Taxap/577/2014 Of Commissioner Of Income Tax -Iv v. Kamleshkumar Gandalal Shah - Huf

C/TAXAP/577/2014 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 577 of 2014With R/TAX APPEAL NO. 578 of 2014With R/TAX APPEAL NO. 578 of 2014 R/TAX APPEAL NO. 593 of 2014 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI andHONOURABLE MR.JUSTICE B.N. KARIA ==========================================================1 Whether Reporters of Local Papers may be allowed to see the judgment ?2 To be referred to the Reporter or not ?3 Whether their Lordships wish to see the fair copy of the judgment ?4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?==========================================================COMMISSIONER OF INCOME TAX -IVVersusKAMLESHKUMAR GANDALAL SHAH - HUF==========================================================Appearance:MR.VARUN K.PATEL for the PETITIONER(s) No. 1MRS MAUNA M BHATT for the PETITIONER(s) No. 1RULE NOT RECD BACK for the RESPONDENT(s) No. 1RULE SERVED for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHIand HONOURABLE MR.JUSTICE B.N. KARIA Date : 05/03/2018ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These appeals arise in similar common background. We may treat Tax Appeal No. 577 of 2014 as the lead matter. Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal dated 08.11.2013. Tax Appeals were admitted for consideration of following substantial questions of law: “(i) Whether in the facts and circumstances of the case, the has erred in law in allowing the assessee deduction u/s 80IB(10) r.w.s. 80IB(1) of the Income Tax Act on profits derived from sale of unutilized FSI not being element of profit derived from the business activity of development and construction of housing project? (ii)Whether on facts and in circumstances of the case, the learned ITAT has erred in law in ignoring the fact that by non-utilization of ‘available FSI’ on the approved plot of land, the pre-condition for the development of minimum one acre of land had not been fulfilled and hence assessee was not eligible for claim of deduction?” 2. With some difficulty, we have been able to gather facts from record. Respondent-assessee is an HUF and was engaged in the development of housing projects. For the assessment year 2006-07, the assessee had filed return of income, on 28.12.2006 showing total of income of Rs. 7,870/- after claiming deduction of Rs. 70,11,618/- under section 80IB(10) of the Income Tax Act. The Assessing Officer in his order of record. Respondent-assessee is an HUF and was engaged in the development of housing projects. For the assessment year 2006-07, the assessee had filed return of income, on 28.12.2006 showing total of income of Rs. 7,870/- after claiming deduction of Rs. 70,11,618/- under section 80IB(10) of the Income Tax Act. The Assessing Officer in his order of assessment dated 29.12.2008 rejected the claim on the ground that the assessee was not the owner of the land. In his opinion therefore, the assesee failed the test of being a developer. In the opinion of the Assessing Officer, the assessee was merely an agent of the land and not a developer of land. assessment dated 29.12.2008 rejected the claim on the ground that the assessee was not the owner of the land. In his opinion therefore, the assesee failed the test of being a developer. In the opinion of the Assessing Officer, the assessee was merely an agent of the land and not a developer of land. 3. The assessee carried the matter in appeal. CIT(Appeals) noted that there were several conditions required to be fulfilled for claiming deduction under section 80IB(10) of the Act. One of them being that the project must be developed on the size of plot of land which has a minimum area of 1 acre. He called for the report of the DVO on the construction activity carried out by the assessee. After sharing such report to the assessee, he noted that in the report the DVO had noted that the assessee had constructed a total of 31 residential units, total admeasuring 4037.76 sq.mtrs. The prevailing FSI was 1.8. The DVO had therefore, divided the built-up area of 4037.76/1.8 to come to a conclusion that effectively the assessee had developed only 2243.2 sq.mtrs of land and had thus not developed a minimum plot area of 1 acre. According to the DVO, the assessee had left open terraces where further construction could be added later while selling the residential units.that there were several conditions required to be fulfilled for claiming deduction under section 80IB(10) of the Act. One of them being that the project must be developed on the size of plot of land which has a minimum area of 1 acre. He called for the report of the DVO on the construction activity carried out by the assessee. After sharing such report to the assessee, he noted that in the report the DVO had noted that the assessee had constructed a total of 31 residential units, total admeasuring 4037.76 sq.mtrs. The prevailing FSI was 1.8. The DVO had therefore, divided the built-up area of 4037.76/1.8 to come to a conclusion that effectively the assessee had developed only 2243.2 sq.mtrs of land and had thus not developed a minimum plot area of 1 acre. According to the DVO, the assessee had left open terraces where further construction could be added later while selling the residential units. 4. The CIT(Appeals) ruled in favour of the Revenue and dismissed the assessee's appeal. He referred to the explanation clause added w.e.f. 01.04.2001 to section 80IB(10) of the Act dismissed the assessee's appeal. He referred to the explanation clause added w.e.f. 01.04.2001 to section 80IB(10) of the Act with respect to works contract. He further noted that the assessee had not raised any objections on the report of the DVO suggesting that he had not developed 1 acre of land which was one of the conditions for claiming deduction under section 80IB(10) of the Act. 5. The assessee carried the matter in further appeal. The Tribunal followed the judgement of this Court in case of Commissioner of Income Tax vs.Radhe Developers reported in 341 ITR 403 on the question of the assessee being a developer or not. With respect to the construction carried out by the assessee, the Tribunal was of the opinion that there was no mandatory requirement under the law that the assessee must fully utilize the permissible FSI. Mainly on these grounds the appeal of the assessee was allowed. The materials on record would suggest that the assessee had put up housing project on a land admeasuring 3786 sq.mtrs. Permissible FSI was 1.8. Maximum construction that could have been carried out on such plot of land therefore was 13294.8 sq.mtrs. As against that, as recorded by the DVO, the assessee had carried out a total construction of 4037.76 sq.mtrs which was less than 1/3[rd ]of the total permissible construction area. The question is, can the profit derived from sale of such unused FSI be stated to be out of the assessee's business of development of housing project? This issue is no longer res integra. This Court in case of Commissioner of Income Tax vs. Moon Star Developers reported in [2014] 367 ITR 621 (Guj.) had considered such a case in following manner: “29. 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. Local authorities, such as Corporations, Municipalities and Panchayats, frame regulations for 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 advantages and disadvantages, 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. 30.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%. In majority of the cases, the assessees have covered barely about one fourth or one third of the permissible FSI. 31.For any commercial activity of 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 remaining same, nonutilization of 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 development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer. 32.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 there has been considerable 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 nonutilization of the FSI. 33.The contention of the counsel for the assessee that as long as there has been 100% utilization of the maximum 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 ground floor area available for construction resulted into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused. 34.What is available for deduction under section 80IB(10) of the Act is the profit of an undertaking derived from developing and building a housing project. Mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits cannot be said to have been derived from such housing project. Terms “derived from”, “arising out of” and “attributable to” are often times used in the context of income tax in different connotation. In the case of Sterling Foods (supra), the assessee was engaged in processing prawns and other sea food which it exported. In the process, the assessee earned import entitlements to use itself or sell the same to others. During the year under consideration, the assessee included such sale proceeds for claiming relief under section 80HH of the Act, in case of any profit or gain derived from an industrial undertaking in backward areas. In this context, the Apex Court held that the import entitlements cannot be said to be derived from the industrial undertaking of the assessee. For the application of the words “derived from”, there must be a direct nexus between the profits and gains and the industrial undertaking and in the case on hand, the nexus was not direct but only incidental. 35.In case of Pandian Chemicals Ltd (supra), once again, the assessee claimed deduction under section 80HH of the Act. This claim included interest on deposit made with Electricity Board for supply of electricity. The Apex Court held that the interest derived by the industrial undertaking of the assessee on such deposits made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself and was not profit earned or gain derived by the undertaking for the purpose of special deduction under section 80HH of the Act. 36.In the case of Liberty India (supra), the assessee was engaged in infrastructure development and claimed deduction under section 80I, 80IA and 80IB, etc. on the draw back receipts and DEPB benefits. The Court held that such income cannot be stated to be derived from the industrial undertaking. 37.The case of Nirma Industries Ltd (supra) rested on different facts. It was a case where the assessee had claimed deduction under section 80IA of the Act. Such claim included the interest received from trade debtors towards late payment of sale consideration. This became a matter of dispute between the assessee and the Revenue. The Court held in favour of the assessee holding that suchadditional consideration can also be stated to be derived from the business. It was observed that when the purchaser pays a higher sale price, if it delays payment of sale proceeds, there is a converse situation to offering of cash discount. In principle, thus the transaction remains the same and there is no distinction as to the source. 38.In view of the above discussion, the question is answered in favour of the Revenue. All Tax Appeals to this extent are allowed. Respective decisions of the Tribunal are reversed to that extent. Appeals are disposed of accordingly.” 6. For the reasons recorded in case of Moon Star Developers (supra), these appeals are required to be allowed. Before closing, however, we notice that the second question framed by the Court at the time of admission of appeal arose out of the Revenue's incorrect appreciation of the facts that the total construction carried out by the assessee should be divided by the permissible FSI to arrive at the computation of land developed by the assessee. By way of such reverse integration, the CIT(Appeals) concluded that the assessee had not developed land area exceeding 1 acre. This is neither correct in facts nor in law. Second question is, therefore, not answered. Nevertheless, while answering question No.1 in favour of the Revenue all these appeals are allowed. Judgements of the Tribunal are set aside. Tax Appeals are disposed of. (AKIL KURESHI,J) JYOTI V. JANI (B N KARIA,J)