ITAT CHENNAI BENCH 'B'

IT Appeal No. 637 (Mds.) of 2013
[ASSESSMENT YEAR 2009-10]

ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER

S. Sridhar for the Appellant.
M. Srinivasa Rao for the Respondent.

ORDER

Abraham P. George, Accountant Member - In this appeal filed by the assessee, it has raised five grounds of which, grounds 4 and 5 are general needing no adjudication.

2. Vide its ground No.1, assessee assails denial of its claim for deduction under Section 54G of Income-tax Act, 1961 (in short 'the Act').

3. Facts apropos are that assessee, engaged in infrastructural development and construction work, including manufacturing and erection and commissioning of boilers for power plant, had filed its return for the impugned assessment year on 29.9.2009 declaring an income of Rs. 12,60,91,350/-. Assessee had claimed a deduction of Rs. 41,03,70,946/- under Section 54G of the Act, on capital gains arising out of sale of its land in Chemmenchery Village, Tambaram Taluk, effected by it on 23.4.2008 and 14.7.2008. Claim of the assessee was that the land was urban in nature coming within the meaning of Section 54G of the Act, sold in connection with shifting of its industrial undertaking from an urban area to a non-urban area, i.e. shifting of industrial undertaking from Chemmenchery to Koppur which was a non-urban area. As per the assessee, Chemmenchery Village, where the land sold was situated, was an urban area and therefore it was eligible for claiming the benefits under Section 54G of the Act.

4. Assessing Officer, however, was of the opinion that Chemmenchery Village was included in Chennai City Corporation only from 2011 through Government Order D No.256 dated 26.12.2009. According to the A.O., assessee's averment that the land in Chemmenchery Village was an urban area could not be accepted. Authority for recognizing any land as an urban land, for the purpose of Section 54G, in the opinion of the A.O., was the Central Government. Government of India had issued a Notification No.10076 on 2.4.1996, notifying areas comprised in Corporation of Chennai (then Madras), along with certain other towns and cities as urban land within the meaning of Section 54G of the Act. As per the A.O., expansion of limits of a city fell in the domain of the State Government. He was of the firm opinion that expansion of the limits of Chennai city so as to include Chemmenchery Village within, had taken effect only in 2011 through Notification dated 26.12.2009.

5. Assessee in support of its contention that Chemmenchery Village was an urban area, produced receipts for paying urban land tax payments. However, A.O. noted that payments of urban land tax were made to Village Panchayats and not to Chennai City Corporation. Assessee had also relied on the Master Plan of Chennai Metropolitan Development Authority (CMDA), which classified Chemmenchery Village as an industrial zone forming a part of Chennai. This was also not accepted by the A.O. for the reason that Metropolitan Development Authority had a different role, viz. planning of city development, and they had no authority to expand the city limits. Based on a study of the Notification No. D-256 dated 26.12.2009, Assessing Officer came to a conclusion that Tamil Nadu Government had decided to bring into the fold of Chennai city, the surrounding villages and town panchayats, inter alia including therein Chemmenchery Village also, based on reports of two sub-committees, formed for that purpose, only from the year 2011. According to him, at the time when the property at Chemmenchery Village was sold by the assessee, it was not an urban area.

6. Even otherwise, as per Assessing Officer, the report of the Directors of assessee-company for financial year 2007-08, had mentioned that its work site was being shifted from Chemmenchery to Puzal. Both Chemmenchery and Puzal Village were included in Chennai City limits only by way of Notification No.256 of 26.12.2009 which was to take effect in 2011. Therefore, according to him, both the villages could not be considered as part of Chennai city. Hence, shifting of industrial undertaking, if at all done by the assessee, was from non-urban area to another non-urban area and therefore, capital gains arising in the course of such shifting, could not enjoy the deductions given under Section 54G of the Act.

7. Assessing Officer also made a verification of the items on which the claim of deduction under Section 54G was made by the assessee. He found that such claim was for machinery purchased during financial years 2007-08 and 2008-09 and for land purchased at Venkateshpuram Village in Koppur hamlet of Tiruvallur District, in 2010. As per the A.O., the claim for exemption were in respect of assets added in preceding previous years 2007-08 and 2008-09, and for assets purchased during 2009-10 and 2010-11. Out of the above, latter purchases alone were made utilizing funds drawn from deposits of Rs. 19.6 Crores made under Capital Gains Deposits Scheme. In other words, according to A.O., there was nothing to show that assessee had shifted any industrial undertaking from Chemmenchery Village to Koppur. As per A.O., the list of machinery added by the assessee during the material period, were ones used in construction and earth moving, and had no use as such in a fabrication unit.

8. Assessee had also filed an expert opinion of an Advocate as well as a Chartered Accountant in which it was stated that Chemmenchery Village was in urban area. Nevertheless, as per the A.O., though the Chemmenchery Village could be considered as urban area within the meaning of Tamil Nadu Urban Land (Ceiling and Regulation) Act, 1978, it would not be an "urban area" falling within Section 54G of the Act, unless and until there was a Central Government Notification bringing Chemmenchery Village within Madras city limits. He thus came to a conclusion that assessee was not entitled to claim deduction under Section 54G of the Act. An addition of Rs. 41,03,70,946/- was made.

9. In its appeal before CIT(Appeals), argument of the assessee was that it had shifted its plant from Chemmenchery Village to Koppur Village, Tiruvallur District. As per the assessee, main dispute was with regard to nature of location of Chemmenchery unit. For buttressing its argument that Chemmenchery Village was an urban area, assessee once again relied on the legal opinion furnished before Assessing Officer. However, the CIT(Appeals) was not impressed. According to him, assessee was unable to adduce any authentic material to support its claim. Tamil Nadu Government, vide Order in D.No.256 dated 26.12.2009, had clearly stated that Chemmenchery would be added to Chennai City Corporation limit with effect from 2011 only. Assessee's claim related to a period much prior to that. He thus held that the addition was rightly done by the A.O.

10. Now before us, Adv. S. Sridhar, appearing for the assessee, submitted that Koppur, the place to which assessee had shifted was undisputedly a non-urban area. The only question was whether Chemmenchery was an urban area or not. Assessing Officer had confused himself in considering Puzal as the area to which assessee had shifted from Chemmenchery. Assessee had in fact shifted to Koppur. Notification dated 26.12.2009 of Tamil Nadu Government related back to the date, when expansion of city limits had actually taken place. Notification only declared the factum of expansion of city limits which had already taken place. It would never mean that such area was not a part of the city. Relying on Notification No.10056 dated 2nd April, 1996 of Central Government, learned A.R. submitted that Central Government had declared areas falling within the limits of Municipal Corporation or Municipality to be an urban area within the meaning of Section 54G of the Act. The question therefore, according to learned A.R., was whether the places mentioned in the said Notification would include Chemmenchery or not. According to him, Notification dated 26.12.2009 of Tamil Nadu Government had considered actual expansion of city limits which had happened after 1978, and this was clearly mentioned in the preamble thereof. Notification only recognized what had already happened. It would not mean that such areas were not part of Chennai city.

11. Continuing his arguments, ld. counsel for the assessee referred to Section 6-A of Tamil Nadu Urban Land Tax Act, 1966. According to him, "urban area" was defined therein as area comprised in city of Madras as also those areas in Madras city belt area. Further, according to him, by virtue of Section 3(o) of Tamil Nadu Urban Land (Ceiling & Regulation) Act, 1978, any land situated within the limits of an urban agglomeration fell within the ambit of urban land. "Urban agglomeration" was defined in Section 3(n) of the same Act to mean the area comprised in Schedule I thereto. Schedule I specified that St. Thomas Mount-cum-Pallavaram Cantonment to be within Madras urban agglomeration. Chemmenchery Village fell within St. Thomas Mount-cum-Pallavaram Cantonment and hence it was nothing but urban land. According to him, it was required to give a harmonious construction to the term "urban area" while interpreting Section 54G of the Act, since Central Government notification dated 2nd April, 1996 itself mentioned limits of Municipal Corporation or Municipality of Madras without exactly specifying how such limits were to be construed.

12. Coming to the aspect of shifting from Chemmenchery to Kopur, which was doubted by the lower authorities, learned A.R., relying on paper-book page 35, submitted that boiler erection registration renewal certificate issued by Director of Boilers, Tamil Nadu on 4.5.2007 was addressed to the Chemmenchery unit. According to him, PWD Department, vide its letter dated 26.9.2011, placed at paper-book page 42, had noted the shifting of works to Koppur location. As per learned A.R., Puzal was only a holding area and the shifting was from Chemmenchery to Koppur. Relying on a certificate issued by Central Board of Excise And Customs dated 27.1.2011, placed at paper-book page 44, learned A.R. submitted that the location of its manufacturing unit at Koppur Road was registered by said Department based on its application dated 21.1.2011.

13. Again, as per learned A.R., urban land tax was paid in respect of Chemmenchery land as early as from 1998. Placing reliance on an order of Asstt. Commissioner of Urban Land Tax, Alandur, placed at paper-book pages 49 to 52, learned A.R. submitted that said authority had held Chemmenchery to be an urban land. Accordingly, assessee was paying urban land tax every year. Learned A.R. submitted that neither purchase of land at Koppur, nor the sale of land at Chemmenchery were doubted by the Department. According to him, assessee had submitted a detailed list of plant and machinery acquired for Koppur unit during financial years 2007-08 and 2008-09 costing in total Rs. 22,32,81,824/-. Relying on paper-book pages 159 to 187, learned A.R. submitted that the break-up of such plant and machinery clearly showed that these were not any earth moving or construction equipment. Items acquired were machinery used in a fabrication plant and such plant was established by the assessee at Koppur. According to him, Section 54G allowed an assessee to purchase new machinery or acquire building or land within a period of one year prior or three years after the date of transfer. Transfer of land at Chemmenchery having been effected during the period 23rd April, 2008 to 14th July, 2008, the assessee could claim exemption under Section 54G for investment made during the period 23rd April, 2007 to 22nd April, 2011. According to him, assessee's claim for exemption were on plant and machinery acquired from 23rd April, 2007 and not for any date prior to that. Total value of plant and machinery came to Rs. 22,32,81,824/- and the cost of the land acquired came to Rs. 18,70,89,122/-. According to him, authorities below gave a very narrow interpretation of Section 54G and denied a legitimate claim available to the assessee. Assessee had moved out of an urban area to a rural area and despite that, it was not given the benefit of Section 54G. Relying on a decision of Hon'ble Karnataka High Court in the case of CIT v. Sambandam Udaykumar [2012] 206 Taxman 150/345 ITR 389/19 taxmann.com 17 (Kar.), learned A.R. submitted that object of Section 54G was to encourage shifting of industrial undertaking from urban area to rural area and considering such object, a liberal interpretation was required to be given.

14. Per contra, learned D.R., strongly supporting the orders of authorities below, submitted that Assessing Officer had no confusion regarding the claim of shifting of undertaking made by the assessee. Assessee was only trying to create confusion by stating that shifting of undertaking was from Chemmenchery to Koppur, which argument was never taken before the Assessing Officer. Even otherwise, assessee along with the appeal papers, had enclosed a copy of the assessment order, which was not complete. It had not attached two important annexures mentioned therein, namely, Order D.No.256 dated 26.12.2009 of Tamil Nadu Government and Notification No. 10056 dated 2nd April, 1996 of Central Government. For this reason alone, according to him, the appeal had to be dismissed.

15. Continuing his arguments, learned D.R. submitted that assessee's address mentioned in various communication placed at paper-book pages 36 to 41, was that of its Puzal office. Puzal was the registered office of the assessee and not a holding area as mentioned by the assessee. Machinery acquired were only for earth moving and construction and not any manufacturing equipment. As per the learned D.R., conditions mentioned in Section 54G were not satisfied by the assessee. Notification dated 2nd April 1996 of Central Government mentioned Municipal limits of Madras as the urban area for the purpose of Section 54G of the Act. In the opinion of learned D.R., Tamil Nadu Urban Land Tax Act, 1966, was an enactment for assessing urban land tax. Definition given therein would have no effect whatsoever on a claim of exemption made under Section 54G of the Act. Mere mentioning of an area as urban area in Tamil Nadu Urban Land Tax Act, 1966, would not per se make it urban area qualifying for deduction under Section 54G of the Act. The only authority to decide the limits of Chennai City Corporation was Tamil Nadu Government. Order D.No.256 dated 26.12.2009 of Tamil Nadu Government clearly mentioned that Chemmenchery would be added to the city limits with effect from 2011 only. Even otherwise, as per the learned D.R., this Notification itself had come on 26.12.2009 and even this date was well after the end of the relevant previous year. In any case, according to him, assessee could not say that even prior to 26.2.2009, Chemmenchery was a part of Chennai City Corporation limits. Just because Madras city as such was considered as urban area under Tamil Nadu Urban Land Tax Act, 1966, it could not be said that city limits stood expanded.

16. Further continuing his arguments, learned D.R. submitted that Assessing Officer had not taken a narrow view on the interpretation of Section 54G. Assessing Officer could not overstep the limits provided in the Act. If the land sold was situated in urban area, assessee could claim such exemption under Section 54G of the Act, but not otherwise. The land sold, on the other hand, at the time of sale, was not a part of Chennai city limits and therefore, not an urban area.

17. Ad libitum reply of the learned A.R. was that assessee in its letter dated 8.12.2011, placed at paper-book pages 12 to 18, had clearly stated before the Assessing Officer that claim of deduction under Section 54G was for shifting of its undertaking from Chemmenchery to Koppur Village. Assessee had also given a legal opinion by Shri L.S.M. Hasan Fizal, B.A., M.L., Government Advocate, Madras High Court, which clearly stated that Chemmenchery was an urban area. As for the pleading of the learned D.R. that copy of assessment order filed alongwith appeal was incomplete and was not having the notifications appended thereto, learned A.R. submitted that such notifications were in public domain and not any private documents.

18. We have perused the orders and heard the rival submissions. There is no dispute that claim of deduction under Section 54G has been made by the assessee on a land sold at Chemmenchery Village. In our opinion, three questions are required to be decided. First is whether Chemmenchery was an urban area falling within the Explanation given under Section 54G(1) of the Act. Second is whether the assessee had established an industrial undertaking at Koppur Village. Third is whether the sale of land at Chemmenchery and establishment of an industrial undertaking, if any, at Koppur Village satisfied the requirements regarding shifting of an industrial undertaking mentioned in Section 54G of the Act.

19. Taking up the first question, it is necessary to have a look at Explanation to Section 54G(1), which defines "urban area", before we progress further. The said explanation reads as under:—

"Explanation.—In this sub-section, "urban area" means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section."

Obviously, the power to declare any area as "urban area" is vested with Central Government by virtue of the above explanation. This brings us to the Notification issued by the Central Government on 2nd April, 1996, which reads as under:—

"NOTIFICATION No.10056, DT. 2nd APRIL, 1996.
CAPITAL GAINS
SECTION 54G(1)

In exercise of the powers conferred by the Explanation below sub-section(1) of section 54G of the Income-tax Act, 1961(43 of 1961), the Central Government, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, hereby declares the areas falling within the limits of Municipal Corporation or Municipality, as the case may be, mentioned and in column(3) of the Schedule hereto annexed and situated within the State shown in column(2) thereof, as urban areas for the purpose of sub-section(1) of section 54G of the Income-tax Act, 1961 (43 of 1961):

SCHEDULE

2. This Notification will come into effect from the date of its publication in the Official Gazette."

20. The above Notification states that areas within the limits of various Municipal Corporation or Municipality mentioned therein which, inter alia, includes "Madras" as well, would be urban area for the purpose of Section 54G of the Act. First question thus boils down to issue as to whether Chemmenchery was within the limits of Municipal Corporation of Madras. As per the Revenue, the sole authority to determine the limits of Municipal Corporation is Government of Tamil Nadu. Government of Tamil Nadu had through its Order No. D 256 dated 26.12.2009 mentioned about explanation of limits of various Municipal Corporation. Said Notification in 'Tamil' is one of the annexures forming part of the assessment order. A copy thereof has been placed on record by the learned A.R. during the course of arguments before us. Village of Chemmenchery does find a mention therein. A look at the introduction para of the Notification clearly shows that the limits to Chennai Metropolitan area was earlier fixed in 1978, but thereafter, over the period, Chennai had grown considerably. Said introduction para reads as under:—

IMAGE
English translation of the above if attempted can read like this:-
"Chennai Corporation is currently spread over an area of 174 Sq. Kilometers. Current boundaries of Chennai Corporation were defined in 1978, more than 30 years ago. Chennai Metropolitan area is witnessing rapid growth in recent times. Attention has to be paid to ensure that the needs of these past developing regions are met with and plans have to be drafted to provide basic amenities like good roads, drinking water supply, street lamps, sewage disposal and proper solid waste management. There is a vast difference in the quality of services and amenities provided by various local Municipalities and Union s that are located in Chennai Metropolitan area. Moreover, it was found that the services have failed to meet the requirements. The need for and opportunities to unite these muncipalities and unions governing regions close to the metropolis and for the expansion of Chennai Metropolitan area has been felt."

A close reading of the Notification, in our opinion, does show that it was only recognition of an existing situation, or more in the nature of a fait accompli. Places surrounding the perimeter fixed in 1978, had already widened over the period of time. In other words, for all practical purposes, Chennai city limit had expanded. Just because a notification in this regard was issued by the State Government on 26.12.2009, would not mean that Chennai city limits stood static after 1976, not moving an inch wider. Notification of the Government itself had come at a stage when actual ground realities could not be ignored. This is evident from various standing orders referred in the Notification dated 26.12.2009 which have been referred all through such notification. Various committees were working on the issues affecting urbanization since long, as mentioned in the Notification itself. An official recognition of expanded city limits might have taken considerable time. Just because Notification dated 26.12.2009 state that Ward Divisions will as such continue upto 2011, would not mean that Chennai was a small city only of 174 sq. Kms ever since 1978 without any change.

21. While interpreting a provision in a statute, intention behind the enactment is extremely important. Enactment of Section 54G by the Legislature was with an intention to de-urbanise populated areas and de-industrialise such area by encouraging industrialization of areas, which were under developed. That Tamil Nadu Government itself had considered areas peripheral to city limits as urban area, is clear from the substitution of Section 6 by Section 6-A in Tamil Nadu Urban Land Tax Act, 1966, through an amendment Act of 1975. Section 6-A defined an "urban area" to include both city of Madras as well as the Madras city belt area. No doubt, as pointed out by learned D.R., Tamil Nadu Urban Land Tax Act, 1966 is a State enactment for levying urban land tax. But, nevertheless, if for the purpose of collection of urban land tax, an area is considered to be urban, we cannot say that for other purposes, it is not urban. Just because the Notification of Tamil Nadu Government expanding the limits of Chennai City Corporation came only on 26.12.2009, would not in any way take the glean out of the argument of the assessee that Chemmenchery, which was a part of Madras city belt area, was already an urban area. Harmonious interpretation therefore requires the Notification D.256 dated 26.12.2009 to be construed as relating back to the various periods in which different areas mentioned therein became a part of the Chennai city limits, in practical reality.

22. Assessee had produced before the Assessing Officer a legal opinion given by a Government Advocate, copy of which has been placed at paper-book pages 19 to 23. It is stated therein that Chemmenchery Village was covered within Chennai Metropolitan area and was an urban land situated within the urban agglomeration of Chennai. Pertinent part of this opinion is reproduced hereunder:—

'11. Section 6-A of Tamil Nadu Urban Land Tax Act, 1966, defines "Urban Area" to include Madras City Belt Area. Section 1-A of Tamil Nadu Urban Land Tax Act, 1966, extends the applicability of the Tamil Nadu Urban Land Tax Act to Madras City Belt Area with effect from 01.07.1975 in the area comprised within 16 Kilometres of the outer limits of the City of Madras, as per Tamil Nadu Urban Land Tax (Amendment) Act, 1975, (Act 45 of 1975).

12. Section 3(o) of Tamil Nadu Urban Land (Ceiling & Regulation) Act, 1978, defines "Urban Land" to include any land situated within the limits of an urban agglomeration and referred to as such in the master plan. Section 3(n) of Tamil Nadu Urban Land (Ceiling & Regulation) Act, 1978, defines "Urban Agglomeration" to mean the area comprised in the urban agglomeration specified in Schedule I. Schedule I of Tamil Nadu Urban Land (Ceiling & Regulation) Act, 1978, includes St. Thomas Mount-cum-Pallavaram Cantonment to be within the Madras Urban Agglomeration. Section 3(i) of Tamil Nadu Urban Land (Ceiling & Regulation) Act, 1978, defines "Master Plan" to in relation to an area within an urban agglomeration or any part thereof, means the Plan (by whatever name called) prepared under any law for the time being in force or in pursuance of an order by the State Government for the development of such area or part thereof.

13. Second Master Plan for Chennai Metropolitan Area describes Chennai Metropolitan Area to comprise the area covered by Chennai City Corporation (Chennai District), 16 Municipalities, 20 Town Panchayats & 214 Villages forming part of 10 Panchayat Unions in Thiruvallur and Kancheepuram Districts. Annexure XXVI of Second Master Plan gives the list of Corporation Division and Villages in Chennai Metropolitan Area. As per the said list, Item No.XXXXVI names St. Thomas Mount Panchayat Union, wherein Village No.190 Semmanchery in Tambaram Taluk, Kancheepuram District, is included in Serial No.297.

14. From the above discussions, I conclude that the above immovable properties being vacant lands in different Survey Numbers in Semmanchery Village, Tambaram Taluk, Kancheepuram District, measuring different extents of lands, covered within the Chennai Metropolitan Area are Urban Lands situated within the Urban Agglomeration of Chennai.'

In our opinion, lower authorities fell in error in brushing aside the above legal opinion lightly. Explanation to Section 54G(1) of the Act has to be harmoniously interpreted so that it is in consonance with the needs of a developing city. Notification dated 26.12.2009 of Tamil Nadu Government, read along with the definition of "urban area" given in Section 6 A of Tamil Nadu Urban Land Tax Act, 1966 will clearly show that Chemmenchery was indeed within city limits. Assessee here was paying urban land tax for its Chemmenchery property right from 1998, based on determination of such urban land tax by Asst. Commissioner of Urban Land Tax. Thus, in our opinion, the first question has to be answered in favour of assessee. Chemmenchery Village in which the land sold by the assessee was located, fell within the scope of "urban area" mentioned in Section 54G of the Act.

23. Coming to second question as to whether assessee had established an industrial undertaking at Koppur Village, we find that acquisition of land by the assessee at Koppur Village on 18th day of January, 2010 and 24th May, 2010 are evidenced by conveyance deeds, copies of which have been placed at paper-book pages 119 to 158. That assessee had deposited the capital gains on transfer of the Chemmenchery land in a Capital Gains Account Scheme with State Bank of India, cannot be disputed since this has been certified by the bank vide its letter dated 31st October, 2011, copy of which has been placed at paper-book page 159. That assessee had acquired various plant and machinery during the financial year 2007-08 to 2009-10 also cannot be disputed. Break-up of such acquisition has been placed at paper-book pages 160 to 187. This gives an exhaustive list of different items of machinery purchased. The nature of such items does not show that these were earth moving or construction machines. What is to be seen is whether the plant and machinery purchased were used in Koppur for setting up an industrial unit. On this aspect, the certificate of Central Board of Excise & Customs issued on 27.1.2011, placed at paper-book 44, is very relevant. This particular certificate is reproduced hereunder:—

FORM RC
Central Excise Registration Certificate
[Under Rule 9 of the Central Excise Rules,2002]

This is to certify, subject to conditions specified below, that

M/s EDAC ENGINEERING LTD, MANUFACTURING OF EXCISABLE GOODS (name and style in which the Registrant is likely to carry out business) (in case of a proprietary concern or business owned by a Hindu Undivided Family, the name of proprietor/Hindu Undivided Family, as the case may be, shall also be indicated)

is/are registered for OPERATING AS A MANUFACTURER OR EXCISABLE GOODS (type or business) at 0.100, KOPPUR ROAD, VENKATESAPURAM VILLAGE, THIRUVALLUR, THIRUVALLUR, TAMIL NADU (address of the business premises) on the basis of the application received in this office on 21/01/2011 (date of receipt).
Registration Number is AABCS0321GEM004

Conditions

Commercial Taxes Department of Government of Tamil Nadu had also issued a certificate on 3.2.2011, copy of which has been placed at paper-book page 45, which also states that assessee had established a branch/factory/godown at Koppur, with effect from 28.1.2011. Assessee had also received a certificate from Directorate of Boilers, copy of which has been placed at paper-book page 43, which gives its Koppur Road unit registration as a Special Class Boiler Repairer under Indian Boiler Regulations, 1950. No doubt, as pointed out by learned D.R., Public Works Department of Boilers Directorate had addressed number of letters to its Puzal office regarding assessee's application for upgrading it to a Special Class Boiler Repairer. But, nevertheless, the final certificate with regard to such recognition as Special Class Boiler Repairer was addressed to its Koppur unit. One other contention taken by learned D.R. is that assessee had never mentioned before the lower authorities that shifting was from Chemmenchery to Koppur. However, Assessing Officer himself has noted at para A(viii) of his order that assessee had indeed purchased a land at Venkateshpuram Village, Tiruvallur District in January, 2010 and claimed deduction under Section 54G on this purchase. Further, ld. CIT(Appeals) had in his order at para 6 clearly stated that claim of the assessee under Section 54G was with regard to shifting from Chemmenchery to Koppur Village, Tiruvallur District. This being so, we are unable to accept the argument of the learned D.R. that assessee had never put the claim before the Assessing Officer. We cannot say assessee's claim was for shifting its Chemmenchery unit to Puzal unit. Circumstantial evidence clearly show that assessee had established an industrial undertaking in Koppur Village.

24. This takes us to the last question whether the sale at Chemmenchery and establishment of undertaking at Koppur, satisfied the requirement of "shifting" mentioned in Section 54G of the Act. Section 54G is reproduced hereunder:—

"54G. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area :— (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as the original asset) to any area (other than an urban area) and the assessee has within a period of one year before or three years after the date on which the transfer took place,—

then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

A reading of above would show that the exemption available under it is on capital gains arising on transfer of a capital asset which can be in the nature of machinery or plant or building or land. Transfer giving rise to the capital gains need not be of machinery and plant and land and building together. The requirement is satisfied even if there is only a transfer of land. Second requirement is that such transfer has to be effected in the course of, or in consequence of, shifting of the industrial undertaking. That assessee had a unit at Chemmenchery is clear from the boiler erection renewal certificate dated 4.5.2007 issued by Director of Boilers, Tamil Nadu, which is addressed to the Chemmenchery unit. Once it is accepted that assessee had sold its land in Chemmenchery, and had not retained any land or building there, we cannot say that assessee was still having an industrial undertaking there. "Shifting" mentioned in the Section does not mean that the new industrial undertaking established in the non-urban area should use only the plant and machinery and items taken from the transferred area. Exemption under Section 54G is available for purchase of new machinery or plant, acquisition of building or land, construction of building, shifting of original asset as well as expenses incurred for these purposes. Original asset sold here is land, and land is not amenable to a shifting. Assessee had purchased land and established an undertaking in Koppur Village. What is to be seen is whether assessee had adhered to the time-window allotted for this purpose. Section provides for a time window of four years starting from one year prior to the date of transfer and ending three years after the date of transfer. Here the acquisition of plant and machinery was done and the land was acquired within this time-window. We are, therefore, of the opinion that the transaction of sale at Chemmenchery and setting up of an industrial undertaking at Koppur Village satisfied the requirement of "shifting" mentioned in Section 54G of the Act and the third question also has to be answered in favour of the assessee.

25. There can be no dispute that the object of enacting Section 54G was to de-urbanise and remove industries from populated area and promote industrialization in underdeveloped areas. Section 54G is a provision intended for promoting inclusive growth of the country. In such a situation, giving a very narrow interpretation to the said Section will defeat the very purpose thereof. We are thus of the opinion that the assessee was eligible for claiming exemption under Section 54G of the Act.

26. Ground No.1 of the assessee stands allowed.

27. Vide its ground No.2, grievance raised by the assessee is that its claim for expenditure incurred on construction of road, was not allowed.

28. Facts apropos are that assessee had claimed an expenditure of Rs. 22,10,07,155/- for construction of road at its contract work sites at Ratnagiri, Maharashtra and Toranagallu, Bellary, Karanataka. Assessee had entered into service and supply contracts with M/s JSW Energy (Ratnagiri) Limited (in short JSWERL) and M/s JSW Energy (Vijayanagar) Limited, for engineering and construction of a 4 x 300 Megawatt thermal power plant at JSWERL, Ratnagiri District, Maharashtra and 2 x 300 Megawatt thermal power plant at Toranagallu, Bellary District, Karnataka State. Assessee had claimed temporary road construction expenditure at these sites, since it had to move heavy equipment to the work sites, which were situated in remote areas. As per the assessee, such road construction was entrusted to two persons, namely, one Shri N. Erulappan and one Shri S. Kesavan. Assessing Officer made enquiries with Shri N. Erulappan and Shri S. Kesavan, which revealed that Shri N. Erulappan was a petty cotton merchant and Shri S. Kesavan was the President of a village panchayat not proficient in any contract work. Shri S. Kesavan was not even assessed to tax. As per the A.O., these persons were residing in Pollachi and had no capacity to execute contracts of such magnitude, that too at unknown places like Bellary and Ratnagiri. Assessing Officer it seems recorded statements from these persons, who admitted that they had not done any work of the nature mentioned. According to them, one Shri M. Nandakumar, Vice-President (Projects) of assessee-company, had contacted them during a marriage function in Coimbatore and asked them to accommodate the assessee. Assessing Officer found that bank accounts were opened in the name of these persons at ICICI Bank, Pollachi. Money credited in such accounts were withdrawn and given to the persons identified by Shri M. Nandakumar. As per the A.O., they had also denied issuing of any invoices and also stated that signatures in various letters purported to have been written by them were not their actual signatures. Further, as per the A.O., assessee never cross-examined these persons despite opportunity given. Shri N. Erulappan, one of the two persons, was shown by the assessee as a creditor for whole of the contract amount. A.O. also made enquiries with JSWERL as to whether any road construction was done by the assessee. They informed that no such road construction was done by the assessee. However, they did mention that assessee might have constructed roads for execution of work. Assessing Officer required the assessee to file any other credible proof for having done any road construction work. Assessee could file only measurement taken by an Engineer showing abstract quantities. He therefore concluded that the claim as such was bogus and disallowed the sum of Rs. 22,10,07,155/-.

29. Assessee's appeal on this issue before CIT(Appeals), did not meet with any success. According to the ld. CIT(Appeals), except for a ledger extract and documents in the nature of invoices raised by the two persons, there was nothing to show any road having been constructed by the assessee. Ld. CIT(Appeals) refused to consider pictures of road leveling and construction work filed by the assessee before him for the reason that it was never produced before the Assessing Officer. As per ld. CIT(Appeals), assessee could not show what prevented it from producing such evidence before the A.O. In any case, according to ld. CIT(Appeals), the pictures did not reveal the location of the work or the dates when the work was done. He, therefore, held that Assessing Officer was justified in disallowing the claim.

30. Now before us, learned A.R., strongly assailing the orders of authorities below, submitted that even though Shri N. Erulappan and Shri S. Kesavan had denied any receipt of money for road work from the assessee, the fact remained that assessee had constructed roads in both these sites. Both these persons could not deny that money was credited to their respective bank accounts. Such accounts were operated by them, and they had also effected withdrawals therefrom. According to learned A.R., assessee was entrusted with erection, commissioning and building a part of the large thermal plants at Ratnagiri and Bellary. The area was inaccessible forest land and assessee had to start from the scratch. It had to clear the area, level it, demarcate it and then make it ready for construction. Very heavy equipment had to be brought in. It was impossible to do such work without constructing roads. Relying on paper-book pages 394 and 395, learned A.R. submitted that hydraulic cranes, crawler cranes, telescopic cranes, trailors, trucks, buses and jeeps had to be deployed at the sites in both Bellary and Ratnagiri. Assessee had to transport equipment to the sites. The contract scope included creating access with suitable roads and drains. As per the learned A.R., presumption taken by the lower authorities that assessee had not constructed any road at all was incorrect. If that was taken to be true, it would mean that assessee was not executing any work at all.

31. Per contra, learned D.R., supporting the orders of authorities below, submitted that both for Bellary as well Ratnagiri, list of equipment moved by road, placed by the assessee at paper-book pages 394 and 395, were the very same. As per learned D.R., the same equipment could not have been used for both the sites, which were disparately situated. Further according to him, no details were given by the assessee regarding length of road constructed nor the type of road constructed. The quality and type of road nor the quantity of materials used for constructing such roads were produced. Evidence produced were proved by the A.O. to be fabricated ones. The construction of road, according to him, was nothing but a cock and bull story. No presumption could be taken that assessee had constructed any road without proper evidence. Claim was therefore rightly rejected by the A.O. As per the learned D.R., nothing stopped the assessee from producing the evidence in the nature of photos before the A.O. and hence these were rightly rejected by the ld. CIT(Appeals).

32. We have perused the orders and heard the rival submissions. Assessee had claimed before the A.O. that it had incurred road construction expenditure of Rs. 22,10,07,155/- through two sub-contractors, namely, Shri N. Erulappan and Shri S. Kesavan. Both the persons denied having done any such work. They also denied their signatures. They also stated that money credited in the accounts with ICICI were distributed by them to the persons nominated by Shri M. Nandakumar, Vice-President (Projects) of the assessee-company. Nevertheless, it remains a fact that money paid by assessee-company were credited in the bank accounts opened and operated by Shri N. Erulappan and Shri S. Kesavan. With banks strictly administering the KYC norms, we cannot say that their true identities were not known to the bank. However, in the face of their admission before the A.O. that they had not done any work by themselves, and also the refusal of assessee to cross examine them, we cannot fault the Assessing Officer for rejecting the evidence produced for the claim, as unreliable. At the same time, we cannot brush aside the fact that assessee was doing substantial contract work for establishing thermal power plants at Ratnagiri and Billary. There can be no case for the Revenue that assessee had not done any work in these places since contract receipts from M/s JSWERL were reflected in its accounts. None of the authorities below have doubted the claim of the assessee that it had to start work from scratch. For building a thermal power plant, it is essential to move in heavy equipment. Temporary roads have to be laid and such roads necessarily had to have capacity to carry heavy equipment to the site. Even M/s JSWERL have stated that assessee might have constructed temporary roads for the execution of work. Assessee had also filed certain measurements taken by an Engineer before the Assessing Officer, which he refused to consider. The areas identified for the project had to be brought to a shape where work could be started, buildings could be constructed and plant and machinery set up. To say that assessee had not laid any temporary roads for access, for moving in machinery, will be equivalent to saying that assessee had never done any work on the project. Admittedly assessee had done substantial work and received payments as well. In such a situation, to deny the whole of the claim of expenditure for laying the access roads to the project sites, for a reason that persons engaged by the assessee for doing the work, were not competent or had denied receipt of money, would, in our opinion, be unfair. Now the question arises as to what would be the fair amount that could be considered as expenditure for laying such roads against rs 22,10,07,155/- claimed by the assessee. When assessee adopted an unfair means to create evidence for the outgo, there is every possibility that it would have preferred an exaggerated claim. Obvious course in such a situation will be to send the matter back to the Assessing Officer for estimating the expenditure on roads based on a valuation report of an approved valuer. But, here the project had started in April, 2008 and would have significantly progressed by now. Temporary roads earlier laid, would no more be there and would have been replaced by pucca approaches and buildings. In such a situation, a remand for ascertaining the actual outgo may not serve any purpose. Hence to give a quietus to the issue, we are of the opinion that a disallowance of 25% on the total claim of Rs. 22,10,07,155/- will serve the ends of justice. We, therefore, set aside the orders of the authorities below on the issue and direct the A.O. to disallow Rs. 5,52,51,790/- out of the total claim of Rs. 22,10,07,155/- on roads, and allow the balance.

33. Ground No.2 of the assessee is partly allowed.

34. Vide its ground No.3, assessee is aggrieved on a disallowance under Section 40(a)(i) of the Act, which was confirmed by the CIT(Appeals).

35. Facts apropos are that assessee had entered into a contract with one M/s Gulf Spic Engineering (LLC), Dubai, for Mass Alkali Flushing work of Boiler unit of JSWERL, Torangallu, Karnataka. Assessee had not deducted any tax on payments effected by it. Assessing Officer required the assessee to explain why the expenses of Rs. 3,84,96,230/- claimed for such work, should not be disallowed. Reply of the assessee was that the work was sub-contracted by M/s Gulf Spic Engineering (LLC), Dubai, to two Indian companies, namely, M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises. M/s Gulf Spic Engineering (LLC), Dubai, had required the assessee to make the payments directly to these two companies. Accordingly, assessee had directly paid these two parties and when such payments were effected, tax was deducted at source. Therefore, according to the assessee, there was no question of any disallowance under Section 40(a)(i) of the Act. In support it seems, assessee had filed copies of correspondence, work orders and ledger extracts.

36. However, the A.O. was not impressed. According to her, original work order dated 2.6.2008 was issued to M/s Gulf Spic Engineering (LLC), Dubai. M/s Gulf Spic Engineering (LLC), Dubai, vide its letter dated 14.6.2008 and 15.6.2008, required the assessee to entrust the work to M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises respectively and debit the amounts paid to them, from their invoices. As per the A.O., the sub-contracting was not done by the assessee. It was M/s Gulf Spic Engineering (LLC), Dubai that sub-contracted the work to M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises. Ledger extracts produced by the assessee showed that it had effected payments to the said two companies, after deducting TDS, on behalf of M/s Gulf Spic Engineering (LLC), Dubai. M/s Gulf Spic Engineering (LLC), Dubai had raised an invoice on the assessee on 6.10.2008 for whole of the work. Thus, according to him, assessee had effected payments to a non-resident company without deducting tax at source. He, therefore, applied Section 40(a)(i) of the Act and disallowed the claim of Rs. 3,84,96,230/-.

37. In its appeal before CIT(Appeals), argument of the assessee was that M/s Gulf Spic Engineering (LLC), Dubai, themselves had required the assessee to hire the sub-contractors and get the work executed in India. Assessee had employed M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises for this purpose. Payments were effected to these parties after deducting tax and such tax deducted was remitted to the Government Account. In any case, as per the assessee, the amount stood paid during the relevant previous year itself and therefore, Section 40(a)(i) could not be applied in view of the decision of Special Bench in the case of Merilyn Shipping and Transport v. Addl. CIT.

38. Ld. CIT(Appeals) was not impressed by any of the above contentions. According to him, work order was issued to a non-resident company. Invoice for the work was raised by the non-resident company. Therefore, income for the non-resident company accrued in India. Though the said work was sub-contracted to two Indian entities, this was done on behalf of the non-resident company. Assessee was obliged to deduct tax on payments effected to the non-resident company. Therefore, according to him, assessee failed to comply with provisions of Section 194C of the Act. Insofar as reliance placed on the decision of Merilyn Shipping and Transport (supra) was concerned, ld. CIT(Appeals) held that the said decision stood stayed by Hon'ble Andhra Pradesh High Court vide its order dated 8.10.2012. He thus confirmed the disallowance.

39. Now before us, learned A.R. submitted that assessee had given details of expenditure to the Assessing Officer through its letter dated 8th December, 2011, copy of which has been placed at paper-book pages 12 to 18. According to him, M/s Gulf Spic Engineering (LLC), Dubai, to which the work was awarded, had on receipt of order, required the assessee to identify sub-contractors for execution of the job. Assessee had identified two companies who could do the work in India. Assessee had directly issued work orders to these parties. M/s Gulf Spic Engineering (LLC), Dubai had authorized assessee to make payments directly to local contractors. Terms of payment mentioned that 100% payment was to be made against submission of invoice by such parties. Tax was deducted at the rate mentioned in Section 194C on the payments effected to such contractors. Account of M/s Gulf Spic Engineering (LLC), Dubai was debited. As per learned A.R., there was no further remittance to M/s Gulf Spic Engineering (LLC), Dubai and for payments made to Indian entities, tax was deducted.

40. Per contra, learned D.R., strongly supporting the orders of authorities below, submitted that assessee had debited the amount in the account of M/s Gulf Spic Engineering (LLC), Dubai. It would only show that the amounts were earlier credited to M/s Gulf Spic Engineering (LLC), Dubai. Assessee had not deducted tax at source as required under Section 194C of the Act. Therefore, according to him, rigours of Section 40(a)(i) stood attracted.

41. We have perused the orders and heard the rival submissions. There is no dispute that the original work order was given by the assessee to M/s Gulf Spic Engineering (LLC), Dubai. It is also an admitted position that the work was eventually done by two Indian concerns, namely, M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises. M/s Gulf Spic Engineering (LLC), Dubai had themselves asked the assessee to identify persons in India for doing the work. Assessee had accordingly identified two India's concerns and placed work order on them. Revenue has not disputed the contention of the assessee that when payments were effected by it to M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises, tax was deducted at source in accordance with Section 194C of the Act. Assessing Officer had fastened a disallowance under Section 40(a)(i) by relying on Section 195 of the Act. At this juncture, a reading of Section 195 is required. Section 195 is reproduced hereunder:—

"195. Other sums:— [(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force."

The said Section can be applied only on a person responsible for paying to a non-resident any sum which is chargeable under the Act. Here, admittedly, assessee had not directly paid any amount to the non-resident. Payments were effected by the assessee only to the two Indian concerns. When such payments were effected, assessee had indeed deducted tax at source as mentioned under Section 194C of the Act. Section 194C applied to payments made to a resident contractor. When the assessee never effected any payment to M/s Gulf Spic Engineering (LLC), Dubai and had under their instruction given work orders to two Indian companies, and made payments directly to such Indian concerns, after deducting tax at source, we cannot say that assessee had failed to deduct tax at source. Assessee had effected deduction of tax as stipulated under Section 194C and remitted it to Government Account. This has not been disputed. There is no finding by any of the lower authorities that M/s Gulf Spic Engineering (LLC), Dubai had done any work for the assessee, for which assessee was obliged to make any payments. In any case, in such circumstances, assessee had reasonable grounds to have a bonafide belief that the payments effected to M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises did not attract Section 195 of the Act. It could not be faulted for failure to deduct tax at source as mentioned in Section 195 of the Act, since the work was done only by M/s Fairline Shipping Services Ltd. and M/s AMS Enterprises and not by M/s Gulf Spic Engineering (LLC), Dubai. We are, therefore, of the opinion that assessee could not be held liable for any failure for non-deduction of tax at source. Disallowance under Section 40(a)(i) of the Act therefore stands deleted.

42. Ground No.3 of the assessee stands allowed.