M/s.Abad Builders, Cochin V. The ACIT, Cochin

ITA 185/COCH/2017

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The case revolves around the eligibility of M/s. Abad Builders for a deduction under Section 80IB of the Income Tax Act for the Assessment Year 2010-11. The assessee had claimed a deduction for a project named Blue Chip, which was initially denied by the Assistant Commissioner of Income Tax (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)). The primary contention was whether the assessee, being a contractor and not the landowner, was eligible for the deduction. The Tribunal examined the agreements and the nature of the assessee's involvement in the project, ultimately deciding in favor of the assessee based on precedents and the specific circumstances of the case.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 115268 (ITAT-COCHIN)
• Duration Of Justice: 5 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 31-12-0000
• Assessment Year: misc
• Appeal Filed On: 10-05-2017
• Other Referred Cases: CIT v. Radhe Developers [2012] 341 ITR 403 (Guj), Shobha Developers v. CIT, LTU- ITA No.339/Bang/2011, ITO, Baroda v. Keval Construction Baroda \\u2013 ITA No.3175/Ahd/2009
• Laws Referred To: Section 80IB of the Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset
• Section: 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH : COCHIN BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S., ACCOUNTANT MEMBER ITA No. 185/Coch/2017 Assessment Year : 2010-11 M/s. Abad Builders, No.86, 8th Floor, Nucleus Mall, N.H. 49, Maradu, Cochin – 682 304. PAN : AAEFA 3929 L Vs. The Assistant Commissioner of Income Tax, Circle 2(1), Kochi. APPELLANT RESPONDENT Assessee by : Shri Tinu Anto, CA Revenue by : Smt. J M Jamuna Devi, Sr. AR Date of hearing : 06.12.2022 Date of Pronouncement : 19.12.2022 O R D E R Per Padmavathy S, Accountant Member: This appeal is against the order of CIT(A)-1, Cochin dated 10.3.2017 for the AY 2010-11. “1. The learned Commissioner of Income Tax (Appeals) has gone wrong in dismissing the appeal filed by the appellant. 2. There is no justification for sustaining the disallowance of deduction u/s.80 IB of Rs.3,24,56,056/-. The finding of the assessing officer as well as the Commissioner of Income Tax (Appeals) that the appellant is only a works contractor and hence not entitled to deduction u/s.80 IB is without any basis and also without properly appreciating the facts of the case. ITA No. 185/Coch/2017 Page 2 of 10 3. The Commissioner of Income Tax (Appeals) ought to have held that the appellant is a developer / builder eligible for deduction u/s.80 IB(10). 4. The observation of the Commissioner of Income Tax (Appeals) that the appellant through a jugglery of words had managed to avoid paying service tax to the Central Excise Authorities by disguising itself as only a contractor and claimed deduction u/s.80 IB by contrastingly disclaiming being a contractor but as a developer, is unwarranted, unjustified and contrary to facts and circumstances of the case. The appellant had been regularly paying service tax as a builder/developer as required under the statute. 5.(a) The learned Commissioner of Income Tax (Appeals) has gone wrong in directing the assessing officer to "provide necessary information to the service tax authorities to examine and determine whether the appellant or M/s.ABPL or their controlling stakeholders have evaded service tax liabilities by posing or disguising the appellant or M/s.ABPL as a contractor simpilciter through the multi-agreement arrangement above , and if the answer is in the affirmative, necessary corrective steps be taken" .The direction of the Commissioner of Income Tax (Appeals) is beyond his powers arising out of an appeal against disallowance of deduction u/s.80 IB in the case of the appellant. (b) In any case, there is no justification to issue direction in the case of M/s.ABPL or other controlling stakeholders. 6. The learned Commissioner of Income Tax (Appeals) ought to have followed the decision of the ITAT, Cochin Bench in the case of M/s.Desai Homes and also of the Gujarat High Court in the case of M/s.Radhe developers. 7. For these and other grounds that may be permitted to be adduced at the time of hearing of the case, it is prayed that the orders of the lower authorities may be ordered to be modified to the extent prayed for in the appeal.” ITA No. 185/Coch/2017 Page 3 of 10 2. The assessee is a partnership firm engaged in the business as builders and land developers. For AY 2010-11, the assessee filed the return of income on 1.10.2010 declaring a total income of Rs.2,37,03,922. The case was selected for scrutiny under CASS mainly to examine the claim of deduction Chapter VIA. During the year under consideration, the assessee has claimed deduction u/s. 80IB for an amount of Rs.3,24,56,056 for the project Blue Chip. 3. During the course of hearing, the AO noticed that the land on which the project Blue Chip has been undertaken is owned by Abad Builders Pvt. Ltd. with whom the assessee has entered into an agreement for construction of residential apartments. The AO denied the benefit of deduction u/s. 80IB on the ground that the assessee is only a contractor and bears only the contact risk but does not bear the investment risk. The AO held that the assessee is therefore not a developer of the project Blue Chip and that deduction u/s. 80IB is applicable only to those undertakings who develop and build housing projects at his own risk and not to contractors. Aggrieved, the assessee filed appeal before the CIT(A), who upheld the disallowance made by the AO. Aggrieved, the assessee is in appeal before the Tribunal. 4. The ld. AR submitted that the assessee has entered into an agreement with the owners of the land Abad Builders Pvt. Ltd. for the purpose of development of residential apartments. The ld. AR submitted that the assessee is registered under the Service Tax and ITA No. 185/Coch/2017 Page 4 of 10 Commercial Tax which goes to evidence that the assessee is in the business of development of residential complex. The main ground on which the deduction u/s. 80IB was denied to the assessee is that the assessee does not bear the investment risk in the project and that the land is not owned by the assessee. With regard to assessee bearing the investment risk the ld. AR drew our attention to various clauses of the agreement as given below:- “Clause 2 of the agreement — The second party shall undertake steps to advertise the availability of land as well as possibility of construction in the said land fully described in the schedule hereunder in order to sell the undivided share of the said land to prospective purchasers. Clause 4 of the agreement — In consideration of the efforts to be put in by the second party and also having in mind the necessity to have a single builder to build the building as per the plan sanctioned by the concerned authorities, the first party agree that they shall impose a condition while conveying any portion of the land or while entering in to an agreement for sale of land or any part thereof that the purchaser shall carry out the construction in the schedule property, whatsoever in nature, only through the second party. Clause 5 of the agreement — As far as possible, the first party shall enter into agreement for sale of land or execute sale deed in respect of undivided share and interest in land in favour of the purchaser only after the purchaser has entered into a construction agreement with the second party for construction of the residential space in the proposed building to be put up in the schedule property. Clause 7 of the agreement — The first party hereby grants leave and license to the second party to enter into the said property and to construct in the said land as its own cost and risk, the multi storied residential building complex to be known as "BLUE CHIP APPARTMENTS", Kakkanad, Kochi — 30, as per the building plan approved by the first party and sanctioned by the concerned authorities and other licensing authorities and such costs and expenses shall not anyway bind the first party in whatsoever capacity. ITA No. 185/Coch/2017 Page 5 of 10 Clause 10 of the agreement — It is further agreed that if the second party is not able to procure purchasers and realize the full consideration for the said land within a period of 36 months from the date of this agreement, this agreement shall stand terminated. Thereafter the first party shall be at liberty to appoint any other party and complete the construction. The first party shall also be free to sell the unsold portion of the scheduled property and the unsold portion of the building to any other person of their choice. Expenses incurred by the second party in construction of the building so taken over by the first party and 10% of such expenses incurred shall be reimbursed by the first party to the second party out of sale consideration realized by the first party on selling such land and construction. However the second party can extend the period of this agreement on the same terms and conditions, by depositing prior to the expiry of 3 months from the date of this agreement an amount equivalent to the value of the unsold areas of the scheduled property or on any other terms and conditions mutually agreed upon. This deposit shall be refunded by the first party to the second party as and when such unsold portion of the land is sold and in the same proportion. Clause 11 of the agreement — The second party shall engage workmen of their choice including masons, carpenters and supervisory staff, such engineers, architects, and other consultants and contractors as they may deem fit, at their own cost and risk and shall be wholly responsible to comply with all provisions of applicable statutes and laws protecting and ensuring safety, interest and welfare of workmen and general public and the first party shall not be in any way responsible for such compliance. The second party shall indemnify and keep the first party indemnified against all such risks and shall be bound to compensate the first party any loss or damages sustained on the account. Clause 12 of the agreement — It is further agreed that all the amounts due as value of undivided share of land shall be to the account of first party and the value of construction to the account of second party.” 5. The ld. AR further submitted that the CIT(A) has in his order has perused these clauses and stated that “all of the above are very well and neatly thought out but the fact remains that M/s. ABPL and the ITA No. 185/Coch/2017 Page 6 of 10 assessee are sister concerns and the possibility of the agreement being collusively manufactured with devious and tax evading intent cannot be ruled out”. The ld. AR submitted that the contention of the CIT(A) on a possible devious and tax evading intent are far fetched. It is also submitted that the AO had admitted that deduction u/s. 80IB would have been available had the land been in the name of the assessee. Therefore, the question of allowability is mainly revolving around the ownership of the land and not with respect to the genuinity of the contract or the project involved. The ld. AR relied on the following decisions with regard to the ownership of the land is not the criteria for allowance of deduction u/s. 80IB. 1. CIT v. Radhe Developers [2012] 341 ITR 403 (Guj) 2. Shobha Developers v. CIT, LTU- ITA No.339/Bang/2011 3. ITO , Baroda v. Keval Construction Baroda – ITA No.3175/Ahd/2009 6. The ld DR relied on the order of the CIT(A) 7. We have heard the rival submissions and perused the material on record. We notice that in the case of Radhe Developers (supra) the Hon’ble Gujarat High Court has considered the issue of ownership of the land for eligibility to claim deduction u/s.80IB and held that- “41. In the present case, we find that the assessee had, in part performance of the agreement to sell the land in question, was given possession thereof and had also carried out the construction work for development of the housing project. Combined reading of Section 2(47)(v) and Section 53A of the Transfer of Property Act would lead to a situation where the land would be for the purpose of Income Tax Act deemed to have been transferred to the assessee. In that view of the ITA No. 185/Coch/2017 Page 7 of 10 matter, for the purpose of income derived from such property, the assessee would be the owner of the land for the purpose of the said Act. It is true that the title in the land had not yet passed on to the assessee. It is equally true that such title would pass only upon execution of a duly registered sale deed. However, we are, for the limited purpose of these proceedings, not concerned with the question of passing of the title of the property, but are only examining whether for the purpose of benefit under Section 80IB(10) of the Act, the assessee could be considered as the owner of the land in question. As held by the Apex Court in the case of Mysore Minerals Ltd. (supra), and in the case of Podar Cement (P.) Ltd. and others (supra), the ownership has been understood differently in different context. For the limited purpose of deduction under Section 80IB(10) of the Act, the assessee had satisfied the condition of ownership also; even if it was necessary. 42. In the case of Shakti Corporation similarly the assessee had entered into a development agreement with the land owners on similar terms and conditions. It is true that there were certain minor differences, however, in so far as all material aspects are concerned, we see no significant or material difference. Here also assessee was given full rights to develop the land by putting up the housing project at its own risk and cost. Entire profit flowing therefrom was to be received by the assessee. It is true that the agreement provided that the assessee would receive remuneration. However, such one word used in the agreement cannot be interpreted in isolation out of context. When we read the entire document, and also consider that in form of "remuneration" the assessee had to bear the loss or as the case may be take home the profits, it becomes abundantly clear that the project was being developed by him at his own risk and cost and not that of the land owners. Assessee thus was not working as a works contract. Introduction of the Explanation to Section 80IB(10) therefore in this group of cases also will have no effect. 43. We may at this stage examine the ratio of different judgments cited by the Revenue. The decision in case of Faqir Chand Gulati (supra) was rendered in the background of the provisions of the Consumer Protection Act. In the case before the Apex Court, the land owner had entered into an agreement with the builder requiring him to construct apartment building on the land in question. Part of the constructed area was to be retained by the owner of the land. In consideration of the land price remaining area was free for the builder to sell. When the land ITA No. 185/Coch/2017 Page 8 of 10 owner found series of defects in the construction, he approached the Consumer Protection Forum. It was in this background the Apex Court was considering whether the land owner can be stated to be a consumer and the builder a service provider. It was in this background that the Apex Court made certain observations. Such observations cannot be seen out of context nor can the same be applied in the present case where we are concerned with the deduction under Section 80IB(10) of the Act. 44. In the case K. Raheja Development Corporation (supra), the Apex Court considered whether the builder, who was engaged in the development of property and for such purpose had entered into an agreement with the land owner, can be stated to have executed works contract. Such interpretation was rendered in the background of the term "works contract" defined in Section 2(1)(v-i) of the Karnataka Sales Tax Act, which reads as under:- "12. Section 2(1)(v-i) is relevant. It defines a "works contract" as follows: "2.(1)(v-i) 'works contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;" It is thus to be seen that under the Karnataka Sales Tax Act the definition of the words "works contract" is very wide. It is not restricted to a "works contract" as commonly understood i.e. a contract to do some work on behalf of somebody else. It also includes "any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any movable and immovable property". [Emphasis supplied] The definition would therefore take within its ambit any type of agreement wherein construction of a building takes place either for cash or deferred payment, or valuable consideration. To be also noted that the definition does not lay down that the construction must be on behalf of an owner of the property or that the construction cannot be by the ITA No. 185/Coch/2017 Page 9 of 10 owner of the property. Thus even if an owner of property enters into an agreement to construct for cash, deferred payment or valuable consideration a building or flats on behalf of anybody else, it would be a works contract within the meaning of the term as used under the said Act." It was in background of this definition provided by the statute that the Apex Court concluded that the agreement was one of works contract. The Apex Court observed that the term works contract contained in the Act is inclusive definition and includes not merely the works contract as normally understood but it is a wide definition which includes any agreement for carrying out building or construction activity for cash, deferred payment or other valuable consideration. Thus the interpretation rendered by the Apex Court in the said decision was based on not the normal meaning of term "works contract" but on the special meaning assigned to it under the Act itself, which provided for a definition of the inclusive nature. 45. Under the circumstances, we are of the opinion that the Tribunal committed no error in holding that the assessees were entitled to the benefit under Section 80IB(10) of the Act even where the title of the lands had not passed on to the assessees and in some cases, the development permissions may also have been obtained in the name of the original land owners. 46. We find that it is not even the case of the Revenue that other conditions of Section 80IB of the Act were not fulfilled. We, therefore, answer the question in favour of the assessee and against the Revenue and dispose of all appeals accordingly.” 8. The deduction u/s.80IB(10) is available at 100% of the profits derived by an undertaking who is engaged in developing and building housing projects subject to certain conditions specified there in the section. The explanation to section 80IB(10) states that the deduction is not available to any undertaking which executes the housing project as a works contract awarded by any person. In assessee’s case the assessee has entered a joint development agreement with Abad Builders Private Limited and from the perusal of the various clauses as extracted in the earlier part of this order, we ITA No. 185/Coch/2017 Page 10 of 10 tend to agree with the contention that the assessee is bearing the entire investment risk and other risk associated with completion of the project and not a mere works contractor. In our view therefore the decision of the Hon’ble Gujarat High Court in the case of Radhe Developers (supra) is applicable to assessee and accordingly we hold that the assessee is entitled for the deduction u/s.80IB and the disallowance made in this regard is deleted. 9. In the result, the appeal by the assessee is allowed. Pronounced in the open court on this 19th day of December, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 19th December, 2022. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar, ITAT, Bangalore/Cochin.