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2016 (11) TMI 1120 - ITAT MUMBAI

2016 (11) TMI 1120 - ITAT MUMBAI - TMI - Diversion of Revenue at Source - Reducing the business income being the share of profit of one of the members of AOP of the assessee - Held that:- Assessee has computed the profit of the AOP firm purely on commercial principles after deducting the cost of land and construction expenses from the amount of sales / revenue and accordingly net profit was shown under the head “Income from business” upon which deduction u/s 80IB(10) has been claimed. In our con .....

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action of the lower authorities in re-computing the income was not justified and, therefore, the same is hereby reversed. - Interest on FDR received on account of the funds to be used by the proposed society - Held that:- here was no clarity on facts with regard to transferring of impugned Security Deposit amount to the Society by the assessee in entirety. In fact, from the arguments of the Ld. DR it transpires that this is the only objection left to be addressed as per final stand of the .....

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nt or in violation of the regulations of MOFA, then corresponding amount of interest thereon can be brought to tax in the hands of the assessee. Thus, with these directions, this issue is sent back to the file of the Assessing Officer. The Assessing Officer shall give adequate opportunity of hearing to the assessee before deciding this ground afresh. - Deduction u/s 80IB(10) - Held that:- CIT vs Sarkar Builders & Ors (2015 (5) TMI 555 - SUPREME COURT ) wherein it has been inter alia held tha .....

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16 - SHRI AMIT SHUKLA (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) For The Assessee : Shri Vijay Mehta For The Revenue : Shri S Pandian ORDER Per ASHWANI TANEJA, AM: These cross appeals pertain to the same assessee for different assessment years involving identical issues. Therefore, these appeals were heard together and are disposed of by this common order. 2. First, we shall take up assessee s appeal in ITA No.7116/Mum/2014 for A.Y. 2010-11 filed on the following grounds: Bein .....

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holding that it is a case of diversion of sales or revenue and not a case of application of revenue or sales. The reduction of ₹ 9,37,37,531/-needs to be cancelled and returned business Income and consequential claim u/s 80IB (10) on that amount needs to be accepted. 2) On the facts and circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition of ₹ 30,34,472/- being the interest on FDR made out of funds meant exclusively for the proposed society holdi .....

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₹ 9.37 crores being the share of profit of one of the members of AOP of the assessee, viz. M/s Sanand Properties Pvt Ltd (hereinafter referred to as SPPL) by holding that it was a case of Diversion of Revenue at Source and not a case of application of revenue. 4. During the course of hearing before us, it was stated at the very outset by the ld. counsel of the assessee that now this controversy has been laid to rest as this issue has been decided in favour of the assessee by the Tribunal .....

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no diversion of revenue at the source. Per contra, the ld. DR relied upon the orders of the lower authorities. 6. We have gone through the orders passed by the lower authorities as well as the order of the Tribunal and Hon ble High Court passed in earlier years. The background of the issue and brief facts in this case are that the assessee is an AOP (Association of Persons) and engaged in the business of real estate developer. It has two members namely M/s Ravi Raj Kothari and Company (RKC) and .....

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y between the authorised signatories of the AOP and the respective purchasers of the housing units. The members of the AOP hereby agree that neither of them will during the validity of this Agreement execute any independent or separate Agreement on their own with any prospective Purchaser. All payments receivable from the Purchasers towards the above shall be received only in the name of the AOP, i.e. FORTALEZA DEVELOPERS out of the aforesaid amounts received from the Purchasers of the housing u .....

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ll required and relevant expenditure for the purposes of the business of the AOP shall be met with and whatever net balance remains thereafter, shall be determined as the share of revenue/income of RKC. RKC will be at liberty to actually withdraw its share of revenue/income as worked out hereinabove, from time to time. The above arrangement of sharing of revenue and income is restricted to the present housing project developed by AOP on land admeasuring 31026.90 sq. mtrs (approx. 7.76 acres) on .....

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65% of the revenue. It was noted by the AO that the perusal of the aforesaid agreement revealed that it was a revenue sharing agreement and not a profit sharing arrangement because SPPL, i.e. one of the members of the AOP was entitled to 35% of the gross sale proceeds of the project constructed on land belonging to SPPL and contributed to AOP and remaining 65% of the sale proceeds was to be utilised by the assessee for meeting expenditure on construction and marketing etc and only the balance r .....

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7; 3,56,03,160. The sales were at ₹ 16,85,48,129/- and 35% of that comes to ₹ 5,89,91,145/-. As Rs,5,89,91,145 was al located to M/s. Sanand Properties Pvt. Ltd which was 35% of the sales proceeds, amounts received by M/s Sanand Properties was not share of profits but a share of revenue/sale proceeds of the project. AO thus asked the assessee to show cause why claim of deduction u/s 80IB(10) should not be restricted to ₹ 4,27,32,169/- instead of ₹ 10,41,81,525/-. The Asse .....

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order u/s 263 passed by the CIT(A) in A.Y. 2007-08 has been subsequently set aside by ITAT and thus, the claim of the assessee has been impliedly accepted by the ITAT. Ld. CIT(A) did not follow the order of ITAT for A.Y. 2007-08 on the ground that it was a case of order u/s 263 and thus, assessee cannot have benefit of the same in these proceedings and thus, action of the Assessing Officer was confirmed. 9. Aggrieved, assessee filed appeal before the Tribunal. 10. During the course of hearing be .....

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reached before the Tribunal and the Tribunal decided this issue in favour of the assessee by its order dt 12-10-2012 reported in 141 ITD 133. It is noted by us that the Tribunal not only quashed the order u/s 263 but also discussed and adjudicated the issue involved therein on its merits. Therefore, we find it relevant to refer and reproduce the relevant portion of the order passed by the Tribunal hereunder: 5.5 We have carefully considered the version of Ld. CIT in the light of available on our .....

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which is 35% of gross sale proceeds of the unit amounting to ₹ 43.17 crores. A sum of ₹ 112.62 crore is credited in the account of SPPL on account of land etc. and ₹ 3.49 crore is credited in the account of SPPL. Out of balance 65%, after including the MSEB incidental charges and reducing the developmental charges a sum of ₹ 10.76 crores has been considered as profit share of RRKC. Therefore, the distribution of profit made by the assessee between its members is in accord .....

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itions laid down in the section governing that deduction. The assessee AOP in the present case has been assessed as AOP and found to have fulfilled the condition laid down in section 80-IB ( 10) and has been held to be eligible for such deduction. The quantum of deduction under section 80-IB ( 10) will depend on the income earned from eligible project. The quantum of deduction will not depend upon the mode of distribution of shares amongst the members of AOP as income of AOP is taxable at maximu .....

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by this manner assessee has been benefited by larger in place of smaller deduction available to it. In our opinion such observations of Ld. CIT are incorrect, firstly, on the ground that even distribution of revenue in the books of account of the assessee cannot be said to be contrary to the purpose and intent described in clause-7 of the agreement. Secondly, the allowability or otherwise of deduction under section 80-IB( 10) is dependent upon the manner in which the profit has been distributed .....

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s in the overriding title, therefore, this argument of Ld. CIT DR has to be rejected and it is to be held that 35% share received by SPPL was not in the nature of overriding title to the revenue but it is only share of profit of SPPL. 5.7 In view of above discussion, it is held that the impugned assessment order her erroneous nor prejudicial to the interest of revenue on account of lion of profit between members as per accounts of the assessee as ion of profit in the accounts of the assessee is .....

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sel for the appellant and Mr. Mistri, the learned senior counsel, appearing for the respondent at a considerable length. Mr. Malhotra submitted that the interpretation placed the Assessing Officer and computing the total income of ₹ 14,63,04,860 was correct. He further submitted that the disallowance of deduction claimed under section 80IB (10) was justifiable and considered that the respondent shall not be entitled to claim the benefits of the said section 80IB (10) on account of the mann .....

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Moreover, he submitted that the interpretation of clause 7 of the association of persons agreement by the Assessing Officer was incorrect interpretation of the said clause (7)entitled SPPL constituent of the assessee to appropriate 35 per cent sale proceeds as provided under the said clause before deduction of cost of the project. According to Mr. Mistri, after SPPL appropriates its share of 35 per cent proceeds, the balance 65 per cent would be used by the assessee to pay overall cost includin .....

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the Association of Persons agreement with his own reasoning and that too, to the detriment of the assessee. The facts, in the present case also, reveal that the conclusions arrived at by the Tribunal, vide order dated October 12, 2012, are neither perverse nor giving rise to any error of law apparent on the face of the record. The issue cannot he reopened in the manner sought to be done in the present case and section 263 of the Act could not be resorted to for the purpose. The order of the Asse .....

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e learned CIT(A) erred in confirming the reduction of business income by ₹ 14,64,64,961/- being the share of profit of on the members of the appellant AOP erroneously holding that the agreement entered into between the members of the AOP is for sharing of the Revenue and not for sharing of the net profit. Reduction of business income being bad in law, the same needs to be cancelled and returned business income and consequential claim u/s. 80IB(10) on that amount needs to be accepted. The T .....

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t in this case, the revenue earned by the assessee was diverted at the source whereby 35% of the share was diverted to one of its members, viz. SPPL and, therefore, the said diverted amount should not be considered as part of the business income of the assessee. Therefore, to find out the complete truth, we asked the Ld. Counsel to submit before us complete working of the computation of income and profit of the assessee. In response to the same, it has been submitted by the Ld. Counsel that inco .....

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igation had taken place. With a view to find precise facts and truth in this regard, we analysed, with the assistance of both the parties, the computation of income and P&L account and work sheet of all the assessment years i.e. 2007-08, 2008-09, 2009-10, 2010-11 & 2011-12. It is noted by us that the cost of land has been made part of the work-in-progress and is accordingly apportioned on year to year basis depending upon the amount of difference between the opening balance of WIP and cl .....

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d and construction cost) proportionate to sales 30.41 19.38 6.89 10.34 8.,71 3. Income of AOP 14.25 22.12 10.17 17.13 15.73 4. Share of M/s Sanad Properties Pvt Ltd 3.49 14.18 5.89 9.42 8.45 5. Share of Ravi Raj Kothari and Co. 10.76 7.94 4.28 7.71 7.28 6. Total 14.25 22.12 10.17 17.13 156.73 A perusal of these details and documents clearly reveals that assessee has computed the profit of the AOP firm purely on commercial principles after deducting the cost of land and construction expenses from .....

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l had correctly appreciated the whole issue in the preceding years and the same has also got affirmation from the Hon ble High Court. Thus, viewed from any angle, the action of the lower authorities in re-computing the income was not justified and, therefore, the same is hereby reversed. Ground 1 is allowed. 12. Ground 2: In this ground, the assessee has contested the action of lower authorities in taxing the interest on FDR of ₹ 320,34,472 received on account of the funds to be used by th .....

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at the aforesaid interest income was not taxable in its hands. The assessee submitted that assessee was bound by the agreement entered with the purchasers to form a Society and to transfer the entire funds including the impugned interest income for the maintenance of the housing project developed by it and, therefore, the aforesaid interest income was not income of the assessee at all, and therefore, the same was not taxable in its hands. The relevant part of assessee s submission is reproduced .....

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inancing the cost of common object of maintenance and upkeep of the common amenities/ buildings for mutual interest and have no dealings or relations with any outside body. The concept and principal of mutuality has been elaborately examined by the Apex Court and followed in several decisions of High Courts and Tribunals. There are three conditions for applicability of the principle of mutuality, which are as follows:- a) Where a number of reasons combine together contribute to a common fund for .....

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diverted for any other purpose. In view of principle of mutuality the interest accrued is not a taxable income. The assessee has prepared separate balance sheet and receipt payment account got audited and submitted to the members. As explained above the assessee declared interest income of ₹ 59, 972/- and claimed TDS on this amount only. The interest amount ₹ 29, 74,500/- pertaining to flat purchasers has been kept separate and included in the separate balance sheet and receipt paym .....

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ssee also submitted various evidences to clarify the doubts raised by the Assessing Officer and to show that entire funds which were received by the assessee were transferred to the Society including whatever amount of interest was received from the bank and no amount was used by the assessee for its own use or benefit. Ld. CIT(A) did not accept arguments about application of the principle of mutuality in view of the facts of the case and relying upon the judgment of the apex court in the case o .....

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wn upon relevant provisions of Maharashtra Ownership Flats (Regulations and the Permission of Construction, Sale, Management & Transfer) Act, 1963 (hereinafter called, MOFA) and it was argued that the assessee was bound by these regulations and accordingly assessee was bound to keep these funds in fiduciary capacity to be handed over to the Society for maintenance of the building constructed by the assessee. During the course of hearing, Ld. Counsel submitted that though in the A.Ys 2012-13 .....

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her the assessee has transferred this amount in totality to the Society or some portion has been appropriated by the assessee. 18. We have gone through the facts of the case and orders passed by the lower authorities. The admitted facts are that assessee, an AOP, had collected deposits as per the provisions of the agreement executed witch the buyers of the Flats towards corpus for maintenance and related jobs till the formation of the Society. As per the agreement, the amount was to be transferr .....

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t which the assessee has entered into with one of its customers. It is noted that clause 14 of the agreement clearly stipulates about the obligation of the purchaser to pay a particular amount towards corpus in the name of security deposit for maintenance and upkeep of the common amenities and buildings. It also stipulates and casts an obligation upon the developer builder (i.e. the assessee AOP) to put the entire amount collected from the purchasers towards corpus for the maintenance and upkeep .....

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m, from persons intending to take or who have taken, flats, as advance or deposit, including any sums so taken towards the share capital for the formation of a. co-operative society or a company, or towards the outgoings (including ground rent if any, municipal or other local taxes, taxes on income, water charges, electricity charges, revenue assessment, interest on any mortgage or other encumbrances if any); and he shall hold the said moneys for the purposes for which they were given and shall .....

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as provided in sub-section (2) of this section), 10 or 11 shall, on conviction be, punished with imprisonment for a term which may extend to three years or with fine, or with both. (2) Any promoter who commits criminal breach of trust of any amount advanced or deposited with him for the purposes mentioned in section 5 shall, on conviction, be punished with imprisonment for a term which may extend to five years, or with fine, or with both. 21. Thus, from the perusal of various clauses of the agr .....

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greement. Under these circumstances, it can safely be concluded that this amount was retained in a fiduciary capacity. There was no distinction between the amount of principal and amount of interest credited by the bank, as far as the assessee is concerned. Thus, for the assessee it was simply an amount received in advance which was to be transferred to the Society or to be spent for the designated purposes. It has no character or element of income as far as assessee is concerned. It was simply .....

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axable on the ground that principles of mutuality does not apply here. We agree with the Ld. CIT(A) that principles of mutuality does not apply where the amount of interest income is received from a third source, i.e. a bank here. It has been so clarified now by Hon ble Supreme Court also in the case of Bangalore Club vs CIT (supra). There is no dispute or doubt on that. But the said issue (of application of principle of mutuality) needs to be examined in the hands of the society where this inco .....

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foresaid judgment of the Hon ble Supreme Court or any other law / judgment as may be applicable and also keeping in view applicability of the principles of mutuality. 23. The other apprehension raised by the Ld. DR was that in A.Ys. 2012-13 & 2013-14 the assessee has itself paid tax on the amount of interest on these deposits and therefore, position in these years should not be disturbed irrespective of the fact that whatever decision is taken by the Tribunal in the impugned year. In reply, .....

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ts as per the provisions of agreement executed with the buyers of the f lat towards corpus for maintenance, etc. till the formation of the society. The said amount which was held in fiduciary capacity by assessee AOP was kept in Fixed Deposit and interest was received therefrom. 3. The same was not offered to tax in A.Y. 2010-11 and 2011- 12 since the same belonged to the buyers of the flat and was held in fiduciary capacity by assessee. 4. However, in A.Y. 2012-13 and 2013-14, interest on ED wa .....

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for the sake of finality. Thus, apprehension of the Revenue in this regard duly addressed. 24. The other objection of Ld. CIT(A) which has been reiterated by the Ld. DR also before us was that there was no clarity on facts with regard to transferring of impugned Security Deposit amount to the Society by the assessee in entirety. In fact, from the arguments of the Ld. DR it transpires that this is the only objection left to be addressed as per final stand of the Revenue. Thus, in all fairness to .....

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ions of MOFA, then corresponding amount of interest thereon can be brought to tax in the hands of the assessee. Thus, with these directions, this issue is sent back to the file of the Assessing Officer. The Assessing Officer shall give adequate opportunity of hearing to the assessee before deciding this ground afresh. It is also directed that the assessee shall abide by its undertaking dt 20-07-2016 which has been reproduced above. The Assessing Officer shall also verify relevant facts in this r .....

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fied in allowing the claim of the assessee of deduction u/s.80IB(10) of ₹ 17,08,31,084/- without appreciating the fact that CIT(A) in the impugned order itself correctly interpreted clause 7 of the AOP agreement dated 29/04/2003 by detailed analysis by upholding the action of the AO of excluding the share of SPPL from the revenue of the assessee while computing business income of the assessee while dealing with ground no. 3 of the assessee. 26. Ground 1: In this ground, the Revenue has cha .....

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en contested by the Revenue before us. 27. During the course of hearing, it was brought to our notice by the ld. Counsel of the assessee that the Revenue had carried this matter before the Hon ble High Court and Hon ble High Court has affirmed the order of the Tribunal and dismissed the appeal of the Revenue and thus this issue now stands settled in favour of the assessee by the order of the Hon ble jurisdictional High Court. 28. Per contra, ld. DR relied upon the orders of the lower authorities .....

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has been disputed before us. Therefore, when each of the facts have been constructed as per the plan duly approved by the local authorities and also completed as per the completion certificate, wherein the built up area of each flats has been shown less than 2500 sq.ft., then receiving the consideration by the assessee for more than 2500 sq.ft. showing as saleable area of the flats / residential units as per the sanctioned plant and completion certificate. 4.4. In view of the above discussion as .....

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der of the CIT(A), qua this issue. ……………. 7. We have heard the ld Ld. Departmental Representative as well as the ld Ld. Authorized Representative of the assessee and considered the relevant material on record. In view of our finding that the assessee is entitled for deduction u/s 80IB (10), the issue of addition has become infructuous as it become revenue neutral. Accordingly, we uphold the order of the CIT(A) on this issue also. 8. In the result, the appeal fi .....

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1, 2005, when the amended provisions came into operation, the assessee would be entitled to deduction u/s 80IB (10) and conditions mentioned in clause (d) would not apply. It has been stated that assessee s project was approved prior to the said date which has not been disputed by the Revenue. Thus, respectfully following the decisions of the Tribunal and judgement of the Hon ble Bombay High Court in assessee s own case for earlier years, we find no substance in the appeal of the revenue for th .....

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