DLF Ltd. Vs. JCIT (ITAT Delhi)
Conclusion: Deduction of Rs. 1.78 Billion in respect of profits derived on account of development considerations of bare shells would constitute profits and gains derived from business of developing any Special Economic Zone within the meaning of Section 80 IAB and was allowable to DLF Limited.
Held: Assessee-company was engaged in the business of realistic development. The main issue was with regard to allowability of claim of deduction u/s.80IAB in respect of profit arising from sale of bare shell building in SEZ by assessee to M/s. DLF Pvt. Ltd. As a part of its business activities, assessee had undertaken to develop SEZ project in a Govt. designate Special Economic Zone after obtaining requisite approval under SEZ Act and SEZ Rules in terms of provisions of Section 80IAB. Assessee had undertaken to develop SEZ project which was duly approved by Government of India and later on had entered into MOU with co-developer, wherein it was agreed that assessee shall develop the bare shell building and transfer to M/s. DLF Pvt. Ltd. (co-developer) for further development and lease of the same to eligible tenants. It was also agreed that land on which building was to be constructed will not be sold to the co-developer, M/s. DLF Ltd. but will be leased out for a definite period. It was the profit from such developmental activity, amounting to ₹ 11,19,06,82,702/- arising from transfer of bare shell building was claimed as deduction u/s.80IAB, after obtaining the approvals from ‘Board of Approvals, Ministry of Commerce and Industry’, Government of India in respect of SEZ Project. AO had submitted that transfer of building of co-developer could not be treated as a business activity and the income from such transfer could not be treated as business income. In fact, it was a sale of a building in the nature of capital asset. It was held that the lease was only in respect of land and same could not be applied on transfer of building. In any case, the recognition of revenue relating to real estate projects was governed by AS-7 and assessee had been consistently following POCM which had accepted by the Tribunal in assessee’s own case for AY 2006-07. Hence, such a reasoning of AO to disallow proportionate deduction could not be sustained. Assessee was eligible for deduction under Section 80IAB because they were in consonance not only under the SEZ but also Board of Approval for SEZ had approved such activities.
FULL TEXT OF THE ITAT JUDGEMENT
1. These are the cross appeals filed by the assessee as well as The Deputy Commissioner Of Income Tax, Circle 7 (1)), New Delhi (the Learned Assessing Officer/AO) against the order of Commissioner Of Income Tax (Appeals) – 3, New Delhi (the learned that CIT A) dated 14 May 2015 for assessment year 2010 – 11.
2. The assessee in its appeal in ITA number 4187/del/2015 has raised following grounds of appeal. That the learned CIT(A) has grossly erred in law and on the facts in restricting the disallowance made by Assessing Officer u/s 14A read with Rule 8D(ii) of the Income-tax Act, 1961, to Rs.37,97,74,00/- when no disallowance u/s 14A read with Rule 8D(ii) is warranted as the appellant had itself disallowed / added back Rs. 19,15,695/- u/s 14A. [Page 101-115 of CIT(A)’s Order]
2.1 That learned CIT(A) has grossly erred in law and on the facts in confirming the net addition of Rs.7,69,038/- [i.e. after allowing standard deduction @ 30% on gross addition of Rs. 10,98,626/- which works out to Rs.3,29,588/-] made by the Assessing Officer on account of notional rent, whereas in fact the appellant has not received any rental income from these tenants. [Page 136-140 CIT(A)’s Order]
2.2 That learned CIT(A) has grossly erred in law and on the facts in not appreciating the fact that the taxable income means real income and not a fictional income.
3. That learned CIT(A) has grossly erred on the facts and in law in confirming the disallowance made by the Assessing Officer to the Rs.20,42,053/- on account of registration fee for the Gujarat and Karnataka windmills by treating the same as capital in nature. [Page 151-177 of CIT(A)’s Order]
4. That the appellant reserves its right to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant craves leave to amend, vary or add to the grounds hereinbefore appearing.
3. The learned AO in ITA number 4793/del/2015 has raised following grounds of appeal.
ITA No. 4793/DEL/2015 AY 2010-11
1. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in allowing deduction of Rs. 178,61,73,799/- u/s 80IAB of the Act.
2. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting in disallowances made by Assessing Officer of Rs. 93,02,00,000/- on account expenses to be allocated from non SEZ projects to SEZ projects.
3. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting disallowance of Rs 68,59,59,202/- on account of revenue recognition as per POCM.
4. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the disallowance of Rs. 2,35,037,000/- on account of interest capitalization.
5. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the disallowance of Rs. 145,10,655/- on account of brokerage and commission.
6. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 3,39,112/- on account of contingency deposits received from customers during the year.
7. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 70,62,529/- on account interest free security deposit.
8. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,34,45,144/- on account of registration charges.
9. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,24,52,456/- on account of non allocation of proportionate overheads expenditure to group companies.
10. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in restricting the disallowance u/s 14A of the I.T. Act, 1961 read with Rule 8D of the Income Tax Rule, 1962 to Rs. 18,15,695/-as against the disallowance of Rs. 132,66,81,000/- made by the Assessing Officer.
11. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 8,87,48,896/- on account of reclassification of income from house property to income from business or profession.
12. The Commissioner of Income T-ax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,29,430/- on account of notional rental income on vacant properties.
13. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 5,64,961/- on account of recalculation of depreciation in respect of earlier let out DLF Centre Building, now converted to self occupied property.
14. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 4,75,95,830/- made by the AO on account of disallowance of prior period expenses.
15. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in restricting the disallowance to Rs. 20,42,053/- as against the disallowance of Rs. 735,03,187/- made by the Assessing Officer on account of disallowance of capital expenses.
16. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 4,96,29,551/- on account of expenses not incurred wholly and exclusively for the business purposes under different heads by holding them being personal in nature.
17. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 38,74,49,073/- on account of disallowance of expenses for operation and maintenance of helicopter and air craft not being wholly and exclusively for business.
18. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 69,31,00,000/- on account of notional interest under charged.
19. The Commissioner of Income Tax(Appeals) has erred in law and on the fact of the case in deleting the addition of Rs. 455,15,030/- on account of non charging of interest on loans given to related parties.
20. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case for not adjudicating the issue of disallowance of Rs. Rs.2,04,98,125/- on account of non adding back of disallowance of the items to computation of income and in directing the Assessing Officer to verify the evidences filed by the assessee during the assessment proceedings and to delete the additions if it were already offered to taxation by the assessee.
21. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 13,87,00,000/- on account of non charging of interest on loan given to Saket Courtyard Hospitality.
22. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.
4. Brief facts of the case shows that assessee is a company which is engaged in the business of realistic development. It filed its return of income on 29/9/2011 declaring an income of ₹ 4,743,424,620. The assessment was completed by the learned assessing officer u/s 143 (3) of the act white order of assessment dated 24/9/2014. The total income of the assessee was assessed at ₹ 1,473,850,810/–. Aggrieved by the order of the learned assessing officer, the appellant preferred an appeal before the learned CIT – A passed an order partly allowing the appeal of the assessee on 14th of May 2015. Therefore with respect to the additions deleted by the learned CIT – A, the learned AO is aggrieved and with respect to the addition is confirmed by him, the assessee is aggrieved and therefore both are in appeal before us.
5. Coming to the appeal of the learned assessing officer, the learned departmental representative vehemently supported the order of the learned assessing officer. The learned authorised representative submitted a detailed chart and submitted that except ground number 16 of the appeal all other grounds are covered by the decision of the coordinate bench dated 27th of May 2019 ITA number 2749/del/2013 for assessment year 2008 – 09 in favour of the assessee. He therefore submitted that the coordinate bench order needs to be followed. We have carefully considered the rival arguments and also considered the decision of the coordinate bench for assessment year 2008 – 09 in case of the assessee. We also found that most of the issues are squarely covered by the decision of that assessment year of the coordinate bench.
6. Ground number one of the appeal is with respect to allowing the deduction of Rs 1 78,61,73,799/– u/s 80 IA B of the income tax act. Both the parties agreed that same is covered by the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 wherein ground number two of that appeal covers this issue. The coordinate bench has decided this issue as Under:-
“Disallowance of SEZ deduction u/s 80IAB.
46. The next issue relates to deletion of addition on account of disallowance of SEZ deduction u/s.80IAB, which is one of the core issues raised before us.
47. The facts in brief are that the assessee has shown gross income of ₹ 1497.94 crore from SEZ activities and after reducing the cost of construction amounting to ₹ 378.78 crore and allocation of common expenses had declared eligible profit at ₹ 119.06 crores and claimed the deduction u/s.80IAB.
48. Assessing Officer after considering the assessee’s submission in this regard and strongly relying upon the judgment and order dated 03.02.2011 passed by Hon’ble Punjab and Haryana High Court in respect of assessee’s land, came to the conclusion that the acquisition of land for development of SEZ has been held by the Hon’ble High Court to be illegal and the Court’s order strike to the very root of the notification issued under the SEZ Act, 2005 for the development of SEZ, and therefore, SEZ itself becomes illegal from the date of inception. According to the AO, under section 80IAB, the deduction is available only in respect of profits and gains by an undertaking or enterprise engaged in the development of SEZ, but the assessee-company is not entitled for claim of deduction u/s.80IAB, because land on which SEZ has been constructed has been found to be acquired by the assessee fraudulently.
49. On the other hand, assessee’s reply was that the approval granted by the Board of approval for SEZ has remained untouched despite of the High Court order, and therefore, assessee under the law was entitled for claim of deduction u/s.80IAB. However, the ld. Assessing Officer rejected the said contention and held that the approvals of Board of Approval were granted at the time when High Court order was not pronounced, i.e., on 11.02.2011. Apart from that, the ld. Assessing Officer also proceeded to examine the claim on merits. The relevant observations of the AO in this regard can be summarised as under: –
* Section 80-IAB provides for deduction from the activity of developing, operating and maintaining SEZ. In view of the same, please explain how the activity of constructing buildings and sale thereof to Co-Developer is covered by the provisions of section 80-IAB.
* As per SEZ Rules, 2006, developer of an SEZ cannot sell land in the Special Economic Zone under rule 11(9). In view of the same, you are required to explain how the sale of buildings can take place without the sale of land. Also explain that how any income arising from such transfer of assets is covered under section 80-IAB and eligible for deduction.
* The SEZ Act notifies specified authorized operations which alone qualify for exemptions, deductions. Please explain how sale of constructed buildings can be classified as authorized operations eligible for deduction under section 80-IAB especially with reference to the Notification No. SO/1846(E) dated 27.10.2006 and also with reference to the approval dated 14.02.2007 granted by Government of India, Ministry of Commerce & Industry.
* A modified approval dated 01.06.2009 was granted by Board of Approval, SEZ to codeveloper i.e. DLF Assets Ltd. after taking into account the Co-developer agreement dated 20.03.2008. It has been stated in the aforesaid approval that the transactions were approved subject to the condition that as per terms and conditions of lease agreement between developer and co-developer will not have any bearing on the treatment of income by way of lease / rentals / down payment / premium etc. for the purpose of assessment under the prevalent Income Tax Rules. The AO will have the right to examine the taxability of these amounts under the Income Tax Act. In view of the same, the claim for deduction under section 80 IAB is not dependent merely upon the approval granted by Board of Approval and can therefore be independently examined by the AO under the Income Tax Act. Therefore, you are required to explain how the profits arising from the activity of transfer/sale of constructed buildings in the SEZ notified land by DLF Ltd. to DLF Assets Ltd. will qualify for deduction under section 80 IAB.
* Transactions undertaken between DLF Ltd. and DLF Assets Ltd. amount to transfer of bare shell buildings between the two entities. Why nature of income derived from the co-developer agreement should not be treated as onetime income arising from transfer of assets and why the transaction should not be treated as sold. In this connection, you may note that the Addendum to co-developer agreement clearly states that on expiry of term of lease, the co-developer shall make best efforts to dispose off the warm shell which further shows that he has complete and unfettered rights over the buildings thereby implying that the assessee has basically sold the bare shells to the co-developer and as a result of such sale generated income from the business of development and therefore not eligible for deduction. Further, the Codeveloper i.e. DLF Assets Ltd. has reflected the same as “Fixed Assets” in its books of accounts and not as “Business Asset”. Thus, looking at it from another angle, please explain why the aforesaid transaction involving transfer/sale of constructed buildings from DLF Ltd. to DLF Assets Ltd. should not be treated as income/loss from capital gains. You may also explain that if the transaction is treated as capital gain, then how such income which would be a non business income can be claimed as being eligible for deduction under section 80IAB.
* It was also observed by him that income tax deduction U/s 80IB is allowable for a period of 10 years on the profits arising from development on a year to year basis and there is no provision for claiming the entire deduction of the income in any one year and that also in respect of receipt which actually pertains to a further rent for 49 years. In view of this you may explain why the claim of deduction under section 80IAB, may not be restricted to 1/49th of the total development income received by the assessee company in any one financial year.
50. In light of above observations of the AO, assessee made detail submissions with regard to the specific queries raised by the Assessing Officer which has been noted and dealt by him from paragraph 2.20 to 2.41 of the assessment order. However, ld. Assessing Officer apparently without adverting to the various points and issues raised by the assessee, held that the claim of deduction u/s.80IAB is not allowable predominantly in view of the fact that Hon’ble Punjab and Haryana High Court has held that acquisition of SEZ land was illegal and also the sale of building to a cobuilder is neither a business activity nor one of the authorized operations of SEZ. Accordingly, he denied entire claim of deduction and added the same to the income of the assessee.
51. In the first appeal, Ld. CIT (A) after considering the entire gamut of materials placed on record and after detailed discussion has allowed the assessee’s claim. The relevant finding and observations are as under: –
8.25 From the clarifications dated 18.01.2011 & 10.01.2011 issued by the Ministry as well as the correspondence between the Ministry of Commerce and the CBDT there remains no scope of doubt that the disclaimer referred to by the Assessing Officer in approval letter dated 01.06.2009 is applicable only to a transaction of transfer of land in the guise of long term lease by receiving lease rentals/down payments/premiums commensurate with the sale value of the land as is evidence from para-4 of the letter dtd. 26.05.2009 sent by the Director (ITA-1) CBDT to the Department of Commerce and Industry. Thus, the disclaimer vide point 3 (XVII) of the co-developer approval letter, on which the Assessing Officer has relied upon is not applicable to the transfer of bare shells and coldshells for a consideration. The transfer of bareshells and coldshells for a consideration was approved as authorized operations as per the approval issued by Board of Approvals. The Ministry of Commerce in their clarification issued on 18.01.2011 has explicitly clarified that all leases of land are subjected to general condition contained in para 3(xvii) of letter dated 01.06.2009 and this general condition is applicable to the terms and conditions of the land lease agreement only.
8.26 Keeping in view, the discussions above it is clear that the appellant has been duly approved by the Board of Approvals as a developer, the land owned by the appellant in Sector-30 of Gurgaon was notified by the Govt. of India for establishment of SEZ, the authorized operations to be undertaken in the proposed SEZ were approved by the Board of approvals, the co-developer agreement dated 20.03.2008 executed with the co-developer contemplating transfer of bare shells to the co-developer for an agreed development consideration has been duly approved by the Board of approvals, the DAPL has been approved as a co-developer. The transfer of bare shells to the codeveloper has been approved as an authorized operation by the Board of Approvals and the disclaimer contained in clause 3(xvii) of approval letter dated 01.06.2009 applies only to transfer of land or one time lease rental/one time down payment/premium etc. as clarified by the Ministry of Commerce in the clarification dated 18.01.2011 and correspondence made between the Ministry of Commerce and Department of Revenue as filed by the appellant during the course of appellate proceedings as additional evidence.
In view of the facts discussed above, I agree with the submission of the appellant that the disclaimer condition mentioned in the codeveloper approval letter dated 01.06.2009 is primarily put in by the Board of approvals in the approvals to put a curb on the wrong practices of leasing the land for long periods and receiving onetime payment in the form of lease rental/down payments/premiums etc. which tantamount to sale of land in the guise of long term lease. The appellant has obtained requisite approval from the Board of Approvals by disclosing all facts. The entire controversy as to whether the transfer of bare shell buildings to the co-developer was an authorized operation has been set at rest by the correspondence made between the Ministry of Commerce and Department of Revenue and also by clarification letters issued, dated 18.01.2011 & 20.01.2011 by Ministry of Commerce. I am satisfied that all the conditions as required to be satisfied under the SEZ Act/Rules are fulfilled and the appellant is an approved developer for all intent and purpose of Section 80 IAB of the Act. Consequent upon approval granted by the Board of Approvals for the transfer of bare shells to the co-developer for a consideration is an authorized operation and income derived from such transfer of coldshell or bareshells is eligible for deduction U/s 80 IAB of the Income Tax Act, 1961.
Regarding the observation of the Assessing Officer that the land and building are one composite and cannot be separated, the appellant has stated that the Indian Law recognizes separate ownership of the land and building and this position has been recognized by various High Courts including the Hon’ble Supreme Court wherein it has been held that the maxim, what is annexed to the soil goes with the soil has not been accepted as an absolute rule of law of this country. In the following judgments the Hon’ble Courts have held that a person who bonafidely puts up constructions on land belonging to others with their permission would not be a trespasser, nor would the buildings so constructed vest in the owner of the land.
(i) Park View Enterprises Vs State Govt. of Tamil Nadu [1991] 189 ITR 192.
(ii) The Privy Council in Narayan Das Khettry v. Jatindra Nath Roy Chowdhry, AIR 1927 PC 135, has also taken the view that having regard to the law in India it is possible to have separation of ownership of the building from the ownership of the land.
(iii) This view of the Privy Council was approved by the Supreme Court in Bishan Das v. State of Punjab, AIR 1961 SC 1570.
Therefore, in view of the above judicial pronouncements, land is an independent, identifiable asset, and continues to remain identifiable even after construction of the building.
8.27 I have gone through these judgments and am of the considered view that there is a force in the arguments of the AR as the land and building are independent identifiable assets. It is a common practice in India that one person owns a land and the other owns the superstructure built thereon. Keeping in view these facts and circumstances and the legal position, the appellant has not violated any of the conditions as provided under the SEZ Rules.
8.28 Ground Nos.4.1.7, 4.1.8, 4.1.9, 4.1.10 & 4.1.11 – These grounds of appeal pertains to the observation of the Assessing Officer wherein the Assessing Officer has held that the profit arising from sale of bare shell buildings by the appellant to the codeveloper constitute capital gains and not the business income so as to be eligible for deduction U/s 80 IAB of the Act. Further, the Assessing Officer has held that the sale consideration received for the sale of bare shells had to be spread over the period of 49 years. The appellant has contended without prejudice to the other grounds that if the contentions of the Assessing Officer are accepted that either the appellant was not the lawful owner of the land on which SEZ has been set up or sale of bare shell buildings by the appellant was impermissible then the amount received by the appellant has to be refunded to the co-developer.
The appellant has contended that it had been engaged in the business of real estate and the development of such commercial projects is the main object of the appellant. The appellant had been following the Percentage of Completion Method (POCM) for recognizing revenue of various projects as per the Accounting Standards issued by the Institute of Chartered Accountants of India and it has been accepted by the department since inception. It is a matter of record that the Assessing Officer herself has accepted such incomes as business income of all the projects developed by the appellant even during the year under consideration.
It is seen that the appellant has been following mercantile system of accounting and has been recognizing the revenue in accordance with the Accounting Standard AS-7 & AS-19 issued by the Institute of Chartered Accountants of India. It is now a judicially recognized preposition that in case of contracts or business of construction, in order to ascertain the income, one need not wait till the contract is completed. The Assessing Officer however cannot apply any other method for recognizing the revenue and has to accept the accounting policy followed by the appellant, therefore, when the appellant has recognized the income following percentage of completion method as per AS-7 issued by the Institute of Chartered Accountants of India, the profits derived on account of development considerations of bare shells would constitute the profits and gains derived from business of developing any Special Economic Zone within the meaning of Section 80 IAB of the Act. The claim of deduction U/s 80 IAB is a valid claim considering the overall facts of the case.
The accounting treatment of warm shells by the co-developer in its books of accounts as an asset would not make any difference as far as the appellant is concerned. The admitted fact remains that the appellant has computed its income under the Percentage of Completion Method (POCM) which is prescribed for calculating profits and gains of business of real estate developer under the mandatory accounting standard issued by the Institute of Chartered Accountants of India. The Assessing Officer’s observations by referring to the classification of assets shown by the codeveloper was a sale of capital asset subjected to capital gain is against the very principle of the Act when the bare shell buildings were neither part of capital work in progress nor fixed assets of the appellant. A perusal of the assessment order reveals that the Assessing Officer has not categorically held the income of the appellant under the head ‘Capital Gains’ as no such specific addition has been made. The Assessing Officer has only made her observations without prejudice to her decision in disallowing the entire claim of deduction U/s 80 IAB.
8.29 I have considered the submission of the appellant and observation of the Assessing Officer. It is seen that observations of the Assessing Officer are not based on correct appreciation of facts. The appellant has shown work in progress in the business of construction and by no stretch of imagination work in progress can be treated as capital asset. The stock in trade is specifically excluded from the definition of ‘Capital Asset’ Under section 2(14) of the Act. The development of the bare shell buildings in the SEZ and subsequent transfer thereof cannot be considered as giving rise to short term capital gain considering the business of the appellant and accounting treatment adopted in the books of account irrespective of the treatment by the codeveloper in the books of accounts as fixed assets. The observations of the Assessing Officer on this issue are erroneous, legally untenable and misdirected in holding that the income can be assessed as capital gains. I have gone through the judicial rulings relied upon by the appellant in support to its claim.
Further, the appellant has disputed the decision of the Assessing Officer in holding that the development income was relatable to 49 years of lease period and only 1/49th could have been earned by the appellant in one year. The appellant has contended that having held so the Assessing Officer ought to have allowed a deduction of ₹ 22,83,81,280/-U/s 80 IAB and excluded the remaining income pertaining to the subsequent years for the computation thereby resulting in no addition. It is noticed from the assessment order that Assessing Officer notwithstanding with her decision holding the income from transfer of bare shells as income from capital gains has further held that even if the income from transfer of bare shell was to be treated as development income from SEZ, the entire income was relatable to 49 years spread over the period of 49 years lease.
From the discussions in earlier paragraphs it is an admitted fact that the appellant has leased out only the land. The bare shell buildings have not been leased out but transferred to the co-developer for a agreed consideration which has been approved by the Board of Approvals. Therefore, to link the transfer consideration of bare shells with the period of lease of land is totally irrelevant in the facts of the appellant’s case. It is a fact that the appellant has adopted rent capitalization method for determining the development consideration of bare shells but the period of lease is again irrelevant in such determination because the rent capitalization method includes theory of determination of market value of building having regard to net operating income yielded by the property in a year or average of multiple years. Such method of valuation is in conformity with the basis adopted for capitalisation of net maintainable rent as per Rule- 3 of Schedule III of the Wealth Tax Act. Therefore, when the transfer of bare shells has been permitted as an authorized operation by the Board of Approvals, the application of lease period becomes redundant. Considering the above, there is neither any question for treating 1/49th of development consideration as income of one year for the purpose of deduction U/s 80 IAB nor for the purpose of disregarding balance income filed by the appellant during the year.
The appellant has further contended that if the observations of the Assessing Officer are accepted in as much as the transfer of bare shell buildings is not an authorized operation or the acquisition of land was illegal then nothing accrues to the appellant and the monies received by it from the co-developer ought to have been refunded. I have considered the submissions of the appellant. Since it has been held that the deduction U/s 80 IAB is admissible to the appellant, this ground becomes infructuous and does not call for any adjudication.
8.30 Ground No.4.2 – This grounds pertains to the observation of the Assessing Officer wherein the Assessing Officer held that without prejudice to the disallowance made U/s 80 IAB, if at any higher appellate stage the assessee is allowed deduction U/s 80 IAB of the IT Act, then the quantum of deduction is to be reduced by ₹ 24,20,98,512/- on the basis of findings given by the Special Auditors in para 3.15 to 3.22 at page Nos.25-29 in Volume-IIIA of the Special Audit Report. The appellant has contended that the Assessing Officer has made these observations on the basis of Special Audit Report wherein the Special Auditors have stated that there is short allocation of overheads to the SEZ Division. The Special Auditors proposed that some expenses ought to have been allocated to the SEZ project out of the other non-SEZ project.
The AR of the appellant has drawn my attention to the details filed during the course of assessment proceedings as well as before the Special Auditors. These details have been filed in the paper book at pages 258-271. The AR of the appellant has vehemently argued that the appellant is a listed company and its accounts are subjected to various checks and audits. Particularly for claim of tax holiday U/s 80 IAB of the Income Tax Act, 1961, the appellant has got its accounts audited from an independent accountant specifically for quantification of the deduction admissible to the appellant. It is a statutory requirement that the independent auditor has to certify the computation of deduction admissible U/s 80 IAB of the Income Tax Act, 1961. The appellant has brought to my notice the statutory report in Form No.10 CCB dated 29.09.2008 which has also been filed in the paper book wherein the deduction has been computed at ₹ 1119,06,82,702/-.
The AR has also contended that the tax auditors also while finalizing the report U/s 44 AB of the Act have verified the deduction admissible to the appellant U/s 80 IAB and has certified the same in the Tax Audit Report. It has been contended that the appellant is a pioneer in the real estate business and had been executing projects for more than six decades. The expenditure under various heads proposed to be allocated to the SEZ Project by the Special Auditors had all along been incurred by the appellant over the years and have been allowed to it under the provisions of the Income Tax Act, 1961. It has been stated that despite the fact that the SEZ Project was not in operation in earlier years but still these routine expenses have all along been allowed to the appellant while computing the total income for respective years. The appellant has filed a comparative chart of expenses incurred and claimed by the appellant during the year as well as in the preceding year to show that the expenses have been all along allowed. The appellant has also contended that similar issue arose in the case of M/s DLF Commercial Developers Ltd. for AY 2008-09 and the same has been deleted in appeal vide order dated 19.12.2012 in Appeal No.71/12-13.
8.31 I have considered the submissions of the appellant and have perused the details filed by the appellant on this issue. It is seen that the allocation made by the Assessing Officer from the salary expenses of senior management and expenses under the head ‘other expenses’ have been made without bringing any adverse information on record. The appellant has given details of headwise expenses incurred on SEZ and non-SEZ activities and such information cannot be brushed aside without pointing out any mistake in the allocation of expenses. The allocation cannot be made on the basis of presumptions and some material has to be brought on record to justify such reallocation of expenses for working out deduction U/s 80 IAB. It is seen that this issue has been considered by me while passing the appellate order dated 19.12.2012 in appeal No.71/12-13 in the case of DLF Commercial Developers Ltd. where the similar disallowance has been directed to be deleted.
In view of the factual position, the Assessing Officer is directed to allow the deduction U/s 80 IAB as claimed by the appellant in the return of income without making any reallocation.”
52. The Ld. Spl. Counsel appearing on behalf of the Revenue, after referring to the facts as noted in the assessment order, also summarised the findings of the AO given from pages 31 to 81 of the assessment order, in his written submissions.
53. At the outset, he submitted that in the Assessment Year 2009-10, the Hon’ble High Court in the case of DLF Commercial Developers Ltd., (2018) 92 com 10 has remanded the matter to the Tribunal analyzed the case in the light of the provision of SEZ Act, 2005 which Tribunal has not independently done and set aside the matter back to the file of the Tribunal to decide afresh and in accordance with law. The relevant observation of the Hon’ble High Court reads as under:
“In the present appeals, the ITAT has merely followed the decision rendered in a previous order. The earlier decision in this regard is the one rendered in 2007-08 in the case of DLF Infocity Developers (Chennai) Ltd. There, the Assessing Officers’ (AO) order granting deduction u/s 80IAR was interfered with by the CIT(A) u/s 263 of the Income Tax Act, 1961”. The ITAT proceeded to set-aside the order, holding on merits that the assessee was entitled to the deduction claimed. That order has been followed on merits by the ITAT in the current A. Y 2009-10 and 2010-11. This Court is of the opinion that the ITAT’s decision merely reproduced that CIT(A) ‘s judgement and has not analysed independently, in either of the AYs the applicability of Section 80IAB towards the education claimed in the light of the transactions reported and the documents disclosed. Furthermore, those facts have also to be analysed in the light of the provisions of SEZ Act, 2005, which the ITAT has not independently done. For these reasons, the Impugned orders of the ITAT are set-aside and are remitted for fresh consideration by the ITAT in accordance with the law. All rights and contentions of the parties are reserved.”
54. He further submitted that in order to ascertain the nature of income, it is necessary to examine the relevant issues as per SEZ Act and Rules which according to him should be analyzed as under:
i. In the schedule 13 of the Audit Report under the head “Related party disclosures” DLF Assets Pvt. Ltd., the codeveloper, has been stated to be entity under the subsidiary companies. The entire income claimed to be exempt under section 80 IAB has been shown as received on account of sale of buildings to this related party.
ii. The commercial terms for sale to DLF Assets Pvt. Ltd (DAPL) were decided by the Memorandum of understanding for Co-developer Agreement, Co- Developer agreements and addendums to Co-developers agreements executed. It is significant to note that the intention here, from the very beginning, was to transfer the entire land and buildings to the co-developer and the assessee company never engaged itself in the business of development of SEZ. Some of these clauses were later amended only with a purpose to show that it might not appear to approving authorities that the intention was to transfer both land and buildings to the codeveloper, particularly when they realized that sale of land in SEZ was not permitted. This fact can be vouched from point 3 of the facts of the case mentioned above. Combined reading of all the clauses of Co-Developer Agreement and Lease deed clearly shows that the intention of the assessee company was to sell land to their related company and they have booked business income out of the transaction. Thereafter the deduction u/s 80-IAB has been claimed out of the business income which should not be allowed for the reason that sale of land is not permitted as per SEZ Act and Rules.
iii. When the Board of Approval (BoA) later examined this issue, they were of the categorical view that transfer and handover of buildings on payment of development consideration was against the spirit of SEZ. This issue will be discussed in detail later. The fact remains that the assessee merely built the structure and sold the same to the codeveloper.
iv. It is seen that section 3(8) of SEZ Act specifically states that the Central Government may prescribe the requirements for establishment, namely:
a. The minimum area of land and other terms and conditions subject to which Board shall approve, modify or reject any proposal received by it under sub section(2) to (4); and
b. the terms and conditions, subject to which the Developer shall undertake the authorized operations and entitlements.
v. Further section 3(11) of SEZ Act while referring to the agreement between developer and co-developer stipulates that section 3(8) quoted above shall apply to the said proposal. Thus, the condition regarding examination of taxability of the transactions by Assessing officer is one of the main requirements subject to which the Co-developer agreement has been approved by competent authority.
vi. Section 7 of SEZ Act further restricts the exemptions of Developer from taxes, duties of cess to any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area thus clearly specifying the activities for which exemption from tax will be granted to the developer. In the present case, the assessee company has sold assets and income derived there from does not fall in this category.
vii. Section 9 of SEZ Act clearly define duties, powers and functions of Board of Approval (BOA) which includes granting of approval or rejecting proposal or modifying such proposals for establishment of SEZ.
viii. It is very relevant to note that transfer of buildings by the developer to the codeveloper was considered by the BoA as against the spirit of SEZ as pointed out by the Department of Revenue and agreed to by BOA unanimously. (i.e. it is not the business of development of SEZ.) This is the reason that BOA has put the condition of examination of the issue of taxability after determining the nature of income by the Assessing Officer. In this respect minutes of 32nd meeting and of 34th meeting of SEZ BOA held on 23rd February 2009 and 19th June 2009, which discussed the assessee company’s case as one of the co-developer, are very important and are reproduced as follows:
32nd Meeting
“The representative of the DoR (Department of Revenue i.e representative of CBDT) pointed out that the co-development agreement refers to transfer and hand over deeds which states that co-developer shall be the owner of the SEZ buildings on payment of development consideration, which is against the spirit of SEZ Act and Rules. 34th Meeting
“The Board noted that in the meeting held on 23.02.2009 it was decided to defer the 4 proposals of co-developers in respect of same Developer, i.e., M/s DLF Limited as the representative of the DoR pointed out that the co-developer agreement refers to transfer and hand over deeds which states that co-developer shall be the owner of the SEZ buildings on payment of development consideration, which is against the spirit of SEZ Act and Rules. Following this observation, the proposals were deferred and it was decided to examine the case on file. DoC examined these proposals on file in consultation with CBDT and the agreements were revised by the co-developer. The proposals were approved subject to the condition that particular terms and conditions of lease agreement will not have any bearing on the treatment of income by way of lease rentals/down payment/premium etc. for the purpose of assessment under the prevalent Income Tax Act and Rules. The Assessing Officer, will have the right to examine the taxability of these amounts under the income tax Act. “
Copy of Minutes of 32nd Meeting and 34th Meeting of BOA are enclosed with these Submissions.
ix. Section 27 of the SEZ Act which deals with provisions of Income Tax Act, 1961 to apply with certain modification in relation to Developers and entrepreneurs clearly states that the provisions of the Income Tax Act, as in the force, for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a SEZ. The notification for IT SEZ’s authorized operations does not include sale of building from which income has been shown by the assessee company on which deduction u/s 80IAB has been claimed.
x. Rule 11(10) of SEZ Rules 2006 specifies that the developer shall not sell the land in a SEZ. As sale of land is prohibited and the land has been given to co-developer through an arrangement of lease of land which is nothing but a ploy to overcome this prohibition. This is the reason that BOA said such arrangement was against the spirit of SEZ and asked the assessing officer to examine the taxability of such income.
xi. SEZ Act notifies specific authorized operations which alone would qualify for exemptions, concessions and drawbacks. Sale or transfer of assets is not an authorized operation and therefore income from such operation would not be eligible for exemption as per notification no. S.O.1846 (E) dated 27th October 2006.
Copy of the Notification dated 2Th October 2006 is enclosed with these submissions.
xii. That the copy of CBDT letter dated 26th May 2009 is on page 210 of the paper book II filed by the assessee counsel. Para 4 of the letter clearly states that approval will have no bearing on tax treatment of income arising out of such transaction which will be decided as per the relevant provisions of the Income Tax Act.”
55. If these issues are examined in detail then following facts are established:
a. “That the assessee company has not developed the SEZ rather only constructed the buildings. The deduction u/s 80- IAB is available only in the case of development of SEZ. Mere construction of Bare shell buildings will allow the assessee the deduction u/s 80-IAB. Section 80-IAB states that profit and gains derived from business of developing SEZ. Thus, the deduction is only available once the SEZ is developed and it cannot be allowed before the stage of development of SEZ.
b. Sale of buildings to the co-developer is neither an activity of development of SEZ nor one of the authorized operations for SEZ notified by the competent authority. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the Co- Developer agreement and lease deed that the intention on the part of the assessee company, from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. Co-developer agreement and lease deed very clearly shows that the developer has sold the land and building and loses all rights over these transferred capital assets and the relinquishment of right is irrevocable.
c. Though SEZ Act prohibits for sale of land thereby implicitly denying any benefit to a developer who is basically interested in deriving income by transfer of assets, the assessee has found a way to overcome this prohibition by creating 49 years lease in favour of co-developer. It is pertinent to note that the lease deed is renewable further and thus effectively transferring the land also. Para 2.3 and 5.1 of the Lease Deed clearly allows the parties to renew the lease deed. Thus, the assessee company has transferred the land in actual sense and substance of this present transaction means sale of land. In most of the cases, substance of the transaction and its form are one and the same. However, the substance can be different from the form of the transaction in many cases. In the present case, the assessing officer has rightly gone for the substance of the transaction and disallowed the deduction u/s 80-IAB claimed by the assessee company as the lease deed is mere eye wash and actual transaction was sale of land which is clearly not permissible under SEZ Act. Relevant paras of Lease deed are at page 135 & 136 of the Paper Book II filed by the Counsel of the assessee.
d. The transfer of building is absolute and as per the amended agreement and lease deed , Co-developer shall be treated as owner of the bare shell building and the warm shell building after additions etc and will have exclusive rights to let, mortgage, or allow use of all or any part of buildings.
e. That if the deduction u/s 80-IAB is allowed to the assessee company in this case and the Co-developer does not develop the SEZ later on, how can we say that the SEZ has been developed and why should the deduction be allowed to the assessee company at this stage where the development of SEZ has not been done. Allowing the deduction at the stage of construction of bare shell building would be against the provisions of SEZ and Income Tax Act.
56. Thus, he submitted that assessee’s income from sale of assets is not eligible for deduction u/s.80IAB and once it is established that the transfer of buildings to codeveloper is not a business activity and the income from such transfer is not business income, it is clear that sale of such buildings, in the nature of capital assets, has generated capital gains and, therefore, income shown by the assessee on this count has to be treated as capital gains. In this respect the most important aspect to be examined is whether by co-developer agreement entered in the Financial Year 200708, the transfer of the building can be deemed to be transfer for the purpose of taxability.
57. Thereafter, he referred to the provision of Section 2(47)(v) r.w.s. 53A of Transfer of Property Act and submitted that in such cases capital gain should be taxable in the year in which such transaction is entered into even if the transfer of the immovable property is not complete under the general law. He further submitted that in the light of provisions of section 2(47)(v), this issue was examined in great details by AAR Tribunal in the case of Mr. Jasbir Singh Sarkaria (2007) 294 ITR196, it was held that the transaction of the nature referred to in clause (v) of section 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee has by virtue of that transaction a right to enter upon and exercise the acts of possession effectively. It was further held that to attract clause (v) of section 2(47), it is not necessary that the entire sale consideration up to the last installment should be received by the owner.
In the above-mentioned case the judges have gone into detailed examination of the issue and applicability of provisions section 2(47)(v). To make the issue clearer, it is relevant to reproduce some relevant paragraphs as under: “There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling within the scope of section 53-A of the Transfer of Property Act. The crucial question then arises – at what point of time the transaction allowing the taking of possession in partperformance of such contract had taken place. Incidentally it raises the question as to how the expression ‘transaction’ is to be understood. One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed is itself the ‘transaction’ contemplated by section 2(47)(v). It is enough if the agreement/contract falling within the description of Section 53-A provides for taking possession at some stage before the ownership is transferred in a manner known to law.
What is contemplated by section 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance of the contract of transfer. It is at that point of time that the deemed transfer takes place. In this context, the observations of a Division Bench of Bombay High Court speaking through S.H. Kapadia, J in Chaturbhuj Dwarkadas v. CIT are apposite: We quote the same:
If the Contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability.
Further, if ‘possession’ referred to in clause (v) is to be understood as exclusive possession of the transferee/developer, then, the very purpose of the amendment expanding the definition of transfer for the purpose of capital gains may be defeated. The reason is this: the owner of the property can very well contend, as is being contended in the present case, that the developer will have such exclusive possession in his own right only after the entire amount is paid to the owner to the last pie. There is then a possibility of staggering the last installment of a small amount to a distant date may be, when the entire building complex gets ready. Even if some amount, say 10 per cent, remains to be paid and the developer/transferee fails to pay, leading to a dispute between the parties, the right to exclusive and indefeasible possession may be in jeopardy. In this state of affairs, the transaction within the meaning of clause (v) cannot be said to have been effected and the liability to pay capital gains may be indefinitely postponed. True, it may not be profitable for the developer to allow this situation to linger for long as the process of transfer of flats to the prospective purchasers will get delayed. At the same time, the other side of the picture cannot be overlooked. There is a possibility of the owner with the connivance of the transferee postponing the payment of capital gain tax on the ostensible ground that the entire consideration has not been received and some balance is left. The mischief sought to be remedied, will then perpetuate. We are, therefore of the view that possession given to the developers need not ripen itself into exclusive possession on payment of all the installments in entirety for the purpose of determining the date of transfer.
While on the point of possession, we would like to clarify one more aspect. What is spoken to in clause (v) of section 2(47) is the ‘transaction’ which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession or the instances of possessory acts exercised is not very relevant. The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. Relying upon the aforesaid decision, he submitted that income received during the year from sale of assets to the developer is taxable under the head “Short Term Capital Gain” in Assessment Year 2008-09 due to following reasons.
a. The co-developer agreement, giving full ownership rights over buildings to co-developers, was signed on 20103/2008 and substantial amount of sale consideration was also received during the year 2007-08.
b. There is a transfer of assets in the form of land and bare shell buildings which is not stock-in-trade in the books of the assessee company, and has been shown as addition to fixed assets in the co-developer’s case (i.e. the buyer).
c. There is a specific sales consideration, which has been fixed for this transaction.
d. The transfer of building is absolute and as per clause 7.1 of the Co- Developer Agreement dated 20.03.2008, the Co- Developer shall have exclusive rights to let, sub-let, mortgage, or to allow use of all or any part of the SEZ buildings in accordance with the SEZ Act, on such terms and conditions as the Co-developer may impose and agreed to. In the amended clause 2.4 to the addendum to MOU also it has been made clear that Co-developer shall own the bare shell buildings and shall continue to own warm shell building also.
e. Sale of buildings is not one of authorized operations in the SEZ as per the notification dated 27th October, 2006 issued by the Ministry of Commerce and Industry, Govt, of India.
f. As the sale of bare shell buildings to the co-developer, i.e. DLF Commercial Developers Ltd. in accordance with the codeveloper agreement, is against the spirit of SEZ Act & Rules and is not one of the authorized operations of SEZ, the assessee did not derive income from business of developing SEZ. Such isolated transaction of sale of bare shell buildings to the co-developer is nothing but sale of capital assets as the assessee has relinquished all rights over the buildings. Accordingly, the income from sale of bare shell buildings is capital gains on sale of buildings.
g. Sale of buildings to the co-developer is not an activity of development of SEZ. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the agreement that the intention from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. CO-developer agreement is very clearly showing that the developer loses all rights over these assets and the relinquishment of right is irrevocable.”
58. Referring to the provisions contained in Section 80IAB, he submitted that the word ‘derived’ is very crucial in appreciating any kind of deduction which would fall within the ambit of the said provision. Here, in this case, the source of income is a sale of bare shell of the building and there is no question of development of SEZ. The same has been done by co-developer. In support, he has also relied upon the following decisions.
“CYBER PEARL INFORMATION TECHNOLOGY PARK P. LTD V. INCOME TAX OFFICER- (2017) 399 ITR 310(Mad)
Hon’ble Madras High Court held that the consistent view of the courts has been that wherever, in such like sections, the expression “derived” is used, as against “attributable to”, the width and the amplitude is narrower. Therefore, courts have held consistently that in order to come to a conclusion as to whether such pro fits or gains, i.e., income, would be amenable to deduction, the effective source of such income is to be looked at. Once, it is found that the income is derived from a secondary source, which is not the effective source, it falls outside the purview of such like provisions, which provide for deductions with purpose of giving fillip to the designated activity, which, in the instant case, is the business of developing a Special Economic Zone.
PANDIAN CHEMICALS LTD. V. COMMISSIONER OF INCOME TAX – (2003) 262 ITR 278(SC)
Hon’ble Supreme Court held that the words “derived from” in Section 80HH of the Income Tax Act 1961, must be understood as something which has a direct or immediate nexys with the assessee’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for is supply is a step removed from the business of industrial undertaking. Held accordingly, that interest derived by the industrial undertaking of the assessee on the deposits made with the Electricity Board for supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under Section 80HH.
COMMISSIONER OF INCOME TAX V. STERLING FOODS – (1999) 237 ITR 579 (SC)
Hon’ble Supreme Court held that there must be, for the application of the words “derived from’, a direct nexus between the profits and gains and the industrial undertaking. Copies of the Judgments are enclosed with these submissions.”
59. He further referred to the Supreme Court’s judgment in the case of Commissioner of Custom vs. Dileep Kumar & Co. (supra) wherein it was held that tax exemption has to be interpreted wherein the benefit of doubt should go in favour of the Revenue and also referred to observations of Their Lordships in paragraph 49 to 52. Thus, he submitted that assessee is not eligible for claim of deduction u/s.80IAB.
60. By way of counter submission, learned counsel for the assessee submitted that the Revenue’s counsel has merely reiterated the observations of the Assessing Officer and no new arguments have been taken in respect of claim of deduction u/s.80IAB. He has tabulated the various arguments and point-wise rebuttal of ld. Special counsel in his written submissions.
61. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. The main issue is with regard to allowability of claim of deduction u/s.80IAB in respect of profit arising from sale of bare shell building in SEZ by assessee to M/s. DLF Pvt. Ltd. As a part of its business activities, the assessee has undertaken to develop SEZ project in a Govt. designate Special Economic Zone after obtaining requisite approval under SEZ Act and SEZ Rules in terms of provisions of Section 80IAB of the Income Tax Act. As brought on record, assessee had undertaken to develop SEZ project which was duly approved by Government of India and later on had entered into MOU with codeveloper, wherein it was agreed that assessee shall develop the bare shell building and transfer to M/s. DLF Pvt. Ltd. (co-developer) for further development and lease of the same to eligible tenants. It was also agreed that land on which building was to be constructed will not be sold to the co-developer, M/s. DLF Ltd. but will be leased out for a definite period. It was the profit from such developmental activity, amounting to ₹ 11,19,06,82,702/- arising from transfer of bare shell building was claimed as deduction u/s.80IAB, after obtaining the approvals from ‘Board of Approvals, Ministry of Commerce and Industry’, Government of India in respect of SEZ Project. In order to appreciate the facts, it would be relevant to highlight the sequence of event in this regard: –
