2016 (9) TMI 247 - AT - Income Tax

Claim for deduction u/s 80IB(10) - consideration of unutilized FSI - Held that - In the case the operation of unutilized FSI is exorbitant i.e. more than 30% of the total permissible area then the matter has to be looked into from a different angle and one cannot ignore the possibility of the situation wherein claim under section 80IB(10) is intentional deduction from sale of unutilized FSI on which no construction or development has been done and for mere sale of such unutilized land or portion deduction u/s 80IB(10) of the Act is claimed. We find that in the case of assessee almost 60% of the permissible FSI remained unutilized i.e. no construction was made thereon. As per the working appearing in the assessment order, we find that in the project Vaikunth-I permissible FSI was 1423.7 sq.m. and FSI utilized for construction was 571.81 sq.m. which left behind unutilized FSI at 851.89 sq.m. Now observing these facts of the case in the light of judgments of Hon. Jurisdictional High Court, we find that Hon. High Court in the case of Moon Star Developers (supra) came across the fact that only 23% of the FSI was utilized and decision was given in favour of Revenue by confirming the disallowance made for sale of unutilized FSI. However, it was also observed by Hon. High Court that utilization of FSI has to be introspected with the overall project and one has to keep space for the margin for keeping some portion of FSI unutilized depending on case to case. We observe that the same Hon. Bench of the Jurisdictional High Court which has decided the issue in favour of Revenue in the case of Moon Star Developers (2014 (4) TMI 1042 - GUJARAT HIGH COURT ) had dealt with similar issue of allowability of deduction u/s 80IB(10) of the Act for sale of unutilized FSI in the case of M/s Shreenath Infrastructure (supra) and came with the view that 25-30% of non-utilisation of FSI is permissible and assessee should not be devoid of claiming deduction u/s 80IB(10) of the Act. Respectfully following the judgment of Hon. Jurisdictional High Court in the case of Shreenath Infrastructure (2014 (4) TMI 482 - GUJARAT HIGH COURT) we are of the view that assessee should be allowed to claim deduction u/s 80IB(10) of the Act to the extent of 30% of unutilized FSI. We hereby deem it fit to sustain the disallowance to 50% as the assessee has 60% unutilized FSI and after giving the benefit of 30% unutilized FSI. Accordingly, assessee will get relief of ₹ 3,01,869.50 as against disallowance made at the time of assessment at ₹ 6,03,739/-. Accordingly, this ground of Revenue is partly allowed.

Summary

Issues Involved:
1. Deduction under Section 80IB(10) of the Income Tax Act, 1961 on profit derived from the sale of unutilized Floor Space Index (FSI).

Detailed Analysis:

Issue 1: Deduction under Section 80IB(10) on Profit Derived from Sale of Unutilized FSI

Facts of the Case:
The assessee, a partnership firm engaged in land development and construction of housing projects, filed a nil return for the assessment year 2002-03, claiming a deduction under Section 80IB(10) of ?12,55,093 towards income earned from the development and construction of residential houses. The Assessing Officer (AO) disallowed the deduction on two grounds:
1. The assessee was not the owner of the land and was treated as a work contractor.
2. The assessee utilized only 40% of the available FSI for construction and claimed deduction on the total profit, including the profit from the sale of unutilized FSI.

CIT(A) Decision:
The CIT(A) deleted the additions made by the AO, relying on the decisions in the cases of M/s. Radhe Developers and M/s. Shakti Corporation, where it was held that the assessee need not be the legal owner of the land to claim the deduction under Section 80IB(10). The CIT(A) also rejected the AO's view on the unutilized FSI, stating that the deduction should be allowed on the overall profit from the housing project.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision but partially allowed the Revenue's appeal by restricting the deduction to 50% of the profit derived from the sale of unutilized FSI.

Legal Precedents Considered:
1. CIT vs. Moon Star Developers: The Gujarat High Court held that the deduction under Section 80IB(10) should be allowed for the development of housing projects, and the profit from the sale of unutilized FSI should be excluded if the FSI utilization is significantly low.
2. CIT vs. Shreenath Infrastructure: The Gujarat High Court allowed the deduction for marginal under-utilization of FSI (25-30%) but disallowed it for significant under-utilization.

ITAT's Observations:
The ITAT observed that the deduction under Section 80IB(10) is intended to encourage the development of housing projects. The permissible FSI is the maximum area on which construction can be done, and the developer has the liberty to utilize it as deemed fit. However, significant under-utilization of FSI (more than 30%) cannot be justified for claiming the deduction. In the assessee's case, 60% of the permissible FSI remained unutilized, which was considered excessive.

Conclusion:
The ITAT concluded that the assessee should be allowed to claim the deduction under Section 80IB(10) to the extent of 30% of the unutilized FSI. Accordingly, the ITAT sustained the disallowance to 50% of the profit derived from the sale of unutilized FSI, granting partial relief to the assessee.

Outcome:
For the assessment year 2002-03, the ITAT allowed the Revenue's appeal in part, reducing the disallowance to 50% of ?6,03,739. For the assessment year 2003-04, the ITAT applied the same principle, reducing the disallowance to 50% of ?1,81,50,125.

General Grounds:
The general grounds raised by the Revenue were not adjudicated as they were considered general in nature.

Final Decision:
The appeals filed by the Revenue were partly allowed for both assessment years 2002-03 and 2003-04.