Sri Sai Builders, Hyd, Hyderabad vs Assessee

Sri Sai Builders, Hyderabad. vs. Income Tax Officer, Ward - 11(4), Hyderabad PAN - ABGFS 4180G (Appellant) (Respondent)

Assessee by : Shri S. Rama Rao Revenue by : Shri Rajat Mitra

Date of hearing 13-05-2015 Date of pronouncement 27-05-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 21/01/2015 of ld. CIT(A)-VII, Hyderabad pertaining to AY 2010-11.

2. The only issue arising in the aforesaid appeal is related to direction of CIT(A) with regard to claim of deduction u/s 80IB(10) of the Act.

3. Briefly the facts are, assessee a partnership firm, is engaged in the business of real estate development. For the AY under consideration, assessee filed its return of income on 13/10/2010 declaring total income of Rs. 4,00,000 after claiming deduction u/s 80IB(10) of the Act. During the assessment proceeding, AO while examining assessee's claim of deduction u/s 80IB(10) found that assessee has purchased land admeasuring four acres at Mallapur Village, Uppal Mandal on 10/07/2003. Further, assessee on 14/02/05 2 ITA No. 208 /Hyd/2015 Sri Sai Builders

has applied to Hyderabad Urban Development Authority (HUDA) for approval of a plan for construction of group houses on the said land and on the basis of the application made by assessee, HUDA accorded technical permission on 22/08/05 and authorized Kapra Municipality for approving the plan. However, after receiving the approved plan, assessee sold 2 acres 23.85 guntas out of the total four acres of land to M/s Modi Ventures by executing an agreement of sale-cum-GPA. Further, on 22/10/05, assessee entered into a joint development agreement with M/s Modi Ventures for development of residential apartments under group housing scheme in the name and style of Gulmohar Gardens. AO observed that as per the joint development agreement total number of flats to be constructed on the entire land of four acres is 350 flats and out of which 97 flats will fall to the share of assessee and the remaining 253 will be in the share of M/s Modi Ventures. He noticed that one of the clauses in the said joint development agreement, stated that assessee is to pay cost of construction for the flats falling to its share aggregating to Rs. 300 per sft. AO further noticed that the firm has subsequently entered into a supplementary agreement on 22/12/08 with M/s Modi Ventures for the development of some more blocks wherein assessee has agreed to pay cost of construction of Rs. 600 per sft. AO, however, disallowed deduction claimed u/s 80IB(10) of the act by observing that the development activities having entirely done by M/s Modi Ventures and assessee being a mere land owner is not eligible for deduction u/s 80IB(10). AO observed that as per the joint development agreement, it is M/s Modi Ventures, who has carried out the development activities. Accordingly, deduction claimed u/s 80IB(10) was disallowed. Being aggrieved, assessee preferred appeal before ld. CIT(A).

4. Ld. CIT(A), though, agreed in principle that assessee is eligible for deduction u/s 80IB(10) thereby upsetting the decision of AO, she however relying upon the provisions contained u/s 80(IB(10) read with 3 ITA No. 208 /Hyd/2015 Sri Sai Builders

section 80IA(10) of the Act, observed that the cost of construction paid at Rs. 300 per sft. to the developer M/s Modi Ventures is inadequate. Accordingly, she directed AO to verify the cost of construction in the hands of M/s Modi Ventures and adopt mark up of 10% to arrive at the reasonable cost of construction at assessee's hand. She further observed, if the figure so worked out is lower to Rs. 300 per sft., the difference should be ignored, otherwise, if it is found to be more than Rs. 300 per sft., such higher figure should be adopted and the profit derived from eligible business should stand reduced to that extent for computing deduction u/s 80IB(10).

5. Ld. AR drawing our attention to the provisions contained u/s 80IA(10), submitted before us, the conditions laid down therein has not been proved to conclude that the cost of construction has been understated. Ld. AR further submitted, before applying the provisions of section 80IA(10), ld. CIT has not given any opportunity to assessee to explain its case. Ld. AR submitted, while considering identical issue of understatement of cost of construction incase of developer i.e. M/s Modi Ventures, the Tribunal has held that joint development agreement between assessee and M/s Modi Ventures is genuine and the cost of construction @ Rs. 300 per sft. having been agreed upon between the parties in the year 2003-04 on the basis of prevailing fair market rate cannot be disputed or disbelieved.

6. Ld. DR on the other hand supporting the reasoning of ld. CIT(A) submitted before us, there being close connection between assessee and the developer, the direction of ld. CIT(A) is justified.

7. We have considered the submissions of the parties and perused the materials on record. As can be seen, there is no dispute to the fact that assessee is otherwise eligible for deduction u/s 80IB(10) as the department has not challenged the decision of ld. CIT(A) on this issue. However, coming to the quantum aspect, it is seen that ld.

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CIT(A) on the basis of the provision contained u/s 80IA(10) has inferred understatement of cost of construction as disclosed at Rs. 300 per sft. and has issued a direction to AO to consider the cost of construction to the developer with a mark up of 10%. A reference to section 80IA(10) would show that where AO on considering the close connection between assessee carrying on the eligible business and any other person or for any other reason comes to a conclusion that it has been arranged in a manner to result in more than ordinary profit to assessee, then, AO while computing profit and gains of such eligible business for computing deduction u/s 80IB shall take the amounts of profits as may be reasonably deemed to have been derived therefrom. Thus, as per the aforesaid provision, AO can estimate the profit from eligible business at a reasonable rate if he thinks that assessee for deriving more benefit has entered into a transaction with another person in a manner which could give him profit more than the ordinary profit. In the present case, AO has not invoked the aforesaid provision, it is ld. CIT(A) who even though agrees that assessee is eligible for deduction u/s 80IB(10), but was of the view that assessee has entered into a transaction with a closely related person and thereby understated the cost of construction to show more profit from the eligible business. However, it is to be noted that before coming to such conclusion, ld. CIT(A) has not disclosed the reasons on the basis of which she has come to such a conclusion. Moreover, as rightly pointed by ld. AR, she has not given any opportunity to assessee to have his say on the issue before invoking the provisions of section 80IA(10). It further needs to be mentioned that when the department's appeal in case of the developer M/s Modi Ventures came up for consideration before ITAT in ITA No. 1529/H/12, the coordinate bench in order dated 27/08/2014 while considering the genuineness/validity of joint development agreement held as follows:

"12. We have heard both the parties. We find no infirmity in the order of the CIT(A) as nothing had been brought out by the Department to prove 5 ITA No. 208 /Hyd/2015 Sri Sai Builders

that the agreement of the assessee with M/s. Sri Sai Builders is not genuine. The Department has also not been able to prove that the Joint Development Agreement and Agreement of Construction are between close relatives and we find that both the parties are independent. The rate of Rs. 300 per sft towards construction cost had been agreed upon after due deliberations between the parties in the year 2003-04 at the time of preparing and finalising the building plan at the then prevailing fair market rate for the cost of construction. The loss could have arisen due to escalation in the construction cost subsequently especially between the years 2006 and 2009 and, therefore, in these circumstances it cannot be held that charging of Rs. 300 per sft payable by M/s. Sri Sai Builders is very low when compared to the cost of construction at Rs. 849.42 per sft. Further in this project as a whole a gross profit of 25% and net profit of 19% was earned and had been declared. These profits were computed after absorbing the entire loss incurred on construction receipts from M/s. Sri Sai Builders. The person running the business has viewed the entire project instead of taking construction contract of a single stand alone transaction and that is why at the end of the project, the assessee firm made the net profit about 19%. In these circumstances, we confirm the order of the CIT(A) and dismiss the Departmental appeal on this issue."

On careful reading of the aforesaid observation of the coordinate bench, it is very much evident that not only the tribunal has held the joint development agreement between assessee and developer M/s Modi Ventures as genuine but they have also negated the contention of the department that joint development agreement was between closely related persons. Further, the Tribunal has also held that the cost of construction at Rs. 300 per sft. as per the joint development agreement cannot be held to be very low. In view of such observations of the coordinate bench given in case of the builder, in our view, the direction of ld. CIT(A) is not sustainable. Accordingly, we set aside the impugned order of ld. CIT(A) on the issue and direct AO to allow assessee's claim of deduction u/s 80IB(10) of the Act.

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8. In the result, assessee's appeal is considered to be allowed.

Pronounced in the open court on 27 th May, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 27 th May, 2015 kv

Copy to:-

1) Sri Sai Builders, C/o Sri S. Rama Rao, Advocate, Flat No. 102, Shriya's Elegance, 3-6-643, Street No. 9, Himayatnagar, Hyd-29

2) ITO, Ward - 11(4), Hyderabad 3 CIT(A)-VII, Hyderabad

4) CIT-VII, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.