Commissioner Of Income Tax I v. Desai Developers....opponent(S

O/TAXAP/150/2014 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 150 of 2014 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX I....Appellant(s) Versus DESAI DEVELOPERS....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR B S SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE M.R. SHAHandHONOURABLE MR.JUSTICE K.J.THAKER Date : 15/07/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.Feeling aggrieved by and dissatisfied with the impugned judgment and order dated 14.6.2013 passed by the learned Income-tax Appellate Tribunal, Ahmedbad Bench “D”, Ahmedabad in ITA No. 2191/Ahd/2012 for A.Y. 2009-10, the revenue has preferred the present Tax Appeal to consider the following substantial questions of law: (1)Whether on the facts and in the circumstances of the case, the ITAT was right in law in allowing deduction u/s. 80IB(10) r.w.s. 80IB(1) to the assessee on profit derived from sale of unutilized FSI without appreciating that the said profit is not eligible for deduction u/s 80IB(10) r.w.s. 80IB(1) as it has not been derived by the assessee from the business activity of development and construction of a housing project?(2)Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in upholding the order of the CIT(A) deleting the disallowance/addition of Rs. 22,44,480/- u/s 40(a)(ia) of the Income Tax Act, 1961, holding that the provisions of Section 40(a)(ia) as amended by O/TAXAP/150/2014 JUDGMENT the Finance Act, 2010 w.e.f. 1.4.2010, are of clarificatorynatureand,therefore, retrospective without considering the fact that the relevant portion of the Memorandum Explaining the provisions in Finance Bill, 2010 clearly states that this amendment is proposed to take effect retrospectively from 1.4.2010 and will, accordingly, apply in relation to the Assessment Year 2010-11 and subsequent years ? 2.However, it is required to be noted that by an order dated 31.3.2014, the Division Bench of this Court answered the question no. 2 in favour of the assessee and against the revenue and directed to issue notice for final disposal only insofar as question no. 1 is concerned. Under the circumstances, as such, this Court is required to consider the present appeal qua aforesaid substantial question no.1. 3.The facts leading to the present Tax Appeal, in nut-shell, are as under: 4.That the assessee, a builder and developer, filed e-return of income declaring total income at Rs. NIL for AY 2009-10. The assessee declared gross total income at Rs. 32,81,410/- after claiming deduction of Rs. 32,81,410/- under section 80IB(10), the total income has been written at Rs. NIL. During the assessment 3.The facts leading to the present Tax Appeal, in nut-shell, are as under: 4.That the assessee, a builder and developer, filed e-return of income declaring total income at Rs. NIL for AY 2009-10. The assessee declared gross total income at Rs. 32,81,410/- after claiming deduction of Rs. 32,81,410/- under section 80IB(10), the total income has been written at Rs. NIL. During the assessment proceedings and on the basis of the material on record, it was found that the assessee firm had carried out construction activity on the land bearing survey no. 259, Atladara, Surat without fully utilizing the permissible floor space index (hereinafter referred to as “FSI”). It was found that the assessee had total plot area of 10539.69 sq. mtrs. for development, after reduction on account of common plot and roads etc. It was further found that the assessee was eligible to construct super build up area of 16863.5 sq. mtrs. @ 1.6 FSI. It was found that the assessee had constructed the housing project by deploying construction of 3665.39 sq.mtrs. of FSI. It was found that thus, the FSI of 5864.62 sq. mtrs. came to be utilized for the construction of the same, out of permissible FSI of 16863.5 sq. mtrs. It was found by the AO that the profit ensuring from the entire project for the year as per the profit and loss account, includes additional profit attributable to sale of unutilized FSI has also been booked by the assessee firm. Therefore, the AO observed and held that since the eligible profit for claim of deduction u/s 80IB(10) can only relates to those from the project of development and construction, the profit attributable to the sale of untilized FSI not relating to development and construction undertaken shall not become eligible for the said claim. Consequently, the AO disallowed Rs. 32,81,410/- claimed under sec. 80IB(10) of the Act being profit under untilized sale of FSI of project in housing units. The AO also disallowed Rs. 22,44,480/- claimed under sec. 40(a)(ia) of the Act. 5.Feeling aggrieved by and dissatisfied with the order passed by the AO disallowing the claim of assessee under sec. 80IB(10) and under sec. 40(a)(ia) of the Act, the assessee preferred an appeal before the CIT(A) and the learned CIT(A) allowed the said appeal and deleted the disallowance made by the AO claimed by the assessee under sec. 80IB(10) and under section 40(a)(ia) of the Act, respectively. 6.Feeling aggrieved by and dissatisfied with the order passed by the CIT(A), the revenue preferred an appeal before the learned ITAT. The learned Tribunal by impugned judgment and order has dismissed the said appeal confirming the order passed by the CIT(A). 7.Feeling aggrieved by and dissatisfied with the impugned judgment and order passed by the learned Tribunal, the revenue has preferred the present Tax Appeal to consider the aforesaid substantial question of law. 8.Mr. K.M. Parikh learned advocate appearing for the appellant -Revenue has vehemently submitted that as such the question involved in the present Tax Appeal is now not res integra in view of the recent decision of the Division Bench of this Court dated 5 & 11/03/2014 passed in Tax Appeal No. 549/2008 and other allied Tax Appeals. It is submitted that in the said decision, the Division Bench of this Court has upheld the view of the Revenue that the profit relatable to the sale of unutilized FSI would not be eligible for deduction under section 80IB(10) of the Act. It is submitted that in view of the above, the question no. 1 raised in the present appeal be answered in favour of the revenue and against the assessee, and consequently allow the present appeal. Mr. S.N. Soparkar learned senior counsel the present Tax Appeal is now not res integra in view of the recent decision of the Division Bench of this Court dated 5 & 11/03/2014 passed in Tax Appeal No. 549/2008 and other allied Tax Appeals. It is submitted that in the said decision, the Division Bench of this Court has upheld the view of the Revenue that the profit relatable to the sale of unutilized FSI would not be eligible for deduction under section 80IB(10) of the Act. It is submitted that in view of the above, the question no. 1 raised in the present appeal be answered in favour of the revenue and against the assessee, and consequently allow the present appeal. Mr. S.N. Soparkar learned senior counsel appearing for the assessee has fairly conceded that, as such, substantial question no. 1 which is required to be considered in the present appeal, as now the same is squarely covered in favour of the revenue and against the assessee in view of the decision of the Division Bench of this Court in Tax Appeal No. 549/2008 and with other allied Tax Appeals. However, Mr. Soparkar has requested to remand the matter to the learned A.O. to consider the exact unutilized FSI and exact calculation with respect to the unutilized FSI. In support of his above request, Mr. Soparkar learned senior counsel has relied upon the decision of the Division Bench of this Court in the case of Commissioner of Income-tax-I vs. Shreenath Infrastructure, reported in [2014] 44 taxmann.com 461 (Gujarat).By making above submission, it is requested to remand the matter to the learned A.O. 10. Heard the learned advocates appearing for the respective parties. 11. The question, which is posed for consideration of this Court is, whether on the facts and in the circumstances of the case and in law, the ITAT was right in law in allowing deduction u/s80IB(10) r.w.s. 80IB(1) to the assessee on profit derived from sale of unutilized FSI without appreciating that the said profit is not eligible for deduction u/s. 80IB(10)r.w.s. 80IB(1) as it has not been derived by the assessee from the business activity of development and construction of a housing project. The aforesaid substantial question of law is now not res integra in view of the recent decision of this court rendered in Tax Appeal No. 549 of 2008 and other allied Tax Appeals. In the aforesaid decision, the Division Bench of this Court has specifically observed and held that the profit relatable to the sale of unutilized FSI would not be eligible for deduction under sec. 80IB(10) of the Act. In para -28 to 32, the Division Bench of this Court has observed and held as under: 28.In this context, we may examine, whether 28.In this context, we may examine, whether the decision of the Assessing Officer to treat the income of the assessees from sale of FSI separate and excludable from the purview of section 80IB(10) of the Act? The concept of FSI, is a wellknown one.Localauthorities,suchas Corporations,Municipalitiesand Panchayats,frameregulationsfor regulating activities of development of lands within their local areas. Such regulations are popularly referred to General Development Control Regulations (GDCR).In addition to providing different zones controlling development activities in different areas for regulated and orderly development of urban areas, these regulations also provide for various other details such as maximum height upto which the construction can be carried out, maximum area on the ground floor or on other floors which can be covered under construction, margin to be left on sides, parking facilities to be provided depending on the nature of building and most importantly, the maximum construction that can be carried out on a given piece of land. The last element, namely, the ratio of the land area versus the maximum construction permissible on such land, is referred to as floor space index (FSI for short).It is this FSI which will decide the maximum area of construction that can be carried out on any given piece of land. It is, therefore, not difficult to appreciate that besides several other factors of situational and other advantagesanddisadvantages,FSI permissible for the land in question would be an important factor in the context of development of the land. Given all other factors same, higher the FSI, the greater the value of the land. 29.It is in this context, we have to appreciate the underutilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the earlier portion of the judgment, we can gather that such utilization of the FSI by the assessees ranges from the minimum of 11.14% of the full FSI available to a maximum of 65.81%. O/TAXAP/150/2014 JUDGMENT In majority of the cases, the assessees have covered barely about onefourth or onethird of the permissible FSI. 30.Foranycommercialactivityof construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remainingsame,nonutilizationof available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Let us compare two instances. In the same area two residential schemes are developed. Both have residential units of 1500 sq. feet. In one scheme 100% FSI is used in another 25% FSI is used and 75% is passed on to the buyer of the unit. Price of the unit in the later scheme would for apparent reason be considerably higher than the former because the buyer there gets not only a residential unit of 1500 sq. feet, he also gets the right to build further construction of 4500 sq. feet. Whether this includes open land or not is not important. In terms of construction business, it is equivalent to sale of land. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of developmentandconstructionof residential units and from sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer. 31.It is true that section 80IB(10) of the Act does not provide that for deduction, the undertaking must utilize 100% of the FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction under section 80IB(10) of the Act on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80IB(10) of the Act. This is not to suggest that for claiming deduction under section 80IB (10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if therehasbeenconsiderable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, 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 thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the assessees have made any special ground for non utilization of the FSI. 32.The contention of the counsel for the O/TAXAP/150/2014 JUDGMENT assessee that as long as there has been 100%utilizationofthemaximum permissible area on the ground floor, deduction under section 80IB(10) of the Act cannot be declined, cannot be accepted. As noted earlier, in case of M/s.Moon Star Developers and many other assesses, such full utilization of the groundfloorarea availablefor construction resulted into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused. 12. Under the circumstances and in view of the aforesaid decision of coordinate Bench of this Court in Tax Appeal No. 549 of 2008 with other allied Tax Appeals, the substantial question of law raised in the present appeal is to be answered in favour of the revenue and against the assessee. So far as request made by Mr. Soparkar on behalf of assessee relying upon the decision of the Division Bench this court in the case of Shreenath Infrastructure (supra) and to remand the matter to the AO to calculate the exact unutilized FSI is concerned, in the facts and circumstances of the case, the aforesaid cannot be accepted. At the out-set, it is required to be noted that in the assessment order on the basis of the material on record, the AO has given full particulars and details with respect to the total permissible FSI available for construction; the FSI utilized and the FSI unutilized by the assessee. In para-12, the AO has observed and given the particulars as under: “12. During the year, the assessee firm has earned profit of Rs. 32,81,410/- on So far as request made by Mr. Soparkar on behalf of assessee relying upon the decision of the Division Bench this court in the case of Shreenath Infrastructure (supra) and to remand the matter to the AO to calculate the exact unutilized FSI is concerned, in the facts and circumstances of the case, the aforesaid cannot be accepted. At the out-set, it is required to be noted that in the assessment order on the basis of the material on record, the AO has given full particulars and details with respect to the total permissible FSI available for construction; the FSI utilized and the FSI unutilized by the assessee. In para-12, the AO has observed and given the particulars as under: “12. During the year, the assessee firm has earned profit of Rs. 32,81,410/- on sale of the housing unit clubbed with right of unutilized FSI. The ratio of utilized FSI vis-a-vis unutilised FSI is 3665.39 : 10539.69. The profit relevant to the unutilized FSI is computed as under: The aforesaid finding recorded by the AO is on appreciation of evidence and the same has never been disputed by the assessee. Under the circumstances, when the aforesaid factual aspect with respect to the total permissible FSI available for construction; the FSI utilized by the assessee and the FSI unutilized by the O/TAXAP/150/2014 JUDGMENT assessee is available on record, there is no question to remand the matter to the AO for the aforesaid question. 13. In view of the aforesaid facts and circumstances of the case and the decision of the Division Bench of this Court, the question raised in the present Tax Appeal as referred to hereinabove, is answered in favour of the revenue and against the assessee. Consequently, the present Tax Appeal is allowed. No order as to costs. (M.R.SHAH, J.) mandora (K.J.THAKER, J)