2013 (3) TMI 148 - AT - Income Tax

Deduction u/s 80IB(10) - housing project - validity of the certificate issued by Corporation of Chennai - whether the Corporation of Chennai can be considered a local authority - held that - No doubt, local authority has not been defined anywhere in Section 80-IB(10) of the Act. However, sub-section (2) of Section 10 exempts income of a local authority which is otherwise chargeable to tax under the head Income from house property, capital gains or income from other sources. Explanation thereunder states that local authority will definitely include a Municipal Committee, Panchayat and Cantonment Board. Therefore, we are of the opinion that ld. CIT(Appeals) was correct in reaching a conclusion that a local authority will include Corporation of Chennai. - Decided in favor of assessee. Deduction u/s 80IB(10) - disproportionate profits when compared to projects on which there was no such claim - held that - There is no case for the Revenue that any of the expenses was not properly allocated to the projects nor that some of the expenses were exclusively incurred on the projects for which there was a claim of deduction under Section 80-IB(10) of the Act. Therefore, a finding that the projects on which claim of deduction under Section 80-IB(10) of the Act was preferred had higher margin of profit, would not be sufficient enough reason to reject such a claim. Deduction u/s 80IB(10) - works contractor versus developer - held that - No doubt, Finance (No.2) Act of 2009 with retrospective from 1.4.2001 had added an explanation to Section 80-IB(10) whereby it has been declared that deduction under Section 80-IB(10) could not be given to an undertaking which executes a housing project as works contractor. But, as already held by us, here the assessee could not be considered as a mere works contractor, it having been concerned with acquisition of land, promotion of the project, construction and selling of the flats. Undue reliance was placed by the A.O. on the agreements entered by the assessee with prospective buyers in this regard. - Deduction allowed - Decided in favor of assessee.

Summary

Issues Involved:
1. Withdrawal of deduction under Section 80-IB(10) of the Income-tax Act, 1961.
2. Disallowance under Section 14A of the Income-tax Act, 1961.
3. Eligibility of the assessee as a developer under Section 80-IB(10) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Withdrawal of Deduction under Section 80-IB(10):
The Revenue contested the deletion of the withdrawal of the deduction under Section 80-IB(10) by the Commissioner of Income Tax (Appeals) [CIT(A)]. The primary contention was that the Completion Certificate from the Corporation of Chennai did not suffice, and the assessee should have obtained it from the Chennai Metropolitan Development Authority (CMDA). The Assessing Officer (A.O.) had denied the deduction because the CMDA had not issued a Completion Certificate by the stipulated date. However, the CIT(A) ruled in favor of the assessee, noting that the Corporation of Chennai had issued a certificate confirming the completion of the project in February 2008. The Tribunal upheld the CIT(A)'s decision, stating that the Corporation of Chennai qualifies as a "local authority" under the Income-tax Act, and thus, the Completion Certificate issued by it was valid.

2. Disallowance under Section 14A:
The Revenue challenged the restriction of disallowance under Section 14A to 5% of the dividend income. The A.O. had disallowed Rs. 70,38,725/- based on Rule 8D, attributing a portion of the managerial and interest expenses to the exempt dividend income. The CIT(A) reduced this disallowance to Rs. 50,000/-, reasoning that Rule 8D could not be applied retrospectively, as established by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. The Tribunal agreed with the CIT(A), noting that the A.O. had not established a direct nexus between borrowed funds and the investments. The presumption was that investments were made from interest-free funds, as per the Reliance Utilities and Power Ltd. case.

3. Eligibility of the Assessee as a Developer:
The Revenue argued that the assessee was only executing a works contract and not developing and building housing projects, thus ineligible for deduction under Section 80-IB(10). The A.O. had denied the deduction, stating that the assessee had separate agreements for land and construction, classifying it as a works contractor. The CIT(A) ruled in favor of the assessee, stating that the assessee had acquired land, developed the project, and bore the risk, thus qualifying as a developer. The Tribunal upheld this view, emphasizing that the assessee's activities went beyond mere construction, involving acquisition, promotion, construction, and sale of flats. The Tribunal referenced the decision in C. Subba Reddy (HUF) and concluded that the assessee was indeed a developer, not just a works contractor.

Separate Judgments Delivered:
The Tribunal delivered a unified judgment for both assessment years, dismissing the Revenue's appeals and upholding the CIT(A)'s decisions on all contested issues.