2015 (2) TMI 492 - AT - Income Tax

Non genuine business arrangement - suppression of receipts - applicability of arms length price - charging of ₹ 300 per sft payable by M/s. Sri Sai Builders is very low when compared to the cost of construction at ₹ 849.42 per sft - Held that - Find no infirmity in the order of the CIT(A) as nothing h ad been brought out by the Department to prove that the agreement of the assessee with M/s. Sri Sai Builders is not genuine. The Department has also not been able to prove that the Joint Development Agreement and Agreement of Construction are between close relatives and we find that both the parties are independent. The rate of ₹ 300 per sft towards construction cost had been agreed upon after due deliberations between the parties in the year 2003-04 at the time of preparing and finalising the building plan at the then prevailing fair market rate for the cost of construction. The loss could have arisen due to escalation in the construction cost subsequently especially between the years 2006 and 2009 and, therefore, in these circumstances it cannot be held that charging of ₹ 300 per sft payable by M/s. Sri Sai Builders is very low when compared to the cost of construction at ₹ 849.42 per sft. Further in this project as a whole a gross profit of 25% and net profit of 19% was earned and had been declared. These profits were computed after absorbing the entire loss incurred on construction receipts from M/s. Sri Sai Builders. The person running the business has viewed the entire project instead of taking construction contract of a single stand alone transaction and that is why at the end of the project, the assessee firm made the net profit about 19%. In these circumstances, we confirm the order of the CIT(A) - Decided against revenue. Disallowance of deduction u/s. 80IB(10) - CIT(A) allowed the claim - Held that - No infirmity in the order of the CIT(A) as the provisions of section 80IB(10) inter alia provide that 100% of the profit derived by an undertaking developing and building housing projects approved by a local authority shall be allowed as deduction in computing the total income for tax purpose. A plain reading of this provision requires that the profits are derived from an 'approved housing project' and such approval should be by a local authority. It does not provide that the approval of the local authority should only be in the name of the undertaking proposing to develop the housing project. As observed by the CIT(A) when the land on which housing project has been approved is sold the approval still continues to apply. Subsequent ratification or regularisation are required only if there are deviations from the approved plan. Hence the claim of deduction u/s. 80IB(10) of the Act cannot be rejected on the ground that sanction from the local authority for the housing project is standing in the name of M/s. Sai Developers. - Decided against revenue.

Summary

Issues:
1. Discrepancy in construction cost charges between parties under a joint development agreement.
2. Disallowance of deduction under section 80IB(10) due to approval granted to a different party.

Issue 1: The case involved a firm engaged in real estate development, where the Assessing Officer (AO) found a significant difference between the actual construction cost incurred by the assessee and the amount charged to M/s. Sai Builders under a joint development agreement. The AO considered this a tax avoidance scheme and added the difference as suppressed receipts. The CIT(A) disagreed, stating that the arrangement was genuine and the low rate charged was not for tax minimization but based on fair market rates at the time. The CIT(A) also noted that the profits earned by the assessee were reasonable despite the loss incurred. The Tribunal upheld the CIT(A)'s decision, emphasizing that the agreement was valid, parties were independent, and the agreed rate was fair considering the circumstances.

Issue 2: The AO disallowed deduction under section 80IB(10) as the approval for the housing project was in the name of M/s. Sai Builders, not the assessee. The CIT(A) allowed the deduction, citing that the approval being in another party's name did not disqualify the assessee from claiming the benefit under the section. The Tribunal concurred, stating that the provision required approval for the project, not specifically in the name of the undertaking, and upheld the CIT(A)'s decision based on precedents and the plain reading of the law.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s rulings on both issues in favor of the assessee. The judgment highlighted the importance of genuine business arrangements, fair market rates, and adherence to statutory provisions in tax matters.