2012 (10) TMI 19 - AT - Income Tax

Disallowance of deduction u/s. 80IA - sale of complete residential flat versus semi finished flat - held that - The stand of the Revenue with regard to semi-finished condition of flats is devoid of merit inasmuch as what is sought to be constructed and sold by the assessee is residential units and what is sought to be purchased by the individual buyer is the ownership of a residential unit and registration of flat in semi finished condition is only to facilitate the convenience of the parties and agreement for development and completion of the balance work in relation to the flats registered, is only an incidental formality to protect the interest of the parties which need not be viewed as fatal to the claim of the assessee for deduction u/s. 80IB(10) of the Act. - Ultimately, the entire work from the stage of commencement to the stage of making residential units habitable has been carried out by the assessee only and the Revenue has no dispute whatsoever on this count. - Decided in favor of assessee. Separate books of accounts - held that - Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act. - In favor of assessee. Disallowance of claim u/s. 36(1)(iii) read with section 14A - Held that - Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) - as the income received from M/s. SMR Builders (firm) is exempted income and as such provisions of section 14A are applicable - against assessee.

Issues Involved:
1. Eligibility for deduction under Section 80IB for semi-finished flats.
2. Maintenance of separate accounts for the eligible project.
3. Disallowance of interest expenditure under Section 36(1)(iii).

Detailed Analysis:

1. Eligibility for Deduction Under Section 80IB for Semi-Finished Flats:
The primary issue revolves around whether the assessee is eligible for deduction under Section 80IB(10) despite selling semi-finished flats. The Assessing Officer (AO) disallowed the deduction, arguing that the assessee sold undivided shares of land with semi-finished structures, which do not qualify as complete residential units. The AO emphasized that a residential unit must be a place where a person can live, and semi-finished units do not meet this criterion.

The assessee contended that the registration of semi-finished flats was a matter of mutual convenience between the seller and buyer and did not signify the end of the construction process. The assessee continued to build and complete the flats after registration, fulfilling the requirement of Section 80IB. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that the entire process, from commencement to completion, was handled by the assessee, and the sale agreements reflected the total consideration for completed units.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, stating that the AO's focus on technicalities was misplaced. The ITAT emphasized a liberal interpretation of incentive provisions in tax law, supporting the assessee's claim for deduction under Section 80IB(10).

2. Maintenance of Separate Accounts for the Eligible Project:
The AO disallowed the deduction under Section 80IB for the assessee's failure to maintain separate accounts for the eligible project, as required by Section 80IA(7). The AO argued that the absence of separate accounts made it impossible to determine the eligible deduction.

The assessee argued that it maintained a common establishment for multiple projects and used a computer application to capture cost center-specific data. The CIT(A) found that the assessee had maintained separate accounts for the eligible unit and that the profits could be clearly ascertained from these accounts. The ITAT agreed, noting that the accounts were audited, and the requisite certificate was filed, thus meeting the requirements of Section 80IA(7).

3. Disallowance of Interest Expenditure Under Section 36(1)(iii):
The AO disallowed interest expenditure claimed by the assessee under Section 36(1)(iii), arguing that the assessee had diverted interest-bearing funds to a sister concern without charging interest. The AO held that the interest on loans raised for business purposes should not be allowed if the funds were used for non-business purposes.

The assessee contended that the investment in the sister concern was for commercial expediency. However, the CIT(A) upheld the AO's decision, noting that the assessee failed to demonstrate that the funds were used for business purposes. The ITAT agreed, stating that the onus was on the assessee to prove that the loans were used for business purposes and that the diversion of funds to sister concerns without interest justified the disallowance.

Conclusion:
The ITAT dismissed the revenue's appeals, upholding the CIT(A)'s decision to allow the deduction under Section 80IB for the semi-finished flats and confirming that the assessee maintained separate accounts for the eligible project. However, the ITAT also dismissed the assessee's appeal regarding the disallowance of interest expenditure under Section 36(1)(iii), agreeing with the AO and CIT(A) that the funds were not used for business purposes.

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