"There Is No Equity About a Tax": Madras High Court Allows 80IB(10) Deduction for A.Y. 2006–07, Bars It Thereafter Due to Section 80AC

“Deduction Cannot Be Denied for A.Y. 2006–07 When Section 80AC Was Not Yet in Force,” In a landmark judgment, the Madras High Court has ruled that M/s. Coromandel Cables Pvt. Ltd. is entitled to claim deduction under Section 80IB(10) of the Income Tax Act for Assessment Year (A.Y.) 2006–07, as the statutory bar under Section 80AC was not applicable at that time. However, the Court barred such deductions for subsequent assessment years, holding that once Section 80AC came into force, failure to make a claim in the return filed under Section 139(1) was fatal to eligibility.

Delivering the judgment in a series of tax appeals filed by both the assessee and the Income Tax Department, a Division Bench comprising Justice R. Suresh Kumar and Justice C. Saravanan emphasized:

“Failure on the part of the assessee to make a claim on the income earned during the Previous Year 2005–2006... cannot be denied even if no claim was made in the return of income that was filed under Section 139(1) of the IT Act... as Section 80AC was not yet in force.”

At the same time, the Court was unambiguous that for the Assessment Years 2007–08 to 2011–12, the statutory bar under Section 80AC must operate:

“The express requirement of Section 80AC... cannot be read down in a statutory appeal... This Court does not have powers similar to those vested with the Supreme Court under Article 142 of the Constitution.”

The Court clarified that while the benefit of Section 80IB(10) may otherwise have been available to the assessee, non-compliance with the procedural mandate of Section 80AC after its enactment was fatal to the claim.

Dispute Originated in Joint Development Deal With Related Party Structuring

The judgment arises from a long-standing tax dispute involving a Joint Development Agreement (JDA) dated 23.11.2005 between the assessee company and M/s. Doshi Housing, a developer firm in which the son of the Managing Director of the assessee was inducted as a partner. Under this agreement, 62.46% of land was transferred in exchange for 37.54% of the constructed area.

The Revenue had sought to tax the capital gains in A.Y. 2006–07 under Section 2(47)(v) of the Income Tax Act, read with Section 53A of the Transfer of Property Act, on the ground that possession was transferred under the JDA. However, the High Court agreed with the Tribunal’s findings that no development activity had taken place during that year.

“There was no development activity in the Assessment Year 2006–07... Therefore, capital gains are to be computed only from the Assessment Years 2007–08 onwards based on actual transfer.”

The Court also noted that the assessee failed to show financial records of income from development activity for A.Y. 2006–07 and observed that the JDA alone did not result in a 'transfer' within the meaning of the Act.

Court Condemns Profit Diversion and Bogus Cost Claims

The Revenue had argued that the capital gains were suppressed by diverting proceeds of ₹25 crores to the Managing Director’s son under the guise of partnership share in the developer firm. It was further alleged that the assessee had booked bogus expenses of ₹4.52 crores through a hawala operator—M/s. Takshil Trading Pvt. Ltd.—under the head of cost of improvement.

While the Tribunal had remanded these issues for reconsideration, the Department objected that the remand was unnecessary given overwhelming evidence of fraudulent invoicing and statements recorded during survey proceedings under Section 133A.

The High Court, however, did not make conclusive findings on the fraudulent claims but emphasized that such matters could be pursued by the Revenue separately and remitted for verification.

Section 80IB(10) Deduction Denied from A.Y. 2007–08 Onwards Due to Non-Compliance with Section 80AC

The Court underscored the procedural rigour introduced by Section 80AC:

“As per Section 80AC... no deduction is to be allowed... if no return of income was filed under Section 139(1)... on or before the due date.”

For A.Y. 2006–07, the provision was not yet in force, allowing the benefit to flow. However, the assessee’s failure to claim the deduction in time-bound returns for later years proved costly.

“The benefit of Section 80IB(10) of the Act cannot be straight away extended... in view of the express restriction in Section 80AC of the IT Act for the Assessment Years 2007–08 onwards.”

Nevertheless, the Court left a narrow window of relief open: “The benefit of Section 80IB(10)... can be claimed... subject to a valid challenge to Section 80AC in a separate and collateral proceeding.”

The Court relied on the ruling in Goetze (India) Ltd. v. CIT [(2006) 284 ITR 323 (SC)] to draw a distinction between what an Assessing Officer and what a Tribunal or Appellate Court may allow, emphasizing that statutory appellate jurisdiction under Section 260A is limited.

Partial Victory for Assessee, Conditional Liberty to Challenge Section 80AC

In conclusion, the Court allowed the assessee's appeal for A.Y. 2006–07 and dismissed appeals for A.Y. 2007–08 to 2011–12, albeit for statistical purposes, granting the assessee liberty to challenge Section 80AC's rigidity in a collateral constitutional proceeding.

The appeals filed by the Income Tax Department were also disposed of for statistical purposes, with similar liberty to revive the matters depending on the outcome of such a challenge.

Date of Decision: May 9, 2025