Benefit of deduction u/s 80IB(10) available on profit on transfer of flat to partners

ITO Vs Lakshmi Brick Industries (ITAT Chennai)

ITAT Chennai held that profit on transfer of flats to partners is computable in the hands of firm, however, benefit of deduction u/s 80IB(10) of the Income Tax Act duly available even on transfer of flats to the partners by way of MOU.

Facts- The assessee is a partnership firm engaged in the business of land development and construction of residential buildings. During the course of assessment proceedings, AO noticed that the assessee has transferred 26 flats measuring 30,313 sq.ft. by way of unregistered MOU dated 20.11.2008 to its partners. Similarly, the assessee has transferred another 20 flats measuring 24,648 sq.ft. by way of unregistered MOU dated 08.10.2009 to its partners. The first transfer of 26 flats is supported by necessary evidence including payment of service tax etc. The second lot of 20 flats transferred during the impugned assessment year is not supported by any evidences.

Therefore, AO called upon the assessee to explain as to why transfer of flats to its partners cannot be treated as sales and consequent income should be assessed for tax. AO, after considering relevant submissions of the assessee and also taken note of certain facts observed that, the assessee could not substantiate transfer of 20 flats measuring 24,648 sq.ft. to its partners and corresponding income offered to tax in the hands of the firm. Further, in absence of corroborative evidence to support MOU dated 08.10.2009 coupled with the fact that the asset in the form of stock in trade was reflected in the financials of the firm up to A.Y. 2013-14, the contentions of the assessee cannot be acceded and thus, sale value of 20 flats has been assessed in the hands of the firm.

CIT(A) directed AO to allow the benefit of exemption claimed u/s 80IB(10) of the Act. Being aggrieved, revenue has preferred the present appeal.

Conclusion- It is clear that the assessee is eligible for 100% deduction towards profit derived from housing project u/s. 80IB(10) of the Act. In light of above fact, if you examine transfer of 20 flats by way of MOU dated 08.10.2009 to partners, and taxability of profit from said transfer in the hands of the firm, no doubt transfer of 20 flats to partners by way of MOU should be treated as sales in the hands of the firm and consequent profit should be offered to tax, because the assessee has classified properties as stock in trade in the hands of the firm. But fact remains that, even if you compute profit from transfer of 20 flats to partners in the hands of the firm, but because the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act for 100% profit derived from housing project, the assessee could very well claim the deduction u/s. 80IB(10) of the Act towards profit, if any, derived from transfer of 20 flats to its partners by way of MOU dated 08.10.2009.

Since, the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act, we are of the considered view that, whatever profit computed by the AO in the hands of the firm, consequent to transfer of 20 flats to partners by way of MOU dated 08.10.2009, is also eligible for deduction u/s. 80IB(10) of the Act and thus, we direct the AO to compute profit towards transfer of 20 flats to its partners and further, allow benefit of deduction u/s. 80IB(10) of the Act to entire profit derived from transfer of flats to its partners.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals), Chennai, dated 21.09.2020 and pertains to assessment year 2014-15.

2. The revenue has raised the following grounds of appeal:

“1. The order of the learned CIT(A) is erroneous in law and facts and opposed to the facts and circumstances of the case.

2. CIT(A) erred in deleting the addition made towards profit on sale of 20 flats not disclosed in the P& L a/c.

3. CIT(A) ought to have noted that the flats were sold by the firm and not by the partners as evident from the registered sale deed for sale of UDS in lands. He erred in ignoring the fact that the consideration was also received by the firm beg the owner of transferred asset and hence the profit therefrom was rightly assessed in the hands of assessee firm by the AO.

4. CIT(A) erred in giving evidentiary Value to the MOU dated 08.10.2009 even though it is not registered.

5. CIT(A) erred in holding that since AO accepted the transfer through MOU dated 20.11.2008 as genuine, he ought to have accepted the transfer through MOU dated 08.10.2009 also. CIT(A) ought to have noted that sales though MOU dated 20.11.2008 is supported by declaration of such sales contemporaneously before the service tax authorities whereas there is no such evidence in support of the alleged MOU dated 08.10.2009 and such transaction not disclosed for service tax purpose; the facts are not identical.

6. CIT(A) erred in holding that attachment of property by I.T. Department is a reason for non-payment of service tax. He ought to have noted that according to assessee, transfer took place by way of MOU dated 08.10.2009 whereas attachment by I.T. Department is much later ie. on 24.12.200 and hence assessee ought to have paid service tax, of which liability fell on 08.10.2009.

7. CIT(A) erred in relying on the decision of the Apex Court in the case of Bankipur Club Ltd, when facts are distinguishable.

8. CIT(A) erred in granting deduction u/s80IB(l0) when role of assessee is only as a land owner and not as a developer /builder.

9. CIT(A) ought to have noted that the decision of ITAT has not become final and appeal is pending before the High Court.

10. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

3. The brief facts of the case, are that the assessee is a partnership firm engaged in the business of land development and construction of residential buildings. The appellant firm filed its return of income for the assessment year 2014-15 on 30.09.2014, declaring total income of Rs. 14,01,020/-, after claiming deduction u/s. 80IB of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), towards profit derived from housing project for Rs. 81,36,667/-. During the course of assessment proceedings, the AO noticed that the assessee has transferred 26 flats measuring 30,313 sq.ft. by way of unregistered MOU dated 20.11.2008 to its partners. Similarly, the assessee has transferred another 20 flats measuring 24,648 sq.ft. by way of unregistered MOU dated 08.10.2009 to its partners. The first transfer of 26 flats is supported by necessary evidence including payment of service tax etc. The second lot of 20 flats transferred during the impugned assessment year is not supported by any evidences.

Therefore, The AO called upon the assessee to explain as to why transfer of flats to its partners cannot be treated as sales and consequent income should be assessed for tax. In response, the assessee submitted that it has transferred 20 flats measuring 24,648 sq.ft. to its partners and said transfer has been made for book value and thus, even if you consider said transfer as sales, there is no profit from the transfer and thus, the question of making additions does not arise. The assessee, further contended that assuming for a moment, profit derived from transfer of flats to partners at cost is assessable to tax, even then there is no tax effect because the assessee is claiming benefit of deduction u/s. 80IB(10) of the Act for 100% profit and thus, there is no question of making any addition. The AO, after considering relevant submissions of the assessee and also taken note of certain facts observed that, the assessee could not substantiate transfer of 20 flats measuring 24,648 sq.ft. to its partners and corresponding income offered to tax in the hands of the firm. Further, in absence of corroborative evidence to support MOU dated 08.10.2009 coupled with the fact that the asset in the form of stock in trade was reflected in the financials of the firm up to assessment year 2013-14, the contentions of the assessee cannot be acceded and thus, sale value of 20 flats has been assessed in the hands of the firm. The relevant findings of the AO are as under:

The submissions made by the assessee are carefully considered. The first unregistered MOU dated 20/11/2008 by which 26 flats measuring 30,313 Sq. feet is transferred by the firm to its partners is supported by corroborative evidence in the form of payment of service tax. The service tax is paid by the firm on account of transfer of 26 flats to partners of firm who happens to be the family members. But the fact of the matter is the second unregistered MOU dated 8/10/2009 by which 20 flats measuring 24648 Sq. Feet is transferred by the firm to its partners is not supported by any corroborative evidence so as to substantiate the document. It is pertinent to mention that assessee has not paid any service tax on the 20 flats transferred to partners by the firm on the basis of purported MOU dated 8/10/2009.

In the absence of any corroborative evidence to support the MOU dated 8/10/2009 coupled with the fact that the assets in the form of stock in trade were reflected in the financials of the firm until A Y 2013-14 the contentions of the assessee cannot be acceded to. Accordingly the sale value of 20 flats is assessed in the hands of the firm. The details are as under:

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has filed detailed written submissions on the issue and explained that merely because MOU dated 08.10.2009 is not supported by payment of service tax, it cannot be held that said MOU is not genuine and further, sale value of flats transferred to partners cannot be brought to tax. The assessee, further contended that assuming for a moment, profit derived from transfer of flats to partners is assessable in the hands of the firm, but fact remains that the firm is enjoying the benefit of exemption u/s. 80IB(10) of the Act for 100% of the profit and thus, even if you assess profit, the assessee can avail benefit of exemption and thus, the question of making additions does not arise.

5. The Ld. CIT(A), after considering relevant submissions of the assessee and also by following certain judicial precedence including the decision of Hon’ble Supreme Court in the case of CIT vs Bankipur Club Ltd, dated 08.05.1997, observed that transfer of 20 flats measuring 24,648 sq.ft. by way of MOU dated 08.10.2009 is genuine and further, the AO is erred in disbelieving the transfer of 2^nd batch of 20 flats for the mere reason of non-payment of service tax. Therefore, directed the AO to consider the transfer of 20 flats as genuine and re­compute the business income by excluding the sale proceeds.

In so far as, claim of exemption u/s. 80IB(10) of the Act, the CIT(A) by following the decision of ITAT, ‘B’ Bench in assessee’s own case for assessment years 2007-08 to 2009-10 in ITA Nos. 1644 to 1647/Mds/2012, observed that the assessee is eligible for deduction u/s. 80IB(10) of the Act, in respect of profit derived from housing project and thus, directed the AO to allow the benefit of exemption claimed u/s. 80IB(10) of the Act. The relevant findings of the CIT(A) are as under:

“4.1.3 I have considered the contents of the assessment order and the submissions of the assessee firm carefully. There are two sets of transfer of flats by the firm to its partners, one in November 2008 of 26 flats measuring 30,313 sq.ft, vide MOU dated 20.11.2008; and the second one in October 2009 of 20 flats measuring 24,648 sq.ft, vide MOU dated 08.10.2009. The AO has accepted the transfer of the first batch of 26 flats, as a genuine one, solely on the ground that it was supported by the corroborative evidence of payment of service tax. However, the AO has treated the transfer of the second batch of 20 flats as non-genuine, only on the ground that it was not supported by the corroborative evidences like payment of service tax.

4.1.4 As explained by the assessee, both sets of transfers of flats (i.e. 26 flats and 20 flats) by the firm to its partners, were by way of MOUs only. The only difference was that in the first case there was payment of service tax and in the latter case no such service tax was paid. As per the service tax rules, existing for F.Y.2009-10, an assessee (firm) was required to remit the service tax quarterly, i.e. on or before 6 July (for first quarter), 6 October (for second quarter), 6 January (for third quarter), 31st March (for fourth quarter). Since the assessee transfer of second batch of flats (20 flats) was on 09.10.2009, it falls in the 3° quarter wherein the assessee was required to remit the service tax on or before 6 January 2010. But before the expiry of the due date the Income Tax Department has attached all the 50 flats. Any action after the attachment of the property by the Income Tax will amount to contempt of the IT provisions. Hence the assessee’s claim that it could not pay the service tax as it would amount to violation of IT provisions, cannot be ignored. The IT attachment of the property could be considered as a reason preventing the assessee from paying the service tax. Therefore, non-payment of service tax, in view of the IT attachment, cannot be a reason for disbelieving the transfer of the 20 flats to the partners. Further, when an assessee claims two transactions of similar nature, and the department accepts one transaction as genuine, the other transaction also should be considered as genuine, unless the revenue proves the contrary. In any case, as the assessee was prevented Dy a genuine reason from paying the service tax, mere absence of payment of service tax should not be a reason for denying the transaction.

4.1.5 In this context, the returns of individual partners have to be examined. When the flats were finally sold by them to the outsiders, the entire sale proceeds of 46 flats (i.e. 26 flats + 20 flats) were taken into account in the respective hands of the partners and offered to tax. Thus, the sale proceeds of all 46 flats have been offered to tax in the respective partners’ returns that too in A.Y.2014-15. Therefore, when the sale proceeds were considered and offered to tax in the hands of the partners, the transaction of ‘transfer of flats to partners’ is to be considered as genuine. It is. also important to mention here that when the assessee (firm) is eligible for 100% deduction u/s.801B(10) of the Act, which was also allowed by the Hon’ble ITAT as early as 2012, there was no need for the assessee for any tax planning, that too when the partners are not exempt from tax. Therefore, it is not possible to presume that the assessee had ulterior motives in designing / transferring the flats to the partners either in 2008 or 2009. Further, when the ITAT decision allowing 100% exemption in the hands of the firm, it is also not possible to presume that the transfer of46 flats (i.e. either the entire 46 flats or the second batch of 20 flats) was an afterthought, to avoid tax in the hands of the firm.

In continuation of the same line of thought and principle it is a well known judicial maxim that one cannot make a profit from himself. In a transfer from firm to partners, can the firm make profit from the partners ? Questions of similar nature have arisen in different contexts, but the principle is the same. Can contributors derive profit from contributions made by them, which can only be returned to themselves. Certain tests have been advocated in the decision of Hon’ble Supreme Court in the case of CIT vs. Bankipur Club Ltd.

4.1.6. In the said decision the apex court relied upon a very early decision in the case of The English and Scottish Joint Cooperative Wholesale Society Ltd. v. CIT where the Privy Council has observed that there are three important tests /conditions to prove the existence of mutuality. These tests are :

(i) Oneness of the contributors to the fund and the recipients from the fund : No person ought to contribute to the common fund without having the entitlement to participate as a beneficiary in the surplus thereof The moment such a transaction opens itself to non member, either in the contribution or the surplus, the uniformity of identity is impaired and the transaction assumes the taint of a commercial transaction.

(ii) Entity constituted merely for the convenience and common benefit of the members: presupposes the contributors and participators to be two separate classes, but there is oneness or equality in the matter of sharing of surplus/profits. There is no interference of any alien commercial entity in the transaction (British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201).

(iii) Impossibility that contributors derive profit from the contributions made by them to a fund which could only be expended or returned to themselves: The third test of mutuality requires that the purported mutual operations must be marked by an impossibility of profits. In this case, it is clear that the excess fund remaining after meeting the expenses, shall be distributed amongst the partners or the same must be adjusted in the cost of next year. Thus, the company should operate on non profit mechanism.

Hence, even if the profit occurs in the hands of the firm, the same is passed on to the partners only. In this case, the gains were exempt u/s.80IB.

The peculiar circumstances prevailing in the instant case, induced the partners to transfer the flats to them individually and dissolve the firm. The same was disputed by attachment proceedings by the department. However, that will not alter any of the material facts discussed above.

4.1.7 In view of the above reasons, I am of the considered opinion that the transfer of all 46 flats (i.e. 26 flats measuring 30,313 sq.ft. transferred on 20.11.2008and 20 flats measuring 24,648 sq.ft. transferred on 08.10.2009) is genuine. The AO was not justified in disbelieving the transfer of second batch of 20 flats for the mere reason of non-payment of service tax. Therefore the AO is directed to consider the transfer of al146 flats (i.e. 26 flats transferred on 20. 11.2008and 20 flats transferred on 08.10.2009) as genuine transfers and recompute the business income by excluding the sale proceeds of all46 flats (i.e. 26 flats + 20 flats) claimed as transferred to the partners. This ground of appeal is allowed.

4.2 Claim of exemption u/s.8OIB(10) of the Act: The next issue is regarding the disallowance of assessee’s claim of deduction u / s. 80IB(10) of the Act. The assessee firm in its return of income med, claimed 100% deduction of Rs.81,36,667/- u/s.80-IB(10) of the Act, being the profits derived from the housing project. The Assessing Officer, in his assessment order, denied the deduction claimed u/s.80IB(l0) of the Act, on the ground that the assessee 1S a mere !and contributor in the project and hence not eligible for the deduction, This issue is a recurring issue coming from the earlier years, The ITAT ‘B’ Bench, Chennai, while disposing the appeals of A.Ys.2007-08 to 2009-2010, vide order in ITA Nos. 1644 to 1647 (Mas,) /2012(Dept) and ITA Nos.1662 to 1665 (Mds)/2012 (Assessee) dated 22.11.2012, has held that the assessee is eligible for deduction u/s.80IB(l0) of the Act,

Therefore, respectfully following the decision of the ITAT in assessee’s own case of earlier years, I hold that the assessee is eligible {or 100% deduction u/s.80IB(10) of the Act, on the income derived from the housing project, and the AO is directed to allow the same. This ground of appeal is allowed.”

6. The Ld. DR, submitted that the Ld CIT(A) erred in holding that since the assessee accepted the transfer of 26 flats through MOU dated 20.11.2008 as genuine, he ought to have accepted the transfer of 20 flats through MOU dated 08.10.2009 also genuine, without appreciating fact that first transfer of 26 flats is supported by declaration of such sales to contemporaneously before the Service Tax Authorities, whereas, the second transfer of 20 flats is not supported by any evidence. The Ld. DR, further referring to the order of the CIT(A) submitted that the findings of the ld. CIT(A) that because of attachment of property by IT Department, the assessee could not pay service tax is not substantiated, because the assessee entered into MOU with its partners on 08.10.2009, whereas attachment of property to IT Department is much later i.e., on 24.12.2009. Therefore, reasons given by the assessee that taking declaration from Service Tax Authorities against attachment is unproved. The Ld. DR, further submitted that the Ld. CIT(A) erred in holding that since the partners of firm had offered income from sale proceeds of these flats in their individual hands, addition in the hands of the firm is not warranted. However, fact remains that right income should be assessed in the hands of right person is held by the Hon’ble Apex Court in the case of CIT vs Atchaiah (218 ITR 239) and S.P Jaiswal vs CIT (224 ITR 619). The ld. DR, further submitted that the CIT(A) erred in following the decision of Hon’ble Apex Court in the case of Bankipur Club Ltd (supra), without appreciating fact that said case was that of principle of mutuality applicable to members of the club, whereas, the facts in this case is transfer of asset by firm to partners. The Ld. CIT(A) erred in holding that transfer of assets from firm to partners will not result in any profit ignoring the provisions of section 45(4) of the Act. Therefore, ld. DR submitted that ld. CIT(A) completely erred in holding that transfer of flats in the hands of the firm is not taxable. As regards deduction claimed u/s. 80IB(10) of the Act, the Ld. DR, fairly agreed that the Department has not accepted order passed by the Tribunal and has preferred further appeal before the Hon’ble High Court of Madras, which is pending for adjudication and thus, the issue may be decided in accordance with law.

7. The Ld. Counsel for the assessee, on the other side supporting the order of the CIT(A), submitted that there is no dispute with regard to the fact that the assessee has transferred 20 flats to its partners at book value without there being any profit and thus, even assuming for a moment, profit from transfer of flats should be assessed in the hands of the firm, but in reality there is no profit from the transactions. He further submitted that, the assessee has explained the reasons for not considering transfer of flats to its partners as sales, and said transfer has been explained with necessary evidences. The CIT(A), after considering relevant facts has rightly deleted additions made by the AO and their order should be upheld. In so far as deduction u/s. 80IB(10) of the Act is concerned, the issue is covered by the decision of the ITAT in assessee’s own case in earlier assessment years and said findings has been approved by the Hon’ble Jurisdictional High Court of Madras in TCA No. 387 to 394 of 2013 dated 17.03.2021.

8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts with regard to impugned dispute are that the appellant firm has transferred 20 flats measuring 24,648 sq.ft. by way of unregistered MOU dated 08.10.2009 to its partners. The assessee has not offered any income from transfer of flats to its partners, on the ground that said transfer does not give rise to any income in the hands of the firm. According to the assessee, partners have declared income from sale of flats in their individual hands and also paid highest rate of tax, which is applicable to firm and thus, there is no revenue loss from the transfer. We find that the assessee had transferred 20 flats by way of unregistered MOU to its partners and claimed that said transfer does not give rise to any income and consequent income cannot be assessed in the hands of the partnership firm. In our considered view, there is no merit in the arguments advanced by the Ld. Counsel for the assessee, that transfer of flats to partners by way of MOU does not give rise to any income in the hands of the firm, because as per provisions of section 45(4) of the Act, transfer of capital asset by firm to partners is a transfer which need to be dealt in accordance with law. Assuming for a moment, what was transferred by the assessee firm is not a capital asset, but stock in trade, when the assessee has treated asset as stock in trade, then sale of said asset to partners is as good as sales to outsiders and the assessee needs to consider profit derived from sales in the hands of the firm. In our considered view, to this extent the findings of the facts recorded by the Ld. CIT(A) that transfer of flats to partners by way of unregistered MOU does not give rise to any income in the hands of the firm and reasons given by the CIT(A) to reach said conclusion is not correct.

9. Having said so, let us come back to whether is there any tax impact on transfer of flats by the firm to its partners, more particularly when the firm is enjoying the benefit of exemption u/s. 80IB(10) of the Act. Admittedly, the assessee is claiming deduction u/s. 80IB(10) of the Act, towards entire profit derived from housing project. Although, the AO has denied benefit of deduction u/s. 80IB(10) of the Act right from beginning, but co-ordinate bench of ITAT in assessee’s own case for assessment years 2007-08 to 2009-10 in ITA Nos. 1644 to 1647/Mds/2012 had considered an identical issue and held that the assessee is eligible for deduction u/s. 80IB(10) of the Act, in respect of 100% profit derived from housing project. The Hon’ble Jurisdictional High Court of Madras in TCA Nos. 387 to 394 of 2013 dated 17.03.2021, has upheld the findings of the Tribunal in allowing the benefit of deduction u/s. 80IB(10) of the Act towards profit derived from housing project. From the above, it is clear that the assessee is eligible for 100% deduction towards profit derived from housing project u/s. 80IB(10) of the Act. In light of above fact, if you examine transfer of 20 flats by way of MOU dated 08.10.2009 to partners, and taxability of profit from said transfer in the hands of the firm, no doubt transfer of 20 flats to partners by way of MOU should be treated as sales in the hands of the firm and consequent profit should be offered to tax, because the assessee has classified properties as stock in trade in the hands of the firm. But fact remains that, even if you compute profit from transfer of 20 flats to partners in the hands of the firm, but because the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act for 100% profit derived from housing project, the assessee could very well claim the deduction u/s. 80IB(10) of the Act towards profit, if any, derived from transfer of 20 flats to its partners by way of MOU dated 08.10.2009. Since, the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act, we are of the considered view that, whatever profit computed by the AO in the hands of the firm, consequent to transfer of 20 flats to partners by way of MOU dated 08.10.2009, is also eligible for deduction u/s. 80IB(10) of the Act and thus, we direct the AO to compute profit towards transfer of 20 flats to its partners and further, allow benefit of deduction u/s. 80IB(10) of the Act to entire profit derived from transfer of flats to its partners.

10. In this case, although we do not appreciate the findings of the ld. CIT(A) in allowing relief to the assessee on the aspect of taxability of income in the hands of the firm, but yet the assessee is entitled for deduction u/s. 80IB(10) of the Act on entire profit and further, the CIT(A) has allowed deduction claimed u/s. 80IB(10) of the Act to entire profit, in our considered view, there is no error in the reasons given by the ld. CIT(A) to delete additions made by the AO towards profit derived from transfer of flats to its partners. Thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss appeal filed by the revenue.

11. In the result, appeal filed by the revenue is dismissed.

Order pronounced in the court on 08^th February, 2023 at Chennai.