No deduction U/s. 80-IB(10) if Assessee utilises only small part of eligilble FSI

ITO Vs J. R. Construction (Gujarat High Court)

It is true that section 80IB(10) of the Act does not provide that for deduction, the undertaking must utilize 100% of the FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction under section 80IB(10) of the Act on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80IB(10) of the Act. This is not to suggest that for claiming deduction under section 80IB (10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the assessees have made any special ground for nonutilization of the FSI.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

1. This appeal is filed by the Revenue challenging the judgement of the Income Tax Appellate Tribunal dated 26.08.2011. The Revenue has presented two questions. First one was whether the Tribunal had committed an error in allowing the assessee claiming deduction under section 80IB(10) of the Act not appreciating that the relationship between the assessee and the end user of the units was that of work contract? The question was rejected by the Court relying on the judgement of this Court in case of Commissioner of Income Tax vs. Radhe Developer reported in 341 ITR 403.

2. The sole surviving question admitted reads as under:

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing deduction u/s. 80IB(10) r.w.s. 80IB(10) to the assessee on profit derived from sale of unutilized FSI, not being the element of profit derived from the business activity of development and construction of the housing project relating to the sale of tenements?”

3. Brief facts are that the assessee is a partnership firm engaged in the business of development of housing project. For the assessment year 2004.05, the assessee had filed the return of income on 31.10.2004 declaring total income of Rs. 23,500/-after claiming deduction under section 80IB(10) of the Act.

The Assessing Officer took the return into scrutiny. He noted that the assessee had developed three housing projects Shubhlaxmi, Samruddhi and Bhagyalaxmi. He further noted that out of the total permissible area for construction looking to the size of the land in the permissible FSI, the assessee had utilized only a small portion thereof. He therefore confronted the assessee with following facts:

“In the context of the assessment proceedings and pursuant to perusal of the details furnished in this regard, it is observed that you have not undertaken the completion of the project in its entirety as far as development and construction of the utilizable FSI is concerned. This implies that you had only developed and constructed a housing project by way of tenements by deploying construction of 9389.81 sq.mtrs of FSI, which has been utilized for the construction of the same. This leaves you with untilised FSI of 35364.19 sq.mtrs. Since the profits ensuing from all the projects to the extent of units (utilising FSI of 4815.27 sq.mtrs) sold by you have been booked by you for the year as per the profit and loss account, it is stated that in addition to booking profits out of the project of construction and development, additional profit attirbutable to sale of untilised FSI has also been booked by you. Since the eligible profits for claim of deduction u/s. 80IB(10) can only relate to those from the project of development and construction the profits attributable to the sale of unutilized FSI not relating to development and construction undertaken by you shall not become eligible for the said claim. The values thereof are computed as per table below:

Calculation of are and cost of land not utilized for construction but sold as stated above

4. In response to the notices issued by the Assessing Officer, the assessee contended inter alia that there is a difference between total permissible FSI as per the building by laws and permitted FSI as per the plan approved by the Vadodara Municipal Corporation. It was contended that as per the plan approved, the FSI permitted only 0.40 which was fully exploited by the assessee. The assessee further contended that it is not possible to segregate the profit derived from development of the housing project and one which is derived from sale of FSI. Any attempt on part of the Assessing Officer to do so would be logical.

5. The Assessing Officer by his order dated 27.12.2006 rejected such contention of the assessee. Out of the total deduction of Rs. 1,64,29,588/- claimed by the assessee under section 80IB(10) of the Act. The Assessing Officer granted only of Rs. 38,06,524/- and disallowed for Rs. 1,26,23,064/-. He made following observations:

“(c) Be that as it may, it is further stated that the above stated show cause notice also dwells upon another illustration of significant import which demonstrates that wherein a part of the FSI has been developed, by the constructing housing project thereupon and part of the FSI gets sold without developing, deduction u/s. 80IB logically would be available to the builder/developer only in respect of the area developed and constructed by him. The deduction u/s. 80IB(10) shall, therefore, not be available to the assessee who has merely sold unutilized FSI attributable to a plot of land though he may take a plea that it represents composite value stemming from his activity of development and construction of project in question. Hence, in the case of the assessee, it is seen that the deduction u/s. 80IB(10) is available to the assessee as far as it relates to the profit derived from that part of the property which is developed and constructed by the assessee and not on profits relating to unutilized FSI still remaining to be exploited in respect of the said partly developed property.

(d) In the final, analysis, as the assessee has not undertaken the completion of the project in its entity as far as development and construction of the utilisable FSI is concerned, it is stated that, the profit element pertaining to the covert sale unutilised FSI would be beyond the ambit of provisions of section 80IB and the deduction u/s. 80IB would be rightly deniable to him. Since the eligible profits for claim of deduction u/s. 80IB can only relate to those from the project of development and construction, the profits attirbutable to the sale of unutilized FSI not relating to development and construction undertaken by the assessee is ineligible for deduction u/s. 80IB. Accordingly, deduction u/s. 80IB(10) is not available to the assessee on the said value being in the amount of Rs. 1,26,23,064/-. Penalty proceeding u/s. 271(1)(c) r.w.s. 274 of the Act is initiated.”

6. The assessee carried the matter in appeal. CIT (Appeals) allowed the assessee’s appeal relying on the judgement of the Tribunal in case of Shakti Corporation dated 07.11.2008.

7. The Revenue carried the matter in appeal. The Tribunal dismissed such appeal by the impugned judgement dated 26.08.2011.

8. As noted at the outset, the assessee’s eligibility for deduction under section 80IB(10) of the Act is concluded. The Revenue’s objection was overruled relying on the judgement of this Court in case of Radhe Developers (supra). The only question that survives is, would the assessee be entitled to entire deduction as claimed or would there be disallowance as held by the Assessing Officer on the ground that the substantial portion of the assessee’s profit was not derived from development of housing project?

9. We have already noticed that the assessee was in the process of developing three housing projects viz. Subhlaxmi, Samruddhi, Bhagyalaxmi. In such projects, considering the land area and the permissible FSI of 1.6, the assessee was entitled to carry out total construction of 20198 sq.mtrs, 11426 sq.mtrs and 13130 sq.mtrs respectively. As against this, the assessee had actually carried out construction of 4538.13 sq.mtrs, 2212.42 sq.mtrs and 2639.26 sq.mtrs respectively in these projects. That left unutilized FSI of 15659.87 sq.mtrs, 9213.58 sq.mtrs and 10490.74 sq.mtrs respectively. Thus, in each of the projects, the assessee had utilized about 20% or less of the permissible FSI. It was in this context that the Assessing Officer had raised objection of the assessee’s profit being derived through sale of unused FSI. Such an issue was examined by this Court in case of Commissioner of Income Tax vs. Moon Star Developers reported in [2014] 367 ITR 621 (Guj.) making following observations:

“29. In this context, we may examine, whether the decision of the Assessing Officer to treat the income of the assessees from sale of FSI separate and excludable from the purview of section 80IB(10) of the Act? The concept of FSI, is a wellknown one. Local authorities, such as Corporations, Municipalities and Panchayats, frame regulations for regulating activities of development of lands within their local areas. Such regulations are popularly referred to General Development Control Regulations (GDCR). In addition to providing different zones controlling development activities in different areas for regulated and orderly development of urban areas, these regulations also provide for various other details such as maximum height upto which the construction can be carried out, maximum area on the ground floor or on other floors which can be covered under construction, margin to be left on sides, parking facilities to be provided depending on the nature of building and most importantly, the maximum construction that can be carried out on a given piece of land. The last element, namely, the ratio of the land area versus the maximum construction permissible on such land, is referred to as floor space index (FSI for short). It is this FSI which will decide the maximum area of construction that can be carried out on any given piece of land. It is, therefore, not difficult to appreciate that besides several other factors of situational and other advantages and disadvantages, FSI permissible for the land in question would be an important factor in the context of development of the land. Given all other factors same, higher the FSI, the greater the value of the land.

30. It is in this context, we have to appreciate the underutilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the earlier portion of the judgment, we can gather that such utilization of the FSI by the assessees ranges from the minimum of 11.14% of the full FSI available to a maximum of 65.81%. In majority of the cases, the assessees have covered barely about one fourth or one third of the permissible FSI.

31. For any commercial activity of construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remaining same, nonutilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Let us compare two instances. In the same area two residential schemes are developed. Both have residential units of 1500 sq. feet. In one scheme 100% FSI is used in another 25% FSI is used and 75% is passed on to the buyer of the unit. Price of the unit in the later scheme would for apparent reason be considerably higher than the former because the buyer there gets not only a residential unit of 1500 sq. feet, he also gets the right to build further construction of 4500 sq. feet. Whether this includes open land or not is not important. In terms of construction business, it is equivalent to sale of land. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer.

32. It is true that section 80IB(10) of the Act does not provide that for deduction, the undertaking must utilize 100% of the FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction under section 80IB(10) of the Act on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80IB(10) of the Act. This is not to suggest that for claiming deduction under section 80IB (10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the assessees have made any special ground for nonutilization of the FSI.

33. The contention of the counsel for the assessee that as long as there has been 100% utilization of the maximum permissible area on the ground floor, deduction under section 80IB(10) of the Act cannot be declined, cannot be accepted. As noted earlier, in case of M/s.Moon Star Developers and many other assesses, such full utilization of the ground floor area available for construction resulted into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused.

34. What is available for deduction under section 80IB(10) of the Act is the profit of an undertaking derived from developing and building a housing project. Mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits cannot be said to have been derived from such housing project. Terms “derived from”, “arising out of” and “attributable to” are often times used in the context of income tax in different connotation. In the case of Sterling Foods (supra), the assessee was engaged in processing prawns and other sea food which it exported. In the process, the assessee earned import entitlements to use itself or sell the same to others. During the year under consideration, the assessee included such sale proceeds for claiming relief under section 80HH of the Act, in case of any profit or gain derived from an industrial undertaking in backward areas. In this context, the Apex Court held that the import entitlements cannot be said to be derived from the industrial undertaking of the assessee. For the application of the words “derived from”, there must be a direct nexus between the profits and gains and the industrial undertaking and in the case on hand, the nexus was not direct but only incidental.

35. In case of Pandian Chemicals Ltd (supra), once again, the assessee claimed deduction under section 80HH of the Act. This claim included interest on deposit made with Electricity Board for supply of electricity. The Apex Court held that the interest derived by the industrial undertaking of the assessee on such deposits made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself and was not profit earned or gain derived by the undertaking for the purpose of special deduction under section 80HH of the Act.

36. In the case of Liberty India (supra), the assessee was engaged in infrastructure development and claimed deduction under section 80I, 80IA and 80IB, etc. on the draw back receipts and DEPB benefits. The Court held that such income cannot be stated to be derived from the industrial undertaking.

37. The case of Nirma Industries Ltd (supra) rested on different facts. It was a case where the assessee had claimed deduction under section 80IA of the Act. Such claim included the interest received from trade debtors towards late payment of sale consideration. This became a matter of dispute between the assessee and the Revenue. The Court held in favour of the assessee holding that such additional consideration can also be stated to be derived from the business. It was observed that when the purchaser pays a higher sale price, if it delays payment of sale proceeds, there is a converse situation to offering of cash discount. In principle, thus the transaction remains the same and there is no distinction as to the source.

37. In view of the above discussion, the question is answered in favour of the Revenue. All Tax Appeals to this extent are allowed. Respective decisions of the Tribunal are reversed to that extent. Appeals are disposed of accordingly.”

10. In the result, the Revenue’s appeal is allowed. Judgement of the Tribunal and CIT (Appeals) are reversed that of Assessing Officer is restored. Question is answered against the assessee. Tax Appeal is disposed of accordingly.