2007 (6) TMI 316 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings

Issues Involved:
1. Eligibility for deduction under section 80-IB(10) of the Income-tax Act.
2. Ownership of land as a pre-condition for claiming deduction.
3. Interpretation of the term "developer" versus "contractor."
4. Treatment of unutilized Floor Space Index (FSI).
5. Additional grounds related to disallowance under section 40A(3) and interest on loans.

Issue-Wise Analysis:

1. Eligibility for Deduction under Section 80-IB(10):
The primary issue is whether the assessee is eligible for claiming deduction under section 80-IB(10) of the Income-tax Act on profits derived from developing and building residential housing projects. The Tribunal held that the conditions for claiming the deduction are:
- The undertaking must be developing and building a housing project approved by a local authority.
- The project must commence on or after 1-10-1998 and be on a plot of land with a minimum area of one acre.
- The residential unit should have a built-up area not exceeding 1,500 sq. ft. for places other than Delhi and Mumbai.

The Tribunal concluded that there is no requirement for the developer to own the land to claim the deduction. The assessee, having entered into a tripartite agreement and carried out the development and building work, is eligible for the deduction.

2. Ownership of Land as a Pre-condition:
The Tribunal examined whether ownership of the land is a pre-condition for claiming the deduction under section 80-IB(10). The Tribunal found that the section does not stipulate that the developer must own the land. The Tribunal emphasized that the deduction is available to the undertaking developing and building the housing project, irrespective of land ownership. The Tribunal cited various legal precedents to support this interpretation, including the Supreme Court's decision in Mysore Minerals Ltd. v. CIT, which held that possession and dominion over the property are sufficient to claim ownership benefits.

3. Interpretation of "Developer" vs. "Contractor":
The Tribunal addressed the revenue's argument that the assessee was merely a contractor and not a developer. The Tribunal clarified that the terms "contractor" and "developer" are not mutually exclusive. A developer can enter into contracts and still be considered a developer if they undertake the development and building of the housing project. The Tribunal concluded that the assessee was indeed a developer as they undertook all the responsibilities and risks associated with the development and building of the housing project.

4. Treatment of Unutilized FSI:
The Tribunal examined the issue of unutilized FSI and whether profits derived from its sale should affect the eligibility for deduction under section 80-IB(10). The Tribunal found that there is no requirement under section 80-IB(10) to fully utilize the permissible FSI. The Tribunal noted that the utilization of FSI depends on various factors, including market conditions and buyer preferences. The Tribunal rejected the revenue's argument that the assessee sold unutilized FSI without development, stating that the concept of unutilized FSI sold is imaginary and based on surmises.

5. Additional Grounds:
- Disallowance under Section 40A(3): In the case of Ashirwad Enterprises, the Tribunal remitted the matter back to the CIT(A) for adjudication on the disallowance of Rs. 48,042 under section 40A(3).
- Interest on Loans: In the case of Shyamal Builders, the Tribunal upheld the disallowance of interest on loans advanced to sister concerns, as the assessee paid interest on partners' capital used for these loans.
- Other Disallowances: In the case of Sahjanand Developers, the Tribunal upheld the disallowance of expenses for fan purchase and telephone expenses as they pertained to earlier years and were not substantiated by the assessee.

Conclusion:
The Tribunal ruled in favor of the assessees, allowing the deduction under section 80-IB(10) and dismissing the revenue's appeals. The Tribunal emphasized that ownership of land is not a pre-condition for claiming the deduction, and the term "developer" includes those who undertake development and building activities under contractual agreements. The Tribunal also clarified the treatment of unutilized FSI and addressed additional grounds related to disallowances and interest on loans.

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