Featured image for Supreme Court Judgment dated 05-03-2020 in case of petitioner name Commissioner of Income Tax, Ud vs M/s. Chetak Enterprises Pvt. L
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Income Tax Deduction Dispute: Supreme Court Upholds Tax Benefits for Infrastructure Developer

The Supreme Court of India, in a significant ruling on March 5, 2020, dismissed an appeal by the Commissioner of Income Tax, Udaipur, and upheld the eligibility of M/s. Chetak Enterprises Pvt. Ltd. for tax deductions under Section 80-IA of the Income Tax Act. This case involved complex issues concerning infrastructure development, company conversions, and the applicability of tax benefits under the law.

Background of the Case

The dispute arose in connection with the assessment year 2002-2003. M/s. Chetak Enterprises, originally a partnership firm, had entered into an agreement with the Government of Rajasthan for the construction of roads and toll collection. The construction was completed on March 27, 2000, and the road was inaugurated on April 1, 2000. On March 28, 2000, the firm converted into a private limited company, M/s. Chetak Enterprises Pvt. Ltd.

Following the conversion, the company started collecting toll tax and claimed deductions under Section 80-IA of the Income Tax Act. However, the assessing officer denied the deduction, leading to a legal battle that reached the Supreme Court.

Legal Proceedings

Assessing Officer’s Decision

  • The assessing officer rejected the claim for deduction under Section 80-IA, arguing that the company had not directly entered into an agreement with the government.
  • The firm was originally responsible for the road construction, and since the company was formed after the completion of construction, it could not claim benefits meant for infrastructure developers.

Appellate Authority and ITAT Ruling

  • The Commissioner of Income Tax (Appeals), Udaipur, overturned the assessing officer’s decision and ruled in favor of the company.
  • The Income Tax Appellate Tribunal (ITAT) upheld this ruling, stating that the conversion of a firm into a company under Part IX of the Companies Act resulted in a statutory transfer of all rights and liabilities, including tax benefits.

High Court’s Decision

  • The Rajasthan High Court dismissed the tax department’s appeal, affirming that the company was eligible for deductions under Section 80-IA.
  • It observed that the firm’s conversion into a company was a statutory process, and the business continued under the new corporate structure.
  • The court emphasized that since the infrastructure was operated and maintained by the company, it met the criteria of Section 80-IA.

Petitioner’s Arguments (Commissioner of Income Tax, Udaipur)

  • The tax department contended that deductions under Section 80-IA are applicable only to entities that directly enter into agreements with the government.
  • Since the original agreement was executed by the partnership firm, the newly formed company could not claim tax benefits.
  • The department argued that allowing deductions in such cases would set a precedent for tax avoidance through restructuring.

Respondent’s Arguments (M/s. Chetak Enterprises Pvt. Ltd.)

  • The company argued that under Part IX of the Companies Act, all rights, assets, and liabilities of the partnership firm automatically vested in the newly incorporated company.
  • Since the company was operating and maintaining the infrastructure facility, it was entitled to claim deductions under Section 80-IA.
  • The agreement between the firm and the government included provisions allowing for a successor entity to continue the contract.

Supreme Court’s Observations

The Supreme Court reviewed the legal framework under Section 80-IA of the Income Tax Act, which allows deductions for enterprises engaged in the development, operation, and maintenance of infrastructure facilities.

The Court noted:

“By operation of law, there is statutory transformation of the firm into the company, and all its rights and liabilities vest in the company. The agreement comprehends successors and assigns, making the company eligible for deductions.”

Key Findings

  • The conversion of the firm into a company was a statutory process, not an artificial restructuring.
  • The company continued the business of operating and maintaining infrastructure, meeting the conditions of Section 80-IA.
  • The agreement explicitly mentioned that successors and assigns would be covered, allowing the company to inherit contractual rights.

Final Verdict

The Supreme Court dismissed the tax department’s appeal and ruled in favor of M/s. Chetak Enterprises Pvt. Ltd., stating:

“Considering from any standpoint, the assessee could not be denied the benefit of deduction available to it.”

With this ruling, the company was allowed to claim deductions under Section 80-IA, reinforcing the legal principle that statutory conversions do not hinder tax benefits.


Petitioner Name: Commissioner of Income Tax, Udaipur.
Respondent Name: M/s. Chetak Enterprises Pvt. Ltd..
Judgment By: Justice A. M. Khanwilkar, Justice Dinesh Maheshwari.
Place Of Incident: Rajasthan.
Judgment Date: 05-03-2020.

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