Supreme Court settles Section 80-IA deduction eligibility for a company succeeding a partnership in infrastructure projects: Commissioner of Income Tax vs. Chetak Enterprises (2020) INSC 179 (05 March 2020)

Date of the Judgment: 05 March 2020
Citation: (2020) INSC 179
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J.

Can a company claim tax deductions under Section 80-IA of the Income Tax Act, 1961, for an infrastructure project when it has taken over the project from a partnership firm? This question was at the heart of a recent Supreme Court case. The court examined whether a company, formed after a partnership firm had already entered into an agreement for an infrastructure project, could avail of tax benefits under Section 80-IA. The Supreme Court, in this case, clarified the conditions under which such a deduction can be claimed. The judgment was authored by Justice A.M. Khanwilkar, with Justice Dinesh Maheshwari concurring.

Case Background

M/s. Chetak Enterprises, a partnership firm, entered into an agreement with the Government of Rajasthan for the construction of a road and the collection of toll tax. The firm completed the road construction on March 27, 2000, and it was inaugurated on April 1, 2000. On March 28, 2000, the firm was converted into a private limited company, M/s. Chetak Enterprises (P) Ltd., under Part IX of the Companies Act, 1956. The company informed the Chief Engineer (Roads), P.W.D., Rajasthan, about the conversion. The authority cancelled the firm’s registration and granted a fresh registration code to the company. The company then started collecting toll tax. For the Assessment Year 2002-2003, the company claimed a deduction under Section 80-IA of the Income Tax Act, 1961, which was initially denied by the assessing officer.

Timeline:

Course of Proceedings

The assessing officer initially rejected the company’s claim for deduction under Section 80-IA of the Income Tax Act, 1961. However, the Commissioner of Income-Tax (Appeals), Udaipur, reversed this decision. The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner’s decision, following its own precedent in the company’s case for the Assessment Year 2001-2002. The Income Tax Department then appealed to the High Court of Judicature for Rajasthan at Jodhpur, which also ruled in favor of the company. The High Court framed the question of law as to whether the assessee-company was right in finding that the assessee fulfilled the condition of sub-Section (4)(i)(b) of Section 80-IA.

Legal Framework

The core legal provision in question is Section 80-IA of the Income Tax Act, 1961. This section provides a deduction for profits and gains derived from the business of an industrial undertaking or an enterprise engaged in infrastructure development. The relevant portion of Section 80-IA, as applicable to Assessment Year 2002-03, states:

“80-IA (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years…”

Section 80-IA(4)(i) specifies that this section applies to:

“Any enterprise carrying on the business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility which fulfills all the following conditions, namely:— (a) it is owned by a company registered in India or by a consortium of such companies; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility…”

The court also referred to Section 575 of the Companies Act, 1956, which deals with the vesting of property on registration:

“575. Vesting of property on registration.—All property, movable and immovable (including actionable claims), belonging to or vested in a company at the date of its registration in pursuance of this Part, shall, on such registration, pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein.”

This section implies that upon registration, all properties of the erstwhile firm automatically vest in the newly formed company.

Arguments

The Income Tax Department argued that the assessee-company did not independently fulfill the conditions of Section 80-IA(4)(i)(b) of the Income Tax Act, 1961, because the agreement was initially between the government and the partnership firm. The department contended that the company was a separate legal entity and had not entered into a direct agreement for the infrastructure project.

The assessee-company contended that upon conversion of the partnership firm into a company under Part IX of the Companies Act, 1956, all assets and liabilities of the firm, including the agreement with the Government, were statutorily vested in the company. The company argued that the agreement with the government should be considered as an agreement with the company, given the statutory transfer of assets and liabilities. The company also relied on the fact that the Chief Engineer had been informed about the conversion and had accepted the company as the successor to the firm.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the assessee-company fulfilled the condition of Section 80-IA(4)(i)(b) of the Income Tax Act, 1961, given that the agreement was initially with the partnership firm, and not the company?

Treatment of the Issue by the Court

Authorities

The Court considered the following legal provisions and their implications:

• Section 80-IA of the Income Tax Act, 1961: This section provides for deductions on profits from infrastructure development. The court interpreted the conditions specified in sub-section (4)(i) regarding ownership and agreement with the government.
• Section 575 of the Companies Act, 1956: This section deals with the vesting of property upon registration of a company after conversion from a partnership firm. The court used this section to establish that all assets and liabilities of the firm, including the agreement, were transferred to the company by operation of law.

Judgment

The Court also considered the following authorities and how they were used:

What weighed in the mind of the Court?

The Court’s decision was heavily influenced by the statutory provisions regarding the conversion of a partnership firm into a company. The court emphasized that Section 575 of the Companies Act, 1956, clearly stipulates that all assets and liabilities of the firm are automatically vested in the company upon registration. This statutory transfer was a key factor in the court’s reasoning. The court also noted that the government was aware of the conversion and had accepted the company as the successor to the firm. This demonstrated that the agreement was effectively between the government and the company, even though the initial agreement was with the partnership firm.

The court’s reasoning was that the conversion of the partnership firm into a company under Part IX of the Companies Act, 1956, resulted in a statutory transfer of all assets and liabilities, including the agreement with the government, to the company. The court noted that the agreement itself included successors and assigns, and therefore, the company was a successor to the firm. The court emphasized that the government was aware of the conversion and had accepted the company as the successor. The court also noted that the construction of the road was completed before the commencement of the assessment year, and the company was only maintaining and operating the infrastructure facility. The court also made the observation that the assessee-company is an enterprise carrying on the stated business pertaining to infrastructure facility and owned by a Company registered in India on the basis of the agreement executed with the State Government to which the respondent/assessee-Company has succeeded in law after conversion of the partnership firm into a company.

The Court stated:

“It is manifest that all properties, movable and immovable (including actionable claims) belonging to or vested in a company at the date of its registration would vest in the company as incorporated under the Act.”

The Court further stated:

“On such statutory vesting, all the properties of the firm, in law, vest in the company and the firm is succeeded by the company.”

The Court also stated:

“A priori, it must follow that the business is carried on by the enterprise owned by a company registered in India and the agreement entered into between the erstwhile partnership firm and the State Government, by legal implication, assumes the character of an agreement between the company registered in India and the State Government…”

There were no dissenting opinions.

Key Takeaways

• A company formed by converting a partnership firm can claim tax deductions under Section 80-IA of the Income Tax Act, 1961, for infrastructure projects if the original agreement was with the partnership firm, provided that the conversion is under Part IX of the Companies Act, 1956.
• The statutory vesting of assets and liabilities under Section 575 of the Companies Act, 1956, ensures that the agreement between the government and the firm is considered an agreement with the company.
• The acceptance of the company as the successor by the concerned government authority is a crucial factor in determining eligibility for tax deductions.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that a company formed by converting a partnership firm can claim tax deductions under Section 80-IA of the Income Tax Act, 1961, for infrastructure projects if the original agreement was with the partnership firm, provided that the conversion is under Part IX of the Companies Act, 1956. This clarifies the position of law regarding the eligibility of a company for tax deductions when it has succeeded a partnership firm in an infrastructure project.

Conclusion

The Supreme Court’s decision in Commissioner of Income Tax vs. Chetak Enterprises clarifies that a company succeeding a partnership firm in an infrastructure project can avail of tax deductions under Section 80-IA of the Income Tax Act, 1961, provided that the conversion is under Part IX of the Companies Act, 1956, and the government authority has recognized the company as the successor. This judgment provides clarity on the eligibility criteria for tax deductions in cases where a partnership firm is converted into a company during the course of an infrastructure project.