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2018 (5) TMI 1158 - HC - Income TaxDeduction u/s 80IB(10) - income from sale of unutilized FSI - substantial portion of the assessee s profit was not derived from development of housing project - Held that - As already noticed that the assessee was in the process of developing three housing projects viz. Subhlaxmi, Samruddhi, Bhagyalaxmi. In such projects, considering the land area and the permissible FSI of 1.6, the assessee was entitled to carry out total construction of 20198 sq.mtrs, 11426 sq.mtrs and 13130 sq.mtrs respectively. As against this, the assessee had actually carried out construction of 4538.13 sq.mtrs, 2212.42 sq.mtrs and 2639.26 sq.mtrs respectively in these projects. That left unutilized FSI of 15659.87 sq.mtrs, 9213.58 sq.mtrs and 10490.74 sq.mtrs respectively. Thus, in each of the projects, the assessee had utilized about 20% or less of the permissible FSI. It was in this context that the Assessing Officer had raised objection of the assessee s profit being derived through sale of unused FSI. Such an issue was examined by this Court in case of Commissioner of Income Tax vs. Moon Star Developers reported in 2014 (4) TMI 1042 - GUJARAT HIGH COURT in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged, bifurcation of profits arising out of such activity and that arising out of the net sell of FSI must be resorted to - none of the assessees have made any special ground for non-utilization of the FSI - Decided in favour of Revenue.
Issues Involved:
1. Whether the Tribunal erred in allowing the assessee's claim for deduction under section 80IB(10) of the Income Tax Act, considering the relationship between the assessee and the end user as a work contract. 2. Whether the Tribunal was right in law in allowing deduction under section 80IB(10) on profits derived from the sale of unutilized Floor Space Index (FSI), not being the element of profit derived from the business activity of development and construction of the housing project. Issue-wise Detailed Analysis: 1. Relationship Between Assessee and End User as a Work Contract: The first issue raised by the Revenue was whether the Tribunal had committed an error in allowing the assessee's claim for deduction under section 80IB(10) of the Income Tax Act, not appreciating that the relationship between the assessee and the end user of the units was that of a work contract. The Court rejected this question, relying on the judgment in the case of Commissioner of Income Tax vs. Radhe Developer reported in 341 ITR 403. Therefore, this issue was resolved in favor of the assessee, confirming that the relationship did not affect the eligibility for deduction under section 80IB(10). 2. Deduction on Profits Derived from Sale of Unutilized FSI: The sole surviving question was whether the Tribunal was correct in allowing deduction under section 80IB(10) read with section 80IB(10) to the assessee on profit derived from the sale of unutilized FSI, which was not related to the development and construction of the housing project. The brief facts revealed that the assessee, a partnership firm engaged in the development of housing projects, had claimed a deduction under section 80IB(10) for the assessment year 2004-05. The Assessing Officer noted that the assessee had utilized only a small portion of the permissible FSI for construction and had booked profits from the sale of unutilized FSI, which he deemed ineligible for deduction under section 80IB(10). In response, the assessee contended that the permissible FSI as per the approved plan was fully utilized and that segregating profits from development and sale of FSI was illogical. However, the Assessing Officer disallowed a significant portion of the claimed deduction, allowing only the part related to the developed and constructed area. The CIT (Appeals) and the Tribunal had allowed the assessee's appeal, but the Revenue challenged this decision. The Court examined the issue in light of the judgment in Commissioner of Income Tax vs. Moon Star Developers reported in [2014] 367 ITR 621 (Guj.), which discussed the concept of FSI and its importance in development activities. The judgment emphasized that the deduction under section 80IB(10) is available only for profits derived from the development and construction of housing projects, not from the sale of unutilized FSI. The Court observed that substantial underutilization of FSI, without special grounds, could not justify a full deduction under section 80IB(10). The Court concluded that the profits from the sale of unutilized FSI were distinct from those derived from the development and construction of housing projects and thus not eligible for deduction under section 80IB(10). The judgment of the Tribunal and CIT (Appeals) was reversed, and the decision of the Assessing Officer was restored. Conclusion: The Revenue's appeal was allowed, and the question was answered against the assessee. The judgment of the Tribunal and CIT (Appeals) was reversed, and the Assessing Officer's decision was restored, confirming that profits from the sale of unutilized FSI were not eligible for deduction under section 80IB(10). The Tax Appeal was disposed of accordingly.
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