IN THE ITAT HYDERABAD BENCH ‘B’
Deputy Commissioner of Income-tax
SMR Builders (P.) Ltd.
IT APPEAL NOs. 671 (HYD.) OF 2010 and
1921 & 1948 (HYD.) OF 2011
[ASSESSMENT YEARs 2005-06 & 2006-07]
JULY 12, 2012
Chandra Poojari, Accountant Member –
ITA No. 671/Hyd/2010 and ITA No. 1948/Hyd/2011 are by the Revenue and ITA No. 1921/Hyd/2011 is by the assessee directed against different orders of the CIT(A), Guntur for assessment years 2005-06 and 2006-07. Since the above appeals involve common issues, they are clubbed, heard and are being disposed of by this common order, for the sake of convenience.
2. Firstly, we will take up Revenue appeals in ITA No. 671/Hyd/2010 and ITA No. 1948/Hyd/2011. The Revenue raised the following grounds of appeal:
“ITA No. 671/Hyd/2010
2. The CIT(A) should have upheld the order passed by the AO as the assessee sold semi-finished unit.
3. The CIT(A) should have upheld the order passed by the AO as the assessee has not maintained any separate accounts in respect of ‘SMR Metro Polis’ project due to which the eligible deduction u/s. 80IA could not be worked out.
ITA No. 671/Hyd/2010
1. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though the semi-finished flats are registered in favour of the purchasers.
2. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though contract for further construction of flats are being entered from the purchasers of the flats.
3. The CIT(A) ought to have held that the assessee is only a contractor and hence disallowed the deduction as per the amendment to section 80IB(10).
4. The CIT(A) ought to have considered only the year end balance for disallowance of interest as on 31st March and should have considered the opening balance and the utilisation of funds on transaction to transaction basis as held in Income-tax Act, 1961. No. 21/Hyd/2011 for the A.Y. 2007-08 in the case of M/s. Ambience Properties Ltd., by Hyderabad A Bench of the Hon’ble ITAT.”
3. The facts relating to the both the assessment years are common in nature and hence, we consider the facts relating to the assessment year 2005-06. In this assessment year the Assessing Officer completed the assessment disallowing the assessee’s claim u/s. 80IB of the Act. The assessee had claimed deduction of Rs. 23,63,612 as deduction u/s. 80IB of the Act in respect of the residential housing projects “SMR Metropolis”. The assessee’s claim u/s. 80IB(10) was for this project consisting of residential units ranging from 890 sq. feet to 1400 sq. feet of built up area. After verifying the details filed during the assessment proceedings, the Assessing Officer denied the assessee’s claim for deduction u/s. 80IB(10).
4. The Assessing Officer held that from the details furnished it was seen that the assessee had sold flats in a semi finished stage. After verifying the sale deeds executed by the assessee company in favour of the transferee of flats, the Assessing Officer held that it was clear from the sale deed that the assessee company sold undivided share of land with super structure of semi finished build up area for a certain consideration. The Assessing Officer held that the assessee did not satisfy the condition prescribed in the section i.e., the assessee did not sell complete residential units in all respects. The Assessing Officer held that semi finished structures can never be considered as residential units since a residential unit is a place where a person can live. In this case, on the same date when the sale deed was executed a construction agreement was also entered into with the transferee for further construction of the same flats by the builder company itself. That is the company undertook to complete the flat which was purchased by the transferee in the semi finished stage. From this the Assessing Officer concluded that what was sold by the assessee company was only semi finished residential units which would not make the company eligible for claiming deduction u/s. 80IB of the Act.
5. The Assessing Officer further observed that the assessee was asked to produce the accounts maintained in respect of “Metropolis Project”, but these accounts were not produced and that the Authorised Representative had submitted that only single material consumed accounts were maintained for all projects. The Assessing Officer held that the provisions of Sec. 80IB require the accounts of the undertaking in respect of which the deduction is claimed, to be audited and the audit report to be tiled along with the return of income. The Assessing Officer concluded that since the appellant company did not maintained any separate accounts in respect of the eligible project it was not possible to work out the deduction available to it u/s. 80IB and therefore it was not eligible for the deduction u/s. 80IB(10) of the Act.
6. Against this the assessee went in appeal before the CIT(A) and the CIT(A) allowed the claim of the assessee u/s 80IB of the I.T. Act. Against this the revenue is in appeal before us.
7. The learned DR submitted that as can be seen from the computation statement filed along with the return of income, the assessee claimed Rs. 23,63,612/- towards deduction u/s 80IB of the IT Act. When asked as to how the assessee company is eligible for such deduction, it was submitted that the assessee was eligible for deduction u/s 80IB in respect of Residential Housing Project “SMR Metro Polis” at Madeenaguda Village, Serilingampally Mandal and Municipality, Ranga eddy District. It was also mentioned that total land area of the project is Rs 1.4 acres and the housing project was approved by the local authorities i.e. Hyderabad Urban Development Authority and Serilingampally Municipality on 06.05.1999. Further it was also mentioned that the built up area of each residential flat is ranging from 890 sq. ft to 1400 sq. ft.
8. The learned DR submitted that the assessee is in the business of construction and sale of flats. During the accounting year, the assessee under took development of residential project by name “SMR Metro Polis”. To make one eligible for deduction Section 80IB in respect of House Projects the following conditions should be complied with:
(i) The development and construction of the housing project should commence after 01.10.1998;
(ii) The plot area on which housing project developed should be minimum area of 1 acre;
(iii) The built up area of each unit should not exceed 1,500 sq. ft.
9. The DR further submitted that from the details furnished it is seen that the assessee sold the flats in semi finished stage. During the course of assessment proceedings copies of certain Sale Deeds executed by the assessee company in favour of transferees of flats are obtained and verified. From the description mentioned ‘in the Sale Deeds it is clear that the assessee company sold undivided share of land with superstructure of semi finished built up area for certain consideration. Thus, from the details it can be seen that the assessee company did not sell complete residential unit in all respects. But the provision clearly mentions that the assessee should sell only residential units to make themselves eligible for deduction u/s 80-IB. He submitted that semi finished structure can never be called as a residential unit. Unless it is completed in all respects the semi finished unit cannot be called residential unit. A residential unit is a place where a person can live in. In that context a semi finished unit where a person cannot live, cannot be identified as a residential unit. It may also to be mentioned after selling the property, the assessee entered into “construction agreement” with the transferees for further construction of the same flats. He drew our attention to an example which is as follows:
“The assessee company executed a sale deed on 09.06.2004 in favour of Sri Niraj Kumar. The property sold was undivided share of 47 sq. yds and Flat No. 408 consisting of 1,065 sq. ft of semi finished built up area. The sale consideration mentioned was Rs. 6 lakhs. The Sale Deed was registered on 11.06.2006. The assessee company also entered into a “construction agreement” with Sri Niraj Kumar on 19.05.2004. As per the terms and conditions of the construction agreement, the assessee company has to carry on further construction of the flat for a consideration of Rs. 4,47,200/- The condition is that the assessee company has to under take and complete the flat which was purchased by the transferee in semi finished stage.”
10. The learned DR submitted that from the above, it is clear that the transferee purchased flat along with undivided share of land in semi finished stage through the Sale Deed. The transferee entered into an agreement with the assessee company (the builder) for completion of the flat by paying substantial amount. This is an agreement executed on stamp paper without any registration. From the above, it is clear that the assessee sold the flats in semi finished stage and same are incomplete residential units. But as per Section 80-IB, the assessee company should sell only residential units if they want to make themselves eligible for claiming deduction u/s 80-IB. Thus in this case the assessee did not fulfil the conditions required u/s 80-IB of the LT. Act 1961.
11. The learned DR submitted that during the course of scrutiny proceedings when asked for accounts maintained in respect of “Metro Polis Project”, the AR ‘stated that they have maintained only single material consumed account for all projects and the details of materials consumed the each project can not be ascertained. In this connection it is to be mentioned that sub-section (13) of Section 80-IB clearly states that sub-section (5), (7) to (12) of Section 80IA shall apply to the eligible business under this section. Sub-section (7) of Section 80-IA clearly states that for the purpose of determining the quantum of deduction the same should be computed as if such eligible business was the only source of the income of the assessee during the previous year. For clarity the relevant sub-section is reproduced hereunder:-
“sub-section (7) [* * *] The deduction under sub-section (1) from profits and gains derived from an [***] undertaking shall not be admissible unless the accounts of the [* * * ] undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income the report of such audit in the prescribed form duly signed and verified by such accountant”
12. The DR submitted that in the assessee’s case, the assessee did not maintain any separate accounts in respect of eligible project i.e. SMR Metro Polis. This is clear from the confirmation made by the assessee that they maintained single account for all the projects. In the absence of such separate accounts for eligible business it is not possible to work out the deduction u/s. 80IA. Further as the assessee did not comply with the condition laid down u/s 80IA(7) of the IT. Act, the assessee is not eligible for deduction u/s 80IB of the LT. Act.
13. The learned AR submitted that the assessee company filed its return declaring total income of Rs. 1,46,14,388. It claimed deduction of Rs. 23,63,312 u/s. 80IB of the I.T Act, 1961. During the course of assessment proceedings, it was explained to the Assessing Officer that the deduction was claimed in respect of a residential housing project called “SMR metropolis” situated at Madinaguda village, Serilingampally Mandal & Municipality. It was also explained that the total land area of the project was 1.4 acres and that the housing project was approved by the Hyderabad Urban Development Authority and the Serilingampally Municipality on 6-5-1999. Built-up area of each residential unit was from 890 Sq. ft to 1400 Sq. ft. On the strength of these facts, the assessee claimed deduction u/s. 80IB(10) of the I.T Act. The Assessee executed sale deeds in favour of the purchasers of flats and registered these sale deeds with the Sub-registrar. From the narration in these sale deeds the Assessing Officer concluded that the assessee sold the flats in semi-finished stage i.e., the assessee company sold undivided share of land and together with semi-finished superstructure. On account of this fact, he concluded that the assessee did not sell residential units. He was of the view that Sec. 80IB requires sale of residential units, that a residential unit is a place where a person can live in and in that context a semi finished residential unit cannot be called a residential unit. He denied the deduction claimed by the assessee u/s. 80IB(10).
14. The AR submitted that the assessee filed appeal before the Commissioner of income Tax (Appeals). It was submitted that the Assessing Officer noticed that the assessee entered into a “construction agreement” with the transferee for further construction of the same flats. As an example the Assessing Officer cited a specific case in which the details were as under:
“Assessee executed a sale deed on 9-6-2004 in favour of one Sri Niraj Kumar whereby undivided share of 47 sq. yds together with semi-finished flat of 1065 sq. ft was sold for Rs. 6 lakhs. The deed was registered on 11-06-2004. The assessee also entered into a “construction agreement” with the same person on 19-5-2004 (i.e., prior to the execution of the sale deed itself). As per this agreement the assessee was to carry on further construction of the flat for a consideration of Rs 4,47,200.”
15. The AR submitted that the title to the property to an apartment is transferred through a registered document for undivided share of land. Section 80IB entitles deduction for profits derived from developing and building housing projects. The development activity involves conceptualization of a project, determining cost of the project, arranging debt and equity, getting appropriate approvals etc. Building involves the act of carrying out all physical activities that bring into existence a tangible building in existence. It was submitted that the facts recorded by the assessing officer actually demonstrates compliance or fulfilment of the same. The requirement of Sec. 80IB is that profits should be derived in the previous year relevant to any assessment year from developing and building housing projects approved before the 31st day of March, 2008 by a local authority. In the case of the assessee, the objection taken by the Assessing Officer is in respect of the fact that the assessee company registered a semi finished flat and that such a semi-finished flat does not fulfil the requirement of Sec. 80IB. It was submitted that the registration of a semi-finished flat to the buyer is only in accordance with mutual convenience of the seller and buyer and it does not signify the culmination of the assessee’s responsibility to build and handover a completed residential unit. Considerations such as incidence of lesser amount of statutory levies like registration charges, insistence of buyers in getting legal title to property for ensuring compliance with exemption provisions under tax laws, necessity to produce documents before financing/lending institutions etc. are a few of the reasons that result in early registrations of residential units in favour of buyers. In the case of the assessee, the execution of the construction agreement signifies the continued commitment to build and deliver a residential unit. The view taken by the Assessing Officer was erroneous inasmuch as the registration of a semi finished flat does not result in the conclusion of the transaction with the client but it only results in the completion of one of the phases in the process of developing and building a residential flat. It is the assessee company and none else that is entitled to the profits of the housing project whether up to the stage of registration or thereafter. In this view of the matter, the Assessing Officer was not correct in holding that the assessee is not eligible for deduction u/s. 80IB(10) as claimed by it.
16. The AR further submitted that the sequence of transaction with each buyer as explained to learned CIT(A) together with copies of the documents is as follows. The sequence of the transactions as mutually agreed in the agreement to sell as noted by CIT(A) in her order is as follows:
“(1) That the vendee agreed to pay Rs. (x) to the vendors towards the sale consideration for the schedule of property within two weeks from the date of this agreement of sale.
(2) That the vendee entered into a construction agreement with Vendor 7 (the assessee) (on the same date) for finishing of the schedule of property for a cost of Rs. (y) which includes the proportionate cost of infrastructure and one car parking space in stilt floor and Rs. (z) towards corpus fund, as such the total comes to (y + z).
(3) That the vendors are hereby agreed to execute the registered sale deed and hand over the physical vacant possession of the schedule of property to the vendee immediately after receiving the total sale consideration and construction agreement amount.
(4) That the vendee is hereby agreed to bear the stamp duty and registration fees and expenditures for executing the agreement of sale, construction agreement and sale deed for the schedule of property.
18. The Authorised Representative of the appellant also filed copies of letters of possession issued by the appellant company in respect of flats in SMR Metropolis. These letters were issued to the site supervisor to hand over the flat and keys by the appellant in respect of individual flats on different dates evidence the completion of the construction of the flats in all respects. The Authorised Representative also filed receipts signed by authorized signatories of the financial institutions to show that after the registration of the sale deed and prior to the handing over of the possession of the completed unit, the bank certified the receipt of the registered sale deed from the appellant and that the liability of the builder was discharged.
19. The facts considered in the preceding paragraphs show that (i) the appellant enters into an agreement for both – sale of undivided portion of land and construction of the flat on the same date (ii) the sale agreement states that the sale would be registered only after the payments of consideration as per sale agreement and construction agreement (iii) the tripartite agreement; with the finance companies considers the total payment towards undivided portion of land and towards construction (iv) the letters show that the completed flats were handed over to the buyers.
20 It is clear that all the facts taken together show that the appellant company is constructing a complete residential unit. The consideration received is clearly reflected in the sale of agreement. The entire amount has been accounted for as sales by the appellant builder. The papers filed also show that the keys to the flat are handed over only after it is complete in all respects.
21. I therefore hold that the Assessing Officer erred in holding that the appellant only sold a semi-finished flat. In fact the appellant undertook to construct the flat in its entirely – the consideration which was separately determined for undivided portion of property and construction were both considered as sales made by the company. The Assessing Officer is not justified in holding that the appellant is intelligible to claim deduction u/s. 80 18(10) on this ground.”
17. The AR submitted that the learned CIT(A) had undertaken a detailed examination of the progression of the transaction till the handing over of the completed residential flat to conclude that the AO erred in disallowing the claim u/s. 80IB.
18. Without prejudice to the submissions made above, it was also submitted by the AR that section 80IB envisages deduction in respect of the profits derived in the previous year in respect of approved hosing projects. Having regard to the fact that housing projects take more than one year to develop and complete, an eligible assessee stands to derive such profits over a period of more than one previous year. The extent of such profits relating to a particular year necessarily relate to income accrued in that year depending upon the system of accounting for recognition of income followed by the eligible assessee. Even according to Accounting Standard 7, two methods of accounting commonly followed are the percentage of completion method and the completed contract method. It is not mandated by the section that in order to be eligible fur deduction, profits should relate only to completed residential units. The section promulgates deduction of profits attributable to and arising from housing projects and the quantum of profits depends on the method of accounting followed by assessee. The segregation of the activity into registration and subsequent construction by the AO is not valid as both the activities are carried out by the specified undertaking claiming deduction u/s. 80IB. It is worth mentioning at this juncture that the reference to “residential unit” in the section arises in the context of fixing maximum built up area with respect to each individual unit within the housing project. Sub-section 10 of Sec.80lB starts with the sentence “The amount of deduction in the case of an undertaking developing and building housing projects ……….. ” clearly indicating that it is the profit derived from the developing and building housing projects that is eligible for deduction.
19. The AR submitted that the AO has put undue emphasis on technicalities. The AO has taken a hypertechnical view of the provisions, according to his own interpretation of the provisions, rather than a pragmatic view. It is a well accepted principle of interpretation that substance of law, if complied with weighs over form and more so while interpreting an incentive provision. Tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for concession, deduction, and relief should be construed reasonably and in favour of the assessee to advance the object rather than to defeat the same. It was explained before the CIT(A) that the bank funding the customers of the company provides the loan under the category of housing loan. In order to ensure the housing loan disbursed to the company is utilized for the purpose of construction of the residential house, it enters to agreement with the customer and developer (SMR) being the guarantor under the agreement. The guarantor (SMR) is required to complete the house and provide the registered sale deed to the bank after the appropriate inspection by the staff of the bank. Upon providing such registered document to the bank for mortgage, the bank discharges the guarantor company (SMR) from being guarantor to such loan disbursement.
20. The AR submitted that the CBDT, vide instruction 4/2009 dt. 30.06.2009 opined that deduction u/s. 80IB is available on year to year basis on partial completion of housing projects. This implies that semi finished houses are eligible for deduction u/s. 80IB. Copy of CBOT instruction No 4.2009 is submitted herewith.
21. The AR submitted that on the issue whether the assessee sold only semi-finished residential units which cannot be considered as a place where a person can live in, the CIT(A), held that the facts of the case show that the assessee is constructing a complete residential unit. The consideration received is clearly reflected in the sale agreement and the entire amount has been accounted for as sales by the assessee company. The learned Commissioner of income tax (Appeals) held that the assessee undertook to construct the flat in its entirety. The learned Commissioner of Income tax (Appeals) accordingly held that the Assessing Officer erred in holding that the assessee only sold a semi-finished flat. The learned Commissioner of Income Tax (Appeals) allowed the assessee’s appeal. The learned Commissioner of Income Tax (Appeals) allowed the assessee’s appeal on this issue.
22. Regarding maintenance of separate accounts for the eligible project, the AR submitted that the assessee got its accounts audited and complied with the requirement of filing audit report in Form No. 10CCB as required u/s. 80IB(13) read with Sec. 80IA(7). The Assessing Officer however held that the assessee should have maintained separate accounts in respect of the eligible project. He held that in the absence of separate accounts for the eligible project, deduction allowable u/s. 80IB could not be worked out. The Assessing Officer accordingly held that the assessee did not comply with the condition laid down u/s. 80IA(7) and denied the claim of deduction u/s. 80IB.
23. In this connection, the AR submitted that the assessee is engaged in development and execution of more than one housing project simultaneously. Accordingly, the assessee is required to maintain a common establishment for all the projects to facilitate coordinated activity in the areas of administration, client relations, advertisement, communications, transport, compliance with statutory obligations etc. It was submitted that the assessee had maintained Books of accounts with the use of a Computer Application which facilitated capturing of information/data relating to cost centres as a separate sub-ledger of the composite Books of accounts thus facilitating cost centre-wise details of direct expenditure and revenue. The assessee arrives at the results of the working of each project by adding the appropriate amounts of expenditure incurred by the common establishment. During the year under account also, the assessee maintained its accounts on the same basis. These set of accounts were also subject to audit as required by the statute. The assessee filed a revised Audit Report U/s. 80IB in Form 10CCB before the Commissioner of Income Tax (Appeals) which was forwarded to the Assessing Officer and a remand report was obtained. In his report the Assessing Officer admitted that the assessee produced soft copy of the account and the same were verified with reference to the vouchers produced and on verification has maintained separate accounts of the eligible unit. In spite of the fact that separate audit report in Form No. 10CCB was filed, the AO stated that the books of account were audited as a whole. He commented that had separate books been maintained, the assessee would have got its account audited separately. The Assessing Officer repeated his claim that separate books were not maintained.
24. The AR further submitted that The Commissioner of Income Tax (Appeals) was called upon to offer its comments on the remand report. The assessee replied stating that the AO failed to understand the method of maintaining the books of accounts when an entity has separate divisions for each kind of business. A entity may be having different business lines carrying out different business activities situated at different geographical locations. These divisions being an integral part of the legal entity (say a company) shall continue to have its business results such as sales, purchase, debtors, credit etc. as part of the general ledger of the entity (say company) to which such entity belongs. The business transactions of the division/undertaking are reflected as a sub ledger in the main ledger of the entity (say company) to which these divisions/undertaking belong to. In the instant case the eligible undertaking Metropolis is a division of SMR Builders Pvt Ltd. The ledger accounts relevant to Metropolis are reflected as “Cost Centres” in the main accounting records of SMR Builders Pvt Ltd. The accounting application allows the preparation of financial statements of the undertaking “Metropolis” separately. It was submitted that the AO failed to appreciate such position and incorrectly concluded by saying that separate books of accounts are not maintained. The Assessing Officer has also commented that the assessee got its accounts audited for the business as a whole and that had it maintained separate accounts; it would have got its accounts audited separately. The assessee submits that here again, the Assessing Officer has not appreciated the fact that the audit u/s. 44AB is required to be conducted for the business as a whole including the undertakings eligible for deduction U/s 80IB. Hence, the auditor has furnished the report required U/s. 44AB and also U/s 80IB(13) r.w.S. 80IA(7) based on the audit of such undertaking.
25. The AR submitted that the report furnished by the assessee reflects the profits of the eligible business as culled out from the separate account maintained by it for the whole business. The Assessing officer, though he examined the accounts and the report furnished by the assessee, for the eligible unit in course of remand proceeding chose to comment on the absence of a separate audit. The assessee reiterated that the claim made by it is in accordance with the provisions of Sec .80IB and requested that the deduction may be allowed.
26. The AR also submitted that notwithstanding the above position, the incentives by way of deduction from profits and gains of undertakings have been incorporated in various provisions in Chapter VIA-C of the LT Act and these provisions do not require maintenance of separate accounts. This has been judicially recognised in several cases. The AR cited the case of CIT v. Abhirami Cotton Mills (P.) Ltd.  220 ITR 84 wherein the High Court has categorically held, after referring to the decisions of various High Courts, that relief (u/s. 80J in this case) cannot be denied to the assessee even though separate set of accounts were not maintained.
27. The AR submitted that regarding the maintenance of accounts relating to the eligible project, the learned Commissioner of Income Tax (Appeals) has given clear finding that the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes including indirect incomes arising to the project have been considered and that the accounts have also been audited and the requisite certificate was also filed. In the light of these factual findings, the learned Commissioner of income tax (Appeals) has held that the assessee company has fulfilled the requirement of maintenance of separate accounts and that the Assessing officer erred in concluding that the assessee is ineligible for deduction u/s. 80IB(IO) of the IT Act.
28. Accordingly, the learned AR submitted that the findings of the learned Commissioner of income Tax (Appeals) are based on critical examination of facts and the order is based on such factual findings and the same may be upheld and the appeal filed by the department is misconceived which deserves to be dismissed.
29. We have heard both the parties and perused the material on record. We have carefully gone through the circular Instruction No. 4 of 2009 dated 30.6.2009 which reads as follows:
“Under sub-section (1) of section 80IB an undertaking developing and building housing projects is allowed a deduction of 100% of its profits derived from such projects if it commenced the project on or after 01/10/1998 and completes the construction within four years from the financial year in which the housing project is approved by the local authority.
2. Clarifications have been sought by various CCsIT on the issue whether the deduction u/s 80-IB(1) would be available on a year to year basis where an assessee is showing profit on partial completion or if it would be available only in the year of completion of the project u/s 80-IB(1).
3. The above issue has been considered by the Board and it is clarified as under:-
(a) The deduction can be claimed on a year to year basis where the assessee is showing profit from partial completion of the project in every year.
(b) In case it is late, found that the condition of completing the project within the specified time limit of 4 years as stated in section 80-IB(1) has not been satisfied, the deduction granted to the assessee in the earlier years is should be withdrawn.
4. The above Instruction will override earlier clarification on this issue contained in Member(R)’s D.O. letter No. 58/Misc./2008/ CIT(IT&CT) dated 29/04/2008 and Member (IT)’s D.0. Letter No. 279/Misc/46/08-ITJ, dated 02/05/2008.
5. This may kindly be brought to the notice of all the Assessing Officers in your charge”.
30. As per the above circular, it is clear that deduction u/s. 80IB(10) of the Act can be claimed on year to year basis where the assessee is showing profit from partial completion of the project in each year. In case it is found later that the project was not completed within four years, the deduction granted to the assessee in earlier year shall be withdrawn. The same interpretation was made in the case of Nagarjuna Homes v. ITO  46 SOT 287. In that case the Tribunal held that it is not necessary for the assessee to complete the entire project in a particular year. Even on partial completion of the project the assessee is liable for deduction u/s. 80IB of the Act. Therefore, it was concluded that the assessee can claim deduction u/s. 80IB(10) of the Act on year to year basis.
31. The stand of the Revenue with regard to semi-finished condition of flats is devoid of merit inasmuch as what is sought to be constructed and sold by the assessee is residential units and what is sought to be purchased by the individual buyer is the ownership of a residential unit and registration of flat in semi finished condition is only to facilitate the convenience of the parties and agreement for development and completion of the balance work in relation to the flats registered, is only an incidental formality to protect the interest of the parties which need not be viewed as fatal to the claim of the assessee for deduction u/s. 80IB(10) of the Act. Ultimately, the entire work from the stage of commencement to the stage of making residential units habitable has been carried out by the assessee only and the Revenue has no dispute whatsoever on this count.
32. It is the settled position of law that while interpreting the taxation statutes, more importantly incentives provisions thereof a liberal interpretation is called for. The approach while interpreting such provisions should be to advance the cause for which such pro visions have been incorporated and not to frustrate the same. For this proposition, he relied on the judgement of Supreme Court in the case of Bajaj Tempo Ltd. v. CIT  196 ITR 188 wherein held as follows:
” .. .A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT  177 ITR 418 (SC), the assessee, a co-operative society, claimed that the receipts from ginning and pressing activities was exempt under section 81 of the Income-tax Act. The question for interpretation was whether the co-operative society which carried on the business of ginning and pressing was a society engaged in ‘marketing’ of the agricultural produce of its members. The court held that the object of section 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental or ancillary to the activities mentioned in section 81(1), the assessee was entitled to exemption and the proviso did not stand in his way. In CIT v. Strawboard Manufacturing Co. Ltd.  177 ITR 431 (SC), it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. The question before the court was whether strawboard could be said to fall within the expression ‘paper and pulp’ mentioned in the Schedule relevant to the respective assessment years. The court held that since the words ‘paper and pulp’ were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit. “
33. We may also refer to the judgement Supreme Court in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 wherein the Court held that while interpreting the statutory provisions “if two reasonable constructions are possible, that construction which favours the assessee must be adopted.”
34. When the developer is offering profit under percentage completion method, the estimated profit that the developer will have on completion of the project is spread over the earlier years and offer every year the percentage of that profit based on percentage of project completion that year. Obviously, the contention of the Department that the assessee has not maintained any separate accounts to determine the profit from the housing project cannot be upheld. The assessee claimed deduction on pro-rata basis, furnished the details as required under the provisions in Form 10CCB and if there is any doubt regarding the computation, the Assessing Officer is at liberty to verify the same. In the case of the assessee, the assessee maintained regular books itself, the assessee maintaining separate account on eligible unit in the ledger. More specifically the assessee maintained details regarding Metro Polis project.
35. The AR drew our attention to the details filed before the lower authorities during the remand proceedings. These comprise of the following accounts maintained with reference to the “Metropolis Project” – (1) Sale of flats in Metropolis, (2) Finishing and Extra Works, (3) Labour (cost Centre Metropolis), (4) Material, (5) Structural Engg. Consultancy, (6) Land Development Charges, (7) Architecture fee, (8) Diesel and lubricants, (9) Indirect Incomes, (10) Salaries, (11) Postage and Telephones, (12) Printing & Stationery, (13) Repairs and Maintenance, (14) Security service charges, (15) Staff welfare, (16) Taxes and fees and (17) Water & Electricity.
36. Apart from these expenses such as expenditure on books and periodicals, conveyance charges, freight and transport, miscellaneous expenses etc. were also identified with reference to the eligible business. The Authorised Representative explained the allocation of common expenses such as remuneration, finance charges and interest and depreciation to the project. Such allocation is seen to be made as a proportion of the sales made. As per the statement after considering the sales made by the project, the direct and indirect expenses incurred and the allocation of common expenses, the profit of the business is worked out at Rs. 21,17,268/- for the assessment year 2005-06.
37. Section 80IA(7) which is applicable to the provisions of Sec. 80IB requires the accounts of the eligible undertaking to be audited and a certificate to be filed. The essence of this requirement is that, at any given time the financial position of the undertaking, should be ascertainable. The intent is that the profits of the undertaking eligible for the deduction can be properly identified. This requires maintenance of accounts in such a fashion that the sales of the eligible business are known, the expenses – both direct and indirect are identifiable and the common expenses are apportioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act. We, therefore, find that the assessee (1) maintained separate accounts relating to the project and (2) undertaken to construct a complete residential unit. Being so, in our opinion, the findings of the CIT(A) that the assessee is entitled for deduction u/s. 80IB(10) is upheld. Since the facts relating to the assessment year 2006-07 is identical to the facts that we considered for the assessment year 2005-06, we are inclined to uphold the order of the CIT(A) for the assessment year 2006-07 on this issue relating to 80IB in this assessment year i.e. 2006-07 also.
38. In the result, revenue appeals in ITA No. 671/Hyd/2010 and ITA No. 1948/ Hyd/2011 are dismissed.
39. Now we take up the appeal in ITA No. 1921/Hyd/2011 by the assessee. The assessee raised the following grounds of appeal:
“1. The order of the learned CIT(A) is erroneous in law and on the facts of the case.
2. The learned CIT(A) erred in upholding the disallowance of an amount of Rs. 12,00,000/- out of the claim made by the appellant u/s. 36(1)(iii).
3. The learned CIT(A) ought to have appreciated that the expenditure incurred by the appellant by way of investment in M/s. SMR Builders was on account of commercial expediency and accordingly, the learned CIT(A) ought not to have considered the disallowance solely in the light of s. 14A.
4. The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if it is considered necessary.”
40. Brief facts of the issue are that the assessee company is in the business of real estate and also a builder. It filed the return of income for the A.Y. 2006-07 on 29.11.2006, admitting total income at Rs. 1,78,69,784/-. In the computation of income, the assessee claimed deduction of Rs. 39,98,756/- u/s 80IB of the IT Act and the deduction was claimed in respect of a residential housing project called “SMR Vinay City”. While completing the assessment, the Assessing Officer has rejected the deduction claimed u/s 80IB by the assessee company stating that the assessee did not maintain any separate accounts in respect of eligible project i.e. SMR Metro Polis and hence, it is not possible to work out the deduction u/s 80IA and also the assessee did not comply with the condition laid down u/s 80IA(7) of the IT Act, hence the assessee is not eligible for deduction u/s 80IB of the Act. The AO further opined that audit report in Form No. 10CCB was not furnished along with municipal approval and hence disallowed the claim. Besides the above, disallowance, the Assessing Officer has also disallowed (i) an amount of Rs. 1,10,18,185/- u/s 40(a)(ia) in the absence of any proof for payment of TDS, (ii) disallowed expenditure incurred for earning exempted income amounting to Rs. 12,00,000/- (iii) disallowed interest of Rs. 1,40,820/- as it is not related to manufacturing activity and (iv) proportionate disallowance of interest made on loans given to directors amounting to Rs. 12,35,000/-.
41. The CIT(A) held that he had considered the submissions filed by the appellant, gone through the remand report of the AO and heard the AR in person. The broad parameters set by the AO were not refuted by the assessee, i.e., interest bearing funds diverted to sister concern and the share of profit derived from the sister concern is not taxable and as such the provisions of section 14A are attracted. Either during the assessment proceedings or during the remand proceedings or during the appellate proceedings before him, the assessee has not tried to find out as to what is the exact interest element is involved in this regard. Except, saying that the AO has not furnished the working, no material has been furnished to counter the action of the AO. In the circumstances, he observed that the action of the AO in this regard requires no interference and dismissed the ground raised by the assessee. Against this, the assessee is in appeal before us.
42. We have heard both the parties and perused the material on record. The assessee claimed deduction of Rs. 80,36,942 towards interest paid to bank and other loans. The Assessing Officer noticed that the assessee-company is a partner in M/s. SMR Builders, a firm, and has invested Rs. 1,63,80,793 in that firm. The assessee has received a share of profit from that firm at Rs. 3,04,65,830 in the year under consideration. This income is exempted u/s. 10(2A) of the Act. The Assessing Officer was of the opinion that the proposed interest on the amount invested in the firm is not for the purpose of business and the same was disallowed. The admitted fact is that the income received from M/s. SMR Builders (firm) is exempted income and as such provisions of section 14A are applicable. As per provisions of section 36(1)(iii) of the Act, the interest on loans raised by the assessee for business purposes are available. Once the assessee claims any such interest as deduction in their books of account the onus always will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the assessee has advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of outstanding loans on which the assessee is incurring liability to pay interest, there was no justification to advance the loans to sister concerns for non-business purposes without charging any interest. Accordingly, there is no merit in the plea of the assessee that the entire interest paid on borrowing has to be allowed.
43. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed.
44. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea would be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case.
45. The view that where the amount is advanced from a mixed account or share capital or sale proceeds or profits, it would not be deemed `as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds is not correct. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act.
46. In view of the above discussion, we are of the opinion that there is no merit in the plea of the assessee. The various case-law relied on by the assessee are delivered on their own facts and have no application to the facts of the present case. Being so, we are not able to agree with the arguments of the assessee’s counsel. The ground raised by the assessee is rejected.
47. In the result, assessee’s appeal as well as the Revenue appeals are dismissed.
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