2017 (9) TMI 1855 - AT - Income Tax

Deduction u/s 80IB(10) - proportionate deduction - HELD THAT - On the issue of proportionate deduction, we also find that Hon ble Madras High Court in the case of CIT Vs. Arun Excello Foundations (P.) Ltd 2012 (12) TMI 415 - MADRAS HIGH COURT has approved the principle of proportionate deduction to the extent the assessee has complied with the provisions of Sec.80IB(10) of the Act. Following the aforesaid decision of Hon ble Madras High Court we are of the view that the assessee cannot be denied the deduction for the complete housing project and therefore find no fault in the order of Ld.CIT(A) and thus the grounds of Revenue are dismissed. Denial of deduction u/s 80IB(10) on account of non compliance of the condition stipulated in clause (f) to Sec. 80IB(10) clauses (e) and (f) were inserted to Sec.80IB(10) by Finance (No.2) Act, 2009 w.e.f 01.04.2010 - The object behind the introduction as explained by the Memorandum explaining the provisions is that the objective of the tax benefit for housing projects was to build housing stock for low and medium income households by ensuring the size of the residential unit. It was circumvented by the developers by entering into agreement to sell multiple adjacent units to a single buyer. Accordingly the new clause was inserted to provide that the undertaking which develops and builds the housing project shall not be allowed to allot more than one residential unit in the housing project to the same person not being an individual and where the person is an individual, no other residential unit in such housing project to spouse or minor children of such individual, to HUF in which the individual is a karta. In the present case at the time of making sale/booking a unit and for complying with the requirement of clause (e) and (f), the assessee is required to exercise normal due diligence expected of a normal businessman and proceed on the basis of the documents/information furnished by the other person and is not supposed to act like a detective and microscopically investigate and go behind the documents and verify the background of those submissions. Further no guidelines have issued by Revenue Department to show as to what and how the verification has to be conducted and therefore it is not a case of Revenue that the required guidelines issued by Revenue Department so as to check the compliance of clause (e) and (f) have not been followed by assess Assessee had prima facie exercised normal due diligence expected of a normal businessman more so when the purchasers at the time of booking had given different addresses, were having different surnames and then later on they turned out to be closely related. In such a situation, we are of the view that the assessee cannot be denied the deduction u/s 80IB(10). Claim of deduction u/s 80IB(10) be allowed and thus the grounds of assessee are allowed.

Summary

Issues Involved:
1. Denial of deduction under section 80IB(10) due to violation of sub-clause (f) by selling adjacent row houses to husband and wife.
2. Proportionate deduction under section 80IB(10) when conditions are violated for only some units in the project.

Issue-wise Analysis:

1. Denial of Deduction under Section 80IB(10) due to Violation of Sub-clause (f):
The assessee, a partnership firm engaged in promoting and building residential and commercial projects, filed a return of income for A.Y. 2010-11, declaring a total taxable income of Rs. Nil and claiming a deduction of ?8,35,95,698 under section 80IB(10) for the housing project "Sukhwani Oasis." The Assessing Officer (AO) disallowed this deduction, citing a violation of sub-clause (f) of section 80IB(10) because adjacent row houses (Nos. 38 and 39) were sold to husband and wife. The AO concluded that the assessee was aware of this relationship, which breached the conditions stipulated in section 80IB(10)(f). The assessee argued that it was under the genuine impression that the purchasers were not related, as they had used different names and addresses. However, the AO found this explanation unacceptable and denied the entire deduction.

2. Proportionate Deduction under Section 80IB(10) when Conditions are Violated for Only Some Units:
The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the AO's decision to deny the deduction due to the violation of clause (f) but granted partial relief by limiting the denial to the profits derived from the sale of row houses Nos. 38 and 39. The CIT(A) noted that the appellant firm failed to exercise due diligence expected of it, despite the misrepresentation by the purchasers. However, the CIT(A) also considered the intention behind clauses (e) and (f) of section 80IB(10), which aim to prevent the circumvention of unit size limitations. The CIT(A) concluded that disallowing the entire deduction for the project due to violations in just two units would be too harsh. Therefore, the CIT(A) directed the AO to recompute the deduction, limiting the denial to the profits from the two row houses in question.

Tribunal's Decision:
The Income Tax Appellate Tribunal (ITAT) considered both the assessee's and the Revenue's appeals. The ITAT found no fault in the CIT(A)'s order, which relied on the decision of the Pune ITAT in the case of Pharande Developers, allowing proportionate deduction. The ITAT also referred to the Madras High Court's decision in CIT Vs. Arun Excello Foundations (P.) Ltd, which approved the principle of proportionate deduction. The ITAT held that the assessee had exercised normal due diligence expected of a normal businessman, given the different addresses and names provided by the purchasers. The ITAT concluded that the assessee could not be denied the deduction for the entire project and allowed the deduction under section 80IB(10) for the remaining project, excluding the profits from the two row houses.

Conclusion:
The ITAT allowed the assessee's appeal and dismissed the Revenue's appeal. The final order pronounced that the assessee is entitled to the deduction under section 80IB(10) for the housing project, excluding the profits from the two row houses sold to the husband and wife.