Navratan Techbuild (P) Ltd. vs Commissioner of Income Tax

M.C. Garg, J.—This income-tax appeal has been filed under s. 260A of the IT Act, 1961 aggrieved of the order passed by the learned Tribunal, Indore Bench, Indore, dt. 30th July, 2013 whereby the learned Tribunal has dismissed the ITA No. 547/Ind/2012 filed by the appellant-assessee for the asst. yr. 2008-09 thereby, rejecting the prayer made by the appellant to allow the deduction made by them in their IT return for the concerned year under s. 80-IB(10) of the IT Act, 1961 (in short "the Act") by holding that the such deduction could not been availed by the appellant without construction of residential units. In the present case, the assessee had sold the plots and did not undertake construction of residential units, therefore, condition prescribed in cl. (c) of sub-s. 80-IB(10) of the Act was not satisfied. It was submitted that liability of claiming of deduction as per cl. (a) of sub-s. (10) of s. 80-IB of the Act requires obtaining completion certificate of the project as a whole within the specified period. It was held that once construction of the residential units itself in the housing project has not been undertaken, there does not arise any reason to issue completion certificate by the competent authority, who has approved the project. Contention of the appellant to the effect that development of the land and infrastructure as undertaken by the assessee was in furtherance of object of development of housing project, whatever activity has been undertaken by the assessee, out of which activity has been undertaken by the assessee, out of which the assessee has derived profit should be eligible for claim of deduction under s. 80-IB(10) of the Act found to be of no substance for the reason that mere development of the infrastructure and development of land does not amount to construction of residential units. Before proceeding further, it will be appropriate to take note of the letter granting approval of this project to the appellant. The said approval letter dt. 27th May, 2006 reads as under:

According to the learned counsel for the appellant, the Tribunal failed to appreciate the provisions contained under s. 80-IB(10) of the Act in correct perspective and considering that whatever was done by the assessee was not the development of housing project.

It is also submitted that this appeal raises following questions of law:

"(i) Whether the Tribunal erred on facts and in law in upholding the detail of deduction under s. 80-IB(10) of the Act in respect of profits derived from undertaking development and construction of a housing project consisting of housing sites (also referred to as "developed plots")?

(ii) Whether the Tribunal erred in law in holding that construction of residential units is a sine qua non for claim of deduction under s. 80-IB(10) of the Act?

(iii) Whether the Tribunal erred in law in construing the true meaning and import of words ''development and construction of housing project'' referred to in s. 80-IB(10) of the Act as development and construction of residential units?

(iv) Whether on the facts and in the circumstances of the case, the findings and the conclusion arrived at by the Tribunal are perverse in as much as the Tribunal failed to take into consideration various activities undertaken for development and construction of housing project?

(v) Whether on the facts and circumstances of the case, the conclusion arrived at by the Tribunal is erroneous as per the provisions of law?"

Briefly stating the facts of this case as mentioned in the appeal filed by the appellant need notice. The same are reproduced hereunder for the sake of reference:

"That the appellant who is private limited company engaged in the business of real estate development and construction of residential/housing project. For the previous year, relevant to the asst. yr. 2008-09, the appellant filed a e-return on 29th Sept., 2008 declaring nil income. In the return of income, the appellant claimed deduction of Rs. 13,37,31,420 under s. 80-IB(10) of the Act in respect of income derived from eligible housing project at Omaxe City Indore."

According to the appellant relevant facts are required to be taken into consideration which are reproduced hereunder for the sake of reference:

"(i) In terms of the agreement dt. 5th May, 2008, the appellant undertook development and construction of the housing project in collaboration with M/s. Omaxe Ltd. (hereinafter referred to as ''Omaxe'') and M/s. Shardha Buildcon (P) Ltd. (hereinafter referred to as ''SBPL'').

(ii) The housing project was on an area of 36.074 hectares i.e. 89.14 acres.

(iii) Approval for carrying out the housing project on an area of 36.074 hectares was granted on 27th May, 2006.

(iv) The eligible housing project consisted of development of housing sites as well as development and construction of residential units.

Though the consolidated approval also consisted of an area of 8.292 acres demarcated for commercial use, the same was, however, transferred to M/s. Omaxe Buildwell (P) Ltd. (in short Omaxe Buildwell) on 31st March, 2009 for development and construction and consequently, the commercial area did not form part of the eligible housing project undertaken by the appellant.

The eligible housing project undertaken by the appellant accordingly, consisted of the residential area only, comprising of housing sites and constructed residential units having a build-up area of less than 1,500 sq. ft.

(v) The appellant was following percentage of completion method for recognizing revenue. During the year under consideration, revenue of Rs. 13,31,37,420 was recognized on sale of housing sites and accordingly, deduction under s. 80-IB(10) of the Act was claimed in respect thereof in the return income.

That in the assessment order dt. 31st Dec, 2010 passed under s. 143(3), the AO denied the aforesaid deduction claimed by the appellant by holding that various conditions laid down in s. 80-IB(10) of the Act [except the condition prescribed in cl. (b) regarding area of the project being more than 1 acre] were not fulfilled. The findings of the AO may be summarized as under:

(a) Deduction under s. 80-IB(10) of the Act was not admissible in case of sale of plots in as much as cl. (c) of the said section clearly refers to deduction being allowed in respect of residential unit and not plots.

Further, the sizes of the plots developed by the appellant were in the range from 775 sq.ft. to 7,734 sq.ft. built-up area on plots of basic size of more than 135 sq. mtrs (equivalent to 1453.13 sq. ft.) was found to be more than the built-up area of residential unit as prescribed in cl. (c) of s. 80-IB(10) of the Act.

(b) The appellant could not be regarded as "developer" of the project in as much as the entire development/construction was to be undertaken by Omaxe. The appellant was merely owner of the plot and the entire costs and risks associated with the development of the project were transferred to Omaxe.

(c) Since first approval for the project was obtained on 29th July, 2005, the appellant was required to complete construction of the project on or before 31st March, 2010. The said condition was not satisfied, in as much as the project was found to be still under development at the time of framing of assessment in December, 2010.

Benefit of extended period of five years, as per the clause amended by the Finance Act, 2010, being applicable only in respect of approval granted after 1st April, 2006, the enlarged period of completion was and is, therefore, not applicable in the case of project under consideration, which was approved prior to the said date.

(d) Since the proposed built-up commercial area in the entire project was 5.338 acres, which was almost 9.71 per cent of the total area, the condition prescribed in cl. (d) of s. 80-IB(10) of the Act was also not satisfied. The contention of the appellant that development of commercial area was being undertaken by another company viz. Omaxe Buildwell was not supported by any documentary evidence."

In view of the aforesaid, the AO held that various conditions prescribed in s. 80-IB(10) of the Act, except condition relating to the project being undertaken on plot size of more than 1 acre, were not fulfilled in respect of the project undertaken by the appellant and therefore, deduction under that section was not admissible. Copy of the order dt. 31st of Dec, 2010 passed by the AO under s. 143(3} of the Act is marked as Annex. A/3.

It is a matter of record that this order of AO passed, under s. 143(3} of the Act was assailed by the appellant before CIT(A) but without any success.

"The CIT(A) vide order dt. 1st Aug., 2012, however, dismissed the appeal filed by the appellant and affirmed the order passed by the AO denying deduction claimed by the appellant under s. 80-IB(10) of the Act. The CIT(A} held that deduction was not admissible qua profit derived from sale of developed plots since, according to the CIT(A), construction of residential units was a necessary precondition for claim of deduction under the said section. The CIT(A) further observed that the Director of Town and Country Planning (in short ''DTCP''), had accorded approval for development of residential colony and in case of residential colony, the activities of the developer/builder are restricted to development of plot, while construction of the residential unit thereon is undertaken by the purchaser of the plot. According to the CIT(A), deduction under s. 80-IB(10) of the Act was admissible only in that case, the project would be regarded as ''housing project''.

The CIT(A) further held that the developed plots consisted of varied sizes and therefore, it could not be ensured that the build-up area of residential units thereon would not be exceeding the maximum limit of 1,500 sq. ft as prescribed in cl. (c) of s. 80-IB(10) of the Act was never intended to be given for merely developing plots. Accordingly, CIT(A) affirmed the order of the AO denying deduction" under s. 80-IB(10) of the Act."

The order passed by the CIT(A) was then taken before the learned Tribunal by filing income-tax appeal which has been dismissed for the reasons as discussed subsequently.

According to the appellant, the orders passed by the AO, by CIT(A) and the learned Tribunal are not sustainable for the reasons that the pronouncement made by these authorities is on wrong interpretation of s. 80IB(10) of the Act which is reproduced hereunder for the sake of reference:

"80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.--(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) (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 such percentage and for such number of assessment years as specified in this section.

............

(10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st March, 2008 by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project if,--

(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st Oct., 1998 and completes such construction,

(i) in a case where a housing project has been approved by the local authority before the 1st April, 2004, on or before the 31st day of March, 2008;

(ii) in a case where a housing project has been, or, is approved by the local authority on or after the 1st April, 2004, but not later than the 31st March, 2005 within four years from the end of the financial year in which the housing project is approved by the local authority.

(iii) In a case where a housing project has been approved by the local authority on or after the 1st April, 2005, within five years from the end of the financial year in which the housing project is approved by the local authority.

Explanation: For the purposes of this clause,--

(i) in a case where the approval in respect of the housing project is obtained more than once, such housing project shall be deemed to have been approved on the date on which the building plan of such housing project is first approved by the local authority;

(ii) the date of completion of construction of the housing project shall be taken to be the date on which the completion certificate in respect of such housing project is issued by the local authority;

(b) the project is on the size of a plot of land which has a minimum area of one acre:

Provided that nothing contained in cl. (a) or cl. (b) shall apply to a housing project carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law for the time being in force and such scheme is notified by the Board in this behalf;

(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the city of Delhi or Mumbai or within twenty-five kilometers from the municipal limits of these cities and one thousand and five hundred square feet at any other place; and

(d) the built-up area of the shops and other commercial establishments included in the housing project does not exceed three per cent of the aggregate built-up area of the housing project or five thousand square feet, whichever is higher;

(e) not more than one residential unit in the housing project is allotted to any person not being an individual; and

(f) in a case where a residential unit in the housing project is allotted to a person being an individual, no other residential unit in such housing project is allotted to any of the following persons, namely--

(i) The individual or the spouse or the minor children of such individual

(ii) The Hindu divided family in which such individual is the Karta.

(iii) any person representing such individual, the spouse or the minor children of such individual or the HUF in which such individual is the Karta.

Explanation: for the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government).

(14) For the purposes of this section,--

(a) ''built-up area'' means the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but does not include the common areas shared with other residential units;"

It has been submitted that bare perusal of the aforesaid section shows that the said section confers 100 per cent tax holiday in respect of profit derived from housing project(s) undertaken by the assessee. To claim deduction under that section, the housing project must be approved by a local authority before 31st March, 2008 and the following conditions must be satisfied:

"(a) Development and construction of the housing project must commence on or after 1st Oct., 1998 and such construction must be completed as under:

(i) in case where the housing project is approved before 1st April, 2004, on or before 31st March, 2008.

(ii) in case where the housing project is approved between 1st of April, 2004 and 31st March, 2005, within 4 years from the end of the financial year in which the project is approved.

(iii) in case, where the housing project is approved after 1st April, 2005, within 5 years from the end of the relevant financial year in which housing project is approved.

(b) The housing project must be on the size of a plot of one acre or more

(c) The residential units in the project should have maximum built-up area of 1,000 sq. ft. in respect of projects in Delhi, Mumbai and within 25 kms thereof, and 1,500 sq. ft. at other places.

(d) The built-up area of shops and other commercial shops included in the housing project should not exceed 3 per cent of the aggregate built up area of the housing project or 5,000 sq. ft. whichever is more.

Prior to amendment, by the Finance Act, 2010, w.e.f. 1st April, 2010, the condition was that the built-up area of shops and other commercial establishments should not exceed 5 per cent of the aggregate built up area or 2,000 sq. ft. whichever is less."

It is submitted that once the aforesaid contentions are satisfied, the assessee becomes entitled for claiming deduction of the income-tax derived from the eligible housing project to the extent of 100 per cent thereof.

Having perused the aforesaid conditions mentioned in the order of granting approval for the aforesaid project, it is apparent and clear that the assessee ought to have not only developed infrastructure, but also should have raised residential units which in this case is admittedly missing. Developed residential plots stand sold by the assessee admittedly and no building on any of the plot was constructed within the time prescribed. To understand the mind of the appellate authority, we make reference to the reasons given by the Tribunal in having dismissed the appeal which does not call for any interference:

"8 We have considered the rival submissions and gone through the orders of the authorities below and found from record that the assessee has got approval for development of housing project. However, during the year under consideration, the assessee has just undertaken development of plots and their sales and no construction activity was undertaken in respect of residential units proposed on such plots...............

It is crystal clear from the plain reading of sub-s. (1) of s. 80-IB that deduction is subject to condition of undertaking, development and construction of housing project. Thus, the construction and development of housing project is sine qua non for claim of deduction under s. 80-IB(10) subject to fulfilment of other conditions. In the instant case, it is not in dispute that the assessee has just developed the plots and sold them. No construction activity was undertaken during the year. Thus, the assessee is not eligible for claim of deduction in respect of profit earned on sale of developed plot insofar as there was no profit on sale of residential units..........

We have carefully gone through these judgments and nowhere found that deduction was allowed without construction of residential units. Accordingly, the case law relied upon by the learned Authorized Representative were distinguishable on facts and will not help the assessee for getting deduction under s. 80-IB(10) without undertaking construction of residential units. Since the assessee has sold plots and did not undertake construction of residential units, the condition prescribed in cl. (c) of s. 80-IB(10) was not satisfied. Clause (a) of sub-s. (10) of s. 80-IB makes the assessee eligible for claim of deduction only after obtaining completion certificate of the project as a whole within the specified period. Once the construction of residential units itself in the housing project has not been undertaken, there does not arise any reason to issue completion certificate by the competent authority, who has approved the project. Contention of the learned Authorized Representative to the effect that development of land and infrastructure as undertaken by the assessee was in furtherance of object of development of housing project, whatever activity has been undertaken by the assessee, out of which the assessee has derived profit should be eligible for claim of deduction under s. 80-IB(10) of the Act, has no substance insofar as the development of infrastructure and development of land does not amount to construction of residential units, which is a sine qua non for claim of deduction under s. 80-IB(10) of the IT Act, 1961.

In the result, the appeal of the assessee is dismissed "

We have also gone though the written submissions made on behalf of the appellant as well as the judgment cited by the learned counsel for the appellant which are reproduced hereunder:

"1. Santosh Hazari Vs. Purushottam Tiwai (Dead) by Lrs.,

M. Janardhana Rao Vs. Joint Commissioner of Income Tax,

Deputy Commissioner of Income Tax Vs. Marudhar Hotels (P.) Ltd.,

Commissioner of Income Tax Vs. Arun Excello Foundations (P.) Ltd.,

The Commissioner of Income Tax-II Vs. Brahma Associates,

Sreevatsa Real Estates (P) Ltd. v. ITO (2010) 41 DTR (Chennai)(Trib) 497 : (2011) 9 ITR (Chennai)(Trib) 808

Bajaj Tempo Ltd., Bombay Vs. Commissioner of Income Tax, Bombay City-II, Bombay, "

Learned counsel for the appellant has emphasized on the judgments of Madras High Court and Bombay High Court (supra). We have gone through both the judgments and do not find that these judgments are of any help to the case of the appellant.

In this case, the grant of permission with respect to the aforesaid project which would have made the appellant eligible for exemption, requires not only development of the residential plots, but also construction of the plots which admittedly was not done. Construction of residential plots or construction of some plots later on would not qualify the appellant for exemption. Legal position has been clearly understood and complied by the appellate authority in the impugned judgment, in as much as it has been referred that reading of sub-s. (1) of s. 80-IB(10) of the Act is clear that deduction was subject to the condition of undertaking, condition of undertaking development and construction of the residential project, thus, the construction and development of the housing project was sine qua non for claim of deduction under s. 80-IB(10) of the Act, besides fulfilment of other conditions. The Tribunal has rightly observed that in the instant case, it is undisputed that the assessee has just developed the plots and sold them. No construction activity was undertaken during the relevant year and therefore, it was held that the assessee was not liable for claim of deduction. We have also put the relevant provisions of the statute in para 9 of the judgment. Considering the aforesaid enactment and the judgment of the Tribunal, we find that in this case, legal issues were clearly understood by the Tribunal and it is not the case where any interpretation of the law is required or needs any clarification at this level. Hence, we are of the considered view that in this case, there is no substantial questions of law raised by the appellant which requires admission of the appeal filed by the appellant. Consequently, present appeal filed by the appellant is dismissed.