Poddar & Ashish Developers, Mumbai vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH "C", MUMBAI ᮰ी आर. सी. शमाᭅ, लेखा सद᭭य एवं ᮰ी िववेक वमाᭅ, ᭠याियक सद᭭य के समᭃ । BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA No. : 4239/Mum/2013 (Assessment year: 2010-11) Poddar & Ashish Developers, Vs Income Tax Officer-15(1)(3), 5C, Court Chamber, No. 35 New Marine 1st Floor, Income Tax Offices, Matru Lines, Mumbai -400 020 Mandir, Grant Road, ःथयी लेखा सं.:PAN: AAAAP 4750 D Mumbai

अपीलाथȸ (Appellant) ू×यथȸ (Respondent) Appellant by : Shri N R Rao Respondent by : Shri Ajit K Srivastava

सुनवाई कȧ तारȣख /Date of Hearing : 08-12-2014 घोषणा कȧ तारȣख /Date of Pronouncement : 02-01-2015

आ दे श ORDER ि᮰ िववेक वमाᭅ, ᭠या स: स: PER VIVEK VARMA, JM:

Instant appeal is filed by the assessee against the order of CIT(A)-26, Mumbai, dated 29.04.2013, wherein the solitary issue raised is:

"On the facts and in the circumstances of the case, the learned CIT(A)-26, Mumbai erred in upholding the decision of the Assessing Officer that whenever the Purchasers and/or their family members bought more than one BHK units in the project and joined them to form a duplex flat the combined area of which exceeded 1000 sq. ft. built up area, it exceeded the limits prescribed u/s 80-IB(10) of the Income tax Act, 1961 and therefore the profits attributable to those flats did not qualify for deduction u/s 80-IB(10) of the Income Tax Act, 1961.

The Appellant craves leave to add to, alter, vary or amend the above ground of appeal".

2. The only issue is denial of deduction u/s 80IB(10). The AO has denied the deduction because, as per the AO, 1 BHK flats do not conform to the conditions for the claim of deduction u/s 2 Poddar and Ashish Developers ITA No. 4239/Mum/2013

80IB(10), as the majority of the flats have been joined together and exceeded the limit of 1000 sq.ft.

3. In the assessment proceedings, it was pleaded by the assessee that it was the purchasers who joined the flats. But the explanation was not accepted by the AO.

4. From the order it is seen that in the preceding years the issue reached the ITAT and coordinate Bench of the ITAT had allowed the claim of deduction by the assessee u/s 80IB(10).

5. At the time of hearing, the AR submitted that the issue is identical and coming from the preceding year in ITA No. 2443/Mum/2012 in assessment year 2009-10, wherein it was observed, "13. Before us, in connection with the appeal of the assessee, Shri J.D. Mistry, Ld counsel for the assessee made various submissions/ arguments. On facts, he mentioned that the project under consideration made a beginning in the A.Y. 2005- 06 after obtaining due approvals and the same is completed in the current assessment year 2009-10. In the initial A.Ys. of the project, there was difference of opinion between he assessee and the AO on the proper timing /AO for recognition of profits of the project. AO disturbed the accounts of the assessee and thrust on him the 'percentage completion method/WIP method' in place of the 'project completion method' (PCM)followed by the assessee. The matter traveled to the SAA ie ITAT and eventually, it is a decided issue now and the profits of the project needs to be completed based on the project completion method as originally followed by the assessee. Further, he narrated the finding of the survey team during the action u/s 133(A) on 11/03/2008, when the project is still in progress. It is an undisputed fact that the project was approved by the local authorities and the assessee has approval to construct 1-BHK flats, 24 in number. Registration of each of such flats was done as 1-BHK flat and not as duplex flats as alleged by the revenue. The ownership each of the flats is individualized. On the finding of the survey team about the providing provision for square shaped hole in the ceiling/floor and providing a single kitchen platform is a matter of making a provision for facilitating creation of duplex flat, if the flat owners/buyers so desire after the sale. Making such a provisions is aimed at the marketing of the 1-BHK flats to attract more buyers from the same family. Assessee provided requisite design to help the buyers in merging the two 1-BHK flats into a 'duplex flat' with single kitchen. As per Ld Counsel, the assessee has not constructed any staircase before the flats were registered/sold to the flat buyers of the one BHK flats. It is on record that all other flat 3 Poddar and Ashish Developers ITA No. 4239/Mum/2013

buyers have filed their replies notices sent u/s 133(6) of the Act. While some buyers gave a categorical statements mentioning that they have not combined two flats and others have mentioned that they got the flats merged after the flats are purchased by them using the said the provision for constructing the stair case using the design and services of the developer. Thus, the developer joined the flats at their request after taking the possession of the flats. Para 16 extracted above is relevant here and AO when visited the flats, found that four of the flats are without any provision for staircase and they have independent kitchen. Individual families are found residing in them. It is categorical assertion of the assessee that a flat buyers combined flats in some cases after taking possession of the flats and in six other flats, there is no such conversion or merger of flats. Assessee has merely made a provision for such merger or combining and in such case, it can not be said that assessee violated the names under the provision u/s 80IB(10) of the Act. The counsel argued that in a case where the joining of the flats is done by the purchaser, it cannot be stated that the assessee who merely provided for such merger, has constructed flats in violation of the area prescribed for each flats. Referring to the provision of clause (c) of Explanation to section 80IB(10) of the Act, ld. counsel mentioned that the assessee is entitled to the deduction of 100% of the profits of housing projects, if apart from the other condition, the residence unit has maximum built up area of less than 1,000 sq. Ft. in Mumbai. Construction of a residential unit (1-BHK flats) with a provision of a squarish hole in the roof/ceiling, does not make the assessee ineligible for claim of deduction merely when the said provision was made by the assessee. It is for the flat buyer to use of reject the said provision. The assessee should be declared eligible for claim of the said deduction. In this regard, counsel brought our attention to the decision in the case of Baba promoters and developers in ITA No. 629/PN/2009 A.Y.2004-05, ITA No.625/PN/2011 A.Y.2006-07 & ITA No.159/PN/2010 A.Y. 2005-06 dated 29/02/2012 and relied on the contents of the para 13 of the said order.

14. Further, ld. Counsel brought our attention to the decision of coordinate Bench ITAT, Mumbai in the case of G.V. Corporation 38 SOT 174 for identical proposition that where the purchaser have requested for joining of two flats thereby exceeding the prescribed limit, the assessee is found eligible for deduction. Para 12 of the order of the Tribunal is relevant

15. Drawing parallel in the instant case, ld counsel mentioned that the impounded brochure merely provides for manner/design of converting the flats in duplex and it never advertised for the sake of flat s exceeding the area of 1000 sq. ft. for each 1BHK flats. Further, he brought our attention to the facts gathered during the post survey action and mentioned that most of the flats are never joined by not even the flat buyers. T

16. On the other hand ld. DR for the revenue relied on the order of the CIT(A) on this issue and mentioned that assessee has clear intention of making sales of the 1BHK flats as duplex flats right from the beginning of the construction of the project. In such circumstances the condition specified in clause (c) of the Explanation to section 80IB(10) of the Act are deemed violated rightly by the AO. On the contents of the proceedings u/s 133(6) of the Act, Ld. DR rely on the order of the AO.

4 Poddar and Ashish Developers ITA No. 4239/Mum/2013

17. We have heard both the parties. The facts necessary of adjudication of the issues under consideration include that the assessee started a project named 'Garden Estate' with A and B Wings with 96 and 95 flats respectively. The project was approved by the local authorities to construct 1-BHK, 2-BHK and 3-BHK flats and accordingly, the built up area of each of these flats so approved does not exceed 1000sq ft. No duplex flats are to be envisaged in this project. There is no dispute with regard to the 2-BHK and 3-BHK flats before us and the dispute now is restricted to 1- BHK flats allegedly merged into the duplex flats only.

18. On this dispute, the facts are that there are 24 such 1-BHK flats in the project. Out of them, there is no dispute with regard to 6 of such 1-BHK flats. Dispute is restricted to 18 of such 24 one-BHK flats. The dispute revolves around (a) developer making a provision (a square shaped hole in the ceiling /floor) for construction of the staircase connecting the lower 1-BHK flat to generate a 'duplex flat' with single kitchen and (b) the impounding from the assessee's premises of a 'brochure with the design' on how to merge two 1-BHK flats into a duplex flat. AO made use of the same to interpret that the assessee always intended to constructed duplex flats, each of which has the built up area exceeding the specified areas in said clause (c) of the Explanation to section 80IB(10) of the Act. In the survey as well as the assessment proceedings, assessee pleaded that the assessee merely made provision as a part of the marketing strategy for selling the 1-BHK flats and such a provision was made use of by the flat buyers after taking possession of the flats. As per the assessee, construction of duplex flats was never a part of his project. He never constructed such duplex flats. Assessee filed confirmation letters from the flat buyers before the AO and the same were not considered. During the assessment proceedings, AO also varied the said claim of the assessee by issuing the letters u/s 133(6) of the Act and in fact made a personal inspection along with the DVO and eventually ignored the said evidences garnered in the proceedings. CIT(A) confirmed the opinion of the AO by referring to the 'intention' of the assessee and interpreting the said 'providing a hole in the roof' against the assessee. In the process, the facts relating to the design and plan of each of the residential flat, approval granted by the local authorities, completion certificate issued by the local authorities etc are ignored. Thus, in the assessee's appeal, only dispute for adjudication relates to if there is any violation by the assessee of the conditions specified in clause (c) to Explanation to section 80IB(10) of the Act relating to the 'maximum built up area of each residential unit' ie 1-BHK flat. To decide the issue under consideration, we need to delve on the following aspects and they are:

A. Relevance of the discrepancies noticed during the survey action on 11/03/2008, when the profits of project are assessable to tax in AY 2009-10 based on Project C Method:

19. Taking into consideration the timing of the discrepancies noted during the survey action in March 2008, AOs who made the assessments for the AY 2005-06 to 2008-09, were under the bonafide belief that the profits of the project needs to be recognized based on the percentage completion (WIP) method in place of 'project completion method adopted by the assessee. The discrepancies noted by the survey team were used against 5 Poddar and Ashish Developers ITA No. 4239/Mum/2013

the assessee ignoring the fact that what needs to be seen are if the project is completed as per the plan approved by the local authorities or not. If the same is considered, what is relevant to be seen by the AO is if the assessee as a developer has completed the construction of 24 1-BHK flats or not. If the developer has dutifully constructed the said flats in accordance with Project Survey u/s Project is started A 133A on B completed in AY in 2005- 11/03/2008 2009-10 06 (AY 08-09)

Diagram showing the relevant dates the plan approved by the local authorities in the AY 2009-10, where the profits needs to be recognized for tax purpose based on the 'project completion method', the said discrepancies ie making a provision of square shapped hole as discovered during survey action in AY 2008-09, becomes irrelevant. Impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, cannot be used against the assessee as it only provides the design of merger. It is not case of the revenue that the developer constructed the duplex flats by merger of two 1-BHK flats with it own money and then sold as such to the buyers. It is on the records that the owners of duplex have merged the flats after taking possession of their flats using the design provisions supplied by the assessee in the brochure. There is evidence contrary to the same.

B. Relevance of the Intention of the assessee:

20. Both AO and he CIT(A) interpreted the discrepancies noted during the survey action to read into the intention of the developer and denied the deduction in respect of the profits of the project. Of course, CIT(A) restricted the disallowance and details are already discussed above. Interpreting the 'provision of hole and the impounding of the brochure, IRS officers are of the opinion that the assessee has the intention from the very beginning of the project that the assessee intends to construct the duplex flats and not the 1-BHK flats. Therefore, such very intention is made use by the AO to deny the benefits of deduction u/s 80IB (10) of the Act. But the fact is that the assessee got the approval for constructing impugned 10BHK flats from the Authorities and completed the constructed as per the approved plans. Assessee obtained 'completion certificate' too from the concerned authorities about which there is no dispute. In our opinion, what is required to be seen should include, what are the plans, designs of the project and built up areas particulars of the residential units at the approval stage, construction stage and finally at sales point. In the instant case, from the approval stage till the stage of issuance of the completion certificate, there is no violation by the developer. The discrepancies noted during the survey action could have been made good during the period from date of survey ie 11/03/2008, to the date of completion of the housing project ie March 2009. There is no evidence to suggest that it is the developer who planned and generated duplex flats out of the 1-

BHK flats and then sold as such to the buyers. In fact there is evidence to indicate that it is the flat buyers who merged the flats into duplex flats during the post sales period. Meaning 6 Poddar and Ashish Developers ITA No. 4239/Mum/2013

thereby, the merger of flats if any taken place after the sale of the said 1-BHK flats by the flat buyers and, may be using the design made available by the developer, the assessee cannot be penalized and denied the claim of deduction. As such, the relevant legal provisions do not authorize the AO to deny deduction based on the intention. What is required to be seen is if the 1-BHK flats are planned, designed, approved for construction, constructed and finally obtained the 'completion certificate' or not. If the answer is affirmative, the claims cannot be denied based on the intention of the assessee.

C. Ignoring the confirmation filed by the flat buyers:

21. AO undertook the exercise of verification u/s 1 33(6) of the Act and all the flat buyers responded to the said queries. Not even a single flat own stated that duplex flat being a residential unit exceeding the specified limit of built up areas was constructed by the developer and sold to the assessee. In our opinion, the revenue authorities have decided the issue against the assessee prejudicially and ignored the evidences that are given against the revenue. In such case, the orders of the revenue cannot be held judicious ones.

D. Absence of any direct evidence to suggest that the assessee constructed the duplex flats:

22. We have examined the orders of the revenue and the papers filed before us in search of the material that establishes conclusively to the effect that the assessee constructed duplex flats whose built up area exceeded the specified limits in clause

(c) of the said Explanation. There is such material or direct evidence to demonstrate the AO's allegation. In our opinion, when 1-BHK flats are otherwise built and sold as such, mere making a provision to help the flat buyers to merge them to suit their convenience during the post-sale, should not disentitle to the assessee to make claim of deduction u/s 80IB(10) of the Act.

It is undisputed fact that few 1-BHK flats remain so without any merger despite the provision of 'hole' left and others are merged into duplex during the post sale using such provision. In our opinion, the developer cannot be penalized by denying the deduction. As such claim of deduction was found allowable by the then CIT(A) who decided the issues in earlier asst years. Of course, these orders are not relevant now considering the order of the Tribunal.

E. Flat buyers owns up the fact of merger of flats into duplex flats by them using the design of the developer:

23. We have discussed this issue in the earlier paragraphs of the order. It is borne on the records that the AO invoked the provision of section 133(6) of the Act and the flat buyers stated categorically, they merged the flats vertically into duplex flats availing the provisions provided by the developer. In our opinion, mere making a provision of a hole for future use by the flat buyers for erecting the stair case or so, should not come on the way of the assessee to claim deduction.

F Scope of the legal pronouncements on the merger of flats by the buyers and by assessee at the instance of flat buyers:

24. The provisions of clause (c) of the Explanation to section 80IB(10) of the Act specifies a condition for the assessee to claiming deduction in respect of the undertaking developing and building housing projects. The condition so specified as part of the Explanation is for the purpose of clause (a) to section 7 Poddar and Ashish Developers ITA No. 4239/Mum/2013

80IB(10) of the Act and the said clause provides that the "undertaking has commenced or commences the development and construction of the housing project on or after the 1st day of October 1998 and completes such construction" on specified dates depending on the date of approval by local authorities.

Condition specified in clause (c) to Explanation provides for "the residential unit has a maximum built up area of one thousand square feet where such residential unit is situated within the city of Delhi or Mumbai or.....".

These provisions do not provide any discretion to the AO to decide anything based on the intention of the assessee. The conditions have to be met adequately before claiming the deduction. These provisions are subject matter of adjudication in various cases and some of them brought to our notice are detailed as follows. These provisions are interpreted by various Tribunals. It is a settled proposition of the law that that for joining of two flats whether horizontally or vertically, so joined by or at the request of the purchaser, the appellant cannot be faulted under the provisions of section 80 IB(10) of the Act. The following decisions of the Mumbai Tribunal support the view point of the appellant:

i. Smt. Manju Gupta vs. ACIT (134 ITR 503) - Mumbai, ii. Emgeen Holding Pvt. Ltd., Mumbai vs. DCIT (47 SOT

98) Mumbai, iii. G V Corporation Vs. ITa (38 SOT 174) - Mumbai. ......

the appellant will be entitled to 100% deduction claimed u/s 80 IB(10) of Act.

We have also perused the order of the Tribunal in the case of Baba promoters and developers (supra) and perused the contents of para 13 and relevant portions read as follows,- 'So far as merger of flats and thereby exceeding the prescribed limit .......... denial of the deduction ........., is concerned there is no substance since it is undisputed fact that each of prescribed limit..... area and if after purchasing of two flats owners of flats merges it into a larger flat, the claim of deduction to the assessee cannot denied on this basis.' Further also, we perused the decision of coordinate Bench ITAT, Mumbai in the case of G.V. Corporation 38 SOT 174 and find para 12 is relevant and the same read as follows,- "It is common knowledge that members of the same family who purchase separate residential units adjacent or contiguous to each other often join them by breaking down a wall or by opening a door way or in many other ways so that the entire family lives together and gets more space to live. In many cases, a request is made by the purchasers to the builder or developer of the housing project to join the flats/residential units and the request is carried out by the builder. In such cases, it is not possible to hold that the builder built the residential flat of more than 1,000 sq.ft. of built- up area. There is no evidence on record to suggest that the assessee itself advertised that the flats were of more than 1,000 sq.ft. and that merely to get the benefit of section 80-IB he drew the plans in such a manner that each residential unit was shown as not more than 1,000 sq.ft. of built-up area. It is not also the case of the CIT that each flat in the housing projects undertaken by the assessee could not have been used as an independent or self-contained residential unit not exceeding 1,000 sq.ft. of built-up area and that there would be a complete, habitable residential unit only if two or more flats are joined 8 Poddar and Ashish Developers ITA No. 4239/Mum/2013

with each other, which would ultimately exceed 1,000 sq.ft. of built-up area. In such a situation, merely because 9 out of 140 purchasers desired to join the flats purchased by them into one single unit, which exceeded 1,000 sq.ft. of built-up area, cannot disentitle the assessee to the deduction. In other words, taking the example of the flats purchased by the Sonawanes', there is no allegation that the flat No. 704 measuring 244 sq.ft. purchased by Meera Sonawane, flat No. 705 measuring 578 sq.ft. purchased by Supriya Sonawane and flat No. 706 measuring 780 sq.ft. purchased by Ethin Sonawane were not independent residential units by themselves and could become independent residential units only when they were joined or combined together. If each residential unit does not exceed the built-up area of 1,000 sq.ft., the fact that they were joined together by the purchasers for better living or for more space or for any other reason does not disentitle the assessee to the claim for deduction under section 80-IB. Drawing parallel in the instant case, we find that there is iota of direct evidence to demonstrate that it is the assessee who merged the two 1-BHK flats in to duplex one with one kitchen. On the contrary there is evidence to suggest that the flat buyers have done it so to their better living in the residential units. In our opinion, mere making a provisions of hole and providing methods/design vide the brochure to the advantage of the flat buyers does not amount to construction of duplex flats by the developer, who is aware of the consequences in matters of claims of deduction one side as well as the obtaining the completion /occupancy certificates from the Authorities, who approved the project with 1 to 3 BHK flats only and not to the duplex flats.

25. Thus, the discrepancy of mere providing a hole for intended stair case for flat buyers and supplying of the design to merge the flats into a duplex flat in our opinion constitutes a marketing strategy to boost the sale of the 1-BHK. Otherwise, the assessee constructed the flats in accordance with the plan approved by the authorities and sold them as such to the buyers. So long as the permanent structure like pillars of flat are constructed as per the approved plan of a residential unit with built up are of less than looks like small and minor deviation made for marketing reasons must not come on the way of granting deduction. As such there is no prohibition for sale of the more flats to the members of a family. The amendments are undisputedly inapplicable to the projects under consideration. Therefore, we are of the opinion, the assessee is entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the project too. To this extent we reverse the order of the CIT(A). Accordingly, we allow the appeal of the assessee.

26. In the result the appeal of the assessee is allowed".

6. Since the issue is identical and is covered by the factual findings by the coordinate Bench in preceding years in the case of the instant assessee, we do not find any reason to deviate or distinguish the facts as per records.

9 Poddar and Ashish Developers ITA No. 4239/Mum/2013

7. We, therefore, respectfully relying on the decision of the coordinate Bench, set aside the order of the CIT(A) on the impugned issue and direct the AO to allow the deduction u/s 80IB(10) as claimed by it.

8. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 2nd January, 2015.

(आर.

आर. सी.

सी. शमाᭅ) (िववेक वमाᭅ) Sd/- Sd/-

लेखा सद᭭य ᭠याईक सद᭭य (R C SHARMA) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Date: 2nd January, 2015

ूित/Copy to:-

1) अपीलाथȸ /The Appellant. 2) ू×यथȸ /The Respondent. 3) The CIT(A)-26, Mumbai. 4) The CIT- 15, Mumbai.

5) ǒवभागीय ूितिनिध "सी", आयकर अपीलीय अिधकरण, मुब ं ई/ The D.R. "C" Bench, Mumbai.

6) गाड[ फाईल Copy to Guard File.

आदे शानुसार/By Order / / True Copy / /

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, मुबं ई Dy./Asstt. Registrar I.T.A.T., Mumbai *चåहान व.िन.स *Chavan, Sr.PS