TMI Blog2011 (6) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions, approvals and IODs from the BMC etc. These cannot be treated as paper transactions - Decision in favour of Assessee. Escapement of tax by double deduction - We have noticed that the gross sale proceeds are to be divided between the assessee and EBPL in 43:57. Thus the assessee would be getting deduction u/s 80-IB(10) in respect of the profits derived by it from the housing project and EBPL will be similarly claiming deduction in respect of its share of the profits. Both of them combined do not exceed 100 per cent of the profits from the housing project. Thus, there is also no double deduction. Disallowance u/s 40A(2)(b) - Assessee paid its managing director remuneration, on account of salary, ex gratia and medical reimbursement which was higher than other directors - AO found it unreasonable - Disallowed the excess payment HELD THAT:- As CIT(A), rightly pointed out that managing director in question is a chartered accountant had quality experience. Other two directors are not so qualified and also did not take part in the business in the same way in which that managing director took. Also, the AO ought to have compared the payment made managing director with pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... layed Employees' Contribution to Provident Fund - Assessee paid amount on the next day of due date - HELD THAT:- The payment is within the grace period allowed as per the circular issued by CPDC. It gives a grace period of five days. The assessee has deposited the contribution within the grace period. Accordingly the decision of the CIT(A) to delete the disallowance is upheld. Disallowance u/s 14A - Administrative Expenses attributable to the Exempt Income - AO disallowed 2.49 percent of Administrative expenses - CIT(A), held, a disallowance of 3 per cent of the dividend income can be held to be a proper estimate of administrative expenses attributable to the earning of the dividend income HELD THAT:- On a careful consideration of the facts, we are of the view that the disallowance sustained by the CIT(A) based on a percentage of the dividend income seems less reasonable than the method adopted by the AO. The AO has adopted the same percentage which the dividend income bears to the total income of the assessee as per the P L a/c. This seems to be a more reasonable approach. We accordingly reverse the decision of the CIT(A) and restore the disallowance made by the AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and EBPL in the ratio of 43:57. It was repeated that the assessee fulfilled all the conditions of s. 80-IB(10) in order to qualify for the deduction. These submissions were put forth in writing by letter dt. 20th Nov., 2006 before the AO and the said letter has been reproduced in full in the assessment order. 3. The AO examined the facts right from the inception when the assessee acquired the development rights over the land and after examining the terms of the agreement between the assessee and EBPL, came to the conclusion that the assessee should be both a developer and a builder to be eligible for the deduction, that it was EBPL which actually developed and constructed the housing project, that the assessee merely provided the other incidental services such as obtaining FSI and all statutory permissions, putting up the pipeline upto the boundary of the project, setting up the infrastructure and complying with the conditions imposed by MMC and these activities do not amount to developing and building the housing project. He accordingly rejected the assessee's claim for deduction under s. 80-IB(10) of the Act. 4. On appeal, the assessee filed detailed written submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... developer and builder eligible for deduction under s. 80-IB ? 1.3 Whether the assessee was entitled to deduction under s. 80-IB(10) even though the development project was started prior to 1st Oct., 1998 ? 6. In respect of the asst. yrs. 2002-03 and 2003-04, the AO reopened the assessments to disallow the assessee's claim for deduction under s. R 80-IB(10) of the Act. The CIT(A), following his predecessor's order for the asst. yr. 2004-05, accepted the assessee's claim, against which the Revenue has come in appeal. It appears that for the asst. yr. 2003-04 the Revenue by oversight filed wrong grounds of appeal before the Tribunal, which mistake has been corrected by filing revised grounds, which are identical to the revised grounds filed in the appeal for the asst. yr. 2004-05. The original grounds of appeal filed by the Revenue for the asst. yr. 2002-03, however, have been correctly framed and therefore there are no revised grounds for that year. 7. In respect of the asst. yr. 2005-06, the AO, even while framing the assessment under s. 143(3) of the Act pursuant to the return filed by the assessee, disallowed the deduction claimed under s. 80-IB(10) for reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim is put forward by the assessee, was designed to avoid payment of legitimate taxes on what is essentially a land deal. 9. The learned CIT-Departmental Representative assailed the findings of the CIT(A) recorded in para 7.7 of the impugned order on the following grounds : (a) None of the findings make the assessee a developer. The activities undertaken by the assessee merely amount to preservation of the land and cannot be called development activities. (b) All the activities on which reliance was placed by the CIT(A) are only paper transactions and not activities of a developer. (c) Assessee has only incurred the expenditure to maintain its title to the land and nothing more. (d) The entire arrangement is a camouflaged sale of land to the buyer of the flats in the housing project and the medium adopted is the documentation to show as if the assessee is also a developer so that it can claim deduction under s. 80-IB(10) of the Act. 10. In order to test the correctness of the arguments of the learned CIT-Departmental Representative and before we refer to the arguments of the learned counsel for the assessee, it is necessary to briefly refer to certain facts. We m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and expenses. Clause 11 provided for the obligation of the assessee to complete the transaction relating to the said land on or before 30th June, 1986. Under cl. 12, it was the obligation of the developers (the assessee) to bear and pay all rates and taxes (excluding personal taxes such as income-tax), cess, land revenue and all other outgoings in respect of the land or any part thereof or in respect of any structure standing on the land or in respect of buildings or structures to be constructed on the land by the developer and payable to the Government or the municipal corporation or any other public body after the developer is put in possession of the land. 11. Clause 13 provides for certain other obligations of the assessee under the agreement. It provides for the following obligations of the assessee : (a) The land shall be developed by the developer at its own risk, costs and expenses and shall carry out the development work in accordance with the plans and specifications duly approved and sanctioned by the Municipal Corporation of Greater Bombay and other concerned local authorities. (b) The assessee as developer shall comply with all the building rules and bye-law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. 2 (i.e. the amount of ₹ 1,11,00,000). 13. Clause 20 of the agreement provides that the assessee as developer further agrees to take a conveyance or any other documentation in respect of the land in their favour or in favour of the nominee or nominees or a co-operative society or a limited company or an association of apartment owners or any other body corporate, as the case may be, after the assessee has paid the full consideration money payable to BJPL. Clause 21 provides that the developer shall not be entitled to transfer or assign the benefit of the agreement for development to any other person without the prior written consent of BJPL. Clause 26 provided that it was the obligation of the assessee as developer to pay brokerage @ 2 per cent of the consideration money on completion of the transaction. 14. The above are in effect the obligations undertaken by the assessee under the agreement with BJPL. 15. It would appear that after the aforesaid agreement was signed between BJPL and the assessee and after the assessee had paid to BJPL the consideration of ₹ 1,05,00,000 pursuant to which BJPL had also agreed to give a power of attorney to the assessee, its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties functioning under ULCRA. (8) To obtain permits for cement, steel and other building materials, water supply, electricity supply, gas, telephones, drainage and sewerage etc. at the assessee's costs. (9) If required by BSES, the assessee shall also put up a sub-station on the property for supplying electricity to the buildings to be constructed. (10) To obtain commencement, occupation and completion certificates in respect of the building to be constructed. There are several other clauses in the power of attorney which obliged the assessee to take various steps in connection with the development of the property and the construction to be put up thereon. They are mostly statutory obligations which are required to be undertaken by a developer in connection with development work. These are contained in cls. 21 to 30 of the power of attorney. 16. On 22nd Dec., 1999 an agreement was entered into between the assessee who is referred to therein as the developers , EBPL who is referred to as the joint developer and M/s Thakur Brothers Agricultural Farm as the confirming party . The preamble to this agreement refers to the grant of development rights on the land by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings on the land. Clause 20 of the preamble refers to the declaration/confirmation of the assessee to EBPL to the effect that its title to the said land is clear, marketable and free from encumbrances and cl. 21 states that the assessee has not entered into any prior commitment for grant of development rights on the land in favour of any other person. Clause 24 of the preamble states that EBPL agrees to carry out and complete the joint construction on the land phase-wise as a residential/shopping/commercial/recreational complex as may be permitted by the concerned local authorities. Clause 25 refers to the assurance of EBPL that it has the requisite financial, managerial and organizational resources as well as the infrastructure to carry out the joint development of the land and marketing of the buildings to be constructed thereon. Clause 26 of the preamble says that the assessee and EBPL have agreed to develop the said land in four phases and that the assessee has permitted EBPL to enter upon the land on which Phase III and Phase IV-A are to be constructed. It is also stated that EBPL has been permitted by the assessee to construct buildings on this land. 17. Now we turn to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee shall not be required to spend any amount for the same. EBPL is not entitled to claim any interest on such expenses (cl. 11). (e) The assessee is responsible for obtaining all statutory permissions including IOD plinth certificates (cl. 13). (f) The assessee shall at its own costs obtain all requisite permissions and orders from ULCRA authorities until the construction is complete (cl. 14). 18. Under the aforesaid agreement dt. 22nd Dec., 1999 EBPL also had certain rights and obligations and these briefly are as follows : (a) To spend monies for the construction of all the buildings without charging any interest thereon (cl. 11). (b) In particular, EBPL shall incur expenses on construction and completion of all the buildings and also all occupation and commencement certificates, expenses on consultants' fee incidental to the construction including architects and RCC consultants' fees (cl. 12). (c) EBPL was to carry out the construction of the buildings in four phases using good building materials, fitting and fixtures and good workmanship in the matter of construction. It is to complete the construction under each phase within three years from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een defined in the sub-section. The central argument of the learned CIT-Departmental Representative before us, based on the Commentary on Income-tax by A.C. Sampath Iyengar, 10th Edition, pp. 5793, 5794 of Volume four, is that the assessee merely transferred the land to the purchasers of the flats for consideration and this was camouflaged by reference to certain activities, which were only on paper, and which cannot amount to any development activity, and therefore the assessee ought to have declared the receipts as capital gains. Though the word develop appearing in the sub-section has not been defined in the Act, it should mean, in our humble opinion, the activities which a person undertakes in order to prepare the land, both factually and legally, for putting up housing projects thereon. The development activity precedes the actual construction or building activity. A clue to this position is given in cl. (a) of sub-s. (10) of s. 80-IB, which says that the deduction will be given if the undertaking has commenced or commences development and construction of the housing project on or after a particular date and completes the construction by a particular date. This shows that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e remembered that the assessee had also undertaken to remove all the structures and unauthorized occupants on the land. In fact M/s Thakur Brothers Agricultural Farm had admittedly been in adverse possession of the land and therefore they had to be given 40 per cent of the FSI and this was largely due to the efforts of the assessee, as can be seen from the tripartite agreement dt. 22nd Dec., 1999 to which the assessee, EBPL and M/s Thakur Brothers Agricultural Farm were parties. We have referred to the terms and conditions in this agreement in considerable detail earlier. The MoU dt. 6th Oct., 1986 and 29th Jan., 1992 under which M/s Thakur Brothers Agricultural Farm were given 25 per cent and 40 per cent respectively of the FSI was entered into only between the assessee and the said M/s Thakur Brothers Agricultural Farm with BJPL confirming the MoU. EBPL was not a party to the MoU under which 40 per cent FSI was given to M/s Thakur Brothers Agricultural Farm in consideration of their giving up adverse possession of the land. 22. Thus most of the crucial, preliminary and basic developmental activities necessary for the purpose of making the land ready and prepared for constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation payable for injury. Clause 20 referred to the understanding that the assessee would get the conveyance either in its own favour or in favour of its nominee or nominees or a co-operative society or any other entity in respect of the structures sold to the flat buyers. All these clauses put the matter beyond doubt and if any clarification is needed reference may be made to cl. 18 of the said agreement which says that the assessee alone is entitled to enter into agreements for sale of the flats, shops, etc. on ownership basis or otherwise. The assessee is a businessman engaged in the development and construction of housing projects and it would make no sense for him to acquire development rights of such a large parcel of land (370 acres plus) if he did not have in mind the proposal to utilize the land for purposes of construction of housing projects. As events turned out the assessee could not find the necessary wherewithal for the construction and the same was supplied by EBPL along with the know-how. The assessee therefore thought it ideal to collaborate with EBPL and put up the housing project. The assessee had all the clearances and statutory permissions ready. EBPL was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) is confirmed and the appeal in ITA No. 6504/Mum/2008 is dismissed. 29. We may now take up the appeal of the Department for the asst. yr. 2005-06. The first ground is that the CIT(A) erred in allowing deduction under s. 80-IB(10) of the Act. The CIT(A) has followed his predecessor's order for the asst. yr. 2004-05, which has been confirmed by us in the appeal filed by the Department for that year. In line with our decision, we confirm the decision of the CIT(A) for this year also and dismiss the ground. 30. The second ground relates to the disallowance under s. 40A(2)(b) of the Act. The assessee paid ₹ 4,45,40,974 to its managing director, Shri P.R. Mody, on account of salary, ex gratia and medical reimbursement. The AO was of the view that it was on the higher side in comparison with the payments made to the other directors of the company. The assessee was therefore asked to justify the payment and also furnish a detailed note as to the applicability of the section. The assessee filed the details of the payments made to Shri P.R. Mody but did not submit any justification as to why the section cannot be applied. The AO noticed that in the asst. yr. 2004-05 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om London and had quality experience as employee of M/s A.A. Ferguson Co. for ten years before joining the assessee. He is also stated to be running the entire show whereas the other two directors are not so qualified and also did not take part in the business in the same way in which Shri P.R. Mody took part in the assessee's business. The CIT(A) is also right in saying that the AO ought to have compared the payment made to Shri P.R. Mody with payments made for similar services by other companies. Comparison of the payment with the payments made to the other two directors is not justified because in every organization there may be differential payments depending upon the qualification, experience, etc. of each employee. The AO has not brought on record anything to show that the payment to Shri P.R. Mody is excessive or unreasonable having regard to the fair market value of the services for which the payment was made or the legitimate needs of the business or the benefit derived from the services of Shri P.R. Mody. The conditions of s. 40A(2)(b) not having been fulfilled, the CIT(A) was right in deleting the disallowance. His decision is confirmed and the ground is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services, the AO, relying on the said provision, disallowed the professional fees and brokerage and commission. 38. On appeal, the assessee pointed out that the tax deducted has been deposited on 6th April, 2005 and therefore there is no default which would attract the provisions of the aforementioned section. The CIT(A) accepted the contention and deleted the disallowance. 39. The Revenue is in appeal. In the present case the assessee has admittedly deducted the tax at source at the time of the payment. According to s. 40(a)(ia), as it stood at the relevant time, if the tax was deducted during the last month of the previous year, it should have been deposited before the due date specified in s. 139(1) and in any other case it should have been deposited with the Government on or before the last day of the previous year. According to the details set out in the assessment order, the tax of ₹ 35,316 was deducted from the professional fees in the month of March, 2005. The due date for depositing the tax, according to Expln. 2 below s. 139(1) is 31st Oct., 2005. The tax of ₹ 35,316 was deposited on 22nd June, 2005, which is within the due date. Therefore, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me constituted 2.49 per cent of the income as per the P L a/c, which came to ₹ 63,56,24,975. The total administrative expenses claimed in the P L a/c were ₹ 6,13,05,507. The AO disallowed 2.49 per cent of the administrative expenses which came to ₹ 15,26,507. On appeal, the assessee submitted that it invested surplus funds in mutual funds through Standard Chartered Bank and the entire activity of selection of the appropriate fund, paper work and redemption was undertaken by the bank and the assessee was not involved in the work at all. It was therefore contended that no specific expenses can be said to have been incurred for earning the dividend income. It was pointed out that even the dividend warrants were directly deposited in the bank by the mutual funds. The CIT(A) did not accept the broad contention that no administrative expenses were incurred by the assessee since it had appointed Standard Chartered Bank for investing in mutual funds. He however held that the calculation of the disallowance as made by the AO was not proper. According to the CIT(A), a disallowance of 3 per cent of the dividend income can be held to be a proper estimate of administrative exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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