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:

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