Whether mere sale of development rights would equate to activities of developer and builder eligible for deduction u/s. 80-IB

Assistant / Deputy Commissioner of Income Tax Vs Bombay Real Estate Development Company Private Limited (ITAT Mumbai)- Whether the CIT(A) erred in directing the AO to allow the deduction u/s 80-IB(10) to the assessee as allowable to a developer and builder for the Poisar Housing Project at Kandivali (E).- Whether the receipts of sale proceeds of development right would amount to income eligible for deduction u/s. 80-IB. – Whether mere sale of development rights would equate to activities of developer and builder eligible for deduction u/s. 80-IB. – Whether the assessee was entitled to deduction u/s. 80-IB(10) even though the development project was started prior to 01.10.1998.

Since the AO has not brought on record anything to show that the payment to the MD is excessive or unreasonable, having regard to the fair market value of the services for which the payment was made or the legitimate needs of the business, no disallowance can be made under s 40A(2)(b). Further, the AO ought to have compared the payment made to the MD with payments made for similar services by other companies.

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, ‘B’, MUMBAI

BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI T R SOOD, ACCOUNTANT MEMBER

I T A No: 6504/Mum/2008

Assessment Year: 2002- 03

I T A No: 4219/Mum/2009

Assessment Year: 2003-04

I T A No: 4728/Mum/2007

Assessment Year: 2004-05

I T A No: 6505/Mum/2008

Assessment Year: 2005-06

Assistant / Deputy Commissioner of Income Tax – 1(1), Mumbai … Appellant

Vs

Bombay Real Estate Development Company Private Limited, Mumbai

… Respondent (PAN: AAACB2092E)

Appellant by: Mr Satbir Singh
Respondent by: Mr Arvind Sonde

Date of Judgement: 3rd June 2011.

O R D E R

R V EASWAR, PRESIDENT:

These are appeals filed by the revenue for the assessment years 2002-03 to 2005-06. The assessee respondent is a private limited company engaged in the business as builder and developer. These appeals arise out of assessments made on the assessee under section 143(3) of the Income Tax Act, 1961. We may first take up ITA No: 4728/Mum/2007 for disposal. It relates to the assessment year 2004-05. This is the year in which the controversy raised in the present appeals first arose and based on the decision taken by the Assessing Officer for this year; the assessments for the other three years were reopened under section 147 of the Act. Thus, in respect of the assessment year 2004-05, the appeal arises out of original assessment proceedings, whereas in respect of the other three years the appeals arise out of the reassessment orders. However, the facts in all the four years and the controversy arising out of those facts are the same and hence all the appeals were heard together and are disposed of by a single order.

2. In respect of the assessment year 2004-05, the assessee filed its return on 01.11.2004, in which it claimed deduction of Rs. 22,07,52,051/- under section 80-IB(10) in respect of the profits from the project called “Evershine Project”. The Assessing Officer called upon the assessee to justify the claim. The assessee submitted that in terms of the development agreement entered into on 22.12.1999 with M/s Evershine Builders Private Limited (hereinafter referred to as EBPL), it had undertaken the activities for development of the project, which activities entitled the assessee to claim deduction under section 80-IB(10) and reference was made to the important terms of the agreement. It was submitted that under the terms of the agreement, the assessee developed the property by undertaking several responsibilities and activities relating to the construction of the buildings and EBPL were associated with the project as joint developers. It was also pointed out that the assessee contributed the land for development whereas EBPL undertook the construction activity as well as finance cum marketing activities and the profits from the project were to be shared between the assessee and EBPL in the ratio of 43 : 57. It was repeated that the assessee fulfilled all the conditions of section 80-IB(10) in order to qualify for the deduction. These submissions were put forth in writing by letter dated 20.11.2006 before the Assessing Officer and the said letter has been reproduced in full in the assessment order.

3. The Assessing Officer examined the facts right from the inception when the assessee acquired the development rights over the land and after examining the terms of the agreement between the assessee and EBPL, came to the conclusion that the assessee should be both a developer and a builder to be eligible for the deduction, that it was EBPL which actually developed and constructed the housing project, that the assessee merely provided the other incidental services such as obtaining FSI and all statutory permissions, putting up the pipeline up to the boundary of the project, setting up the infrastructure and complying with the conditions imposed by MMC and these activities do not amount to developing and building the housing project. He accordingly rejected the assessee’s claim for deduction under section 80-IB(10) of the Act.

4. On appeal, the assessee filed detailed written submissions, which are reproduced in paragraphs 5 and 5.1 of the impugned order of the CIT(A). The CIT(A), after examining the facts in some detail and the various agreements entered into by the assessee, accepted the submissions of the assessee and summed up his findings as below: –

“7.7. On the basis of the facts, the issue is summed up as under: –

a) The appellant prepared the land for building the Housing Project till the issue of commencement certificates dated 17.09.2001 and 01.10.2001 as a developer.

b) The appellant jointly contributed the cost of the entire housing project at Rs. 46,51,16,279/- and jointly appointed the contractors for construction of flats; marketing and sale of constructed flats.

c) The entire sale proceeds of the flats etc. were deposited in the jointly operated current account number 1800102462 with Global Trust Bank Ltd. and their respective shares were subsequently transferred by the bank to separate bank accounts of the appellant and M/s Ever shine Builders Pvt. Ltd. in the ratio of 43% & 57% respectively, as maintained with the same bank.

d) The above facts confirm that the appellant was engaged to develop and build the housing project and as section 80-IB(10) does not prescribe the proportion of developing and building housing project, the appellant is entitled for deduction under section 80-IB to the extent of its business income as the appellant was a developer and builder for the Poisar Housing Project at Kandivali (E). Accordingly, the grounds of appeal are allowed and the AO is directed to grant the deduction under section 80-IB to the appellant.”

5. It is against the aforesaid order of the CIT(A) that the revenue has come in appeal before the Tribunal. Since the original grounds of appeal filed by the revenue were not properly framed, the following revised grounds of appeal were filed, which have been taken into consideration while disposing of the appeal: –

“1. Whether on the facts and in the circumstances of the case, the CIT(A) erred in directing the AO to allow the deduction u/s 80-IB(10) to the assessee as allowable to a developer and builder for the Poisar Housing Project at Kandivali (E).

1.1 Whether the receipts of sale proceeds of development right would amount to income eligible for deduction u/s. 80-IB.

1.2 Whether mere sale of development rights would equate to activities of developer and builder eligible for deduction u/s. 80-IB.

1.3 Whether the assessee was entitled to deduction u/s. 80-IB(10) even though the development project was started prior to 01.10.1998”.

6. In respect of the assessment years 2002-03 and 2003-04, the Assessing Officer reopened the assessments to disallow the assessee’s claim for deduction under section 80-IB(10) of the Act. The CIT(A), following his predecessor’s order for the assessment year 2004-05, accepted the assessee’s claim, against which the revenue has come in appeal. It appears that for the assessment year 2003-04 the revenue by oversight filed wrong grounds of appeal before the Tribunal, which mistake has been corrected by filing revised grounds, which are identical to the revised grounds filed in the appeal for the assessment year 2004-05. The original grounds of appeal filed by the revenue for the assessment year 2002-03, however, have been correctly framed and therefore there are no revised grounds for that year.

7. In respect of the assessment year 2005-06, the Assessing Officer, even while framing the assessment under section 143(3) of the Act pursuant to the return filed by the assessee, disallowed the deduction claimed under section 80-IB(10) for reasons which are identical with the reasons given in the assessment order for the assessment year 2004-05. The CIT(A), following his predecessor’s order for the assessment year 2004-05, decided the issue in favour of the assessee. Certain other dis allowances were also made by the Assessing Officer while completing the assessment, which were deleted by the CIT(A), against which also the revenue has filed grounds of appeal. Therefore, in the appeal for the assessment year 2005-06, the revenue has challenged the findings of the CIT(A) not only with regard to the claim under section 80-IB(10), but also with regard to the various other reliefs given by him. They would be dealt with at the appropriate juncture.

8. In respect of the assessee’s claim under section 80-IB(10), the argument of the revenue, in tune with the reasoning of the Assessing Officer, is that the assessee is not a developer of housing projects and it has only provided some services to EBPL which is actually the developer and therefore the assessee is not entitled to the deduction. It is submitted that mere ownership of land by the assessee is not sufficient compliance with section 80- IB(10) and the assessee has to undertake further activities for development of the housing project, in which case alone he would be entitled to the deduction. It is further contended by the learned CIT DR that this is a simple case of transfer of land by the assessee for consideration, which gives rise to capital gains and not business profits and that such transfer was camouflaged in the present case and put through as a development activity so as to claim deduction under section 80-IB(10). In this connection it was submitted that the fact that the assessee was described as a developer or joint developer in the various agreements was not conclusive of the matter and that these agreements actually concealed the real intention of the assessee, which was only to transfer the land for a surplus. It was pointed out that no development work was undertaken by the assessee and that merely because the assessee was earlier considered as developer is not conclusive so far as the present transaction or present years are concerned and what the assessee was actually obliged to do under the various agreements was only to complete the legal formalities to put through the transfer of the land. It is submitted that the entire documentation, on the basis of which the claim is put forward by the assessee, was designed to avoid payment of legitimate taxes on what is essentially a land deal.

9. The learned CIT DR assailed the findings of the CIT(A) recorded in paragraph 7.7 of the impugned order on the following grounds: –

(a) None of the findings make the assessee a developer. The activities undertaken by the assessee merely amount to preservation of the land and cannot be called development activities.

(b) All the activities on which reliance was placed by the CIT(A) are only paper transactions and not activities of a developer.

(c) Assessee has only incurred the expenditure to maintain its title to the land and nothing more.

(d) The entire arrangement is a camouflaged sale of land to the buyer of the flats in the housing project and the medium adopted is the documentation to show as if the assessee is also a developer so that it can claim deduction under section 80-IB(10) of the Act.

10. In order to test the correctness of the arguments of the learned CIT DR and before we refer to the arguments of the learned counsel for the assessee, it is necessary to briefly refer to certain facts. We may first refer to the agreement dated 29.06.1982, a copy of which is at pages 330 to 357 of the paper book. This is an agreement entered into between a company by name Byramjee Jeejeebhoy Private Limited (hereinafter referred to as BJPL), referred to as “the owners” in the agreement and the assessee company which is referred to as “the developers” in the said agreement. The preamble of the agreement narrates that BJPL owned about 370 acres plus at village Poisar near Kandivli in Greater Bombay and that they had agreed to sell the said land to the developers (the assessee herein) and allow the developers to develop the lands. The consideration is fixed at Rs.1,11,00,000/-. Clause 1 of the terms and conditions of the agreement states that BJPL shall allow the assessee to develop and the assessee shall develop the land for a consideration of Rs. 1,11,00,000/-. Clause 2 prescribes the mode and the instalments in which the consideration was to be paid. Clause 5 on wards refer to the obligations of the developer (the assessee herein) under the agreement. The first obligation of the assessee was to remove at its own costs and expense the unauthorised persons / structures if any upon the land. Clause 6 provides that the assessee shall develop the land subject to all prevailing laws, Acts and enactments in force. Clause 7 says that the assessee shall obtain all the necessary or required permissions, orders or No Objection Certificates in writing from the competent authority under the provisions of the Urban Land (Ceiling & Regulation) Act, 1976 [hereinafter referred to as ULCRA] from the Collector or Deputy Collector of Bombay or the Government of India or the Government of Maharashtra or any other competent authority under any of the provisions of any of the applicable laws in relation to the land at the assessee’s own costs and expenses. However, BJPL, wherever required, shall join in and sign such applications. Clause 8 provided for the obligation of the assessee to remove the unauthorised structures, hutments or occupants thereof and to take such steps in that behalf at its own costs and expenses. Any permission required to do so was also to be taken by the assessee at its own expense. Clause 9 reiterated the assessee’s obligation to obtain permissions under the ULCRA as also the permissions under the Maharashtra Regional Town Planning Act, 1961, at its own costs and expenses. Clause 11 provided for the obligation of the assessee to complete the transaction relating to the said land on or before 30th June 1986. Under clause 12, it was the obligation of the developers (the assessee) to bear and pay all rates and taxes (excluding personal taxes such as income tax), cess, land revenue and all other outgoings in respect of the land or any part thereof or in respect of any structure standing on the land or in respect of buildings or structures to be constructed on the land by the developer and payable to the Government or the Municipal Corporation or any other public body after the developer is put in possession of the land.

11. Clause 13 provides for certain other obligations of the assessee under the agreement. It provides for the following obligations of the assessee: –

(a) The land shall be developed by the developer at its own risk, costs and expenses and shall carry out the development work in accordance with the plans and specifications duly approved and sanctioned by the Municipal Corporation of Greater Bombay and other concerned local authorities.

(b) The assessee as developer shall comply with all the building rules and bye-laws and orders and directions that may be issued by the aforesaid bodies.

(c) The assessee shall bear all charges and expenses in relation to the construction work including the payment of salary and wages of the personnel and workmen employed in the construction work or the payment of any compensation in case of injury or death of any employee or worker.

(d) From the date on which the assessee is put in possession of the land; all rates, taxes, cess and other outgoings in respect of the land and the construction work made thereon including the fees of architects, surveyors, RCC consultants and specialists / professionals engaged in regard to the construction work shall also be the responsibility of the assessee.

(e) The assessee shall indemnify BJPL against any claims or damages made against BJPL by any person for any breach of the building bylaws and rules and regulations issued by the competent authorities. The indemnity also extends to other expenditure incurred by BJPL in relation to the construction work either as salary or wages or compensation or as payment in respect of suppliers of building materials or any other loss that may be suffered by BJPL as a result of the construction work being carried on by the assessee.

12. Clause 14 provides that the assessee shall bear all the expenses relating to the submission of the scheme or project to the Government of Maharashtra for sanction. Clause 18 states that the assessee as developer alone shall be entitled to enter into agreements for sale of flats, shops, garages, godowns, units and other premises comprised in the building to be constructed by the developer on the land on ownership basis. This obligation is further subject to the right of the BJPL under the agreement and shall also be subject to the terms and conditions and obligations on the part of the assessee. Clause 19 provides that the assessee alone shall be entitled to the rights as also be liable and responsible for the observance and performance of the terms and conditions of the agreements for sale of the flats, shops, etc. and the owners (BJPL) shall not be required to join and execute such agreements. The clause further states that the assessee agrees and undertakes that the purchasers of the flats etc. shall not be given possession until the developers had paid in full to BJPL the consideration money payable to BJPL in terms of clause 2 (i.e. the amount of Rs. 1,11,00,000/-).

13. Clause 20 of the agreement provides that the assessee as developer further agrees to take a conveyance or any other documentation in respect of the land in their favour or in favour of the nominee or nominees or a co-operative society or a limited company or an association of apartment owners or any other body corporate, as the case may be, after the assessee has paid the full consideration money payable to BJPL. Clause 21 provides that the developer shall not be entitled to transfer or assign the benefit of the agreement for development to any other person without the prior written consent of BJPL. Clause 26 provided that it was the obligation of the assessee as developer to pay brokerage at the rate of 2% of the consideration money on completion of the transaction.

14. The above are in effect the obligations undertaken by the assessee under the agreement with BJPL.

15. It would appear that after the aforesaid agreement was signed between BJPL and the assessee and after the assessee had paid to BJPL the consideration of Rs. 1,05,00,000/- pursuant to which BJPL had also agreed to give a power of attorney to the assessee, its directors, officers or employees or any nominee to enable the assessee to effectively develop and deal with the said property under the agreement, certain disputes arose between BJPL and another company by name Nanabhoy Jeejeebhoy Private Limited (hereinafter referred to as NJPL). These disputes were ultimately decided by the Honourable Bombay High Court on 21.12.1988 in Company Petition No: 868 of 1988 and in terms of the order passed by the Hon’ble High Court, the entire land of 370 acres and odd vested absolutely in NJPL. Thereafter the assessee requested NJPL to honour the earlier agreement dated 29.06.1982 and give irrevocable power of attorney in favour of the assessee for the purpose of developing the property. NJPL agreed to the request of the assessee and in order to give effect to the arrangement between the assessee and NJPL, an agreement was entered into on 28.02.1989 between NJPL and the assessee (copy is placed at pages 354 to 375 of the paper book). This is actually termed as “irrevocable general power of attorney” given by NJPL to the assessee. Under the power of attorney, the following were the obligations of the assessee: –

(1) To look after and manage the property diligently.

(2) To obtain the plans for construction of the buildings including sub-division and layout plans, submit them to the MCGM or other authorities for obtaining their approval / consent and to revise such plans if necessary and to obtain IOD, commencement, occupation and completion certificates from the MCGM.

(3) To prepare layout plan or development scheme with all details and to submit the same for approval to the concerned authorities, including internal and main roads, water mains and also to design and plan dwelling units for weaker sections of the society.

(4) To engage architects and engineers etc. for development of the property at their own expense.

(5) To complete the construction in accordance with the approved plans and to sell the units.

(6) To act and represent NJPL before the various authorities, public bodies, etc. in any inquiries and proceedings in connection with all matters relating to the development of the property.

(7) To obtain all permissions under the ULCRA for sale or assignment of the property or part thereof and to execute all applications, plans, affidavits, etc. in the name of NJPL before the State or Central authorities functioning under ULCRA.

(8) To obtain permits for cement, steel and other building materials, water supply, electricity supply, gas, telephones, drainage and sewerage etc. at the assessee’s costs.

(9) If required by BSES, the assessee shall also put up a sub-station on the property for supplying electricity to the buildings to be constructed.

(10) To obtain commencement, occupation and completion certificates in respect of the building to be constructed.

There are several other clauses in the power of attorney which obliged the assessee to take various steps in connection with the development of the property and the construction to be put up thereon. They are mostly statutory obligations which are required to be undertaken by a developer in connection with development work. These are contained in clauses 21 to 30 of the power of attorney.

16. On 22.12.1999 an agreement was entered into between the assessee who is referred to therein as “the developers”, EBPL who is referred to as “the joint developer” and M/s Thakur Brothers Agricultural Farm as “the confirming party”. The preamble to this agreement refers to the grant of development rights on the land by BJPL to the assessee by agreement dated 29.06.1982 and the subsequent court order under which the land became vested in NJPL as well as the power of attorney given by NJPL to the assessee on 29.02.1989 enabling the assessee to fully deal with the development activity in the land. Thereafter, clause 7 of the preamble refers to the assessee having obtained sanction and approval for the development of the land from the ULCRA authorities under orders dated 28.10.1989. Clause 12 of the preamble refers to the fact that M/s Thakur Brothers Agricultural Farm, a partnership firm, which is the confirming party in the agreement, was in adverse possession of some portion of the land and also goes on to refer to a Memorandum of Understanding (MOU) dated 06.10.1986 entered into between the assessee and the said M/s Thakur Brothers Agricultural Farm (which was confirmed by BJPL) under which the assessee agreed to make available to M/s Thakur Brothers Agricultural Farm 25% of the permissible FSI in respect of the said land. Clause 13 of the preamble refers to the supplementary MOU dated 29.01.1992 under which the assessee agreed to make available to M/s Thakur Brothers Agricultural Farm 40% of the permissible FSI in respect of the land. Clause 14 of the preamble refers to the proposal of the assessee to construct several buildings on the land having an aggregate built-up area of 20,00,000 sq. ft. by utilizing not only the FSI available in respect of the land but also the FSI of other properties as may be available by way of Transfer of Development Rights (TDR). Clause 15 of the preamble refers to the fact that pursuant to the scheme of development the assessee had already obtained IOD (Intimation of Disapproval) in respect of sanctioned FSI of 2,50,000 sq. ft. Clause 16 of the preamble states that the assessee and EBPL, who is referred to as “the joint developer”, proposed to develop the said land jointly and the development work shall be carried out jointly with the consent of M/s Thakur Brothers Agricultural Farm and that the said M/s Thakur Brothers Agricultural Farm have granted unconditional and irrevocable consent. Clause 18 of the preamble states that the revised layout and building plans shall be prepared by EBPL and approved by the assessee in respect of the FSI of 20,00,000 sq. ft. to be utilised in the construction of the buildings on the land. Clause 20 of the preamble refers to the declaration / confirmation of the assessee to EBPL to the effect that its title to the said land is clear, marketable and free from encumbrances and clause 21 states that the assessee has not entered into any prior commitment for grant of development rights on the land in favour of any other person. Clause 24 of the preamble states that EBPL agrees to carry out and complete the joint construction on the land phase-wise as a residential/ shopping/ commercial/ recreational complex as may be permitted by the concerned local authorities. Clause 25 refers to the assurance of EBPL that it has the requisite financial, managerial and organizational resources as well as the infrastructure to carry out the joint development of the land and marketing of the buildings to be constructed thereon. Clause 26 of the preamble says that the assessee and EBPL have agreed to develop the said land in four phases and that the assessee has permitted EBPL to enter upon the land on which phase III and phase IV-A are to be constructed. It is also stated that EBPL has been permitted by the assessee to construct buildings on this land.

17. Now we turn to the main terms of the aforesaid agreement dated 22.12.1999. Clause 3 states that the assessee and EBPL shall develop the said land through utilisation of the FSI of approximately 20,00,000 sq. ft. by constructing building on the said land in different phases according to the revised layout and building plans. It was the duty of the assessee to ensure that the revised plans are sanctioned by the BMC including the TDR which are to be acquired by the assessee at its costs and made available for joint development in accordance with the agreement. Clause 4 states that the revised layout and the revised building plans are to be prepared by EBPL in consultation with the assessee and it is the assessee’s duty to get them approved by the BMC. The condition however is that no changes shall be made by the assessee unilaterally without obtaining the prior written approval of EBPL. Clause 5 states that all the deposits and other charges for obtaining approval for the revised layout plan and the revised building plan shall be made by EBPL by account payee cheques drawn in favour of BMC and these amounts can be recovered by EBPL from the purchasers of flats, shops, etc. at the time of delivery of possession. EBPL shall also be entitled to withdraw the deposits directly from BMC. Clause 6 provides that all premiums and charges payable to BMC for obtaining additional FSI shall be borne by the assessee alone. It is however provided that initially these amounts may be paid by EBPL to the assessee but the amount is subject to recovery later from the assessee. Clause 7 states that the expenses of obtaining additional FSI in the form of compensatory TDR and the cost of acquisition of the TDR shall be borne and paid by the assessee. The other obligations of the assessee under the aforesaid agreement are : –

(a) To obtain plinth commencement certificate from the BMC (clause 8).

(b) To pay premium for obtaining FSI in respect of staircase, lift and balconies (clause 9).

(c) To provide the requisite pipeline up to the boundary of the land for supply of potable water for construction purposes and drinking purposes at its own cost. It is the duty of the assessee to provide the pipeline in time so that the construction of the buildings is not delayed or impeded (clause 10).

(d) The funds required for the construction of the buildings on the said land shall be expended by EBPL alone and the assessee shall not be required to spend any amount for the same. EBPL is not entitled to claim any interest on such expenses (clause 11).

(e) The assessee is responsible for obtaining all statutory permissions including IOD plinth certificates (clause 13).

(f) The assessee shall at its own costs obtain all requisite permissions and orders from ULCRA authorities until the construction is complete (clause 14).

18. Under the aforesaid agreement dated 22.12.1999 EBPL also had certain rights and obligations and these briefly are as follows:-

(a) To spend monies for the construction of all the buildings without charging any interest thereon (clause 11).

(b) In particular, EBPL shall incur expenses on construction and completion of all the buildings and also all occupation and commencement certificates, expenses on consultants’ fee incidental to the construction including architects and RCC consultants’ fees (clause 12).

(c) EBPL was to carry out the construction of the buildings in four phases using good building materials, fitting and fixtures and good workmanship in the matter of construction. It is to complete the construction under each phase within three years from the commencement of construction, failing which the assessee shall have the option to address a letter to EBPL to call upon it to complete the construction within six months from the date of the letter. If the construction is not completed within such extended period, EBPL’s right as joint developer shall stand forfeited and the right to utilize the balance FSI shall be revoked and the assessee shall be entitled to deal with and dispose of the balance construction as it may deem fit (clause 15).

(d) EBPL is entitled to carry out the construction on its own and also to appoint selling agents in its own right for the marketing of the flats (clause 18).

(e) EBPL is entitled to sell in its own right and on its own account on ownership basis or otherwise the flats / shops / commercial units etc. constructed on the land (clause 20).

19. The other important clause in the agreement is clause 21, which states as to how the gross sale proceeds of the flats, shops, etc. shall be shared between the assessee and EBPL. According to the said clause, 43% of the gross sale proceeds shall belong to the assessee and 57% thereof shall belong to EBPL. This clause further refers to the fact that a sum of Rs. 20,00,00,000/- which EBPL had earlier deposited with the assessee shall be first recovered out of the gross sale proceeds. Clause 22 defines “gross sale proceeds” to mean all proceeds of sales received from the sale of premises excluding certain deposits and other recoveries made from the purchasers of the flats. Clause 28 refers to the deposit made by EBPL to the assessee in the amount of Rs. 20,00,00,000/-. It is this deposit which can be recovered by EBPL from the assessee on priority basis from the sale proceeds as per clause 21. The other clauses of this agreement are not very relevant for the purpose of the present appeals.

20. It is necessary to refer to a specimen agreement for sale of the flat (page 117 of the paper book) only for the purpose of noting that in this agreement EBPL and the assessee are referred to as “joint developers”.

21. From the above facts we are to decide whether the assessee can be described as a developer and builder so as to be entitled to the deduction under section 80-IB(10) of the Act. This provision confers deduction to an undertaking “developing and building housing projects”. What is development of a housing project has not been defined in the sub-section. The central argument of the learned CIT DR before us, based on the Commentary on Income Tax by A C Sampath Iyengar, 10th Edition, pages 5793, 5794 of Volume Four, is that the assessee merely transferred the land to the purchasers of the flats for consideration and this was camouflaged by reference to certain activities, which were only on paper, and which cannot amount to any development activity, and therefore the assessee ought to have declared the receipts as capital gains. Though the word “develop” appearing in the sub section has not been defined in the Act, it should mean, in our humble opinion, the activities which a person undertakes in order to prepare the land, both factually and legally, for putting up housing projects thereon. The development activity precedes the actual construction or building activity. A clue to this position is given in clause (a) of sub-section (10) of section 80-IB, which says that the deduction will be given if the undertaking has commenced or commences development and construction of the housing project on or after a particular date and completes the construction by a particular date. This shows that the development activity precedes the actual construction activity. There is no objection on the ground that the assessee is not a builder of housing projects. The objection is that the assessee should be both a developer and a builder and the assessee in the present case has not undertaken any development activity. We have already referred to the various responsibilities undertaken by the assessee from the day on which it acquired the development rights over the land from BJPL in 1982. Section 80-IB(10) was introduced in the statute book with effect from 01.04.2000 by the Finance Act, 1999. It cannot be postulated that the assessee, even in 1982, with a view to obtaining deduction under section 80-IB undertook certain paper transactions in order to claim deduction at a much later period on the ground that those transactions amounted to development activity preceding the construction of the housing projects. Be that as it may, the obligations and responsibilities undertaken by the assessee under the various agreements, which we have referred to earlier, unmistakably show that the activities undertaken by the assessee are activities relating to development of the housing project. We are in complete agreement with the reasoning and findings of the CIT(A) in support of the conclusion that the various activities carried on by the assessee amounted to development activities within the meaning of section 80-IB(10). In addition, the assessee has been in the business of developers and builders since many years and have undertaken and completed several housing projects such as Viceroy Park, Vasundhara, etc. and hitherto the Assessing Officer has not raised any objection on the ground that the assessee is not a developer. The fact that the construction activity was financed by EBPL cannot obliterate or take away all the earlier responsibilities undertaken by the assessee to legally and factually prepare the land for putting up the housing projects. In business world it is common to find persons having different talents pooling them together. In the same way, the assessee which had the development rights over the land and which had undertaken the responsibility of obtaining all statutory clearances, permissions, etc. for putting up the housing project on the land, had collaborated with EBPL which had the necessary technical know how as well as the finance for putting up the construction. It should also be remembered that the assessee had also undertaken to remove all the structures and unauthorised occupants on the land. In fact M/s Thakur Brothers Agricultural Farm had admittedly been in adverse possession of the land and therefore they had to be given 40% of the FSI and this was largely due to the efforts of the assessee, as can be seen from the tripartite agreement dated 22.12.1999 to which the assessee, EBPL and M/s Thakur Brothers Agricultural Farm were parties. We have referred to the terms and conditions in this agreement in considerable detail earlier. The Memorandum of Understanding dated 06.10.1986 and 29.01.1992 under which M/s Thakur Brothers Agricultural Farm were given 25% and 40% respectively of the FSI was entered into only between the assessee and the said M/s Thakur Brothers Agricultural Farm with BJPL confirming the Memorandum of Understanding. EBPL was not a party to the MOU under which 40% FSI was given to M/s Thakur Brothers Agricultural Farm in consideration of their giving up adverse possession of the land.

22. Thus most of the crucial, preliminary and basic developmental activities necessary for the purpose of making the land ready and prepared for construction activity, both legally and factually, were undertaken and put through only by the assessee. It would be unfair to ignore or brush aside these activities by calling them not developmental activities merely because the assessee has claimed deduction in respect of the profits under section 80-IB(10). It would be particularly so because the department has consistently accepted the assessee as a developer in the other assessment years, which were reopened only because the Assessing Officer did not accept the assessee’s claim for deduction in the assessment year 2004- 05.

23. It is also not fair to treat the activities undertaken by the assessee as paper transactions merely to enable it to claim deduction, because many of the activities and responsibilities undertaken by the assessee were statutory in nature such as the clearance under the ULCRA, permissions, approvals and IODs from the BMC etc. These cannot be treated as paper transactions. Nor is it correct to say that whatever expenditure the assessee had incurred to legally and factually prepare the land for construction was only incurred to preserve and maintain the assessee’s title to the land. Right from the day on which the assessee obtained the development rights from BJPL, which was subsequently confirmed by NJPL, the assessee undertook all the developmental activities only with a view to putting up housing projects on the land. The very fact that the assessee was given development rights by BJPL over the land means that the assessee intended to develop the land by removing all unauthorised persons and structures and to obtain the necessary permissions from all concerned statutory authorities so that the construction of the housing project thereon can be commenced and proceeded with without any hitch. All the clauses in the agreement dated 29.06.1982 between BJPL and the assessee are calibrated only towards this end. We have already referred to this agreement in some detail and at the cost of repetition we may note that clause 13 of the said agreement in particular states that the assessee shall develop the land at its entire risk as to costs and expenses and shall carry out the entire development work in accordance with the plans and specifications duly approved and sanctioned by the MCGM. The clause even referred to the fact that the assessee will bear the expenses in relation to the construction work including compensation payable for injury. Clause 20 referred to the understanding that the assessee would get the conveyance either in its own favour or in favour of its nominee or nominees or a cooperative society or any other entity in respect of the structures sold to the flat buyers. All these clauses put the matter beyond doubt and if any clarification is needed reference may be made to clause 18 of the said agreement which says that the assessee alone is entitled to enter into agreements for sale of the flats, shops, etc. on ownership basis or otherwise. The assessee is a businessman engaged in the development and construction of housing projects and it would make no sense for him to acquire development rights of such a large parcel of land (370 acres plus) if he did not have in mind the proposal to utilize the land for purposes of construction of housing projects. As events turned out the assessee could not find the necessary wherewithal for the construction and the same was supplied by EBPL along with the knowhow. The assessee therefore thought it ideal to collaborate with EBPL and put up the housing project. The assessee had all the clearances and statutory permissions ready. EBPL was prepared to finance the project. Both of them collaborated and put up the housing project.

24. There is also no escapement of tax by way of double deduction. We have already noticed that the gross sale proceeds are to be divided between the assessee and EBPL on the basis of 43% and 57% respectively. Thus the assessee would be getting deduction under section 80-IB(10) in respect of the profits derived by it from the housing project and EBPL will be similarly claiming deduction in respect of its share of the profits. Both of them combined do not exceed 100% of the profits from the housing project. Thus there is also no double deduction.

25. For the above reasons we are of the view that the CIT(A) was right in holding that the assessee was entitled to the deduction under section 80-IB(10). The appeal in ITA No: 4728/Mum/2007 for the assessment year 2004-05 is therefore dismissed.

26. We may add that Ground Nos: 1.1 and 1.2 taken by the department do not arise out of the orders of the departmental authorities. The only objection raised by the Assessing Officer was that the assessee was not a developer. The above grounds however raise the point whether the receipts on account of development rights would be eligible for deduction under section 80-IB of the Act. This objection was not raised by the Assessing Officer. Even otherwise, factually the assessee has not claimed deduction in respect of sale proceeds of development rights. The profits have been shown only from the sale of the units in the housing project. Similarly, Ground No: 1.3, which raises the point that the development of the project was started prior to 01.10.1998, does not arise from the orders of the departmental authorities because no such objection was taken by the Assessing Officer. This point was not also argued before us by the department.

27. As regards the assessment year 2003-04, the grounds are identical with those taken in the assessment year 2004-05. Our observations with regard to the revised grounds raised in this year are the same as in our decision in the appeal for the assessment year 2004-05. The appeal in ITA No: 4219/Mum/2009 is dismissed in line with our decision in the appeal for the assessment year 2004- 05.

28. As regards the assessment year 2002-03, the only ground relates to the decision of the CIT(A) to allow deduction under section 80-IB(10). In line with our decisions for the assessment years 2004-05 and 2003-04, the decision of the CIT(A) is confirmed and the appeal in ITA No: 6504/Mum/2008 is dismissed.

29. We may now take up the appeal of the department for the assessment year 2005-06. The first ground is that the CIT(A) erred in allowing deduction under section 80-IB(10) of the Act. The CIT(A) has followed his predecessor’s order for the assessment year 2004-05, which has been confirmed by us in the appeal filed by the department for that year. In line with our decision, we confirm the decision of the CIT(A) for this year also and dismiss the ground.

30. The second ground relates to the dis allowance under section 40A(2)(b) of the Act. The assessee paid Rs. 4,45,40,974/- to its Managing Director, Shri P R Mody, on account of salary, exgratia and medical reimbursement. The Assessing Officer was of the view that it was on the higher side in comparison with the payment made to the other Directors of the company. The assessee was therefore asked to justify the payment and also furnish a detailed note as to the applicability of the section. The assessee filed the details of the payments made to Shri P R Mody but did not submit any justification as to why the section cannot be applied. The Assessing Officer noticed that in the assessment year 2004-05 the total payments as Directors’ remuneration was Rs. 1,58,21,555/- whereas for the year under consideration it was three times more. The increase was found to be mainly due to the payment made to Shri P R Mody. The Assessing Officer then compared the income of the year with the income of the earlier year and found that even this does not justify the increase in the payment to Shri P R Mody. The other two Directors, Shri P D Colabawala and Shri K E Vaid were found to have been paid only Rs. 5,73,320/- and Rs. 2,60,707/- respectively, though they are also of the same capability as Shri P R Mody. The Assessing Officer for these reasons held that the payment of remuneration to Shri P R Mody was unreasonable and excessive. He restricted the payment to that of the last year, namely, Rs. 1,49,68,760/- and the excess of Rs. 3,01,26,247/- was disallowed under section 40A(2)(b) of the Act.

31. On appeal, it was submitted by the assessee that Shri P R Mody as Managing Director runs the entire business and cannot be compared with the other two Directors who hardly worked. Shri P R Mody is a Chartered Accountant from London and was earlier working for about ten years with M/s A A Ferguson & Company. The other two Directors were stated to be not even graduates. Shri P R Mody, it was pointed out, was paid only 8% of the profits and since the remuneration was linked to the profits, the same increased commensurate with the profits. It was accordingly submitted that it cannot be said to be unreasonable or excessive having regard to the legitimate needs of the business.

32. The CIT(A) found that there was nothing to show that the other two Directors were equally capable as Shri P R Mody. He further found that the reasonableness of the payment should be compared to the payment for similar services in the open market. The Assessing Officer has not compared the payment to Shri P R Mody with the payment made by other companies to similarly qualified and capable Managing Directors. According to the CIT(A), the Assessing Officer was not justified in comparing the payment to Shri P R Mody with the payments made to other two Directors, nor was he justified in comparing the payment with that made in the earlier year. In these circumstances he cancelled the dis allowance.

33. We have considered the facts. The facts are not in dispute. As rightly pointed out by the CIT(A), Shri P R Mody is a Chartered Accountant from London and had quality experience as employee of M/s A A Ferguson & Company for ten years before joining the assessee. He is also stated to be running the entire show whereas the other two Directors are not so qualified and also did not take part in the business in the same way in which Shri P R Mody took part in the assessee’s business. The CIT(A) is also right in saying that the Assessing Officer ought to have compared the payment made to Shri P R Mody with payments made for similar services by other companies. Comparison of the payment with the payments made to the other two Directors is not justified because in every organisation there may be differential payments depending upon the qualification, experience, etc. of each employee. The Assessing Officer has not brought on record anything to show that the payment to Shri P R Mody is excessive or unreasonable having regard to the fair market value of the services for which the payment was made or the legitimate needs of the business or the benefit derived from the services of Shri P R Mody. The conditions of section 40A(2)(b) not having been fulfilled, the CIT(A) was right in deleting the dis allowance. His decision is confirmed and the ground is dismissed.

34. The third ground relates to the addition of Rs. 31,30,792/- being sundry balances written off. The Assessing Officer made the dis allowance of the sundry balances written off in the Profit and Loss Account on the ground that the complete documentary evidence was not adduced by the assessee. He noted that the balances pertained to payments made to contractors which were initially not approved but were finally approved and one payment was made to a person who was declared bankrupt. He therefore disallowed the claim.

35. On appeal, the assessee submitted that the major amount of Rs. 21,59,960/- was in respect of one person by name Hemendra Sheth and the other balances were below Rs. 1,00,000/- each. The amounts have been paid by the assessee as advances to contractors for execution of various projects. If the work done by them and certified is less than the advances paid to them, there is an outstanding balance in their account which is to be written off as a loss. The assessee wrote off the amounts outstanding against the contractors because there was no scope of getting back the amount. In the case of Hemendra Sheth, he had become bankrupt. These facts were accepted by the CIT(A) and he therefore upheld the assessee’s claim.

36. On a careful consideration of the matter we see no ground to interfere, especially when the factual findings of the CIT(A) are not disputed. The ground is accordingly dismissed.

37. The fourth ground relates to the dis allowance of Rs. 7,48,734/- under section 40(a)(ia) of the Act. The Assessing Officer noticed that the assessee paid professional fees of Rs. 6,03,692/- and brokerage and commission of Rs. 1,45,042/-, aggregating to Rs. 7,48,734/- during the year, from which tax of Rs. 43,801/- was deducted in the months of February and March 2005. The tax so deducted was not deposited by the assessee with the Government before the due dates. The relevant details are set out in paragraph 5 of the assessment order in the form of a chart and they are not reproduced here for the sake of brevity and also because there is no dispute about them. Since section 40(a)(ia) says that no deduction would be allowed in computing the business income if the assessee fails to deduct, or fails to deposit the tax after deduction, the tax which is deductible at source under Chapter XVII-B of the Act from interest, commission or brokerage, rent, royalty, fees for professional or technical services, the Assessing Officer, relying on the said provision, disallowed the professional fees and brokerage and commission.

38. On appeal, the assessee pointed out that the tax deducted has been deposited on 06.04.2005 and therefore there is no default which would attract the provisions of the aforementioned section. The CIT(A) accepted the contention and deleted the dis allowance.

39. The revenue is in appeal. In the present case the assessee has admittedly deducted the tax at source at the time of the payment. According to section 40(a)(ia), as it stood at the relevant time, if the tax was deducted during the last month of the previous year, it should have been deposited before the due date specified in section 139(1) and any other case it should have been deposited with the Government on or before the last day of the previous year. According to the details set out in the assessment order, the tax of Rs. 35,316/- was deducted from the professional fees in the month of March 2005. The due date for depositing the tax, according to Explanation 2 below section 139(1) is 31.10.2005. The tax of Rs. 35,316/- was deposited on 22.06.2005, which is within the due date. Therefore, there is no justification for the dis allowance of the professional fees of Rs. 6,03,692/-.

40. As regards the brokerage and commission, from the details given by the Assessing Officer, it is seen that tax of Rs. 2,240/- was deducted in the month of February 2005 and as per section 40(a)(ia), as it stood at the relevant time, the tax ought to have been deposited before 31.03.2005, which is the last day of the previous year. The tax was actually deposited only on 06.04.2005. Therefore, so far as the brokerage and commission payment, on which tax of Rs. 2,240/- was deducted in February 2005 is concerned, the dis allowance made by the Assessing Officer should be upheld. The Assessing Officer is directed to ascertain the relevant amount and disallow the same. However, with regard to the tax of Rs. 6,245/- deducted in March 2005, the same has been deposited on 06.05.2005, which is within the due date as per section 139(1). Therefore, the brokerage and commission payment referable to the tax of Rs. 6,245/- deducted at source cannot be disallowed. The said dis allowance is held to be rightly deleted. Thus Ground No: 4 is partly allowed.

41. Ground No: 5 relates to the disallowance of car expenses. Whereas the Assessing Officer disallowed Rs. 7,85,375/-, the CIT(A) restricted the same to Rs.2,00,000/-. After going through the orders of the departmental authorities, we see no reason to interfere. The ground is rejected.

42. Ground No: 6 relates to the dis allowance of the delayed employees’ contribution to Provident Fund. The amount disallowed is Rs. 28,840/-. According to the assessment order, the due date for deposit of the amount was 15.06.2004 and it was actually paid the next day, i.e. 16.06.2004. The payment is within the grace period allowed as per the Circular issued by CPDC which is referred to in paragraph 9.1 of the order of the CIT(A). It gives a grace period of five days. The assessee has deposited the contribution within the grace period. Accordingly the decision of the CIT(A) to delete the dis allowance is upheld and the ground is rejected.

43. Ground Nos: 7(a) & 7(b) relates to the dis allowance under section 14A of the Act, in respect of administrative expenses attributable to the exempt income. The Assessing Officer disallowed Rs.15,26,507/- by invoking section 14A, noting that the assessee received dividend income of Rs.1,58,32,195/- which was exempt from tax. He noted that the dividend income constituted 2.49% of the income as per the Profit and Loss Account, which came to Rs. 63,56,24,975/-. The total administrative expenses claimed in the Profit and Loss Account was Rs. 6,13,05,507/-. The Assessing Officer disallowed 2.59% of the administrative expenses which came to Rs. 15,26,507/-. On appeal, the assessee submitted that it invested surplus funds in mutual funds through Standard Chartered Bank and the entire activity of selection of the appropriate fund, paper work and redemption was undertaken by the bank and the assessee was not involved in the work at all. It was therefore contended that no specific expenses can be said to have been incurred for earning the dividend income. It was pointed out that even the dividend warrants were directly deposited in the bank by the mutual funds. The CIT(A) did not accept the broad contention that no administrative expenses were incurred by the assessee since it had appointed Standard Chartered Bank for investing in mutual funds. He however held that the calculation of the dis allowance as made by the Assessing Officer was not proper. According to the CIT(A), a dis allowance of 3% of the dividend income can be held to be a proper estimate of administrative expenses attributable to the earning of the dividend income. This came to Rs. 4,75,965/-, which was confirmed, thereby giving relief of Rs. 10,51,541/- to the assessee.

44. There is no appeal by the assessee against the dis allowance sustained by the CIT(A). The contention of the revenue is that the dis allowance made by the Assessing Officer should be restored. On a careful consideration of the facts, we are of the view that the dis allowance sustained by the CIT(A) based on a percentage of the dividend income seems less reasonable than the method adopted by the Assessing Officer. The Assessing Officer has adopted the same percentage which the dividend income bears to the total income of the assessee as per the Profit and Loss Account. This seems to be a more reasonable approach. We accordingly reverse the decision of the CIT(A) and restore the disallowance made by the Assessing Officer.

45. Ground Nos: 8 and 9 are general and require no decision.

46. The appeal of the department for the assessment year 2005-06 in ITA No: 6505/Mum/2008 is thus partly allowed.

47. To sum up, ITA Nos: 4728/Mum/2007, 6504/Mum/2008 and 4219/Mum/2009 are dismissed and ITA No: 6505/Mum/2008 is partly allowed.

Order pronounced in the Open Court on 3rd June 2011.