Deduction u/s. 80-IB(10) not dependent on manner of profit distribution among AOP members

IN THE ITAT MUMBAI BENCH ‘F’

Fortaleza Developers

Versus

Commissioner of Income-tax-15, Mumbai

IT APPEAL NO. 2648 (MUM.) OF 2012
[ASSESSMENT YEAR 2007-08]

OCTOBER  12, 2012

ORDER

I.P. Bansal, Judicial Member

This is an appeal filed by the assessee against order dated 27/3/12 for assessment year 2007-08 passed under section 263 of the Income Tax Act,1961 (the Act) by the Ld. CIT-15, Mumbai. The grounds of appeal read as under:

“Being aggrieved by the order of the Commissioner of Income Tax- 15, this appeal petition is submitted on the following grounds which may considered without prejudice to one another:

1.            On the facts and in the circumstances of the case and in law, the Id. CIT has erred in passing the order u/s. 263 of the Act which is bad in law and without jurisdiction.

2.            On the facts and in the circumstances of the case and in law, the Id. CIT has erred in holding the assessment order to be erroneous and also prejudicial to the interests of the revenue and erred in directing the LD.AO to recompute the income of the appellant on the basis of provisions contained in clause 7 of the AOP agreement dated 29.04.2003.

3.            On the facts and circumstances of the case and in law, the LD.CIT erred in passing order u/s.263 without appreciating the appellant’s submission that in view of matter regarding deduction under Section 801B(10) being subject matter of appeal before the learned CIT(A), the order of the LD.AO on the issue of deduction under Section 8OlB(1O) as a whole had merged with that of the order of the learned CIT(A) and in view of the statutory bar in Explanation to s. 263(1) , revisionary power u/s.263 cannot be invoked.

4.            On the facts and circumstances of the case and in law, the learned CIT has erred, while holding that the assessment order is prejudicial to the interest of the revenue, in observing that the entire amount of Rs. 15.11 crore would be assessable in the hands of M/s Sanand Properties Pvt. Ltd. The learned CIT failed to appreciate that he can not decide the taxability of any amount in the hands of third party while adjudicating the case of the appellant”

2. The assessee is an AOP earlier assessed vide assessment order dated 18/12/2009 passed under section 143(3)(ii) of the Act. The constitution of the AOP is as under:

(1)          M/s Ravi Raj Kothari and Company.

(2)          M/s. Sananand Properties Pvt. Ltd.

2.1 The return of income was filed at an income of Rs.4,13,610/- after claiming deduction under section 80 IB(10) of the Act amounting to Rs.14,54,47,283/-. Noting the fact that assessee did not fulfill the conditions laid out under section 80 IB(10) the AO had disallowed the claim made under section 80 IB(10) and had assessed the assessee at an income of Rs.14,63,04,860/-. The denial of claim vide aforementioned assessment order was agitated in appeal filed before the Ld. CIT(A) and the said appeal of the assessee was decided by Ld. CIT(A) vide order dated 25/3/2010, a copy of this order has been filed by the assessee in its paper book at pages 38 to 62. The main ground raised by the assessee in the said appeal was regarding disallowance of deduction under section 80 IB(10). It was contended that the assessee has fulfilled all the conditions laid down in section 80 IB(10), therefore, the claim of 80 IB(10) has wrongly been denied. In para 8.6 Ld. CIT(A) has recorded a finding that assessee has fulfilled all the conditions laid down in section 80 IB(10) and assessee is entitled to claim the same. He directed the AO to allow the claim of the deduction of Rs.14,54,47,283/-. The aforementioned order of Ld. CIT(A) was challenged by revenue by way of an appeal which has been decided by this Tribunal vide its order dated 25/4/2012 in ITA No.4327/M/10, a copy of which has been placed on record. The Tribunal after deliberating the contentions of both the parties has come to a conclusion that the assessee has fulfilled the conditions laid down in section 80 IB(10), therefore, the deduction cannot be denied and there was no reason to interfere with the order of Ld. CIT(A). In this manner the appeal filed by the revenue was dismissed by the Tribunal.

2.2 However, Ld. CIT vide notice dated 21/3/2012 i.e. during the pendency of the appeal before the ITAT, asked the assessee to show cause as to why the assessment order passed by the AO should not be set aside as the order passed by the AO is prima facie erroneous and prejudicial to the interest of revenue. The reason for initiation of such proceedings have been enumerated in para 2 of the impugned order. Ld. CIT noted from the terms and conditions of AOP agreement, which was dated 29/4/2003 and reference was made to clause(7) of the said agreement. According to Ld. CIT the said clause stated that M/s. Sananand Properties Pvt. Ltd. (SPPL) was to receive 35% of the sale proceeds of the project and out of the balance 65% of the receipts, all the expenditure for the purpose of AOP was to be met with and the net balance remaining thereafter was the share of income of M/s.Ravi Raj Kothari & Company(RRKC). According to Ld. CIT, the manner of allocation of revenue has provided the assessee undue benefit in the shape of higher claim of deduction u/s. 80 IB (10). In contradiction of clause – 7 of the agreement dated 29/04/2003, the assessee instead of first reducing 35% of revenue and claiming deduction under section 80 IB(10) on the balance amount has claimed deduction on the entire revenue. In other words, the share of 35% of the gross revenue pertaining to SPPL was not eligible for deduction under section 80 IB(10). The same was taxable in the hands of SPPL without having the benefit of deduction under section 80 IB(10). By granting deduction in respect of entire revenue, the AO has committed an error by accepting the method of allocation adopted by the assessee in its accounts which made the assessment order erroneous as well as prejudicial to the interest of revenue.

2.3 In response to aforementioned show cause notice the assessee has filed a written submission which is dated 27/3/2012. It was submitted that according to section 167B(2) and section 86 of the Act, the share of profit received by the members of AOP are not liable to be taxed instead the profit earned AOP is liable to be taxed at the maximum margin rate. Reference was made to the decision of Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239, wherein it has been held that if a particular income is income of the AOP in law, only the AOP is to be assessed in respect of such income. It was submitted that while framing the assessment under section 143(3) the AO had properly scrutinized the agreement and after applying the mind on clause (7) he has framed the assessment. The claim of assessee under section 80 IB(10) was rejected by the AO. The appeal was filed by the assessee and the issue has been decided in favour of the assessee. Reference was made to Explanation -(c) to section 263 of the Act according to which, where any order passed by the AO was made subject matter of any appeal, the powers of Ld. CIT under section 263 of the Act is extended only to the matters which had not been considered and decided in the appeal. It was submitted that quantification of deduction under section 80 IB(10) was the subject matter of appeal before Ld. CIT(A), therefore, the impugned assessment order could not be subjected to proceedings under section 263 as the assessment order had merged with the appellate order. Reference was made to the following decision.

(i)           Remex Constructions v. First ITO [1987] 166 ITR 18

(ii)          CIT v. Goodricke Group Ltd. [1993] 71 Taxman 30 (Cal.)

(iii)         CIT v. Method Trading Investment Ltd. [2000] 109 Taxman 414 (Cal.)

(iv)         CIT v. Nirma Chemicals Works (P) Ltd. [2009] 309 ITR 67

(v)          Ranka Jewellers v. Addl. CIT [2010] 328 ITR 148

2.4 It was further submitted that proposed action will reduce the deduction undersection 80 IB(10), however, the assessable income will be much less than the income assessed by the AO. Thus the assessment order cannot be said to be prejudicial to the interest of revenue. Reference in this regard was made to the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT  243 ITR 83 to contend that unless the order passed by the AO is erroneous as well as prejudicial to the interest of revenue, powers under section 263 cannot be exercised. Reliance was also placed on the decision of Hon’ble Delhi High Court in the case of CIT v. Honda Siel Power Product Ltd. [2010] 194 Taxmann 175 wherein it has been held that in a case where AO adopts one of the courses admissible in law and where there two views are possible, CIT cannot exercise power under section 263 of the Act.

2.5 Ld. CIT after considering the submissions of the assessee and referring to clause(7) of the aforementioned agreement has come to a conclusion that assessee has wrongly distributed the profits which are not in accordance with clause (7) of the agreement. According to agreement, before computing the income of AOP, 35% of the gross receipts were required to be paid to SPPL. However, in the books of accounts, the assessee has first adjusted all the expenditure incurred by the AOP against the gross receipts and thereafter net balance has been transferred to the members and this action of the assessee is not in accordance with clause(7) of the agreement. Therefore, Ld. CIT held that the order passed by the AO is erroneous. He refuted the claim of the assessee that according to the proposed action, to be taken under section 263 the assessable income will be substantially lower than income computed by the AO. He observed that by adopting this method the assessee did not pay any tax as it claimed under section 80 IB(10). The members of the AOP also did not pay any tax as allocable income is only after claim of deduction under section 80 IB (10). According to Ld. CIT the amount to be received by SPPL, if distributed according to clause(7) of the agreement, will not enjoy any exemption as the same is not in the shape of share out of the income of AOP but it is out of the sale proceeds. Therefore, Ld. CIT is of the view that the entire amount of Rs.15.11 crores received by SPPL will be assessable to tax in its hand which will be beneficial to the revenue, therefore, assessment order passed by AO becomes prejudicial to the interest of revenue.

2.6 So far as it relates to the contention of the assessee that assessment order had merged with the appellate order, therefore, section 263 could not be invoked, Ld. CIT has also rejected this claim on the ground that subject matter of order passed under section 263 of the Act is entirely different from the subject matter of appeal filed by the assessee before CIT(A). The issue of allocation of 35% of sale proceeds of the assessee AOP to its member SPPL was not subject matter of appeal, therefore, such contention of the assessee is not acceptable. In this manner Ld. CIT has set aside the assessment order with a direction to the AO to recomputed the income of the assessee on the basis of clause (7) of the AOP agreement dated 29/4/2003. He also directed the AO that after completion of the reassessment proceedings in the case of the assessee, the AO holding jurisdiction over the case of SPPL should also be intimated to enable him to take corrective action in the case of SPPL.

2.7 The assessee is aggrieved with the aforementioned directions of Ld. CIT and has filed aforementioned grounds.

3. After narrating the facts Ld. AR took us through clause(7) of the aforementioned agreement which has also been reproduced in para-6 of the order passed by Ld. CIT. Copy of this agreement is placed by the assessee in the paper book at pages 26 to 35. For the sake of completeness clause (7) of the agreement is also reproduced below.

“SHARING OF REVENUE AND INCOME: All agreements for sale of residential units in the housing project under taken by the AOP shall be entered into only between the authorized signatories of the A OP 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 the payments receivable from the purchasers towards the above shall be received only in the name of the AOP, i.e., FORTALEZA DEVELOPERS and the said amounts received from the purchasers of the housing units as aforesaid shall be deposited only in the bank account in the name of the A OP i.e., FOR TALEZA DEVELOPERS.

Out of the aforesaid amounts received from the purchasers of the housing units ( representing the gross sale proceeds of the units inclusive of the value of land) SPPL shall be entitled to, as its share of revenue/income, an amounting comprising of 35% of such receipts. It is hereby agreed and understood between the parties hereto, that SPPL may actually withdraw such share of revenue/income to which it is entitled as per the understanding between the parties from time to time.

Out of the balance 65% of the aforesaid receipts representing the gross sale proceeds), all 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 herein above 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. metrs ( approx. 7.76 acres) on final plot No. 72, Yerawad TPS and bearing S.No.210 (Part) situated at village Yerawads, Taluka Haveli, Dist. Pune. However, for any other project to be developed by this AOP in future the sharing of revenue and income shall be decided mutually by the parties hereto from time to time.”

3.1 Reading from the above clause it was submitted by Ld. A.R that according to aforementioned term SPPL was entitled to receive 35% of the gross sales proceeds of the units to be sold by the AOP inclusive of the value of the land. He submitted that it is a manner of sharing of the profit. The land upon which the project was to be developed was owned by SPPL and the assessee had expertise in construction and development activity, therefore, out of the balance of 65%, after excluding expenses incurred for the project, the balance profit was to be retained by the other member of the AOP namely Ravi Raj Kothari & Company (RRKC). He submitted that Ld. CIT has wrongly observed in para-7 that in the books of account the assessee has first adjusted all expenditure of the AOP against the gross receipts and thereafter net balance is transferred to two members. Ld. A.R submitted that this finding of Ld. CIT is factually incorrect. To substantiate Ld. A.R referred to page 16 of the paper book, where the working of profit distribution has been submitted. The said working is reproduced below:

3.2 Referring to the aforementioned working it was submitted by him that the total revenue was a sum of Rs.43,17,68,917/-, 35% of the total revenue amounting to Rs.15,11,19,120.95 was allocated to SPPL. A sum of Rs. 11,62,00,534/- was already credited to the account of SPPL on account of land which is specifically stated in clause(7) and the balance amount of Rs.3,49,18,586.95 has been considered the profit of SPPL. Similarly out of total revenue 65% remaining amount is a sum of Rs.28,06,49,796.05. In addition thereto MSEB and incidental charges were to the tune of Rs. 1,18,26,666/-. Thus total profit after allocating 35% of the gross receipts of flats came to Rs. 29,24,76,462.05. Out of the said amount the development charges incurred in the year under consideration are to the tune of Rs.18,48,50,281.83 and after reducing the same profit share of RRKC remained at Rs. 10,76,26,180.22. Therefore, Ld. AR submitted that the allocation has been done in accordance with clause (7) of the agreement and Ld. CIT is factually incorrect in observing that allocation is not done by the assessee as per clause(7) of the agreement.

3.3 Ld. A.R submitted that the view taken by Ld. CIT is not in the spirit of law as deduction under section 80 IB(10) is intended to give benefit to an undertaking developing and building housing projects approved before 31/3/2008 by a local authority @100% of the profits provided the condition laid down in that section are fulfilled. He submitted that RRKC at its own alone cannot constitute the undertaking as the land was contributed by SPPL. He submitted that upon scrutiny of all the documents and evidences, it has been found and held that AOP is eligible for deduction under section 80IB(10) and has fulfilled all the conditions laid down in section 80 IB(10). The allocation of profit is also in accordance with clause(7) of the agreement and assessee has not deviated in allocating the profit in accordance with clause (7) of the agreement. Thus Ld. A.R submitted that Ld. CIT is factually incorrect in observing that allocation of profit has been done by the assessee contrary to clause (7) of the agreement.

3.4 Ld. A.R further submitted that Ld. CIT is also wrong in invoking section 263 as the order passed by the AO cannot be said either to be erroneous or prejudicial to the interest of revenue. He submitted that it has been shown that allocation of profit is in accordance with clause(7), therefore, the AO did not commit any error, and thus order passed by the AO cannot be said to be erroneous. He submitted that for invocation of power under section 263, it is well settled that the twin conditions as laid down in that section are required to be fulfilled simultaneously and the order in respect of which these powers are sought to be invoked should not only be erroneous but also prejudicial to the interest of revenue.

3.5 Ld. A.R further submitted that if the method suggested by Ld. CIT is adopted then the assessee will be liable for lesser income being 100% eligible for deduction under section 80 IB (10) which would mean that the assessee will be entitled for lesser assessable income and lesser deduction ultimately to be assessed at nil income. Therefore, Ld. AR pleaded that there is no prejudice to the interest of revenue. He submitted that Ld. CIT is considering the order of AO prejudicial to the revenue for the reason that it is prejudicial to the interest of revenue in the case of SPPL. He submitted that loss, if any, to the revenue in the case of SPPL cannot be a ground for invoking section 263 in the case of the assessee being a distinct and separate assessable entity.

3.6 Ld. A.R further submitted that the assessment order passed by the AO also cannot be said to be prejudicial to the interest of revenue for the reason that AO disallowed the deduction under section 80 IB (10) in its entirety. The deduction was allowed to the assessee in an appeal and deduction has been given to the assessee by way of order passed for giving effect to appeal. Thus assessment order vide which no deduction was allowed under section 80 IB(10) cannot be said to be prejudicial to the interest of revenue as deduction was disallowed in the entirety.

3.7 It was further submitted by Ld. A.R that the assessment order had already merged with the appellate order dated 25/3/2010 passed by CIT(A), therefore, Ld. CIT was debarred from invoking the powers under section 263 as per explanation (c) to section 263(1). He submitted that the only reason for which Ld. CIT has considered the assessment order as erroneous and prejudicial to the interest of revenue is alleged excess claim of deduction under section 80 IB (10) in the hands of the assessee. He submitted that once deduction under section 80 IB(10) was subject matter of appeal before CIT(A) then entire issue of 80 IB(10) was open in appeal and according to following decisions. So far as it relates to deduction u/s. 80IB(10), the assessment order had merged with the appellate order passed by CIT(A).

3.7.1 Sonal Garments v. Jt. CIT [2005] 95 ITD 363(Mum.), wherein it has been held that where computation of deduction under section 80 HHC was subject matter of appeal before Ld. CIT(A) who had given some finding on computation of deduction under section 80 HHC, assessment order had merged with the order of Ld. CIT(A) and Ld. CIT could not exercise power under section 263. In the said case the assessee was in the business of export of garments and the entire turnover of the assessee was export turnover. The assessment was framed under section 143(3) after allowing deduction under section 80 HHC of the Act. An appeal was filed on the issue of deduction under section 80HHC claiming that AO has erred in deducting certain amount from export turnover which were not received within six months from the close of the year overlooking the fact that the said sum was CIF value of the goods exported, whereas the FOB value of such sales should be deducted from the export turnover. CIT(A) had allowed the appeal filed by the assessee and directed the AO to reduce FOB value from the export turnover. Thereafter CIT invoked section 263 and held that profit for section 80HHC should be computed after excluding export incentive and after allowing current years depreciation. After doing so no income will be left in export business, therefore, deduction under section 80HHC was erroneously allowed by the AO. It was the contention of the assessee that the issue regarding deduction under section 80HHC was considered by CIT(A), therefore, the assessment order had merged with the order of CIT(A). On the other side it was the contention of the revenue that the issue regarding depreciation and export incentive having not considered by CIT(A), the assessment order cannot be said to have merged with the appellate order. The Tribunal held that the “matter” as appearing in Explanation (c) to section 263 is certainly a word of wide import and represents a subject or situation that one needs to think about, discuss or deal with. A “matter” might have many aspect and the above mentioned two factors might be the aspects of the “matter” but not the entire “matter” itself. The “matter” in the instant case was deduction under section 80HHC, therefore, the assessment order, so far as it relates to deduction under section 80HHC had merged with the order of Ld. CIT(A). Thus it was held that order passed by CIT under section 263 was not a valid order in the eyes of law.

3.7.2 Reliance was also placed on the decision of Mumbai ITAT in the case of Marico Industries Ltd. v. Asstt. CIT [2009] 27 SOT 73 (Mum.)(URO). In this case also similar proposition was laid down. In the said case powers under section 263 were invoked on the issue regarding deduction under section 80 IB, which was the subject matter of appeal filed before CIT(A) and it was held that since deduction under section 80 IB was the subject matter of appeal before CIT(A), the order of AO had merged with the order of CIT(A).

3.7.3 Reference was also made to the latest decision of Mumbai Benches dated 14/09/2012 in ITA No.3024/Mum/2012 in the case of M/s. K. Sera Sera Productions v. CIT (copy of order placed on record). In the said case assessee was engaged in the business of production , finance and distribution of cinematograph films. The AO while making the assessment order had called for from the assessee the cost of production allowable as per Income Tax rule-9A and after considering the submissions of the assessee out of Rs.27.19 crores a sum of Rs. 2.34 crores was disallowed which was made subject matter of appeal before CIT(A). A remand report was called for by the CIT(A) and on these facts it was held that the order of AO had merged with the order passed by CIT(A) on the issue of cost of production allowable as per Rule 9A of the IT Rules. The case of Ld. CIT in that case was that entire cost of production of a film “Darna Jaroori hai” amounting to Rs.6,99,73,052/- was allowed and, however, as per Rule-9A if film is released in the last quarter of the previous year, then the expenses claimed in that particular year cannot exceed the receipts. Therefore, CIT invoked power under section 263 of the Act and it was held that since computation of cost of production allowable as per Rule-9A was subject matter of an order of appeal and order was passed by CIT(A), the assessment order had merged with the order of CIT(A) and CIT could not invoke power under section 263 of the Act. Thus it was submitted by Ld. AR that order passed by CIT should be held to be invalid and appropriate relief should be granted to the assessee.

4. On the other hand, it was pleaded by Ld. D.R that so far as it relates to issue of merger of order of AO with the order of Ld. CIT(A), the decision relied upon by AR should be ignored in view of the decision of Hon’ble Bombay High Court in the case of CIT v. Ratilal Bacharilal & Son [2006] 282 ITR 457 he submitted that this decision was not considered in the aforementioned decisions of the ITAT. Ld. DR submitted that Hon’ble Bombay High Court in that decision has held that effect of amendment in section 263 by the finance Act, 1989 is that there will be no merger on the part of the order which was not subject matter of appeal. Therefore, he submitted that the decisions relied upon by Ld. AR being contrary to the aforementioned decision of Bombay High Court should be ignored.

4.1 It was submitted by Ld. CIT, DR that 35% of the gross receipts payable to SPPL were in the nature of overriding title and hence, they are required to be deducted at threshold before computing the profits and in this manner the deduction claimed by the assessee would come down to Rs. 10.58 crores and thus assesse has claimed more deduction against what was available to the assessee. He submitted that this was a unique case and invocation of power under section 263 of the Act was necessary as no other remedy was available with the revenue against the action of the assessee in the manner of calculating the divisible amount so that it had reduced the assessable income in the hands of one of the constituent of AOP.

4.2 In the rejoinder Ld. A.R distinguished the decision of Hon’ble Bombay High Court in the case of Ratilal Bacharilal & Son (supra), he submitted that in the said case the issue was regarding weighted deduction under section 35B which was allowed at Rs.5,63,350/- in place of a sum of Rs.8,90,676/- as claimed by the assessee. The assessee never filed any appeal against the reduction of weighted deduction under section 35B of the Act. Therefore, it was held by the Hon’ble Bombay High Court that the issue regarding 35B was not the subject matter of appeal, hence Ld. CIT was right in exercising jurisdiction under section 263 as AO had wrongly allowed weighted deduction on resortment charges without going into the details of these charges and without making any enquiry as to whether these charges were justified. Therefore, Ld. AR submitted that the decision relied upon by Ld.DR is not applicable to the present case and decisions relied upon by him are very much relevant and cannot be ignored.

4.3 So far as it relates to arguments of Ld. DR that 35% share payable to SPPL was in the nature of overriding title, it was submitted by Ld. AR that it is not even the case of Ld. CIT. He submitted that if such arguments of Ld. DR is accepted then it would mean that assessee AOP does not exist. The AOP is very much in existence and it has been assessed as such and the status of AOP has not been objected even by Ld. CIT. He submitted that it is not even the case of Ld. CIT that why land cost is reduced. He submitted that land cost is part of the agreement and allocation of revenue by the assessee is in accordance with clause-7 of the agreement. Thus Ld. AR submitted that appeal of the assessee should be allowed.

5. We have carefully considered the rival submissions in the light of the material placed before us. The assessee in the present case is an AOP, which is an independent and distinct assessable entity and has been defined as ‘person’ in section 2(31) of the Act. According to section 2(7) assessee means a person by whom any tax or any other sum of money is payable under the Income Tax Act, 1961. The AOP was formed by way of an agreement dated 29/4/2003 between SPPL and RRKC . SPPL was having sole development right as owner of the land bearing 37976.90 sq. meters situated at Kalyani Nagar, Pune out of which it had brought 31026.90 sq.mts. as capital and the said land was to be developed as a project for residential building under the name “Fortaleza” comprising of 354 residential flats in three phases of 153,145 and 56 flats. It has filed its return of income at a sum of Rs. 4,13,610/- on 29/10/07 after claiming deduction of Rs.14,54,47,283/- under section 80 IB (10) of the Act, which was completely disallowed by the AO on the ground that assessee did not fulfill the conditions laid down in section 80 IB(10). The disallowance of deduction under section 80 IB(10) was subject matter of appeal filed by the assessee before Ld. CIT(A) and the issue was decided in favour of the assessee. The said order of the Ld. CIT(A) has been confirmed by ITAT. Ld. CIT has exercised his power under section 263 in respect of assessment order dated 18/12/2009 vide which deduction under section 80 IB(10) was completely denied. The main reasons stated by Ld. CIT for invoking section 263 can be summarized as follows:

5.1 The above reasons have further been explained in the order passed by Ld. CIT. According to Ld. CIT SPPL is not entitled to any deduction u/s. 80 IB (10) and entire amount received by it of Rs.15.11 crores is assessable in the hands of SPPL which will be beneficial to the revenue and, therefore, the order passed by AO has become prejudicial to the interest of revenue. These findings of Ld. CIT are recorded in para 8 of the impugned order.

5.2 Ld. CIT has further rejected the contention of the assessee regarding merger of assessment order with the appellate order passed by Ld. CIT(A).

5.3 Against the aforementioned observations of Ld. CIT, the main case of the assessee is that Ld. CIT is factually wrong in stating that the account of the assessee have not been prepared in accordance with clause-7 of the agreement. Clause-7 of the agreement as well as the manner in which assessee has distributed the revenue are already reproduced in the above part of the order. A plain reading of clause-7 will reveal that out of the amount received from purchasers of the housing unit which are described as representing the gross sales of units inclusive of value of land, SPPL shall be entitled to its share of revenue/income as amount comprising of 35% of such receipts. SPPL was also authorized to withdraw such share of revenue from time to time. Out of balance of 65% of the aforesaid receipts all required and relevant expenditure for the purpose of business of AOP were to be met and whatever net balance remains thereafter shall be determined as the share of revenue/income of RRKC which is also at liberty to actually withdraw such share. Such arrangement was applicable only to the land admeasuring 31,026.90 Sq.Meters contributed by SPPL. Against the above clause the distribution of the assessee amongst its members is as under:-

Total proceeds of the flats are Rs.43,17,68,917/-, 35% of which comes to Rs.15,11,19,120.95. After deducting cost of land of Rs.11,62,00,534/-, which was credited to the account of SPPL the balance of Rs.3,49,18,586.95 was considered as profit of SPPL. Similarly 65% of the gross proceeds of flats comes to Rs.28,06,49,796.05 to which a sum of Rs.1,18,26,666/- added on account of receipts of MSEB and incidental charges and the amount available after deducting profit payable to M/s. SPPL remained at Rs. 29,24,76,462.05. From this amount the expenses incurred as development charges amounting to Rs.18,48,50,281.83 have been reduced from the balance 65% and the remaining amount of Rs. 10,76,26,180.22 is considered as profit of RRKC.

(For figures reference can be made to para No. 3.1 of this order.)

5.4 Against the above mentioned calculation adopted by the assessee in its accounts, it is the case of Ld. CIT that a sum of Rs. 15.11 crore (35% of the gross receipts of residential units) should straightway be reduced from gross receipts and income assessee AOP should be arrived at on the balance receipts. In other words, the eligible amount for deduction under section 80 IB(10) in the hands of AOP should be the net income computed on 65% of the gross receipt of residential unit and if the income is computed in this manner then SPPL will be required to pay tax on the entire receipt of Rs.15.11 crores without having the benefit of deduction under section 80 IB(10); the AOP will also be entitled for lesser deduction than what has been claimed/allowed to it.

5.5 We have carefully considered the version of Ld. CIT in the light of material available on our record. We have carefully gone through the clause-7 of the agreement and the distribution of revenue by the assessee in its accounts. The distribution of the revenue in the account of the assessee is in accordance with intent and purpose of clause-7 of the agreement. According to clause-7 of the agreement SPPL is entitled to 35% share of the gross sale proceeds of the units inclusive of the value of the land. According to distribution in the account of the assessee SPPL has received Rs.15.11 crore which is 35% of gross sale proceeds of the unit amounting to Rs.43.17 crores. A sum of Rs.11.62 crore is credited to the account of SPPL on account of land etc. and Rs.3.49 crore is considered as profit share of SPPL. Out of balance 65%, after including the MSEB and incidental charges and reducing the developmental charges a sum of Rs. 10.76 crore has been considered as profit share of RRKC. Therefore, the distribution of profit made by the assessee between its members is in accordance with clause 7 of the agreement. The interpretation of clause-7 sought to be adopted by Ld. CIT will be against the very intent and purpose for which the assessee AOP has been formed and if such interpretation is adopted it will tantamount to denial of existence of AOP which is not even the case of Ld. CIT. It has already been pointed out that AOP is a separate and distinct assessable entity and is also entitled to claim the deductions permitted under the Income Tax Act provided it fulfill the conditions 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 maximum marginal rate. Therefore, manner in which the AOP distribute its project has no bearing over eligible quantum of deduction under section u/s. 80IB (10) as the eligible quantum will be gross receipts from the project reduced by expenses incurred on the project. It is not even the case of Ld. CIT that assessee AOP is not entitled to get the benefit of deduction under section 80 IB (10). The only objection of Ld. CIT is that distribution of revenue in the account of the assessee is inappropriate and by this manner assessee has been benefited by larger deduction 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 not dependent upon the manner in which the profit has been distributed among the members of AOP but it depend upon the fulfillment of the conditions laid down in that section and also the deduction is available to an undertaking and not to the individual constituent of an undertaking.

5.6 We have also not found any force in the submission Ld. D.R that 35% share allocable to SPPL was in the nature of overriding title. Clause-7 of the agreement which has been sought to be interpreted by Ld. CIT DR in this manner does not indicate that 35% of the gross revenue to be shared by SPPL was in the nature of 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 is neither erroneous nor prejudicial to the interest of revenue on account of allocation of profit between members as per accounts of the assessee as allocation of profit in the accounts of the assessee is in accordance with clause-7 of the agreement and manner of allocation of profit in the account cannot alter the quantum of deduction available to AOP under section 80-IB(10).

6. Moreover, the sum and substance upon which Ld. CIT has invoked section 263 of the Act is the quantum of deduction under section 80 IB(10) of the Act. According to Ld. CIT, by manner adopted by the assessee in its accounts, the assessee has erroneously get excess deduction under section 80 IB (10) of the Act, therefore, the order of AO is erroneous as well as prejudicial to the interest of revenue. It has already been mentioned that in the assessment order AO did not allow the claim of the assessee under section 80 IB(10), therefore, there is no question of assessment order being erroneous or prejudicial to the interest of revenue. Ld. CIT is considering the allowance of deduction under section 80 IB(10) after the appeal effect is given to the assessment order. It is not even the case of Ld. CIT that he is invoking power under section 263 of the Act in respect of order giving the effect to the appeal. Thus, the application of section 263 to the impugned assessment order is against the provisions of law. Therefore, also order under section 263 has to be set aside.

6.1 Now coming to the issue of merger. For this purpose reliance has been placed by the Ld. A.R of the assessee on the aforementioned three decisions of co-ordinate benches of Mumbai ITAT which have been discussed in details in paras 3.7.1 to 3.7.3 of this order. The basis of these decisions is the decision of Hon’ble Calcutta High Court in the case of Oil India Ltd. v. CIT [1982] 138 ITR 836. In the aforementioned case following the decision of Hon’ble Calcutta High Court in the case of Oil India Ltd. (supra), it has been held that the word “matter” is word of wide import and represents a subject or situation that need to be think about, discussed or deal with. It was held by Hon’ble Calcutta High Court that if an assessment is subject matter of appeal then any ground which was held in favour of asssee can also be held against him though the appeal was preferred by the assessee. Such jurisdiction of AAC is undisputable and once the appeal has been preferred before the AAC on any aspect of the quantum, the Ld. CIT cannot assume jurisdiction otherwise an anomalous position would arise. Reference in this regard can be made to the following question referred to Their Lordship of Hon’ble Calcutta High Court:

‘1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the issue of disallowance under section 40(a)(v) was not the subject-matter of an order by the Appellate Assistant Commissioner and hence the Commissioner of Income-tax had the jurisdiction under section 263 on this issue?

In response to the above question the observations of Their Lordship are reproduced below:

“Upon this the three questions as mentioned hereinbefore have been referred to this court. The first question is directed to the aspect whether after the appellate order was passed by the AAC or an appeal had been preferred, the Commissioner had jurisdiction in the facts and circumstances of this case under section 263 of the Act. Now, it is well settled that before an appeal before the AAC certain orders are appealable. It is also well settled that in an appeal preferred before the AAC the whole assessment is open for review by the AAC. He is both the appellate as well as the adjudicating authority. But his jurisdiction is limited to the appeal preferred before him.

There are certain orders which are not appealable before the AAC but certain types of allegations can be taken up in an appeal by separate appeals. Apart from those two cases if an assessment is the subject-matter of appeal then any ground which was held in favour of the assessee can also be held against him though the appeal was preferred by the assessee. This jurisdiction of the AAC is indisputable. In this case the question is whether the quantum of allowance or disallowance or depreciation was the subject-matter of appeal or not. It is true that whether depreciation should be calculated on the basis of 12 months or it should be calculated on the basis of 11 months was not a specific aspect which was agitated before the MC nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed 5 per cent or 2 ½ per cent depreciation and should have directed the ITO to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation, If that is the position, then, in our opinion, once the appeal has been preferred before the AAC on any aspect of the quantum of depreciation, the Commissioner cannot assume jurisdiction, otherwise an anomalous position would arise. The Income-tax Officer has been directed by the AAC to fix depreciation at a certain percentage, indicated by the AAC, without any further direction that it should be confined to 11 months or 12 months. But, now, if further consideration is superimposed by the Commissioner by rectification made by the Income-tax Officer as a result of the order passed by the Commissioner under section 263 then that would be in conflict with the direction given by the AAC, then that order, in our opinion, cannot be the subject-matter before the AAC, then that order, in our opinion, cannot be the subject-matter of an order of revision by the Commissioner. This principle, however, comes where the appeal does not lie from the order of the Income-tax Officer and before the AAC where different kinds of appeal are provided for in the scheme of the IT Act. This principle was enunciated by the Supreme Court in the case of CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130. This was also reiterated in the decision in the case of Jeewanlal (1929) Ltd. v. Addl. CIT [1977] 108 ITR 407 (Cal.) and the decision in the case of Premchand Sitanath Roy v. Addl CIT [1977] 109 ITR 751 (Cal.) the Allahabad High Court reiterated the same principle in the case of JJC Synthetics Ltd v. Addl CIT [1976] 105 ITR 344. Therefore, it appears to us that as the quantum of depreciation was the subject-matter of appeal the Commissioner had no jurisdiction, in the facts and circumstances of this case, to issue the notice under section 263 and to pass any order on this aspect of the matter. Question No. 1 therefore, in our opinion, must be answered in the negative and in favour of the assessee.”

6.2 Applying the above principle on the facts of the present case it can be held that once deduction under section 80 IB(10) was subject matter of appeal before Ld. CIT(A), it covered all aspects of the matter relating to deduction under section 80 IB(10) and the order of AO on that issue had merged with the order of CIT(A). Therefore, according to clause (c) of Explanation to section263(1), Ld. CIT was debarred from exercising jurisdiction u/s.263 as the subject matter of the appeal was deduction under section 80 IB (10) of the Act. The decisions of ITAT Mumbai in the aforementioned three cases and the decision of Hon’ble Calcutta High Court in the case of Oil India Ltd. (supra) support this view.

6.3 So far as it relates to contention of Ld. DR that in view of decision of Hon’ble Bombay High Court in the case of Ratilal Bacharilal & Sons (supra) the aforementioned three decisions of ITAT Mumbai should be ignored, we find that the said decision does not support the case of the revenue as it is distinguishable. The facts in the said case were that the assessee for assessment year 1980-81 was assessed by an order dated 23/02/1981. In the assessment order, the ITO had allowed weighted deduction under section 35B at Rs. 5,63,350/- as against a sum of Rs. 8,90,676/- claimed by the assessee. The assessee filed an appeal against the said assessment order on the issues other than weighted deduction and the appeal was decided by Ld. CIT(A) vide order dated 25/11/1981 and order of AO was upheld. Ld. CIT invoked section 263 in respect of assessment order dated 23/2/1981. According to Ld. CIT assessee was not entitled to deduction under section 35B which was claimed on reassortment charges and AO without going into the details of these charges and enquiry had allowed weighted deduction under section 35B. The assessee filed an appeal against the order passed by Ld. CIT under section 263. It was submitted that section 263 could not be invoked since the assessment order was the subject matter of appeal before Ld. CIT(A) and thus the assessment order had merged with the order of Appellate Authority. The Tribunal came to the conclusion that CIT(A) having expressed his views impliedly applied his mind to the question of grant of allowance under section 35B, therefore, order had merged with the order of CIT(A). On these facts, it was found by Hon’ble High Court that since assessee did not prefer any appeal against the issue of weighted deduction, the assessment order did not merge with assessment. Thus, the facts of that case are entirely different. The assessee had claimed the weighted deduction which was allowed to him partly and on the remaining disallowance assessee did not prefer any grievance in the appeal filed before CIT(A). Therefore, weighted deduction under section 35B was never subject matter of appeal filed by the assessee before CIT(A). The facts in the present case are entirely different. In the present case deduction under section 80 IB(10) was denied in its entirety and this was made subject matter of appeal and CIT(A) has held that assessee is entitled to get deduction under section 80 IB(10). Therefore, the decision relied upon by Ld. D.R is not applicable to the present case.

6.4 In view of the above discussions, on merit as well as on issue of merger we hold that power under section 263 has been wrongly invoked. The assessment order passed by AO was neither erroneous nor prejudicial to the interest of revenue. The powers under section 263 having been invoked contrary to law, the impugned order passed by Ld. CIT is quashed.

7. In the result, the appeal filed by the assessee is allowed.