2019 (10) TMI 469 - AT - Income Tax

Disallowance of deduction claimed u/s 80-IB(10) - claim of the assessee rejected on the ground that the profit on sale of the land was suppressed - AO as well as the CIT(Appeals) found that the market value of the land was fixed at a very lower rate since the children of the owners of the land were partners in the assessee-firm - HELD THAT - It is an admitted fact that the assessee-partnership firm is maintaining books of account. No defect was pointed out either by the AO or by the CIT(Appeals) in the books maintained in the regular course of business activity. AO found that the cost of the land which was said to be taken from Shri V. Chandrasekaran and Smt. Saraswathi Chandrasekaran for joint development by the assessee-partnership firm was valued at guideline value. The market value was not paid to Shri V. Chandrasekaran and Smt. Saraswathi Chandrasekaran. It is a well settled principle of law that market value of the land is not a constant or fixed price. It may fluctuate depending upon various factors such as area of the land location of the land infrastructure facility available around the land access to the public road etc. The State Registration Department after considering all these facts fixed the value which is known as guideline value to guide the Sub- Registrar to determine the market value. The guideline value may not always reflect the market value. Sometimes the guideline value may be less or it may be more depending upon the area and location of the property. When the assessee entered into a joint development agreement for transfer of part of the land to the partnership firm at a particular price this cannot be said that the value determined for transfer of part of land or the entire land is a device to increase the profit of the assessee-firm. AO as well as the CIT(Appeals) found that the market value of the land was fixed at a very lower rate since the children of the owners of the land were partners in the assessee-firm. There may be a justification for making allegation like this when the children of the land owners alone are partners. In this case apart from the children of the owners there are other partners who are not related to the land owners at all. The other partners may not cooperate with the land owners to purchase the land or to take the land on joint development so as to reduce the profit of the firm. Moreover the land owners also may not transfer the land for a price less than the market value since the third party partners who are in the assessee-firm indirectly get the benefit. When the third party individuals are partners in the assessee-firm apart from the children of the land owners this Tribunal is of the considered opinion that the contention of the Revenue that the land in question was transferred to the partnership firm at a guideline value in order to increase the profit of the assessee-firm so as to claim deduction u/s 80-IB(10) has no merit at all. Moreover the contention of the Ld. D.R. that the land was transferred at the guideline value so as to shift the profit to the partnership firm is not supported by any material. Profit is more than 50% - As observed earlier the assessee is maintaining books of account in the regular course of business activity and the land was taken by way of joint development agreement and the Revenue authorities have not doubted the books of account maintained in the regular course of business. When the book result discloses the profit at 50% the Revenue cannot doubt that the profit was exorbitant or improbable one. The profit generated by the assessee-firm is supported by the books of account maintained in the regular course of business activity therefore the Revenue authorities have no justification to doubt the percentage of profit. Children of the land owners namely Shri Prem Chandrasekaran and Shri Akil Chandrasekaran are partners in the firm with 35% of stake. Therefore naturally they are eligible for 35% of the profit of the firm. 65% of the profit would go to the other partners who are not in any way related to the land owners namely Shri V. Chandrasekaran and Smt. Saraswathi Chandrasekaran. The land owners may not prefer to give 65% of the shares to the third parties who are not connected with them. In such circumstances this Tribunal is of the considered opinion that there is no arrangement as projected by the Ld. D.R. to shift the profit to the partnership firm so as to claim a higher rate of deduction under Section 80-IB(10) of the Act. This Tribunal is unable to uphold the orders of the lower authorities. Accordingly the orders of both the authorities below are set aside and the Assessing Officer is directed to allow deduction under Section 80-IB(10) of the Act as claimed.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 80-IB(10) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Deduction under Section 80-IB(10)
The primary issue in both appeals is the disallowance of the deduction claimed by the assessee under Section 80-IB(10) of the Income-tax Act, 1961. The assessee, a partnership firm, developed a housing project and claimed deductions under the said section. The Assessing Officer (AO) disallowed the claim on the grounds that the profit on the sale of land was suppressed and that the transaction was dubious due to the involvement of the landowners' children as partners in the firm.

Arguments by the Assessee:
The counsel for the assessee argued that the firm was an independent and separate assessable unit. The landowners, Shri V. Chandrasekaran and Smt. Saraswathi Chandrasekaran, entered into an agreement with the assessee and executed a power of attorney in favor of Shri Mehul H. Doshi. The undivided share of land was sold by Shri Mehul H. Doshi, and the sale proceeds were credited to the assessee's books. The market value of the land was paid to the landowners, and the entire sale consideration received from prospective purchasers was passed on to the landowners. The AO’s observation that the transaction was dubious due to the involvement of the landowners' children as partners was unfounded, as the children were independent and separate assessable units.

The counsel further argued that the landowners’ share of sale proceeds was a composite one, consisting of consideration for the sale of undivided share of land as well as the built-up area. The gain on the sale of land was also eligible for deduction under Section 80-IB. The partnership firm, constituted on 01.10.2008, developed the land by constructing multi-storied residential flats. The landowners had executed an agreement for sale and an irrevocable power of attorney for sale of land to prospective buyers 21 months before the formation of the partnership firm.

Arguments by the Department:
The Departmental Representative (DR) argued that the landowners entered into a joint development agreement and executed a power of attorney for the sale of undivided share of land. The AO concluded that the land was sold at a rate below the market value to reduce taxable income and claim sale proceeds as exempt from taxation by introducing their children as partners in the firm. The AO also found that the profit margin was exorbitant and included the cost of land sold by the landowners, and a part of the cost was diverted as share of profit to the landowners' children.

Tribunal's Findings:
The Tribunal noted that the assessee-partnership firm maintained books of account in the regular course of business, and no defect was pointed out by the AO or the CIT(Appeals). The AO’s observation that the land was transferred at the guideline value to increase the profit of the firm was not supported by any material. The Tribunal found that the market value of the land is not a constant or fixed price and may fluctuate depending on various factors. The contention that the land was transferred at a lower rate since the children of the landowners were partners was not justified, as there were other partners who were not related to the landowners.

The Tribunal concluded that the profit generated by the firm, supported by the books of account, was not exorbitant or improbable. The children of the landowners, holding 35% of the stake, were naturally eligible for 35% of the profit, and 65% of the profit would go to the other partners. There was no arrangement to shift the profit to the partnership firm to claim a higher rate of deduction under Section 80-IB(10).

Conclusion:
The Tribunal set aside the orders of the lower authorities and directed the AO to allow the deduction under Section 80-IB(10) as claimed by the assessee. Both appeals filed by the assessee were allowed.