2014 (4) TMI 482 - HC - Income Tax

Deduction u/s 80IB r.w. Section 80IB(1) of the Act Works contract - Nature of agreement not appreciated - Profit derived from sale of unutilized FSI - Whether the ITAT was right in allowing the deduction u/s. 80IB (10) read with Section 80IB(1) of the Act Held that - The decision in Commissioner of Income-Tax v. Radhe Developers reported in 2011 (12) TMI 248 - GUJARAT HIGH COURT followed - Section 80IB(10) provides for deductions to an undertaking engaged in the business of developing and constructing housing projects under certain circumstances - It does not provide that the land must be owned by the assessee seeking such deductions - from the terms and conditions it can be conferred that the assessee had taken full responsibilities for execution of the development projects and have not acted only as a works contractor. The assessee had in part performance of the agreement to sell the land was given possession thereof and had also carried out the construction work for development of the housing project - Combined reading of Section 2(47)(v) and Section 53A of the Transfer of Property Act leads to conclusion even for limited purpose of Income tax that assessee had satisfied the condition of ownership also - assessees were entitled to the benefit u/s 80IB(10) even where the title of the lands had not passed on to the assessees and in some cases the development permissions may also have been obtained in the name of the original land owners - The assessee in the process of developing two housing projects had utilized 9595.64 sq.m of buildable area against the maximum permissible area of 13004 sq.m and in other cases put up construction of 5997.28 sq.m against maximum permissible construction on 8127.75 sq.m. Underutilization if at all was in the marginal range of 25% to 30% - marginal underutilization of FSI would not be hit by disallowance of deduction u/s 80IB of the Act Decided against Revenue.

Issues Involved:
1. Eligibility for deduction under Section 80IB(10) of the Income-tax Act, 1961, in the context of a "works contract."
2. Eligibility for deduction under Section 80IB(10) concerning profits derived from the sale of unutilized Floor Space Index (FSI).

Detailed Analysis:

Issue 1: Eligibility for Deduction Under Section 80IB(10) in the Context of a "Works Contract"

The Revenue contended that the assessee was not eligible for the deduction under Section 80IB(10) because the nature of the agreement between the assessee and the unit purchasers indicated it was a "works contract." The Revenue argued that since the agreement was entered into before the construction was completed, and the assessee did not bear any risk, it should be treated as a works contract rather than a development project.

However, this issue was addressed by referencing the decision in Commissioner of Income-Tax v. Radhe Developers, where it was held that the assessee undertook the development of the housing project at its own risk and cost. The landowner only received the full price of the land, and the entire risk of investment and expenditure was borne by the assessee. Consequently, the profit and loss accrued solely to the assessee. The Court clarified that the addition of the Explanation to Section 80IB with retrospective effect from 1.4.2001, which states that the deduction does not apply to any undertaking executing a housing project as a works contract, did not impact the assessee's eligibility for the deduction.

Furthermore, the Court examined the question of ownership of the land. It was noted that under Section 2(47)(v) of the Income-tax Act and Section 53A of the Transfer of Property Act, the land would be deemed transferred to the assessee for income tax purposes, even if the title had not legally passed. The Court concluded that for the purpose of Section 80IB(10), the assessee could be considered the owner of the land, satisfying the ownership condition for the deduction.

Issue 2: Eligibility for Deduction Under Section 80IB(10) for Profits Derived from the Sale of Unutilized FSI

The Revenue argued that the profit derived from the sale of unutilized FSI should not be eligible for deduction under Section 80IB(10) because it was not derived from the business activity of developing and constructing a housing project. The Revenue relied on the judgment in Commissioner of Income-Tax v. Moon Star Developers, where it was held that profits from the sale of unutilized FSI, where there was significant underutilization, could not be considered as arising from the development of a housing project.

In Moon Star Developers, the Court examined cases where there was heavy underutilization of FSI, ranging from 11% to 65%. It was observed that the profit from the sale of unutilized FSI was distinct from the profit derived from the development and construction of residential units. The Court held that marginal underutilization of FSI would not disqualify the deduction under Section 80IB(10), but significant underutilization without special grounds would require bifurcation of profits.

In the present case, the assessee utilized 9595.64 sq.m of buildable area against a maximum permissible area of 13004 sq.m in one project, and 5997.28 sq.m against a maximum permissible construction of 8127.75 sq.m in another project. The underutilization was in the range of 25% to 30%, which was considered marginal. The Court concluded that such marginal underutilization did not disqualify the assessee from claiming the deduction under Section 80IB(10).

Conclusion:
Both issues raised by the Revenue were dismissed. The Court upheld the assessee's eligibility for the deduction under Section 80IB(10) of the Income-tax Act, 1961, both in the context of the "works contract" and the sale of unutilized FSI, provided the underutilization was marginal. The Tax Appeals were dismissed.

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