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TMI Blog2012 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... nses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act. - In favor of assessee. Disallowance of claim u/s. 36(1)(iii) read with section 14A - Held that:- Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) - as the income received from M/s. SMR Builders (firm) is exempted income and as such provisions of section 14A are applicable - against assessee. - IT APPEAL NOs. 671 (HYD.) OF 2010 and 1921 & 1948 (HYD.) OF 2011 - - - Dated:- 12-7-2012 - CHANDRA POOJARI, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee's claim u/s. 80IB(10) was for this project consisting of residential units ranging from 890 sq. feet to 1400 sq. feet of built up area. After verifying the details filed during the assessment proceedings, the Assessing Officer denied the assessee's claim for deduction u/s. 80IB(10). 4. The Assessing Officer held that from the details furnished it was seen that the assessee had sold flats in a semi finished stage. After verifying the sale deeds executed by the assessee company in favour of the transferee of flats, the Assessing Officer held that it was clear from the sale deed that the assessee company sold undivided share of land with super structure of semi finished build up area for a certain consideration. The Assessing Officer held that the assessee did not satisfy the condition prescribed in the section i.e., the assessee did not sell complete residential units in all respects. The Assessing Officer held that semi finished structures can never be considered as residential units since a residential unit is a place where a person can live. In this case, on the same date when the sale deed was executed a construction agreement was also entered into with the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, the assessee under took development of residential project by name "SMR Metro Polis". To make one eligible for deduction Section 80IB in respect of House Projects the following conditions should be complied with: ( i ) The development and construction of the housing project should commence after 01.10.1998; ( ii ) The plot area on which housing project developed should be minimum area of 1 acre; ( iii ) The built up area of each unit should not exceed 1,500 sq. ft. 9. The DR further submitted that from the details furnished it is seen that the assessee sold the flats in semi finished stage. During the course of assessment proceedings copies of certain Sale Deeds executed by the assessee company in favour of transferees of flats are obtained and verified. From the description mentioned 'in the Sale Deeds it is clear that the assessee company sold undivided share of land with superstructure of semi finished built up area for certain consideration. Thus, from the details it can be seen that the assessee company did not sell complete residential unit in all respects. But the provision clearly mentions that the assessee should sell only residential units to make themse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumed the each project can not be ascertained. In this connection it is to be mentioned that sub-section (13) of Section 80-IB clearly states that sub-section (5), (7) to (12) of Section 80IA shall apply to the eligible business under this section. Sub-section (7) of Section 80-IA clearly states that for the purpose of determining the quantum of deduction the same should be computed as if such eligible business was the only source of the income of the assessee during the previous year. For clarity the relevant sub-section is reproduced hereunder:- "sub-section (7) [* * *] The deduction under sub-section (1) from profits and gains derived from an [***] undertaking shall not be admissible unless the accounts of the [* * * ] undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income the report of such audit in the prescribed form duly signed and verified by such accountant" 12. The DR submitted that in the assessee's case, the assessee did not maintain any separate accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a sale deed on 9-6-2004 in favour of one Sri Niraj Kumar whereby undivided share of 47 sq. yds together with semi-finished flat of 1065 sq. ft was sold for Rs. 6 lakhs. The deed was registered on 11-06-2004. The assessee also entered into a "construction agreement" with the same person on 19-5-2004 (i.e., prior to the execution of the sale deed itself). As per this agreement the assessee was to carry on further construction of the flat for a consideration of Rs 4,47,200." 15. The AR submitted that the title to the property to an apartment is transferred through a registered document for undivided share of land. Section 80IB entitles deduction for profits derived from developing and building housing projects. The development activity involves conceptualization of a project, determining cost of the project, arranging debt and equity, getting appropriate approvals etc. Building involves the act of carrying out all physical activities that bring into existence a tangible building in existence. It was submitted that the facts recorded by the assessing officer actually demonstrates compliance or fulfilment of the same. The requirement of Sec. 80IB is that profits should be derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for finishing of the schedule of property for a cost of Rs. (y) which includes the proportionate cost of infrastructure and one car parking space in stilt floor and Rs. (z) towards corpus fund, as such the total comes to (y + z). (3) That the vendors are hereby agreed to execute the registered sale deed and hand over the physical vacant possession of the schedule of property to the vendee immediately after receiving the total sale consideration and construction agreement amount. (4) That the vendee is hereby agreed to bear the stamp duty and registration fees and expenditures for executing the agreement of sale, construction agreement and sale deed for the schedule of property. 18. The Authorised Representative of the appellant also filed copies of letters of possession issued by the appellant company in respect of flats in SMR Metropolis. These letters were issued to the site supervisor to hand over the flat and keys by the appellant in respect of individual flats on different dates evidence the completion of the construction of the flats in all respects. The Authorised Representative also filed receipts signed by authorized signatories of the financial institutions to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular year necessarily relate to income accrued in that year depending upon the system of accounting for recognition of income followed by the eligible assessee. Even according to Accounting Standard 7, two methods of accounting commonly followed are the percentage of completion method and the completed contract method. It is not mandated by the section that in order to be eligible fur deduction, profits should relate only to completed residential units. The section promulgates deduction of profits attributable to and arising from housing projects and the quantum of profits depends on the method of accounting followed by assessee. The segregation of the activity into registration and subsequent construction by the AO is not valid as both the activities are carried out by the specified undertaking claiming deduction u/s. 80IB. It is worth mentioning at this juncture that the reference to "residential unit" in the section arises in the context of fixing maximum built up area with respect to each individual unit within the housing project. Sub-section 10 of Sec.80lB starts with the sentence "The amount of deduction in the case of an undertaking developing and building housing pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertook to construct the flat in its entirety. The learned Commissioner of Income tax (Appeals) accordingly held that the Assessing Officer erred in holding that the assessee only sold a semi-finished flat. The learned Commissioner of Income Tax (Appeals) allowed the assessee's appeal. The learned Commissioner of Income Tax (Appeals) allowed the assessee's appeal on this issue. 22. Regarding maintenance of separate accounts for the eligible project, the AR submitted that the assessee got its accounts audited and complied with the requirement of filing audit report in Form No. 10CCB as required u/s. 80IB(13) read with Sec. 80IA(7). The Assessing Officer however held that the assessee should have maintained separate accounts in respect of the eligible project. He held that in the absence of separate accounts for the eligible project, deduction allowable u/s. 80IB could not be worked out. The Assessing Officer accordingly held that the assessee did not comply with the condition laid down u/s. 80IA(7) and denied the claim of deduction u/s. 80IB. 23. In this connection, the AR submitted that the assessee is engaged in development and execution of more than one housing project sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness transactions of the division/undertaking are reflected as a sub ledger in the main ledger of the entity (say company) to which these divisions/undertaking belong to. In the instant case the eligible undertaking Metropolis is a division of SMR Builders Pvt Ltd. The ledger accounts relevant to Metropolis are reflected as "Cost Centres" in the main accounting records of SMR Builders Pvt Ltd. The accounting application allows the preparation of financial statements of the undertaking "Metropolis" separately. It was submitted that the AO failed to appreciate such position and incorrectly concluded by saying that separate books of accounts are not maintained. The Assessing Officer has also commented that the assessee got its accounts audited for the business as a whole and that had it maintained separate accounts; it would have got its accounts audited separately. The assessee submits that here again, the Assessing Officer has not appreciated the fact that the audit u/s. 44AB is required to be conducted for the business as a whole including the undertakings eligible for deduction U/s 80IB. Hence, the auditor has furnished the report required U/s. 44AB and also U/s 80IB(13) r.w.S. 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 29. We have heard both the parties and perused the material on record. We have carefully gone through the circular Instruction No. 4 of 2009 dated 30.6.2009 which reads as follows: "Under sub-section (1) of section 80IB an undertaking developing and building housing projects is allowed a deduction of 100% of its profits derived from such projects if it commenced the project on or after 01/10/1998 and completes the construction within four years from the financial year in which the housing project is approved by the local authority. 2. Clarifications have been sought by various CCsIT on the issue whether the deduction u/s 80-IB(1) would be available on a year to year basis where an assessee is showing profit on partial completion or if it would be available only in the year of completion of the project u/s 80-IB(1). 3. The above issue has been considered by the Board and it is clarified as under:- ( a ) The deduction can be claimed on a year to year basis where the assessee is showing profit from partial completion of the project in every year. ( b ) In case it is late, found that the condition of completing the project within the specified time limit of 4 years as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be to advance the cause for which such pro visions have been incorporated and not to frustrate the same. For this proposition, he relied on the judgement of Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 wherein held as follows: " .. .A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In Broach District Co-operative Cotton Sales, Ginning Pressing Society Ltd. v. CIT [1989] 177 ITR 418 (SC), the assessee, a co-operative society, claimed that the receipts from ginning and pressing activities was exempt under section 81 of the Income-tax Act. The question for interpretation was whether the co-operative society which carried on the business of ginning and pressing was a society engaged in 'marketing' of the agricultural produce of its members. The court held that the object of section 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental or ancillary to the activities mentioned in section 81(1), the assessee was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, (9) Indirect Incomes, (10) Salaries, (11) Postage and Telephones, (12) Printing Stationery, (13) Repairs and Maintenance, (14) Security service charges, (15) Staff welfare, (16) Taxes and fees and (17) Water Electricity. 36. Apart from these expenses such as expenditure on books and periodicals, conveyance charges, freight and transport, miscellaneous expenses etc. were also identified with reference to the eligible business. The Authorised Representative explained the allocation of common expenses such as remuneration, finance charges and interest and depreciation to the project. Such allocation is seen to be made as a proportion of the sales made. As per the statement after considering the sales made by the project, the direct and indirect expenses incurred and the allocation of common expenses, the profit of the business is worked out at Rs. 21,17,268/- for the assessment year 2005-06. 37. Section 80IA(7) which is applicable to the provisions of Sec. 80IB requires the accounts of the eligible undertaking to be audited and a certificate to be filed. The essence of this requirement is that, at any given time the financial position of the undertaking, should be ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, if it is considered necessary." 40. Brief facts of the issue are that the assessee company is in the business of real estate and also a builder. It filed the return of income for the A.Y. 2006-07 on 29.11.2006, admitting total income at Rs. 1,78,69,784/-. In the computation of income, the assessee claimed deduction of Rs. 39,98,756/- u/s 80IB of the IT Act and the deduction was claimed in respect of a residential housing project called "SMR Vinay City". While completing the assessment, the Assessing Officer has rejected the deduction claimed u/s 80IB by the assessee company stating that the assessee did not maintain any separate accounts in respect of eligible project i.e. SMR Metro Polis and hence, it is not possible to work out the deduction u/s 80IA and also the assessee did not comply with the condition laid down u/s 80IA(7) of the IT Act, hence the assessee is not eligible for deduction u/s 80IB of the Act. The AO further opined that audit report in Form No. 10CCB was not furnished along with municipal approval and hence disallowed the claim. Besides the above, disallowance, the Assessing Officer has also disallowed (i) an amount of Rs. 1,10,18,185/- u/s 40(a)(ia) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans were raised by the assessee were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the assessee has advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of outstanding loans on which the assessee is incurring liability to pay interest, there was no justification to advance the loans to sister concerns for non-business purposes without charging any interest. Accordingly, there is no merit in the plea of the assessee that the entire interest paid on borrowing has to be allowed. 43. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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