representative, after amendment to section 80IA(4)(i )(b) which reads as \"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) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility; the word 'it' means undertaking and 'develop' is independent of operating and maintaining or developing, operating and maintaining. For this purpose, he relied on the order of the ITAT, Mumbai larger third Member Bench in the case of B.T. Patil & Sons Belgaum Construction Pvt. Ltd. v. Asstt. CIT [2010] 35 SOT 171. He submitted that the assessee engaged in development of infrastructure facility by way of constructing irrigation canals and irrigation systems. In this connection, he drew our attention to the order of the Tribunal in the case of B.T. Patil & Sons cited supra specifically to paras 36 to 41 which reads as follows:- \"36. Here it is important to mention that the Legislature inserted the word 'or' between (i) and (ii) with effect from 1-4-2002, which is applicable to assessment year 2002-03. So with effect from the assessment year 2002-03, not only the enterprise (i) developing, (ii) operating and maintaining the infrastructure facility shall be entitled to deduction, but also the enterprise which is only (i) developing or (ii) operating and maintaining the infrastructure facility. From such year onwards the enterprise which only develops the infrastructure facility and thereafter transfers it to someone else for operating and maintaining on behalf of transferee shall also be covered for the purposes of granting benefit. The difference in the situation between assessment year 2002-03 onwards and prior two years is that whereas the operation and maintenance of the infrastructure facility on behalf of the enterprise developing is necessary in the former period, but in the later period, the operation and maintenance shall be on behalf of the transferee enterprise itself. Since in the years in question, the transfer of the enterprise for operation and maintenance has necessarily to be on behalf of the enterprise developing the infrastructure facility, and for the time being assuming without admitting the contention of the Id. AR that the assessee is developer of infrastructure facility, it does not satisfy the other condition of its transfer for operating and maintaining on its behalf for the obvious 136 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited reason that there is no transfer at all of any infrastructure facility from the assessee, much less for operating and maintaining on its behalf 37. Be that as it may it remains to be examined as to whether the assessee can be called as 'developer' within the meaning of section 80IA(4). The learned counsel submitted that the work done by the assessee made it a developer entitled to deduction. Shri Vijay Mehta, the learned counsel for the intervener contended that the \"works contract\" has not been defined in the context of section 8o-IA and, hence, in the absence of assignment of any definition by the statute, its meaning should be understood in the common parlance. According to him, a developer is a person who develops the facility and such person mayor may not be a contractor. On the other hand, a contractor is stated to be a legal term whose rights and duties vis-a-vis contract are determined by way of legal document called the contract. He cited an example that if a contract to construct a highway from Mumbai to Delhi is given to a person he is contractor as well as developer. As against that a person who has been given a contract for painting or beautification is merely a contractor but not a developer. According to him, while developing a project, a developer has to make technological inputs, entrepreneurial inputs, etc. Besides, there is financial involvement in terms of deployment of man and machine as well as bank guarantees. He went on to explain that the developer undertakes the risk and reward of the project and is accountable to the authorities for the development work carried out by him. In his opinion, the assessee in the present case cannot be characterized anything other than a developer. 38. In the circumstance, the learned Departmental Representative submitted that the construction is a minor part of the development. According to him, development includes the works to be done relating to the planning, designing, engineering and financing, etc., of the project. He relied on the judgment of the Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd. v. State of Orissa [1984] 55 STC 327 in which it has been observed that in a contract for work, the person producing has no property in the thing produced as a whole, even if part or whole of the material used by him may have been his property earlier. He also relied on another judgment of the Hon'ble Supreme Court in the case of Tamil Nadu v. Anandam Vishwanathan [1989] 1 SCC 613 in which it was held that the nature of contract can be found only when the intention of parties is found out. The fact that in the execution of the works contract some material are used and the property in the goods so used passes to the other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the material. It was, therefore, argued that the developer is a person who brings in additional resources by way of investment and technical expertise for developing the infrastructure facilities. Since the assessee had simply done a part of work of civil construction relating to the infrastructure facility, he stated that it is not eligible for deduction. 137 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 39. We find it as an undisputed position that the words 'developer' and 'contractor' have not been defined in or for the purposes of section 80-1A. The primary question which arises is that how to find out the meaning of a word or an expression which is not defined in the Act. It is a settled legal position that ordinarily the meaning or definition of a word used in one statute cannot per se be imported into another as has been held by the Hon'ble Supreme Court in the case of Union of India v. R.C. Jain [1981] 2 SCC 308. Therefore, the meaning of the words 'developer' and 'contractor', as put forth before us by the rival parties from other legislations, be they State or Central enactments, cannot be automatically applied in the present context. In order to ascertain the meaning of a word not defined in the Act, a useful reference can be made to the General Clauses Act, 1897. If a particular word is not defined in the relevant statute but has been defined in the General Clauses Act, such definition throws ample light for guidance and adoption in the former enactment. According to section 3 of the General Clauses Act, the definitions given in this Act shall have applicability in all the Central Acts unless a contrary definition is provided of a particular word or expression. On scanning section 3 of the General Clauses Act, we observe that neither the word 'contractor' nor 'developer' has been defined therein. Thus, the General Clauses Act is also of no assistance in this regard. Going ahead, when these words are neither defined in the Income-tax Act, 1961 nor in the General Clauses Act, the next question is that where from to find the meaning of such words. There is no need to wander here and there in search of answer which has been aptly given by the Hon'ble jurisdictional High Court in the case of Abdulgafar A. Nadiadwala v. Asstt. CIT [2004] 267 ITR 4881 (Bom.) wherein the Hon'ble High Court was looking into the meaning of the words 'goods' and 'merchandise', which are not defined under section 80HHC in the context of Income-tax Act, 1961. The Hon'ble High Court held that : \"it is well-settled that in the absence of there being anything contrary to the context, the language of a statute should be interpreted according to the plain dictionary meaning of the terms used therein\". Similar view has been expressed by the Hon'ble Supreme Court in the case of CWT v. Officer-In-Charge (Court of Wards) [1976] 105 ITR 133 in which it was held that the ordinary dictionary meaning of a word cannot be disregarded. 40. Coming back to our point of ascertaining the meaning of the words 'contractor' as well as 'developer', which have neither been defined in the Act nor in the General Clauses Act, we fall upon Oxford Advanced Learner's Dictionary to find out their meaning. According to this dictionary, \"developer\" is a person or company that designs and creates new products, whereas \"contractor\" is a person or a company that has a contract to do work or provides services or goods to another. The New Shorter Oxford Dictionary defines the word \"contractor\" as : person who enters into a contract or agreement. Now chiefly spec. a person or firm that undertakes work by contract, esp. 138 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited for building to specified plans\". In the light of the meaning ascribed to these words by the dictionaries, it is observed that the developer is a person who designs and creates new products. He is the one who conceives the project. He may execute the entire project himself or assign some parts of it to others. On the contrary, the contractor is the one who is assigned a particular job to be accomplished on the behalf of the developer. His duty is to translate such design into reality. There may, in certain circumstances, be overlapping in the work of developer and contractor, but the line of demarcation between the two is thick and unbreachable. When the person acting as developer, who designs the project, also executes the construction work, he works in the capacity of contractor too. But when he assigns the job of construction to someone else, he remains the developer simpliciter, whereas the person to whom the job of construction is assigned, becomes the contractor. The role of developer is much larger than that of the contractor. It is no doubt true that in certain circumstances, a developer may also do the work of a contractor but a mere contractor per se can never be called as a developer, who undertakes to do work according to the pre-decided plan. 41. Further it is relevant to note that the word \"developing\" used in sub-section (4) is with reference to \"infrastructure facility\". When we further peruse the meaning of the word \"infrastructure facility\" as per Explanation, it is found to have been defined exhaustively by referring to a road project, airport, port, etc., a highway project, a water supply project and irrigation project, etc. Therefore, the use of word \"developing\" in juxta-position to infrastructure facility indicates that what is eligible for deduction under this sub-section is the profits and gains derived from the development of infrastructure facility and not something de hors it. So in order to be eligible for deduction the development should be that of the infrastructure facility as a whole and not a particular part of it, as has been contended by the Id. AR. It may be possible that some part of development work is assigned by the developer to some contractor for doing it on his behalf. That will not put the doer of such work into the shoes of a developer. 16. Further, he relied on the judgment of Bombay High Court in the case of CIT v. ABG Heavy Industries Ltd. [2010] 322 ITR 323 189 Taxman 54 (Bom) wherein held that: \"Section 80-IA of the Income-tax Act, 1961, was introduced to provide an impetus to the growth of infrastructure in the nation. A sound infrastructure is a sine qua non for economic development. Absence of infrastructure poses significant barriers to growth and development. A model which relied exclusively on the provision of basic infrastructure by the State was found to be deficient. Section 80-IA was an instrument of legislative policy, conceived with a view to provide an impetus to private sector participation in infrastructural projects. Contemporaneously, with the provisions which were made by Parliament in section 80-IA of the Act, explanatory circulars issued in 139 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited an administrative capacity by the Central Board of Direct Taxes held the field. These circulars gave expression to the scope and ambit of the concession was provided by section 80-IA. The evolution of section 80-IA would show a progressive liberalisation of the legislative scheme, in the interests of aiding the growth of infrastructure. The administrative circulars issued by the Central Board of Direct Taxes in implementation of section 80-IA similarly liberalised the scheme, consistent with the Act. The expression \"development\" has not been artificially defined for the purposes of section 80-IA of the Act and must, therefore, receive its ordinary and natural meaning. An assessee does not have to develop the entire port in order to qualify for a deduction under section 80-IA. Parliament did not legislate a condition impossible of compliance. A port is defined to be an infrastructure facility and the circular of the Board clarified that a structure for loading, unloading, storage, etc., at a port would qualify for deduction under section 80-IA. Parliament amended the provision of section 80-IA of the Act so as to clarify that in order to avail of a deduction, the assessee (i) develop, (ii) operate and maintain or (ii) develop, operate and maintain the facility. The condition as regards development, operation and maintenance of an infrastructure facility was contemporaneously construed by the authorities at all material times, to cover within its purview the development of an infrastructure facility under a scheme by which an enterprise would build, own, lease and eventually transfer the facility. This was perhaps a practical realisation of the fact that a developer may not possess the wherewithal, expertise or resources to operate a facility, once constructed. Parliament eventually stepped in to clarify that it was not invariably necessary for a developer to operate and maintain the facility. In Bajaj Tempo v. CIT [1992] 196 ITR 188 , the Supreme Court emphasized that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In the present case, the administrative circulars issued Central Board of Direct Taxes proceeded on that basis by adopting a liberal view of the scope and ambit of the provisions of section 80-IA of the Act. Parliamentary intervention endorsed the administrative practice. After section 80-IA was amended by the Finance Act of 2001, the section applies to an enterprise carrying on the business of (i) developing; or (ii) operating; maintaining; or (iii) developing, operating and maintaining any infrastructure facility which fulfils certain conditions. Those conditions are ownership of the enterprise by a company registered in India or by a consortium (ii) an agreement with the Central or State Government, local authority of statutory body; and (iii) the start of operation and maintenance of infrastructure facility on or after April 1, 1995. The requirement that the operation and maintenance of the infrastructure facility should commence after April 1, 1995 has to be harmoniously construed with the main provision under which a deduction is available to an assessee who develops; or 'operates and maintains; or develops, 140 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited operates and maintains an infrastructure facility. Unless both the provisions are harmoniously construed, the object intent underlying the amendment of the provision by the Finance Act of 2001 would be defeated. A harmonious reading of the provision in its entirety would lead to the conclusion that the deduction is available to an enterprise which (i) develops; or (ii) operates and maintains; or (iii) develops maintains and operates that infrastructure facility. However, the commencement of the operation and maintenance of the infrastructure facility should be after April 1, 1995. The assessee, in terms of the policy of the Government of India to encourage private sector participation in the development of infrastructure, bid for and was awarded a contract for leasing of container handling cranes at the Jawaharlal Nehru Port Trust (JNPT). In pursuance of the contract, the assessee deployed rail mounted quay side cranes, rail mounted gantry cranes and rubber tired gantry cranes at the container handling terminal of the JNPT. JNPT had a dedicated container handling terminal. According to the assessee, the only activities of the terminal consisted of loading, unloading and storage of containers. Under contracts dated September 2, 1994 and October 16, 1995, JNPT accepted the bid submitted by the assessee for supply, installation, testing, commissioning and maintenance of the cranes. By the terms of the agreement, JNPT agreed to pay lease charges in a total sum of Rs. 215.50 crores over a period of ten years. The contract envisaged two options. Under the first option, operation and maintenance was to be carried out by the assessee. Under the second option only maintenance was to be carried out by the assessee. Under the contracts, JNPT reserved the right to exercise the option to request the assessee to carry out both operation and maintenance during the lease period or to carry out only maintenance while operation was done by JNPT. The contracts stipulated, inter alia, the submission of a performance guarantee bond representing 10 per cent of the average annual contract value computed with reference both to maintenance and operation. The assessee assumed the responsibility of making the equipment available for operation for a minimum number of days as stipulated in the contract and became liable to pay liquidated damages for non-availability of the equipment after commissioning. After the expiry of the lease period of ten years, the assessee was liable to hand over the equipment to JNPT free of cost. Under the contract the assessee furnished an indemnity to JNPT towards damages that may be sustained to the equipment or to any property of the port trust or to the lives persons or properties of others. The assessee assumed other contractual obligations including amongst them, the liability to insure the equipment, to indemnify JNPT towards the claims of workers' compensation and for compliance with labour legislation. The assessee claimed special deduction under sec. 80-IA. The Assessing Officer rejected the claim but the Commissioner (A)) and Tribunal allowed it. On appeal to the High Court: 141 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Held, dismissing the appeal, that on May 31, 2004, JNPT issued a certificate confirming the award of contracts to the assessee on September 2, 1994 and October, 16, 1995 for supply, installation, testing, commissioning and maintenance of container handling equipment on lease for a period of ten years for loading and unloading of containers at the port and that the cranes that were to be supplied by the assessee formed an integral part of the port. JNPT clarified that the contracts had been executed under the BOLT scheme and in accordance with its directions; the cranes would be transferred to the port trust at no cost on the expiry of a period of ten years of the commencement of the contract. The obligations which had been assumed by the assessee under the terms of the contract were obligations involving the development of an infrastructure facility. Section 80-IA of the Act essentially contemplated a deduction in a situation where an enterprise carried on the business of developing, maintaining and operating an infrastructure facility. A port was defined to be included within the purview of the expression \"infrastructure facility\". The obligations which the assessee assumed under the terms of the contract were not merely for supply and installation of the cranes, but involved a continuous obligation right from the supply of the cranes to installation, testing, commissioning, operation and maintenance of the cranes for a term of ten years after which the cranes were to vest in JNPT free of cost. An assessee did not have to develop the entire port in order to qualify for a deduction under section 80-IA. The condition of a certificate from the port authority was fulfilled and JNPT certified that the facility provided by the assessee was an integral part of the port. The assessee developed the facility on a BOLT basis under the contract with JNPT. On the fulfilment of the lease of ten years, there was a vesting in the JNPT free of cost. The finding that the assessee had developed the infrastructure facility and that it was engaged in operating the cranes was, therefore, based on the material on record. The fact that the assessee was also maintaining the cranes was not disputed. The facility was commenced after April 1, 1995. The assessee was entitled to the special deduction under section 80-IA\". 16.1 The learned counsel for the assessee placed reliance on two decisions- Mumbai High Court in the case of CIT v. ABG Heavy industries Ltd. (supra) and ITAT Pune Bench in the case of Laxmi Civil Engineering (P.) Ltd. v. Addl. CIT Kolhapur [IT Appeal No. 766 (Pn) of 2009 dated 8-6-2011]. It was urged by the learned authorised representative that these decisions supported the proposition that (i) the ITAT's decision in the case of B.T. Patil & Sons, Larger Bench (Mumbai) reported in 126 TTJ 577 is no longer good law, and (ii) the distinction between developer and contractor is no longer relevant in the context of changed law explained by the Mumbai High Court in the case of ABG Heavy Industries (supra) and followed within its jurisdiction by the Pune Bench of the ITAT in the case of Laxmi Civil Engg. (supra). 142 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 17. On the other hand, the learned departmental representative submitted that the meaning of the word \"developer\" and the eligibility of the business to claim deduction meant for 'development of infrastructural facilities' within the meaning of section 80IA has to be seen in the context of the genesis and legislative history of the section as held by the Supreme Court in the case of CIT v. N.C. Buddhiraja [1993] 204 ITR 412 / 10 Taxman 312 (SC) the provision as introduced by the Finance Act, 1991 as amended by Finance Act, 1996, Finance Act, 1999, Finance Act, 2001, up to Finance Act 2007 and Finance Act, 2009 and as explained by Circular 794 dated 9-8-2000 Circular 779 dated 14-9-1999 (240 ITR st. 32), Circular 794 dated 9-8-2000, Circular 779 dated 14-98-1999 (240 ITR st. 32), Circular 794 dated 19-8-2000, Circular 14/2001 (252 ITR st. 98) and Circular 3/2008 dated 12-03-2008 (168 Taxman st. 12,54) brings out the objectives of the statute and expectations of the law-makers in bringing the enactment. The statutory provisions as would be apparent from the Circulars and Explanatory Notes referred to herein-above seek to incorporate a quid pro quo between introduction of investment and entrepreneurial resources from the private sector and a tax deduction from the government to enable recoupment of expenditure incurred. The BOT/BOOT models seek to augment infrastructural assets in addition to governmental spending and not simply feed on government expenditure. The deduction under section 80IA is, therefore, available to the former, and not to the latter forms of business. The deduction claimed under section 80IA of the Act as prescribed in sub-section (1) is \"in accordance with and subject to the provisions of this section....\" in sub section (2), it is stated that the deduction is available for the specified number of years \"brining from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication services or...\" it is clear therefore that the deduction is inextricably connected to the commencement of operations of the infrastructure facility. It is immediately apparent that the facility has to be conceived of in its totality because part of the infrastructure facility has not existence independent of the whole. A certain number of kilometres of a highway or irrigation canal has no existence by itself, and is incapable of becoming operational without reference to the rest of the project, of which it is only a part. It is evident from the enclosures that the assessee undertook to execute the work as per agreed specifications, at rates agreed upon, subject to maintenance, within a period of 24 months of commencement. 18. The subsequent parts of the paper book details in the rate analysis, Bill of quantities etc., make it clear that the assessee had no autonomy in matters of design and specification which completely vested with the employer. The only lawful entitlement of the assessee was to be paid for the measurement of work completed at rates agreed upon. The partial and sectional nature of the proposed work is immediately clear from this notice and it is also apparent from this that the section of the road proposed for improvement has no independent existence capable of satisfying the requirement of section 80IA(2). Therefore, this project is incapable of 143 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited commencement of operations by itself, or to qualify the larger infrastructure facility of which it is a part. 19. The DR submitted that the contractor was granted mobilisation advance as well as interest-free advance for machinery purchase, should be required them and it would be readily apparent from the agreement that there is no element of entrepreneurial initiative or financial participation of the contractor in this kind of a project The successful bidder merely executes a Government contract and gets paid for it at mutually agreed rates and the nature of responsibilities assumed under the other contracts as per agreements included in the paper book are similar. It is further stated that during the hearing, the authorised representative of the assessee was at pains to emphasise that the assessee undertook maintenance work and was hence it is to be treated as a developer. However, it is clear from the document as furnished in the paper book that the maintenance function was actually remedying of defects for a prescribed period. No separate charges have been collected and this cannot be seen as a maintenance function. 20. On these facts, having regard to the responsibilities assumed under the agreement, the assessee cannot be seen as a developer, instead he plays the role of an executor/contractor. Be that as it may, it was urged by the departmental representative in the reply that the issue whether the assessee was a developer for the purposes of section 80IA after the changes in law w.e.f. 1-4-2002 is not material for adjudication of the grounds in the impugned appellate orders. This is because in so far as the contracts in question are in the nature of works contracts, the explanation inserted below section 80IA(13) with retrospective effect from 1-4-2000 has over-riding influence and debars the assessee's claim. Further it is contended that the introduction of the explanation below section 80IA(13) in 2007 with retrospective effect from 1-4-2000 puts matters beyond doubt. The law on the subject of application of a retrospective amendment is clear from the special Bench decision of the Tribunal in the case of Aquarius Travels ( P.) Ltd. v. ITO [2008] 111 ITD 53 (Delhi) (SB). Such provisions should be applied in pending proceedings, even when they have not been involved earlier. As matters stand, therefore, the most important question for examination on facts is whether the business agreement in question can be termed a works contract or not. If the answer is in affirmative, nothing else matters because the Explanation takes over. If not, the other nuances such a development/operation etc., and other specified conditions become relevant. Reliance was placed in this regard on the decision of the Mumbai High Court in the case of Glenmark Pharma (supra) which digests the case law for ascertainment of whether facts of the agreement would amount to a contract for work or for sale. 21. The ld. DR placed reliance on the decision of jurisdictional High Court in the case of Dr. Mrs. Renuka Datla v. CIT [1999] 240 ITR 463/ 107 Taxman 143 (AP), that provisions granting exemptions have to be strictly construed. It was held by the Supreme Court in the case of IPCA 144 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521 / 135 Taxman 594 (SC) that when there is no ambiguity, provisions cannot be interpreted to confer a benefit upon the assessee. The provision is incapable of application to the facts of the assessee's case because the assessee is only an executor of a contract, which is in turn, part of a larger project undertaken by the Government, or its agency. It has been argued in rejoinder by the departmental representative that such reliance is neither correct nor relevant in deciding the issues on hand. In the case of Laxmi Civil Engg. Pvt. Ltd., the argument of the assessee that was accepted by the ITAT, Pune Bench is broadly-the assessee is a contractor, every contractor is a developer as per the Mumbai High Court decision in the case of ABG Heavy Industries and a developer need not operate and maintain the infrastructure facility, as held by the Mumbai High Court in the case of ABG Heavy Industries. 22. The DR submitted that the decision of the Pune Bench of the ITAT in the case of Laxmi Civil Engg. (supra) is of no help in deciding the issues in the impugned appeals for the reason that the terms and conditions of the contracts and the nature of obligations assumed there-under, by the business are not discussed in the said order. This is the factual fulcrum on which the decision of the ITAT (larger Bench) in B.T. Patil as well as the Mumbai High Court in ABG case was decided. Without such detail, there is no point of comparability between the Pune Bench decision and the other cases. The unanswered questions emerging there-from are – (i) Can we assume that there was a BOLT contract or was it a works contract? (ii) Can we assume that the assessee took ownership control of the asset created? (iii) The circumstances under which the enterprise in ABG Heavy Industries became akin to a developer, and do they obtain in the case of LCE? Such as 10 year ownership; retransfer; assumption of assured responsibility regarding operational readiness, etc., noticed in ABG Heavy Industries are not noticed in the facts of the case as digested by the afore mentioned decision of the Pune Bench of the ITAT in the case of LCE. (iv) The unbundling of conditions of development, operation & maintenance, and development operation and maintenance, in the sense of making them non cumulative by amendment of law effective from 1-4-2002 is not the only relevant issue. The larger issue is whether the assessee is a developer in the first place. (v) In the case of B.T. Patil, the cumulative or non cumulative satisfaction of conditions in section 80IA(4)(i) was never a material fact. This was so not only because the impugned appeals related to pre 1-4-2002 period, but also because the matter was deci9ded on the preliminary issue of whether the assessee was a developer or not in the first place. 145 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited (vi) Some of the attributes of a developer were discussed in the case of B.T. Patil, none of whom were absent in the case of ABG Heavy Industries. 23. According to the DR, the decision of the Mumbai High Court, though later in time was different in facts that there was no occasion even to refer to the ITAT's decision in the case of B.T. Patil. Therefore, it can be said that the decision of the Mumbai High Court in the case of ABG Heavy Industries will be binding in its jurisdiction for infrastructure contract cases, only in so far as the facts of the case are compatible. For the same reason, there can be no adverse implication for the precedent value of the B T Patil case. As submitted hereinabove, on immediate and necessary consequence of the retrospective amendment introduced by the Finance Act, 2009 inserting Explanation below section 80IA(13), is that any business transacted in terms of a works contract stands disqualified from seeking deduction under section 80I(A)(4). The decision of the Mumbai High Court in the case of ABG would have no application from this point of view also. Since the agreement in ABG was a BOLT agreement and not a works contract their Lordships had no occasion to consider the Explanation introduced in Finance Act, 2009 with effect from 1-4- 2001. Even if it is assumed, hypothetically, that the agreement in ABG was in the nature of a works contract, or that every contractor was a developer, the decision of the Mumbai High Court without considering the Explanation cannot operate to overrule the ITAT's decision in the case of B.T. Patil where the Bench of the Tribunal considered the effect of the explanation and it was explained by the Hyderabad Bench of the Tribunal in the case of Hyderabad Chemicals Supplies Ltd. v. Asstt. CIT [IT Appeal No. 352 (Hyd) of 2005, dated 21-1-2011] and 6 others appeals dated 21- 1-2011, in the context of an apparent conflict between a Special Bench (Ahmedabad) decision of the ITAT and Madras High Court at para-15 on page-8 as follows:- \"Further, judgment of High Court though not of the jurisdictional High Court, prevails over an order of the Special Bench even though it is from the jurisdictional Bench of the Tribunal, however, where the judgment of the nonjurisdictional High Court, though the only judgment on the point, has been rendered without having been informed about certain statutory provisions that are directly relevant, it is not to be followed.\" 24. Without prejudice to the argument that the stand that the Mumbai High Court's order in ABG runs on completely different facts, it is respectfully pointed out that this decision cannot be a binding precedent, in any case, for the above-cited reason also and this issue can be seen in another perspective. There is nothing in the case of ABG Heavy Industries that supports the view that the 'developer' has to e seen de hors the contract and its stipulations. In the case of ABG Heavy Industries the Revenue took the stand that the assessee was not a developer because it was only a supplier of the equipment. This did not find favour because it was held that the nature of the business had to be seen in terms of the 146 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited obligations assumed under the contract which included not only supply and installation of the cranes but also testing, commitment of operational readiness for a period of ten years on the pain of liquidated damages and eventual re-transfer after such period. In the case of ABG Heavy Industries, the creation of certain standalone parts of the part complex qualified for being termed on infrastructure project because the Board Circular 793 dated 23-6-2000 clarified that part of the project would qualify if so certified by the Port Authorities. The container handling cranes assembly was certified to be an integral part of the Port Complex by the Port Authority. This is contextually very different from parts of the running length of a highway or irrigation canal being executed on a rate contract. The Department's argument that the assessee did not actually operate or maintain the facility in question was not upheld because the benefits of the section were held to be available to BOT/BOLT contracts by CBDT Circulars, which were any way binding on the IT authorities. In the case of the present case, it is not even claimed by the assessee that the work was carried out under a BOT/BOLT contract, or that it was not a works contract. It is further submitted that the distinction between business of development operation/maintenance and development/operation/maintenance was removed with the change in law effective from 1-4-2002, and that this was explained by the decision of the Mumbai High Court in the case of ABG Heavy Industries is fallacious for the following reasons: \"The Mumbai High Court decision was rendered in the context of a BOLT contract, which was in any case clarified by the Board Circular to qualify for the deduction under section 80IA. It was noticed by their Lordships that the subsequent changes in the law effective from 1-4- 2002 merely mirrored this liberalised outlook. That is not the same thing as saying that a business in the nature of a works contract qualified for the deduction in spite of not operating/maintaining the facility. The decision of the larger Bench in the case of B.T. Patel was not un-ware of the change in law effective from 1-45-2002 as would be evident from para 36 of the order. The change making the conditions of development/operation/maintenance noncumulative was not relevant since the case related to pre 1-4-2002 period. In the case of B.T. Patel the larger Bench enunciated certain tests to determine whether the business was one of a 'developer' or a mere 'contractor'. The briefly stated facts are as follows: The distinction between creation of product vs. Rendering of service (para-40), owner vs. Executor of owner's plan with reference to project specification (para-42), vesting of property, subject to retransfer if need be (para 46) and need for interpretation to avoid absurd results (para 50)\". 25. The DR submitted that in view of the terms of the relevant contract, it was possible to give a finding that the business was not one of 'development' per se. Therefore, the changes in law after 1-4-2002 were not even called into play in the case of B.T. Patil. It is further submitted 147 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited that the Mumbai High Court's decision in the case of ABG Heavy Industries not only runs on different facts, it does not even refer to the case of B.T. Patil. Furthermore, the Mumbai High Court's stand that the nature of the business should be seen in the context of the obligations assumed under the contract only complements, not contradicts the larger Bench's distinction between a developer and contractor simpliciter, as noted hereinabove. It would be wrong and therefore to suggest that the case of B.T. Patil has been impliedly over-ruled by the High Court's decision. The departmental representative also places reliance on another decision of the Mumbai Bench of the Tribunal in the case of Indian Hume Pipe Co. Ltd., v. DCIT ITA No.5172/Mum/2008, dated 29-7-2011 for assessment year 2004-05. This decision pronounced after the Pune Bench decision in the case of Laxmi Civil Engg.. considers the Tribunal decision of B.T. Patil as well as its jurisdictional High Court decision in the case of ABG and goes on to hold that the assessee is not entitled to the deduction under section 80IA(4) in view of the Explanation introduced with retrospective effect. 26. We have considered the elaborate submissions made by both the parties and also perused the materials available on record. We have also gone through all the case laws cited by both the parties. We find that the provisions of Section 80IA(4) of the Act when introduced afresh by the Finance Act, 1999, the provisions under section 80IA(4A) of the Act were deleted from the Act. The deduction available for any enterprise earlier under section 80IA(4A) are also made available under Section 80IA(4) itself. Further, the very fact that the legislature mentioned the words (i) \"developing\" or (ii) \"operating and maintaining\" or (iii) \"developing, operating and maintaining\" clearly indicates that any enterprise which carried on any of these three activities would become eligible for deduction. Therefore, there is no ambiguity in the Income-tax Act. We find that where an assessee incurred expenditure for purchase of materials himself and executes the development work i.e., carries out the civil construction work, he will be eligible for tax benefit under section 80IA of the Act. In contrast to this, a assessee, who enters into a contract with another person including Government or an undertaking or enterprise referred to in Section 80IA of the Act, for executing works contract, will not be eligible for the tax benefit under section 80IA of the Act. We find that the word \"owned\" in sub-clause (a) of clause (1) of sub section (4) of Section 80IA of the Act refer to the enterprise. By reading of the section, it is clears that the enterprises carrying on development of infrastructure development should be owned by the company and not that the infrastructure facility should be owned by a company. The provisions are made applicable to the person to whom such enterprise belongs to is explained in sub-clause (a). Therefore, the word \"ownership\" is attributable only to the enterprise carrying on the business which would mean that only companies are eligible for deduction under section 80IA(4) and not any other person like individual, HUF, Firm etc. 27. We also find that according to sub-clause (a), clause (i) of sub section (4) of Section 80-IA the word \"it\" denotes the enterprise carrying on the 148 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited business. The word \"it\" cannot be related to the infrastructure facility, particularly in view of the fact that infrastructure facility includes Rail system, Highway project, Water treatment system, Irrigation project, a Port, an Airport or an Inland port which cannot be owned by any one. Even otherwise, the word \"it\" is used to denote an enterprise. Therefore, there is no requirement that the assessee should have been the owner of the infrastructure facility. 28. The next question is to be answered is whether the assessee is a developer or mere works contractor. The Revenue relied on the amendments brought in by the Finance Act 2007 and 2009 to mention that the activity undertaken by the assessee is akin to works contract and he is not eligible for deduction under section 80IA(4) of the Act. Whether the assessee is a developer or works contractor is purely depends on the nature of the work undertaken by the assessee. Each of the work undertaken has to be analyzed and a conclusion has to be drawn about the nature of the work undertaken by the assessee. The agreement entered into with the Government or the Government body may be a mere works contract or for development of infrastructure. It is to be seen from the agreements entered into by the assessee with the Government. We find that the Government handed over the possession of the premises of projects to the assessee for the development of infrastructure facility. It is the assessee's responsibility to do all acts till the possession of property is handed over to the Government. The first phase is to take over the existing premises of the projects and thereafter developing the same into infrastructure facility. Secondly, the assessee shall facilitate the people to use the available existing facility even while the process of development is in progress. Any loss to the public caused in the process would be the responsibility of the assessee. The assessee has to develop the infrastructure facility. In the process, all the works are to be executed by the assessee. It may be laying of a drainage system; may be construction of a project; provision of way for the cattle and bullock carts in the village; provision for traffic without any hindrance, the assessee's duty is to develop infrastructure whether it involves construction of a particular item as agreed to in the agreement or not. The agreement is not for a specific work, it is for development of facility as a whole. The assessee is not entrusted with any specific work to be done by the assessee. The material required is to be brought in by the assessee by sticking to the quality and quantity irrespective of the cost of such material. The Government does not provide any material to the assessee. It provides the works in packages and not as a works contract. The assessee utilizes its funds, its expertise, its employees and takes the responsibility of developing the infrastructure facility. The losses suffered either by the Govt. or the people in the process of such development would be that of the assessee. The assessee hands over the developed infrastructure facility to the Government on completion of the development. Thereafter, the assessee has to undertake maintenance of the said infrastructure for a period of 12 to 24 months. During this period, if any damages are occurred it shall be the responsibility of the assessee. Further, during this period, the entire 149 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited infrastructure shall have to be maintained by the assessee alone without hindrance to the regular traffic. Therefore, it is clear that from an un- developed area, infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18-05- 2010, such activity is eligible for deduction under section 80IA(4) of the Act. This cannot be considered as a mere works contract but has to be considered as a development of infrastructure facility. Therefore, the assessee is a developer and not a works contractor as presumed by the Revenue. The circular issued by the Board, relied on by learned counsel for the assessee, clearly indicate that the assessee is eligible for deduction under section 80IA(4) of the Act. The department is not correct in holding that the assessee is a mere contractor of the work and not a developer. 29. We also find that as per the provisions of the section 80IA of the Act, a person being a company has to enter into an agreement with the Government or Government undertakings. Such an agreement is a contract and for the purpose of the agreement a person may be called as a contractor as he entered into a contract. But the word \"contractor\" is used to denote a person entering into an agreement for undertaking the development of infrastructure facility. Every agreement entered into is a contract. The word \"contractor\" is used to denote the person who enters into such contract. Even a person who enters into a contract for development of infrastructure facility is a contractor. Therefore, the contractor and the developer cannot be viewed differently. Every contractor may not be a developer but every developer developing infrastructure facility on behalf of the Government is a contractor. 30. We find that the decision relied on by the learned counsel for the assessee in the case of CIT v. Laxmi civil Engineering (P.) Ltd. (supra ) squarely applicable to the issue under dispute which is in favour of the assessee wherein it was held that mere development of a infrastructure facility is an eligible activity for claiming deduction under section 80IA of the Act after considering the Judgement of the Mumbai High Court in the case of ABG Heavy Engineering [supra]. The case of ABG is not the pure developer whereas, in the present case, the assessee is the pure developer. We also find that Section 80IA of the Act, intended to cover the entities carrying out developing, operating and maintaining the infrastructure facility keeping in mind the present business models and intend to grant the incentives to such entities. The CBDT, on several occasions, clarified that pure developer should also be eligible to claim deduction under section 80IA of the Act, which ultimately culminated into Amendment under section 80IA of the Act, in the Finance Act 2001, to give effect to the aforesaid circulars issued by the CBDT. We also find that, to avoid misuse of the aforesaid amendment, an Explanation was inserted in Section 80IA of the Act, in the Finance Act-2007 and 2009, to clarify that mere works contract would not be eligible for deductions under section 80IA of the Act. But, certainly, the Explanation cannot be read to do away with the eligibility of the developer; otherwise, the parliament would have simply reversed the Amendment made in the Finance Act, 150 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 2001. Thus, the aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contact or sub- contract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all along been to encourage investment in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that the deduction under section 80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business risk. Without any doubt, the learned counsel for the assessee clearly demonstrated before us that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know-how, expertise and financial resources. Further, the order of Tribunal in the case of B.T. Patil cited supra is prior to amendment to sec 80IA(4), after the amendment the section 80IA(4) read as (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility, prior to amendment the \"or\" between three activities was not there, after the amendment \"or\" has been inserted w.e.f. 1-4-2002 by Finance Act 2001. Therefore, in our considered view, the assessee should not be denied the deduction under section 80IA of the Act if the contracts involves design, development, operating & maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction u/s 80IA of Act. In our opinion the contracts which contain above features to be segregated on this deduction u/s. 80-IA has to be granted and the other agreements which are pure works contracts hit by the explanation section 80IA(13), those work are not entitle for deduction u/s 80IA of the Act. The profit from the contracts which involves design, development, operating & maintenance, financial involvement, and defect correction and liability period is to be computed by assessing officer on pro-rata basis of turnover. The assessing officer is directed to examine the records accordingly and grant deduction on eligible turnover as directed above. It is needless to say that similar view has been taken by the Chennai Bench of the Tribunal and deduction u/s. 80IA was granted in the case of Chettinad Lignite Transport Services (P.) Ltd., [IT Appeal No. 2287 (Mds) 2006, dated 27th July, 2007 for the assessment year 2004-05. Later in ITA No. 1179/Mds/08 vide order dated 26th February, 2010 the Tribunal has taken the same view by inter-alia holding as follows: \"7. Moreover, the reasons for introducing the Explanation were clarified as providing a tax benefit because modernisation requires a massive expansion and qualitative improvement in infrastructures like expressways, highways, airports, ports and rapid urban rail transport systems. For that purpose, 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 work contract has been encouraged by giving tax benefits. Thus the 151 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited provisions of section 80IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the section but where a person makes the investment and himself executes the development work, he carries out the civil construction work, he will be eligible for the tax benefit under section 80IA.\" 31. The above order was followed in subsequent assessment years 2007- 2008 & 2008-09 in ITA Nos. 1312 & 1313/Mds/2011 vide order dated 18.11.2011 in the case of the same assessee. Being so, we are inclined to partly allow the ground relating to claiming of deduction u/s. 80IA. 12.9 Based on the above discussions on the interpretation of section 80IA(4), various arguments raised by both sides in respect of each contract and the view expressed by the decisions referred to herein above, we hold that the assessee fulfils necessary criteria under section 80IA(4) in respect of the infrastructure facilities developed under the contracts considered herein, and is eligible to claim exemption under section 80IA(4) of the Act. 31. Ground No. 11filed by the assessee is against disallowance of expenditure of estate maintenance, routine maintenance expenses such as escalation, ground levelling treated as capital expenditure amounting to Rs. 1,61,60,447/-. 31.1. The Ld.AO noted that, assessee submitted certificate of the auditor regarding the expenses incurred on estate maintenance claiming that all these expenses relates to repairs and maintenance of residential building at various factories, is watch and ward, repairing of fan site and compound walls etc. It was submitted that this expenditure do not resulted any benefit of endeavouring nature nor bringing existence to any capital asset. 152 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 31.2 After considering the submissions of the assessee, the Ld.AO rejected the same. It was observed by the Ld.AO that the certificate for E&C unit Baroda revealed a significant expenditure incurred for activity such as escalation of ground levying that cannot be considered as revenue expenditure the Ld.AO after noted that, for HED Capital Unit the landscaping expenses and excavation at ground level was also not treated to be revenue in nature. Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A). 31.3 The Ld.CIT(A) upheld the addition made by the Ld.AO. The Ld.Sr.Counsel at the outset submitted that these expenditure purely relates to repairs and maintenance a various structures of assessee it was also submitted that for assessment year 1995-96 co-ordinate bench of this Tribunal in assessee’s own case vide order dated 1/05/2013 restricted the disallowance at 10% of the expenses. The Ld.Sr.Counsel placed reliance on the decision of coordinate bench of this Tribunal for assessment year 1990-91 to 1993-94 in ITA no. 987, 7321, 3942, 3943/Mum/1998 vide order dated 31/10/2007. On the contrary the Ld.DR relied on the following decision and submitted as under : “4.6. In light of the foregoing arguments and observations, it is respectfully submitted that the disallowance on account of provision for foreseeable losses is justified and in accordance with established legal principles and precedents” 153 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited We have perused the submissions submission advanced by both sides in the light of record placed before us. 31.4.The coordinate bench of the Tribunal in consolidated order for assessment years 1990-91, 1993-94(supra), observed that the expenditures incurred were related to repairs and maintenance of the structures owned by the assessee and other premises. It is noted that, in the consolidated order refer to here in above the disallowance was initially restricted at 25% by the Ld.CIT(A) which was reduced to 10% by this Tribunal. 31.5. This Tribunal observed that these are necessarily to be considered as business expenditure. It is noted that the reasoning based on which the disallowance was restricted to 10% also apply for year under consideration, considering the similarity of fact for the year under consideration. It is not the case of the assessing officer that these expenses were not incurred or were escalated. The relevant extract of the observation by this Tribunal in consolidated order for assessment years 1990-91, 1993-94(supra) is reproduced as under: “The third ground raised by the assessee is against the 25% disallowance of the expenditure confirmed by the CIT(A) in respect of estate maintenance expenditure. It is seen that the issue was considered by the Tribunal for the earlier assessment year 1989-90 and the Tribunal has remanded the matter to the Assessing Authority for fresh adjudication. In this context, it was the fervent request of the learned Counsel appearing for the assessee that year after year the matter is being sent back to the Assessing Officer but no follow up action is taken up by the Assessing Authorities within reasonable time, and therefore, if the issue is remanded for the impugned assessment year as well, that will not serve any purpose. The case of the learned Commissioner appearing for the Revenue is that the expenses related to repairs and maintenance of housing colonies, maintenarse of lawns and nursery, gardening, security, maintenance of roads, etc., for which e 154 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited assessee-company has not produced vouchers. He has stated that the 25% disallowance confirmed by the CIT(A) is, therefore, justified. On considering the matter in detail, we find that the expenses disallowed by the lower authorities are otherwise admissible expenditure by their nature. Those expenses were related tothe repairs and maintenance of housing colonies and other premises of the assessee-company. They are all very necessary expenditure. But the question is that vouchers were not produced. In many cases where expenditure have been incurred by the assessee in respect of the above items it may not be possible to obtain proper and formal bills and vouchers. This is more so that labour expenditure involved in the repairs and maintenance work of housing colonies, maintenance of lawns and maintenance of roads. All the expenses mentioned above have been made up by a greater portion of labour expenses, not by employees on the regular rolls but taken from outside in which case, the availability of vouchers is remote. Therefore, one has to take a practical stand in these kinds of matters. The absence of vouchers may sometime justify the disallowance of expenditure but if at all found necessary, the disallowance should not be vindictive. In the present case, the disallowance is a huge of amount of 25% which is not justified. There is no case that the expenses were inflated or the expenses were not incurred. The only case is that there are no support of formal vouchers and bills for these things. In case of certain - miscellaneous expenditure, the account itself should be considered as the primary source of evidence. We are not disregarding the duty of the Assessing Officer to verify the expenditure, while making the above observation. We are not undermining the scope of discretion available to the Assessing Authority in these circumstances. But what we feel is that the disallowance, if at all, made must be reasonable and not vindictive. On an overall appreciation of the facts of the case, we are of the considered view that the disallowance of 25% is excessive. We modify the disallowance to 10%. This ground is partly allowed.” We do not find any reason to deviate from the above view and direct the Ld.AO to restrict the disallowance to 10%, as observed here in above. Accordingly this ground raised by the assessee stands partly allowed. 155 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 32. Ground no. 12 raised by the assessee is regarding non grant of double tax relief claimed by the assessee amounting to Rs.2,59,97,267/-. The Ld.AO during the assessment proceedings observed that assessee earned income from the project namely SONGO– SONGO Gas Development and Power Generation Project executed in Tanzania. It was submitted by the assessee that, the project executed in Tanzania constituted permanent establishment(PE) in Tanzania, in terms of double taxation avoidance agreement(DTAA) between India and Tanzania. 32.1. It was submitted that the profits were thus attributed to the said PE thus was liable to be taxed in India at 30% as per the local provisions of the Tanzania Income Tax Act. The Ld.AO observed that, the assessee claimed credit under Article 25 of India Tanzania DTAA, amounting to Rs.2,59,97,267/-. The Ld.AO also observed that, the said income was not taxable in Tanzania. He was therefore of the opinion that the income is to be taxed in India and therefore allowing credit u/s. 90 does not arise. The Ld.AO thus disallowed the claim of the assessee. Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A). Ld.CIT(A) upheld the disallowance made by the assessing officer. Aggrieved by the order of the Ld.CIT(A) assessee is in appeal before this Tribunal. 32.3. The Ld.Sr.Counsel submitted that, in view of the tax exemption order of the Tanzania dated 11/10/2001 related to the project being national importance and contributing to economic 156 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited development, the assessee the was exempted from payment of income tax exception of income earned from execution of the said project in Tanzania the assessee has paid taxation related to said income in India. 32.4. The Ld.Sr.Counsel drew reference to Article 25 of the DTAA between India Tanzania, submitted that, tax relief is available to residence of India in respect of the Tanzania tax payable under the laws of Tanzania against the tax liability in relation to the same income in India. He also refer to article 25(2)(b) that defines the “Tanzania tax payable” to include any tax which would have been otherwise payable as Tanzania tax, for any year but for the exemption of tax granted by any competent authority of Tanzania. He thus submitted that, notwithstanding the fact that company is exempt from payment of tax in Tanzania, it is still in entitled to claim tax credited against its tax liability in relation to the same income subjected to tax in India. The Ld.Sr.Counsel in support of placed reliance on the exemption order dated 11/10/2001 issued by Tanzania. 32.5. On the contrary, the Ld.DR submitted as under : “13.5. Furthermore, the judgment of the Hon'ble ITAT Mumbai in Bank of India v. Assistant Commissioner of Income Tax, Circle 2(1)(1) [ITA No 1767/Mum/2019], underscores the significance of actual taxation rather than mere inclusion in the tax net. This precedent highlights the crucial distinction between being \"liable to tax\" and being \"subject to tax,\" emphasizing that relief under the DTAA is contingent upon tax payment in the foreign jurisdiction. 13.6. Similarly, the decision in General Electric Pension Trust v. Director of Income-tax (International Taxation) Mumbai (2005) 8 ITLR 1053/clucidates the requirement of income being subject to tax for eligibility as a resident under the DTAA. The judgment underscores that exemption from taxation precludes an entity from being considered 157 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited \"subject to tax,\" thereby disqualifying it from availing double taxation relief. 13.7. Drawing parallels from the cited case laws, it is evident that the relief sought by the assessee does not meet the requisite conditions for double taxation relief under the, Income Tax Act, as well as Article 25 of India-Tanzania DTAA. In the absence of tax payment in Tanzania, no relief can be granted as there is no tax amount to consider for the application of the DTAA provisions. 13.8. Therefore, the revenue contends that the assessee's claim for double taxation relief lacks legal merit and should be dismissed by this Hon'ble Tribunal. The principles enshrined in the India-Tanzania DTAA and reiterated in judicial precedents unequivocally establish the inapplicability of relief in the present scenario.” We have perused the submissions advance by both sides in the light of record placed before us. 32.6 Article 25 dealing with 'Elimination of Double Taxation' under India Tanzania DTAA as it stood applicable for the assessment year under consideration, reads as under: CHAPTER IV – METHOD FOR ELIMINATION OF DOUBLE TAXATION ARTICLE 25 - Avoidance of double taxation – 1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Agreement. 2. (a) The amount of Tanzanian tax payable, under the laws of Tanzania and in accordance with the provisions of this Agreement, whether directly or by deduction by a resident of India, in respect of income from sources within Tanzania which has been subjected to tax both in India and Tanzania, shall be allowed as a credit against the Indian tax payable in respect of such income provided that such credit shall not exceed Indian tax (as computed before allowing any such credit), which is appropriate to the income derived from sources within Tanzania; so, however, that where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income-tax payable by the company of India and as to the balance, if any, against surtax payable by it in India. 158 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited (b) For the purposes of the credit referred to in sub-paragraph (a) above the term “Tanzanian tax payable” shall be deemed to include any amount which would have been payable as Tanzanian tax for any year but for— (i) any exemption from tax on interest granted under paragraph (1) of the First Schedule, Part II of the Income-tax Act, 1973; or (ii) any investment deduction granted under paragraphs (24), (25) and (26) of the Second Schedule to the Income-tax Act, 1973; or (iii) the lower corporation rate of income-tax provided by paragraph 4(b) of the Third Schedule to the Income-tax Act, 1973; or (iv) any other provisions which may subsequently be enacted granting an exemption or reduction of tax which the competent authorities of the Contracting States agree to be for the purpose of economic development. …………. Article 25(2)(b) provides for credit tax deemed to have been paid in respect of the 4 categories mentioned herein above. This methodology is the \"Tax sparing method\". 32.7 A similar issue arose before the Hon’ble Delhi Tribunal in the case of Polyplex Corporation Ltd. vs. ACIT, reported in (2019) 103 taxmann.com 71. Hon’ble Delhi Tribunal in the case before them considered identical situation of Tax Sparing under India Thailand DTAA, as it stood applicable for the assessment years considered therein, before its amendment. 32.8 Hon’ble Delhi Tribunal, based on the facts placed before them and having regard to the Article 23(2) of India Thailand DTAA applicable for the relevant assessment years, observed and held as under: 20.1 Commentary to Model Conventions (both OECD and UN Model Conventions) acknowledges that there may be lot of difficulties in application of Article on \"relief from double taxation\". It therefore recommends that domestic legislation should provide solutions for all difficult areas/issues. There 159 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited are no rules in domestic statute in India dealing with manner of granting relief from double taxation. Relief from double taxation is thus to be calculated on the basis of provisions of Treaty, read with domestic legislations in India. 21. As per section 90(2) where treaty exists, for granting relief of tax in relation to an assessee to whom such agreements applies, provisions of the Act shall apply to the extent, they are more beneficial to assessee. Thus, though chargeable provision of Income-tax Act is applicable to assessee for its global income, yet as per section 90, if income is taxed both in India and Thailand, assessee is entitled to relief as per clause 23 of the DTAA with Thailand. 22. Reading above reproduced provision of Article 23(2), following are the circumstances that arise: ♦resident of India who earns income, taxed in Thailand directly or by deduction in respect of profits or income arising in Thailand, and also in India, India is to allow credit against Indian tax payable in respect of such profits or income, with a caveat that, credit shall not exceed Indian Taxes. Credit is granted against tax liability in resident country. Therefore, resident would not be required to pay tax to the extent of credit available to him. ♦in the event assessee is not liable to pay tax in India, or if tax payable by him in India, because of deduction/exemption granted, is less than tax payable outside India, assessee cannot claim credit for entire taxes paid. The credit is out of tax on income, of resident. Thus, if there is no tax or lesser tax because of exemption/deduction in India, there is no double taxation and applicability of article 23 of Indo Thailand DTAA does not arise. 23. For several developing countries tax sparing credits become essential to ensure that incentives offered by them to foreign investors yield results. Commentary to UN Model Convention notes; 160 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited \"One of the principal defects of the foreign tax credit method, in the eyes of the developing countries, is that the benefit of low taxes in developing countries or of special tax concessions granted by them may in large part inure to the benefit of the treasury of the capital- exporting country rather than to the foreign investor for whom the benefits were designed. Thus, revenue is shifted from the developing country to the capital- exporting country. The effectiveness of the tax incentive measures introduced by most developing countries thus depends on the inter-relationship between the tax systems of the developing countries and those of the capital-exporting countries from which the investment originates. It is of primary importance to developing countries to ensure that the tax incentive measures shall not be made ineffective by taxation in the capital- exporting countries using the foreign tax credit system. This undesirable result is to some extent avoided in bilateral treaties through a \"tax sparing\" credit, by which a developed country grants a credit not only for the tax paid but for the tax spared by incentive legislation in the developing country.\" Provisions for tax sparing credit are seen in India's DTAA with UK, Australia, Canada, etc. Klaus Vogel notes regarding Article 23 in his book for Double Taxation Conventions as under: \"In accepting the 'tax sparing credit' method, the State of residence takes into consideration special measures by which the State of source has for reasons of economic policy or the like, reduced its tax individually order for certain categories of cases. The tax allowed as credit by the State of residence is that which would have been paid in the absence of such a special reduction. This arrangement avoids the otherwise unavoidable result of the credit method is that the tax relief offered by the State of source would be 'siphoned off' by the higher tax in the State of residence and would, therefore, have no effect. In this regard, the State of residence respect the indirect subsidy given by the State of source. From the 161 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited point of view of international tax law, the result would be the same if the state of source had given the tax spared a direct subsidy and the state of residence had refrained from taxing it.\" 24. On perusal of above commentaries, it is clear that concept of 'tax sparing credit' shall be applicable to an assessee, only if dividend received by assessee is taxable in the hands of assessee as per \"Thai tax laws\" and exemption is available to assessee either as per the 'Revenue Code of Thailand' or as per 'Investment Promotion Act, B.E. 2520(1977)' in order to avail credit of such taxes spared in Thailand as mentioned in paragraph 2 of Article 23. It is further noted that the above decision of Hon’ble Delhi Tribunal has been upheld by Hon’ble Delhi High Court reported in PCIT vs. Polyplex Corporation Ltd.reported in (2023) 152 taxmann.com 479. 32.9 In the present facts of the case, the assessee was granted exemption by the Tanzanian Authority vide order dated 11/10/2001, in respect of the Income generated from the project under the Tanzanian Tax Act. The exemption was granted as the project was considered to be of National importance and that it contributed to the economic development of Tanzania. The said order of the Tanzanian authority is scanned and reproduced as under: 162 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited From the paper book filed before this Tribunal, it is noted that, the assessee entered into agreement with Songas Ltd., for laying gas pipeline for Songo Songo project as per Government notice no.240 dated 12th October. The profit and loss account and balance sheet of the assessee comprises of only income of assessee in Tanzania from the contract entered with Songas Ltd., placed at paged 1332 to 1336. 163 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited 32.10 Admittedly assessee entered into sub contracting agreement with Songas Ltd. The exemption order clearly states that the income of contractors and subcontractors of Songas Ltd., in respect of Songo Songo project shall be exempt from Tanzanian Tax or withholding tax in Tanzania, to the extent that it accurse prior to one year after the commercial operations date. On a conjoint reading of Article 25(2)(b)(iv) of the DTAA and the exemption order dated 11/10/2001, credit will have to be granted to the assessee in respect of the tax spared under the Tanzanian Tax laws in the hands of the assessee on the income earned from Songo Songo project. 32.11 The Ld.AO is thus directed verify the requirement of the accrual of income in the hands of the assessee as per the exemption order dated 11/10/2005. In the event the criteria stands satisfied, credit is to be granted in respect of the tax spared under the Tanzanian Tax laws on the operating income earned from the Songo Songo project in Tanzania, under section 90 of the Indian Income Tax Act. Accordingly, Ground no.12 raised by the assessee stands partly allowed. In the result, the appeal filed by the assessee partly allowed. Order pronounced in the open court on 14/05/2025 Sd/- Sd/- (PRABHASH SHANKAR) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated:14/05/2025 164 ITA No.6972,7223/Mum/2013; A.Y. 2005-06 M/s. Larsen & Toubro Limited Poonam Mirashi, Stenographer Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order (Asstt.Registrar) ITAT, Mumbai "