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2016 (9) TMI 247 - ITAT AHMEDABAD

2016 (9) TMI 247 - ITAT AHMEDABAD - TMI - Claim for deduction u/s 80IB(10) - consideration of unutilized FSI - Held that:- In the case the operation of unutilized FSI is exorbitant i.e. more than 30% of the total permissible area then the matter has to be looked into from a different angle and one cannot ignore the possibility of the situation wherein claim under section 80IB(10) is intentional deduction from sale of unutilized FSI on which no construction or development has been done and for me .....

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ht of judgments of Hon. Jurisdictional High Court, we find that Hon. High Court in the case of Moon Star Developers (supra) came across the fact that only 23% of the FSI was utilized and decision was given in favour of Revenue by confirming the disallowance made for sale of unutilized FSI. However, it was also observed by Hon. High Court that utilization of FSI has to be introspected with the overall project and one has to keep space for the margin for keeping some portion of FSI unutilized depe .....

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g deduction u/s 80IB(10) of the Act. - Respectfully following the judgment of Hon. Jurisdictional High Court in the case of Shreenath Infrastructure (2014 (4) TMI 482 - GUJARAT HIGH COURT) we are of the view that assessee should be allowed to claim deduction u/s 80IB(10) of the Act to the extent of 30% of unutilized FSI. We hereby deem it fit to sustain the disallowance to 50% as the assessee has 60% unutilized FSI and after giving the benefit of 30% unutilized FSI. Accordingly, assessee wil .....

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mon order of ld. CIT(A)-II, Baroda, dated 6.7.2012 in appeal nos.CAB/II-394/10-11 (2002-03) & No.CAB/II-395/10-11 (2003-04) passed against order u/s 143(3) of the IT Act, 1961 (in short the Act) framed on 31.3.2006 by ITO, Wd- 2(4), Baroda. 2. Since the issues involved in both the years are similar, we will first adjudicate appeal for assessment year 2002-03 in ITA No.2192/Ahd/2012 for Asst. Year 2002-03 and the decision taken in this appeal shall be applied in the appeal in ITA No.2193/Ahd/ .....

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dd to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored. 3. Briefly stated facts of the case are that assessee is a partnership firm engaged in the business of land development and construction of housing projects. Nil return was filed on 30th October, 2002 which was processed u/s 143(1) of the Act. Thereafter the case was reopened and notice u/s 148 of .....

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e project and in the second alternative discussed about the utilization of Floor Space Index(FSI) wherein it was observed that assessee had made construction and development of only 40% of the FSI available whereas deduction was claimed for the total profit earned from the sale of project area. In this alternative the ld. Assessing Officer was of the view that section 80IB(10) of the Act is relates to deduction of profits earned from actual construction and development of housing project and can .....

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sees as are deriving profits from an undertaking of building and housing projects approved by the local authority, and for such approval, the assessee must legally own the land which is an inallenable constituent of any housing project. The person doing only the work of developing and constructing the building structure on the authority of the approval granted to the landowner cannot be said to be in the business of an undertaking developing and building housing project, not only on account of n .....

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owance has been confirmed in toto the alternative finding regarding profits attributable to sale of unutilized FSI is not required to be considered. 5. Thereafter the issue came up before the Co-ordinate Bench which was set aside vide its order dated 8.6.2007 by setting aside the order of ld. CIT(A) and restoring the matter relating to claim for deduction u/s 80IB(10) of the Act to the file for deciding the issue afresh. Ld. CIT(A) deleted the addition made by ld. Assessing Officer in both the a .....

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llowed deduction u/s 80(IB)(IO) for AY 2005-06 and 2006-07 in assessee's own case where the facts are identical. From the assessment orders of these years it is seen that the Assessing Officer is satisfied that for all practical purposes the assessee has acquired dominant right over the land and no right in the land remained with the landowner. He has also stated that the assessee is responsible for the risk and costs involved in this project. Hence the conditions prescribed in the Shakti Co .....

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d FSI is not acceptable and is also directed to be deleted. 4.4. It is therefore held that the disallowance of deductions of ₹ 12,55,090/-for AY 2002-03 and of ₹ 3,56,92,433/- for AY 2003-04 u/s. 80IB(10) made by the Assessing Officer are not correct and are hereby ordered to be deleted. 6. Ld. DR supported the order of ld. Assessing Officer. 7. On the other hand, ld. AR submitted that assessee has undertaken for development and construction of the housing project as per the approved .....

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eloper and if it is deemed fit that the said property is to be developed only upto the ground level then it does not tentamount to mean that unutilized FSI has been sold intentionally. Deduction u/s 80IB(10) of the Act is allowable on the profits earned from the housing project and it has to be considered as a completion of overall project and ld. CIT(A) has rightly taken this view by deleting the impugned addition made on account of sale of FSI. Ld. AR placed reliance on the judgments of Jurisd .....

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profit earned on sale of unutilized FSI. We observe that at the time of assessment ld. Assessing Officer made addition taking two alternatives as per of which in the first alternative total deduction u/s 80IB(10) was disallowed with the observation that assessee was not the owner of the land. However, this addition was deleted by ld. CIT(A) and Revenue is not in appeal against this deletion. In the second alternative ld. Assessing Officer has observed that assessee had made construction on only .....

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total permissible FSI available at 1423.7 sq.m. subtracted 571.81 sq.m. on FSI utilized leaving behind 851.89 sq.m. FSI unutilized and proportionately reduced the deduction u/s 80IB(10) of the Act by ₹ 6,03,739/-. We find that assessee has not disputed the facts and figures observed by ld. Assessing Officer relating to FSI available for construction, FSI utilized and FSI unutilized as well as calculation of profit relatable to sale of unutilized FSI. Assessee is pressing the contention th .....

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ed FSI in the case of CIT vs. Moon Star Developer the relevant portion of the judgment is reproduced below :- 22. Having heard the learned counsel for the parties and having perused the documents on record, we may briefly recapitulate the facts. The respondentsassessees were engaged in development of housing projects. In the case of M/s.Moon Star Developers, against the total FSI of 15312 sq. meters available for construction, area of only 3573 sq. meters was utilised. The residential units were .....

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profit of an assessee being an undertaking developing and building housing projects on the profit derived from such housing project subject to conditions laid down therein. Sub-section (10) of the section 80-IB as it stood at the relevant time read as under: "(10) The amount of profits in case of an undertaking developing and building housing projects approved before the 31st day of March, 2005 by a local authority, shall be hundred per cent of the profits derived in any previous year relev .....

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imits of these cities and one thousand and five hundred square feet at any other place." We may notice that subsequently an explanation came to be added at the end of the said sub-section by Finance Act of 2009 but with effect from 1.4.2001 which explanation read as under: "Explanation - For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person ( .....

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five hundred square feet." 24. In the budget speech for the financial year 1999-2000, the Finance Minister in the context of tax benefits under section 80-IA of the Act on housing projects, while increasing the maximum limit of the built-up area of the units from 1000 sq. ft. to 1500 sq. ft. at all locations except Mumbai and Delhi, stated as under: '98. The second element of this incentive package relates to the scheme for housing projects for enjoying a tax holiday under Section 80-I .....

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ncreased from 1000 sq. ft to 1500 sq. ft at all locations except Mumbai and Delhi. I propose to accept this suggestion and make suitable modifications in the law. This amendment in the scheme for treating housing projects as infrastructure will, I believe, also "give a significant fillip to construction activities in the small towns." 25. The said provision was added for easing the housing problem particularly for the middle income group in urban areas. In this context, in the decision .....

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the benefit reaches the people, certain conditions were provided in sub-section(lO) such as specifying date by which the undertaking must commence the developing and construction work as also providing for the minimum area of plot of land on which such project would be put up as well as maximum built-up area of each of the residential units to be located thereon. The provisions nowhere required that only those developers who themselves own the land would receive the deduction under Section 80-13 .....

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h was extended from time to time); (b) that the undertaking commenced development and construction of the housing project after a specified date; (c) that the project is on the size and plot of land which is of minimum of one acre; (d) That each residential unit has a maximum built-up area of 1500 sq. feet barring cities of Mumbai and Delhi and within a radius of 25 km of municipal units of such cities where such area should not exceed 1000 sq. ft. Further conditions were later on added which in .....

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uch individual is the karta. 27. At the relevant time, these later conditions were not in operation. Nevertheless, what can be seen from the conditions which prevailed at the relevant time is that deduction was aimed at providing 100% tax exemption to an undertaking which was involved in developing and building of housing projects in order to make affordable residential units available for middle income group citizens in urban and semi-urban areas. To ensure even distribution of such units and t .....

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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 up to which the construction can be earned out, maximum area on the ground floor or on other floors which can be covered under constr .....

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e, 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. 29. It is in this context, we have to appreciate the under-utilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the ea .....

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developer to under-utilize 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. .....

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ot 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. 31. It is true that section 80-IB(10) of the Act does not provide that for deduction, the undertaking must utilize .....

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he same to a single purchaser and claim full deduction on the profit arising out of such sale' under section 80-13(10) of the Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80-IB(10) of the Act. This is not to suggest that for claiming deduction under section 80-IB (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 80-IB .....

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ad, 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 80-IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged there-under, bifurcation of such profits arising out of such activity and ' that arising out of the net sell of FSI must be resorted to. .....

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ed into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused. 33. 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 or and "attribut .....

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ndertaking 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. 34. In case of Pandian Chemicals Ltd (supra), once again, the assessee claimed deduction under section 80H .....

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ssee was engaged in infrastructure development and claimed deduction under section 80-1, 80-IA and 80-IB, etc. on the drawback receir - and DEPB benefits. The Court held that such income cannot be stated to be derived from ihe industrial undertaking. 36. The case of Nirma Industries Ltd (supra) rested on different facts. It was a case where the assessee had claimed deduction under section 80-IA of the Act. Such claim included the interest received from trade debtors towards late payment of sale .....

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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. 10. We observe that Hon. Jurisdictional High Court has decided the issue in favour of Revenue giving clear indication that deduction u/s 80IB(10) of the Act is allowable for development of housing project where strictly speaking 100% on FSI available may not be utilized for cons .....

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ilized FSI by observing as under :- 3. Second Question pertains to the Revenue's stand that in the process of developing the housing project, the assessee did not realize the full FSI available for development. The assessee thus sold part of the unutilized FSI and the profit derived from such sale cannot be said to have been and would not arise out of the assessee's activity of development and construction of housing project. To such extent, assessee's claim for deduction under Secti .....

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ull deduction under Section 80IB (10) of the Act on the sole consideration of the residential units developed and constructed by the assessees fulfilling other conditions under Section 801B (10) of the Act. It was, however, noticed that in all such cases, there was heavy under utilization of FSI. The utilization in various cases ranged from 11% to 65% and in majority of cases, the construction involved only about oneforth or one-third of the permissible FSI. In this context, the Court upheld the .....

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he concept of FSI, is a well-known 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 detai .....

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oor space index (FSI for short). It is this FSI which will decide the maximum area of construction that can be earned 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. 29. It is in this co .....

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ction, 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 under-utilize 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 .....

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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 separat .....

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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 801B (10) of the .....

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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 FST is way short of the permissible area of construction, looking to the scheme of section 80IB(lG) of the Act and the purpose of granting deduction on the income from development of housing proje .....

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lier, in case of M/s. Moon Star Developers and many other assessees, 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. 33. 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 w .....

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nsideration, 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 cas .....

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oon Star Developers (supra) every case of even marginal under utilization of FSI would not be hit by disallowance of deduction under Section &U1H of the Act In the result, Tax Appeals are dismissed. 12. Now from going through both the judgments of Hon. Jurisdictional High Court, we observe that the issue regarding deduction u/s 80IB(10) of the Act from sale consideration of unutilized FSI has to be seen in the overall context so much so that certainly 100% FSI cannot be utilized for construc .....

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done and for mere sale of such unutilized land or portion deduction u/s 80IB(10) of the Act is claimed. We find that in the case of assessee almost 60% of the permissible FSI remained unutilized i.e. no construction was made thereon. As per the working appearing in the assessment order, we find that in the project Vaikunth-I permissible FSI was 1423.7 sq.m. and FSI utilized for construction was 571.81 sq.m. which left behind unutilized FSI at 851.89 sq.m. Now observing these facts of the case i .....

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ized depending on case to case. We observe that the same Hon. Bench of the Jurisdictional High Court which has decided the issue in favour of Revenue in the case of Moon Star Developers(supra) had dealt with similar issue of allowability of deduction u/s 80IB(10) of the Act for sale of unutilized FSI in the case of M/s Shreenath Infrastructure (supra) and came with the view that 25-30% of non-utilisation of FSI is permissible and assessee should not be devoid of claiming deduction u/s 80IB(10) o .....

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