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Thursday, 16 May 2013

S. 80-IB(10) – Deduction can’t be denied just because Assessee did not construct himself

In the instant case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the Assessing Officer in the assessment order. The assessee entered into an agreement with Reddy Structures (P.) Ltd., for development of housing project on the land owned by the assessee. The assessee got 24 per cent share in the said project and sold 49 flats. The assessee also incurred certain expenses for electricity and water connection connected with the project and also made payment to BWSSB and KEB.  From the terms of the agreement it is clear that the assessee was engaged in the property development and this fact has also been admitted by the Assessing Officer. The assessee got his agricultural land converted for non-agricultural purposes, i.e., for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned. 
From yet another clause in the agreement, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party, i.e., Reddy Structures (P.) Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration. In the instant case, the Assessing Officer denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. The provision contained in section 80-IB(10) is perused.
On a joint reading of sub-section (10) of section 80-IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover, the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows that even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming the deduction under section 80-IB(10) is that the undertaking is developing and building housing projects approved by a local authority. In the instant case, it is not the case of the department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction under section 80-IB(10) to the assessee was that the assessee had not carried out any construction activity, it is held that said reason is not sufficient to deny deduction under section 80-IB(10). In the instant case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction under section 80-IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non-agricultural purpose and getting plan sanctioned. Therefore, considering the totality of the facts and following the ratio land down by the Jurisdictional High Court in the case of CIT v. Shravanee Constructions [2012] 22 taxmann.com 250 (Kar.), set aside the impugned order passed by the Commissioner (Appeals) and direct the Assessing Officer to allow the deduction under section 80-IB(10) to the assessee.
IN THE ITAT BANGALORE BENCH ‘B’
Abdul Khader
v.
Assistant Commissioner of Income-tax 
IT APPEAL NO. 57 (BANG.) OF 2011
[ASSESSMENT YEAR 2006-07]
APRIL 30, 2012
ORDER
N.K Saini, Accountant Member – This is an appeal filed by the assessee against the order dated 8.12.2010 of the learned Commissioner of Income-tax (Appeals) – V, Bangalore.
2. The following grounds have been raised in this appeal :
“1.  The order of the learned CIT(A)-V is not justified in law and on facts and circumstances of the case.
 2.  The learned CIT(A) is not justified in denying the benefit of sec. 80IB(10) to the appellant although the appellant satisfied all the requisite conditions in respect thereof.
 3.  The learned CIT(A) is not justified in holding that sec. 80IB(10) is applicable only to an undertaking involved in developing and construction by ignoring the legal position that sec. 80IB(10) is applicable to an undertaking of developing and building housing project and not developing and construction of housing project.
 4.  The lower authorities have failed to appreciate that sec. 80IB(10) does not require that the assessee himself should construct the housing project and it is sufficient if he undertakes the activity of developing and building the housing project.
 5.  The lower authorities have failed to appreciate that practically every major developer of housing project would outsource construction to third parties which act by itself would not make him any less a developer and would not make any him ineligible for deduction of sec. 80IB(10).
 6.  The lower authorities are not justified in falling to appreciate that sec. 80IB(10) does not insist on actual construction to be carried out by the eligible assessee and in term of Explanation, mere construction on works contract is in fact ineligible for deduction there under.
 7.  The lower authorities are not justified perversely holding that the appellant did not engage in developing but only contributed land for the project ignoring that apart from land contribution appellant incurred sizable expenditure in the development of housing project.
 8.  The lower authorities are not justified in holding that the appellant is a mere contributor of land ignoring that the appellant himself was engaged in the business of real estate, had converted his land holing for commercial purpose, had converted his land into stock-in-trade and had obtained requisite plan sanction, water and electricity for development and building of housing project in his name.
 9.  The lower authorities are not justified in falling to appreciate various terms of Joint Development Agreement which clearly indicated that the appellant was not mute contributor of land but was an active partner in development and building of housing project.
10. The lower authorities have ailed to appreciate that the appellant assumed significant risks associated with the development and building of housing project. Therefore, being co-venturer in the Joint Development Agreement, he is eligible for benefit of deduction u/s 80IB(10).”
3. From the above grounds, it is gathered that only grievance of the assessee relates to the denial of deduction claimed u/s 80IB(10) of the Income-tax Act 1961 ((hereinafter referred to as the ‘Act’, in short).
3.1 The facts of the case in brief are that the assessee is a proprietor of M/s Bilad Builders & Developers and filed its return of income on 31.10.2006 declaring a total income of Rs. 88,28,640/-. The assessee claimed deduction of Rs. 1,72,20,784/- u/s 80IB(10) of the Act out of the gross total income arrived at Rs. 2,60,49,397/-. The case was selected for scrutiny and the AO asked the details regarding the 80IB(10) project undertaken by the assessee. The AO noticed that the assessee is a land developer and converted his land at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Taluk. measuring 1 acre and 31 guntas on 1.9.2003 by putting the same for development by entering into joint development agreement on 3/11/2003 with M/s Reddy Structures Pvt. Ltd and offered the capital gain for tax u/s 45(2) of the Act in the year in which the complete stock in trade was sold. The AO pointed out that the assessee had entered into a joint development agreement with M/s Reddy Structures Pvt. Ltd., for development of the schedule property as per the terms and conditions contained in the joint development agreement. According to the AO, the joint development agreement clearly specifies that the assessees contribution towards the project at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Talulk. was only contributing the land and incurring expenses for statutory approval. The AO was of the view that the deduction u/s 80IB(10) should not be allowed to the assessee since he was only a land owner and the said land was transferred to M/s Reddy Structures Pvt. Ltd. for joint development and that the assessee had not carried out any construction activity as could be seen from the expenses claimed in the profit and loss account and also in the balance sheet. The AO observed that the claim of deduction u/s 80IB(10) of the Act by the assessee was erroneous, since the assessee had not done any construction activity and only transferred the land. The AO was also of the view that any undertaking involved in development and house building project was eligible for deduction, therefore, the developer and the builder should invariably be the same person. According to him, the assessee had not followed the basic requirement of the eligibility criteria for granting deduction u/s 80IB(10) of the Act. The assessee explained to the AO vide letter dated 24.11.2008 that in the terms of the joint development agreement, the assessee had incurred project expenses in relation to statutory approvals like BWSSB, KEB, plan sanction and the balance other expenses were incurred by M/s Reddy Structure Pvt. Ltd. The assessee also furnished the copy of cheque payments made to M/s BWSSB and KEB drawn on HDFC Bank and also copy of a bill for Rs. 2,04,080/- for misc. work done. The AO after considering the above explanation of the assessee observed that no payment relates to the construction activity carried out for the project like purchase of jelly, sand, cement, iron or any such related expenses, therefore, the very nature of expenses clearly proved that the assessee had not undertaken any development which was sin-quo-nor for deduction u/s 80IB(10). The AO held that since the assessee had not involved himself in the construction of the residential complex but merely contributed land for the same, therefore, he was not eligible for deduction u/s 80IB(10) of the Act. Accordingly, the claim of the assessee u/s 80IB(10) was disallowed.
4. The assessee carried the matter to the learned CIT(A) and submitted that the assessee was a joint developer along with M/s Reddy Structure Pvt. Ltd., in the development of the residential project and he was very much involved in the development of the project as he had incurred expenditure for getting statutory approvals necessary for undertaking the project. It was further stated that if a house building project complies with all the requirements of clause (a) to (d) of sec. 80IB(10) of the Income-tax Act, it was not open to the Revenue to look into any other criteria to say, whether the house building project was fully owned or co-owned or jointly undertaken or carried out on partnership basis or in any other pattern. It was accordingly submitted that the assessee was very much entitled for the deduction provided u/s 80IB(10) of the Act.
5. The learned CIT(A) after considering the submissions of the assessee observed that the deduction u/s 80IB(10) of the Act was available to any undertaking involved in development and construction of the housing project. But in the present case, the assessee was not involved in the development and construction of the housing project and only contributed land for the purposes of the project, therefore, he was not entitled for the said deduction. He accordingly confirmed the addition made by the AO.
6. Now the assessee is in appeal before us.
7. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee converted his agricultural land into non agricultural land and then converted into stock-in-trade on 1.9.2003 by putting the same for development by entering into joint development agreement with M./s Reddy Structures Pvt. Ltd. on 3.11.2003 and as per terms of the joint development agreement the assessee got 24% share while another developer got 76% share. He referred to para 2 of the assessment order and submitted that the AO himself admitted that assessee was a land developer. The learned counsel for the assessee stated that the assessee incurred expenses relating to the building project and the amount was spent by the assessee on the development. It was further stated that the assessee produced proof to show that the payments were made to BWSSB and KEB in connection with the development activities, therefore, the assessee was not simply a contributor of land but he is also a developer of the land, as such, the assessee was eligible for deduction u/s 80IB(10) of the Act. The learned counsel for the assessee contended that the assessee incurred expenses for getting electricity and water connection, so it cannot be said that the expenses incurred by the assessee were not related to the development of the housing project. A reference was also made to page No.32 of the assessee compilation, which is a copy of the letter written by the AO to M/s Reddy Structures Pvt. Ltd., who jointly developed the project with the assessee. It was pointed out that in the said letter dated 13.10.2008, the AO asked the information regarding project ‘Cornet’ jointly developed with Abdul Khader (the assessee). On the basis of the aforesaid document (the letter dated 13.10.2008), it was submitted that the AO himself admitted that the assessee developed the project jointly with M/s Reddy structures Pvt. Ltd., a reference was also made to page No. 36 of the assessee’s compilation which is a copy of amendment vide Finance (No. 2) Bill 2009 and it was submitted that objective of the tax concession under sub. Sec. (10) of sec. 80IB of the Act is to provide tax benefit to the person undertaking the investment risk i.e. actual developer and any other person undertaking pure contract risk is not entitled to the tax benefits. It was submitted that the assessee made the investment and contributed his land for the project, so there was investment risks and hence, the assessee was entitled for deduction u/s 80IB(10) of the Act, the reliance was placed upon the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. Shravanee Constructions [2012] 22 taxmann.com 250 (Kar.). Copy of the said order was furnished.
8. In his rival submissions, the learned DR strongly supported the orders of the authorities below and further submitted that the assessee had not made any payment relating to the construction activity and it was the responsibility of the assessee to get electricity and water connection because the ownership was lying with him, therefore, only on this basis that the assessee made the payment for electricity and water connection, it cannot be held that the assessee incurred expenses for development of the housing project and was eligible for deduction u/s 80IB(10) of the Act. It was further stated that the assessee only contributed the land for the project, therefore, he was not eligible to have the deduction u/s 80IB(10) of the Act.
9. We have considered the submissions of both the parties and carefully gone through the materials available on record. In the present case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the AO in para 2 of the assessment order dated 31.12.2008. The assessee entered into agreement with M/s Reddy Structures Pvt. Ltd., for development of housing project situated at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bangalore South Taluk, measuring 1 acre and 31 guntas. The assessee got 24% share in the said project and sold 49 flats as mentioned in page No. 6 of the assessee’s compilation, which is the copy of the bill and sale of flat during the financial year 2005-06. The assessee also incurred certain expense for electricity and water connection connected with the project and also made payment to BWSSB and KEB. The assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd. In the said agreement dated 3.11.2003, copy of which is placed at page Nos. 1 to 13 of the assessee’s paper book dated 28.2.2012, in the said agreement, it is mentioned at page No. 2 as under :
“WHEREAS the first is engaged in property development of the schedule property hence had applied for conversion of the said schedule property from agricultural to residential purpose before the Special Deputy Commissioner Bangalore District and the same was allowed by its order vide No. BDS. ALN.SR(s) 26/2002-2003 dated 28-12-2002.
AND WHEREAS the first party is developing the schedule property by putting up a residential housing enclave and the first party has entered into this agreement with the second party to undertakes the work of development of the schedule property jointly.”
10. From the above, it is clear that the assessee was engaged in the property development and this fact has also been admitted by the AO. The assessee got his agricultural land converted for non agricultural purposes i.e. for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned. The clause – (4) of the agreement entered by the assessee with M/s Reddy Structures Pvt. Ltd. states as under :
“It is hereby agreed that the first party has contributed the schedule property as his capital contribution for joint development & construction and the second party shall make investment on schedule property for joint development and construction. First party shall make investment for all statutory approvals including BWSSB, KEB, plan sanction etc., the first party shall retain 24% of the built up area in the schedule property along with 24% car parking. Both the parties to this agreement shall be entitled to all common rights and facilities in the common areas of the building proportionally as per their respective shares.”
11. From the above clause, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party i.e. M/s Reddy Structures Pvt. Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment on schedule property but the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration.
12. In the present case, the AO denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. Now, we have to analyze the provision contained in sec. 80IB(10) of the Act. The said provision read as under :
“The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of Mar, 2007 by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project.
13. The Explanation has been inserted to sub sec. (10) of sec. 80IB w.e.f. 1.4.2010 with retrospective effect from 1.4.2001 vide Finance (No.2) Act 2009. The said explanation read as under :
“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 (including the Central or State Government).”
14. On a joint reading of sub. sec (10) of sec. 80IB and explanation thereto it is clear that deduction as is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming the deduction u/s 80IB(10) is that the undertaking is developing and building, housing projects approved by a local authority. In the present case, it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s 80IB(10) of the Act to the assessee was that the assessee had not carried out any construction activity, in our opinion that reason is not sufficient to deny deduction u/s 80IB(10) of the Act. In the present case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction u/s 80IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non agricultural purpose and getting plan sanctioned. On a similar issue, their lordships of Hon’ble Jurisdictional High Court in the case of Shravanee Constructions (supra) at para 8 of the judgment dated 28th Feb., 2012 in ITA No. 421 and 422 of 2009 observed as under :
“In terms of the agreement, which are not in dispute, the assessee not only undertook the aforesaid development activities on the land in question, but in fact, he entered into an agreement of sale with the owners of the land, paid the entire consideration but he did not take a registered sale deed in his name. On the contrary, the procedure adopted is he in turn entered into a joint development agreement with the builder and the owner of the land was made a party to the said proceedings. Thus, the assessee contributed the land, undertook the aforesaid development activities in the said land and thus, complied with all other conditions, which have to be fulfilled before claiming benefit u/s 80IB(10) of the Act. The builder has invested the money in the construction. It is after completion of the building in terms of the agreement, the assessee was given 22% share of the building area. It is after sale of the built area, in terms of sec. 80IB(10), the assessee is claiming deduction. As is clear from the joint development agreement, the undertaking of developing and building housing project was jointly undertaken by the assessee and the builder. Therefore, in respect of the residential units numbering 211 in all, the persons who undertook this undertaking are entitled to the benefit of sec. 80IB(10) of the Act in proportion to the share to which they are entitled to in the built up area.”
15. In the present case also, the assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd., for development and building of the housing project on the land belonging to him. The assessee contributed the land, undertook the developmental activities in the said land and thus complied with all other conditions which have to be fulfilled before claiming the benefit u/s 80IB(10) of the Act. In the present case, it was agreed that after completion of the building in terms of the agreement, the assessee was given 24% of the share of the building area which he was entitled to sell to various persons, it was also clear from the joint development agreement that the undertaking of developing and building housing project was jointly undertaken by the assessee and M/s Reddy Structures Pvt. Ltd., therefore, the assessee was entitled for the benefit of deduction u/s 80IB(10) of the Act. We, therefore, considering the totality of the facts and respectfully following the ratio laid down by the Hon’ble Jurisdictional High Court in the above said referred case of Shravanee Constructions (supra), set aside the impugned order passed by the CIT(A) and direct the AO to allow the deduction u/s 80IB(10) of the Act to the assessee.
16. In the result, the appeal of the assessee is allowed.

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