No Provision to Replace Actual Land Cost with Market Value for Section 80-IB(10) Deduction: ITAT Chennai

Baashyam Constructions Pvt. Ltd. Vs ITO (ITAT Chennai)

The Tribunal held that there is no provision under the Income-tax Act permitting substitution of actual cost of land with its market value for the purpose of computing deduction under Section 80-IB (10)

Facts:

• The Appellant/assessee, Baashyam Constructions Pvt. Ltd., is a company engaged in the business of real estate development. For the Assessment Year 2010–11, the assessee filed its return of income on 30.09.2010 declaring NIL income after claiming deduction under Section 80-IB (10) of the Income Tax Act, 1961 amounting to Rs.27,76,97,278/-. The assessee also computed book profits under Section 115JB at Rs.27,79,97,773/-.
• The assessee owned land admeasuring 4.45 acres situated at Kattupakkam Village near Iyyappan Thangal, Chennai, which was held as stock-in-trade. The assessee entered into a Joint Development Agreement (JDA) dated 16.07.2006 with M/s ETA Properties & Investments Ltd. for development of a housing project known as “Jasmine Court.”
• Under the terms of the Joint Development Agreement, the responsibilities between the parties were specifically demarcated. The assessee was entrusted with preparatory activities, reclassification of land, design and architectural work, whereas M/s ETA Properties & Investments Ltd. was responsible for construction of the buildings. It was agreed that the builder would undertake the entire construction at its own cost. In consideration thereof, M/s ETA Properties & Investments Ltd. agreed to allot 73 flats, representing 33.33% share of the total built-up area, to the assessee. Correspondingly, the assessee agreed to assign and convey 66.67% of the total land area, i.e., 2.96 acres out of 4.45 acres, to the builder.
• Upon receipt of the said 73 flats, the assessee sold the same and derived revenue amounting to Rs.31,28,77,343/-. After reducing costs and expenses debited in the Profit & Loss Account in relation to the said housing project, the assessee claimed deduction under Section 80-IB (10) amounting to Rs.27,76,97,278/-.
• The case of the assessee was selected for scrutiny assessment. During the course of assessment proceedings, the Assessing Officer called upon the assessee to justify its claim for deduction under Section 80-IB (10). The Assessing Officer observed that the profits derived by the assessee from the housing project appeared unusually high and formed the opinion that the assessee had merely exchanged land in lieu of 73 flats and was not involved in actual execution of the housing project. On this basis, the Assessing Officer held that the assessee had not fulfilled the conditions prescribed under Section 80-IB (10) and accordingly denied the deduction claimed by the assessee.
• Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Vide appellate order dated 24.03.2015, the Ld. CIT(A) held, in principle, that the assessee was involved in execution of the housing project and was legally entitled to deduction under Section 80-IB (10) of the Act. However, while quantifying the eligible deduction, the Ld. CIT(A) observed that the cost of land had not been debited by the assessee in its Profit & Loss Account and therefore directed that the cost of construction of the 73 flats or the fair market value of 2.96 acres of land be substituted as cost for the purpose of computing eligible profits.
• Pursuant to the aforesaid appellate order, the Assessing Officer passed order under Sections 250/143(3) on 25.07.2016 and adopted the fair market value of land at Rs.18,36,38,273/-. Consequently, deduction under Section 80-IB (10) was restricted to Rs.9,33,37,681/-.
• Meanwhile, the Revenue preferred an appeal before the Income Tax Appellate Tribunal against the order of the Ld. CIT(A). The Tribunal, vide order dated 12.06.2017 in ITA No.1646/Mds/2015, allowed the Revenue’s appeal and restored the order of the Assessing Officer denying deduction under Section 80-IB (10).
• Aggrieved thereby, the assessee carried the matter in appeal before the Madras High Court. The Hon’ble High Court, reported in 422 ITR 346, allowed the appeal of the assessee and held that the assessee was a developer executing the housing project along with the builder and was therefore entitled to deduction under Section 80-IB (10) of the Act.
• The Hon’ble High Court further rejected the Revenue’s contention regarding alleged double deduction and observed that both parties were claiming deduction only qua their respective proportionate shares in the housing project and therefore no double deduction arose.
• The Hon’ble High Court also took note of the factual position that the assessee had in fact debited Work-in-Progress (WIP) amounting to Rs.2.22 crores in its Profit & Loss Account, which included land cost of Rs.1,97,63,024/- pertaining to the housing project and acquired during Financial Years 2004–05 and 2005–06. The High Court therefore observed that the findings of the lower authorities that no expenses were debited in the Profit & Loss Account were incorrect.
• Thereafter, upon receipt of the judgment of the Hon’ble High Court, the assessee filed a rectification application dated 04.07.2019 under Section 154 of the Income Tax Act before the Ld. CIT(A). In the said application, the assessee contended that the direction issued by the earlier CIT(A) requiring substitution of actual land cost with cost of construction of flats or fair market value of land was factually and legally erroneous because the actual land cost had already been debited in the books of account and reduced while computing profits. The assessee further contended that there existed no provision under the Income Tax Act permitting substitution of historical cost with fair market value for computation of deduction under Section 80-IB(10).
• Since the rectification application was not disposed of, the assessee approached the Hon’ble High Court by filing Writ Petition No.29382 of 2024. The Hon’ble High Court, vide order dated 03.07.2025, directed the Ld. CIT(A) to expeditiously dispose of the rectification application filed by the assessee.
• Pursuant to the directions of the Hon’ble High Court, the Ld. CIT(A), vide impugned order dated 14.11.2025, rejected the rectification application on the ground that the earlier order had merged with the orders of higher judicial forums and therefore the application under Section 154 was not maintainable. The Ld. CIT(A) further held that he could not sit in review over the judgment passed by his predecessor.
• Aggrieved by the rejection of the rectification application, the assessee preferred the present appeal before the Income Tax Appellate Tribunal, Chennai Bench.

Issue:

• Whether, on the facts and in the circumstances of the present case, the directions issued by the Learned CIT(A) in the appellate order dated 24.03.2015 for re-working and quantifying the eligible deduction under Section 80-IB (10) of the Income Tax Act, 1961 constituted a mistake apparent from the record, amenable to rectification under Section 154 of the Act.

Observations:

• The tribunal observed that, the facts as discussed above, the undisputed position is that, the assessee is legally entitled to claim deduction u/s 80-IB (10) of the Act in relation to the profits derived from the housing project named ‘Jasmine Court’. The narrow issue in question before us relates to the correct quantification of the eligible deduction and that, whether the directions given by the Ld. CIT(A) in the first appellate order dated 24.03.2015 for re-working the eligible deduction constituted a mistake rectifiable u/s 154 of the Act or not.
• It is noticed from the financials of the assessee that, it had undertaken only one housing project during the year, i.e. Jasmine Court and had derived revenues of Rs.31,28,77,343/- from sale of the flats. The assessee is noted to have debited aggregate costs and expenses of Rs.3,74,13,713/- in the P&L A/c which is found to include WIP of Rs.2.22 crores. The assessee had accordingly computed eligible deduction of Rs.27,76,97,278/- with reference to the profits derived from this housing project. As noted earlier, there is no quarrel that the assessee is entitled to deduction u/s 80-IB (10), as was also held by the ld. CIT(A) in his appellate order dated 24.03.2015. The ld. CIT(A) however is found to have mistakenly observed that the assessee had not debited the cost of land while working out the surplus derived from this housing project. According to the ld. CIT(A), the details of the cost of land was not available with him and therefore, he had directed the AO to substitute the same with the cost of construction of the 73 flats sold during the year, as the cost of land, for working out the eligible deduction u/s 80-IB(10) of the Act. It is seen from the records that, this particular finding of the ld. CIT(A) was factually erroneous as the WIP of Rs.2.22 crores is found to include the cost of land of Rs.1,97,63,024/-, which was purchased by the assessee in FYs 2004-05 and 2005-06.
• It is also observed that, there is also merit in the submission of the assessee that the terms of the JDA dated 16.07.2006 between the assessee and the builder clearly showed that the cost of construction of the entire housing complex was to be borne by the builder on his own account and that, no portion of such cost was borne by the assessee. Accordingly, we agree with the ld. AR that the ld. CIT(A)’s direction to assume that the cost of construction of 73 flats, was incurred by the assessee and thereby direct the AO to deduct the same from the sale proceeds, was prima facie erroneous and constituted an apparent mistake evident from the records.
• We also find force in the assessee’s contention that, there was no provision or Rule in the Income-tax laws which permitted substitution of cost of land with the market value of land, to arrive at the eligible profits u/s 80-IB (10) of the Act. It is not in dispute that, the assessee held land parcels as stock in trade, which was acquired in FYs 2004-05 and 2005-06 and formed part of the WIP debited to the P&L A/c. Hence, it is seen that, the assessee had indeed considered the cost of land while arriving at the profits of the eligible housing project. The profit from any business is the resultant effect of revenues less the actual costs. There is no provision or rule which permits substitution of actual costs with any notional value. Accordingly, the direction issued by the Ld. CIT(A) to alternatively substitute the market value of land admeasuring 2.96 acres as the cost of land of 4.45 acres developed in this project, was ex facie without logic and a patent error of law and therefore amenable to Section 154 of the Act.
• There is yet another aspect brought to the notice by the ld. AR for the assessee. He pointed out that, if the ld. CIT(A)’s direction was to be taken to its logical conclusion, then the cost of land determined as per his directions, viz. cost of construction of 73 flats / market value of land of 2.96 acres, was required to be recorded in the re-drawn P&L A/c and the gross total income of the assessee was also required to be restated by reducing the sum of Rs.18,36,38,273/-. It is seen that, the assessee was undertaking only this housing project ‘Jasmine Court’ and thus as a natural corollary, the business income reported in the income-tax return would comprise of profits from this housing project and consequentially the value of profits eligible for deduction u/s 80-IB (10) of the Act would be equivalent to this business income. The Ld. AR has rightly pointed out that, the direction issued by the Ld. CIT(A) was equally applicable to the computation of business income / gross total income as well, and that the AO could not have reworked the eligible profits u/s 80-IB(10), in isolation of the actual profits derived from the housing project. We are also unable to fathom a situation where the actual profits as per the financials from the eligible project and the amount eligible for deduction u/s 80-IB (10) could be two completely different numbers. It was shown to us that, once the computation of gross total income is also substituted with the cost of 73 flats, as directed by the Ld. CIT(A), then the same would stand correspondingly reduced by Rs 18,36,38,273/-. Further, after reducing the re-worked deduction u/s 80-IB(10), the resultant assessable income would remain the same, as declared in the return of income. Hence, from this angle as well, the direction given by the Ld. CIT(A) is found to be prima facie an error of fact.
• We observe that the Ld. CIT(A) in the impugned order fell into an error by holding that the prayer made by the assessee was not within the scope of rectification. The powers u/s 154 of the Act permits the Ld. CIT(A) to rectify any mistake, albeit by his predecessor, which is “apparent from the record”. The Ld. CIT(A) is permitted to examine the records and if he discovers that he or his predecessor has made a mistake, he can rectify the error and the error which can be corrected may be an error of fact or of law. For this, we gainfully refer to the following observations made in the judgment of the Hon’ble Supreme Court in the case of Asoka Textiles Ltd. v. ITO [41 ITR 732], wherein it was inter alia observed as under i.e., an evident error which does not require any extraneous matter to show its incorrectness. The error may be one of fact but is not limited to matters of fact and include also errors of law. But the law must be definite and capable of ascertainment. An erroneous view of law on a debatable point or a wrong exposition of the law or a wrong application of the law or a failure to apply the appropriate law cannot be considered a mistake or error apparent on the face of the record.
• The tribunal also observed that, the decision of the Hon’ble Madras High Court in the case of English Electric Company of India Ltd. Vs CIT (132 ITR 251). In the decided case, the assessee had filed revised return of income reflecting higher amount of capital, which was described as excess of depreciation reserve over depreciation allowable. The AO proceeded on the revised workings and completed the assessment. Later on, the AO discovered from the balance sheet that there was difference between the written down value in the income-tax records and the value in accordance with the assessee’s books was not reflected in the balance-sheet as any reserve and therefore exercise the powers of rectification u/s 154 of the Act and made the necessary rectification to the total income. The assessee, in this case, had claimed that, there was no error in the original assessment and therefore the rectification order was invalid. On appeal, the Hon’ble High Court held that, where the error was discoverable from analysis of the books of accounts and balance sheet, which revealed inconsistency, the same had to be rectified. The Hon’ble High Court remarked that, “what is sauce for the goose is also sauce for the gander. The Hon’ble High Court thus upheld the validity of the rectification order.
• In our considered view, the above analogy is applicable to the present case as well. As noted above, the financials of the assessee revealed that the cost of land had been debited and charged to P&L A/c. The Ld. CIT(A) however had proceeded on the mistaken premise that, the cost of land had not been debited and therefore directed the AO to re-work the deduction by substituting cost of land, in absence of details, with the cost of construction of 73 flats or market value of land of 2.96 acres. We find that, this particular finding / direction of the Ld. CIT(A) was clearly inconsistent with the face of P&L A/c and the Balance Sheet clearly, and therefore, is required to be rectified u/s 154 of the Act.
• In the facts and circumstances as discussed (supra), the Ld. CIT(A) is incorrect to hold that the order of his predecessor had merged with the order of the higher judicial forums and therefore, he is helpless and not rectify the impugned direction. In this regard, it is observed that the Tribunal has adjudicated on the sole issue as to whether the assessee, in principle, was eligible for deduction u/s.80-IB (10) of the Act. Even the questions framed before the Hon’ble High Court in the appeal filed against the order of this Tribunal, was on the question of eligibility for claiming deduction u/s 80-IB (10) of the Act. It is seen that, the impugned direction of the Ld. CIT(A) or the quantification of the eligible deduction was never subject matter in appeals and therefore the doctrine of merger doesn’t apply in the facts of the case. Rather, we find that, the Hon’ble High Court while adjudicating the assessee’s appeal (supra) had observed that, the cost of land formed part of the WIP debited to P&L A/c and that the Tribunal had erred in observing that no expenses were charged against the sale proceeds in the P&L A/c.
• Also the tribunal observed that, the legal maxim ‘actus curiae neminem gravabit’ comes to the aid of assessee, is noted to be founded upon justice and good sense and affords a safe and certain guide for the administration of the law. Meaning ‘an act of court shall prejudice no man’ which maxim has been approved by the Hon’ble Supreme Court in several cases [Refer decision of Supreme Court in Jayalakshmi Coelho v. Oswald Joseph AIR 2001 SC 1084].
• For the reasons above, the tribunal observed that, the Ld. CIT(A) was unjustified in rejecting the rectification application filed by the assessee. We are of the view that the direction issued by the Ld. CIT(A) in the appellate order dated 24.03.2015 directing the AO to substitute the cost of land with the cost of construction of 73 flats / market value of 2.96 acres of land, was an error of law as well as error on fact. We are therefore inclined to expunge this direction and rectify the order of the Ld. CIT(A) to that extent. As observed by us above, the cost of land already formed part of the WIP debited in P&L A/c and therefore no further adjustment was warranted to the profits of the assessee. The AO shall accordingly re-compute and allow the deduction u/s 80-IB(10) with reference to the profits as disclosed in the Profit & Loss Account. Needless to say, the AO shall pass a speaking order in this regard. In the result, the appeal of the assessee stands allowed.

FULL TEXT OF THE ORDER OF ITAT CHENNAI