2013 (1) TMI 535 - AT - Income Tax

Deduction u/s. 80IB (10) - Whether the assessee is a developer and builder or a Contractor Land owned by five persons Assessee enter into agreement to develop such land with the land owners - Construction of a residential-cum-commercial complex - Development agreement, 46% of the constructed space and, consequently, 46% of the land continues to belong to the land owners, who have thus divested themselves - through this arrangement, only the balance 54% of the land against the value of 46% of the construction - Assessee develops only 54% of the project on its own account, and the balance 46% on account of the land owners - Realizes profit from only its 54%, claiming deduction u/s. 80IB(10) thereon Held that - Though the assessee develops the entire project, its interest therein is limited to a part thereof (54%). Not only the assessee undertakes the entire work, even the sale function is also managed by it. It is, thus, it who pays the land owners through the value of a part of the project, i.e., 46%, rather than being paid for, similarly, by them, i.e., at 54% of its value, as a contractor would be, where not by paid in cash. In favour of assessee Deduction u/s. 80IB(10) In absence of any sales Assessee had shown inflated profit, i.e., at 60%, as against the rate of 23% for another non-80IB Held that - We set aside the impugned order to this extent, and remit the issue of determination of the accrual of income, including, where so, its extent, back to the file of the AO Also clarify as to the revenue neutrality of this exercise, as, if and to the extent income has not accrued, it could neither be brought to tax nor deduction in its respect claimed by, or allowed to, the assessee. The same though is crucial in the overall context of the case, inasmuch as only the real income, since accrued, can be assessed. Further, the value of the closing WIP, as assessed, shall be adopted as the opening WIP for the following year. Also, as this is the first year of construction, and some qualifying conditions u/s. 80IB(10) are subject to satisfaction over time, which has since elapsed, the AO shall also, if not already so verified, i.e., while framing the assessment for any succeeding year(s), satisfy himself as to the satisfaction of those conditions, being, principally, though not limited to, the completion of the project within the stipulated time period, issuing definite findings in its respect. Remand back to AO

Summary

Issues Involved:
1. Whether the assessee is a developer and builder entitled to deduction under section 80IB(10) or merely a contractor.
2. Whether the assessee's claim for deduction under section 80IB(10) is maintainable in the absence of any sales during the year.

Issue-wise Detailed Analysis:

1. Developer vs. Contractor:
The first issue is whether the assessee qualifies as a developer and builder and is therefore entitled to deduction under section 80IB(10) or if it is merely a contractor and thus excluded from the benefit. The facts of the case show that the assessee entered into agreements with landowners to develop a residential-cum-commercial complex, bearing all risks and rewards of the development activity. The assessee claimed it was not a contractor but a developer, undertaking the entire project from conception to sale, using its own resources. The CIT(A) found in favor of the assessee, stating that the assessee's role as a developer was evident from the terms of the agreement, which did not require the construction to be handed back to the landowners. The Tribunal upheld this view, noting that ownership of land is not a criterion for a builder of a housing project under section 80IB(10), and the assessee's arrangement with the landowners effectively transferred the land under section 2(47) read with section 53A of the Transfer of Property Act, 1882. The Tribunal concluded that the assessee was rightly considered a developer, not a contractor, and thus entitled to the deduction.

2. Deduction in the Absence of Sales:
The second issue concerns whether the assessee's claim for deduction under section 80IB(10) is valid despite no sales being made during the year. The assessee used the 'project percentage method' for accounting, which is accepted for long-term projects to recognize profit on a pro-rata basis as work progresses. The CIT(A) accepted this method, noting that advances were received under sale agreements, and future realizations were estimated based on these agreements. The Tribunal agreed that the 'project percentage method' is an accepted method for accounting and that the deduction under section 80IB(10) can be claimed from year to year based on partial completion, as endorsed by the CBDT's Instruction No.4 of 2009. However, the Tribunal found that the assessing officer's concerns about the absence of sales and the high profit rate were valid. The Tribunal noted that income recognition requires reasonable certainty of realization, which was not substantiated by the assessee with specific facts and figures. Therefore, the Tribunal remitted the issue back to the assessing officer to determine the accrual of income and its extent, ensuring that only real income is assessed and the deduction is correctly claimed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision that the assessee is a developer and builder entitled to deduction under section 80IB(10), rejecting the Revenue's claim that the assessee was merely a contractor. However, the Tribunal remitted the issue of income accrual and the extent of the deduction back to the assessing officer for fresh adjudication, emphasizing the need for specific findings of fact and reasonable certainty of income realization. The Revenue's appeal was partly allowed for statistical purposes.