THE issue before the Bench is - Whether mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits can be said to have been derived from such housing project. No is the answer from the Bench.
Facts of the case
A) The assessee are developers. They had developed housing projects fulfilling the conditions contained in section 80IB(10) and claimed deduction on the profits earned from sale of suchhousing projects. The Revenue was of the opinion that the land on which the housing project was constructed was not owned by the assessees and the development permission by the local authority was given in the name of landowners and not the assessees. On such grounds, AO declined to grant the benefit of deduction u/s 80IB(10), instead treating the assessees as a works contractors. On appeal, Tribunal ruled in favour of the assessees. The Revenue thereupon filed further appeals before the HC. In the case of CIT v. Radhe Developers, (2012-TIOL-71-HC-AHM-IT), HC dismissed the Revenue’s appeals and confirmed the view of the Tribunal. The AO in addition to raising objection to the entire claim of the assessees for deduction u/s 80IB(10) further noticed that the assessees had not utililzed the full extent of the Floor Space Index of the land in question. After putting the assessees to notice and eliciting their response, the AO, concluded that the profit which could be relatable to the sale of unutilized FSI cannot be stated to had been derived from the assessees activity of development and construction of a housing project. Proportionate profit, therefore, reflected in the assessees income from the sale of residential units was taken out from eligible deduction u/s 80IB(10). The Tribunal on this issue also ruled in favour of the assessees. The Revenue, therefore, raised the additional question in these appeals.
B) For the AY 2003-04, assessee had filed its return of income on 1.12.2003 declaring total income at nil. In such return, it had declared gross total income of Rs.26,99,082/and claimed deduction u/s 80IB(10) on the entire income. The AO, noticed that permission for construction was obtained for only part of the permissible FSI, the residential units to be constructed thus had area far less than the maximum permissible builtup area on the land. The assessee, thus, carried out only partial construction out of the total available FSI for the land in question. As per the approved plan, construction had been carried out, there was balance FSI available on the plots of land which was not utilized. AO was, therefore, of the opinion that the assessee could not claim deduction u/s 80IB(10) for the profit relatable to sale of unutilized FSI. AO, therefore, called upon the assessee to explain the same. Assessee made a detailed representation contending that it had completed the development and construction of housing project fulfilling all conditions contained in section 80IB(10). The project was constructed on 12000 sq. meters of land. As per the building regulations of the local authority, maximum permissible construction was 1.6 times of the land area. As per the building bylaws for development of housing project, 10% of the total land area was to be set apart for common purposes. Primarily, 30 to 35% of the land area was utilised for providing internal roads, effectively, therefore, only 60% of the ground floor area was available for development. As per the building regulations, the constructed area on the ground floor could not exceed 40%. The assessee had completed the construction on the entire area permissible on the ground floor against the maximum construction limit of 3848.10 sq. meters, the assessee had carried out construction of 3573.48 sq. meters. The assessee further contended that the provisions of section 80IB pertain to granting of benefits to the assessee, the same should be interpreted liberally. AO rejected the assessee’s claim after observing that the land area and FSI of 1.6, the assessee had 15392.40 sq. meters of construction available for development. As against which, the assessee consumed only 3573.48 sq. meters of FSI and 11818.92 sq. meters remained unutilised. He segregated the assessee’s profit from sale of FSI out of the total figure of Rs.26.99 lacs claimed as profit from sale of housing units. Since the eligible profits for claim of deduction u/s.80IB(10) can only relate to those from the project of development and construction, the profits attributable to the sale of unutilised FSI not relating to development and construction undertaken shall not become eligible for the said claim.
On appeal, CIT(A) rejected the entire claim u/s 80IB(10) and therefore, did not find it necessary to examine this separate aspect of claim for deduction u/s 80IB(10). It was observed that the action of AO in disallowing the claim of deduction u/s.80IB(10) was justified, hence the same was confirmed. Since the disallowance had been confirmed in toto the alternative finding regarding profits attributable to sale of unutilized FSI was not required to be considered. On further appeal, Tribunal allowed the assessee’s appeal after observing that on verification of the sale deed executed in favour of the buyers of the residential houses, it was clear that the assessee had made this sale deed for sale of plot of land. Further, on verification of development agreement with the landowner, we find that here also the reference was with respect to land area only. In both the documents, assessee had not acquired rights and had snot relinquished rights with reference to FSI. Further, on verification of approved map for each unit was with reference to built up area only. Under the circumstances, the assessee had never dealt with FSI, both in terms of acquiring rights in the land and for relinquishment of such rights in the land. The calculation given in approved plan was of maximum permissible FSI and by giving such calculation it was not made mandatory by any provisions of any Act to make construction to the fullest extent of maximum permissible FSI. The utilization of FSI by the builder developer depends on many factors like situation of plot, the type of locality, and the type of buyers affordability. It was the market force, which determines the average size of the residential unit – a commercial decision, which prevails for the purpose of carrying out the business and for making residential units and not the permissible maximum FSI. It would also be impossible to construct any housing unit as per the provisions of Sec.80IB(10) by utilizing the maximum FSI. The AO stated further that in the approved lay out plan, the local authority had permitted to build residential unit of lesser area than the maximum permissible built up area on the land and therefore the assessee had carried out only partial construction of the available FSI vis-a-vis the entire plot of land available for development with the assessee. We find that the approved FSI in regard to the units constructed had been fully utililzed as per the approved plan of the local Authority, namely the FSI was fully utilized, the FSI actually passed and permitted by the authorities for each project. The question was whether the Revenue was correct in segregating the assessee’s profit from sale of housing units and denying the benefit of deduction u/s 80IB(10) to the extent the same was relatable to the sale of unutilized FSI or whether the Tribunal was correct in holding that since the assessee fulfilled the conditions of section 80IB(10), no part of the claim could be disallowed.
Before HC, the Revenue's counsel had contended that the assessee had utilized only a small portion of the available FSI in development of the housing project. The units constructed and sold by the assessee, therefore, had inbuilt element of unused FSI. The purchasers would be entitled to carry out extensive further construction utilizing the remaining FSI. The idea behind giving deduction u/s 80IB(10) was to make residential units for middle income group citizens at affordable cost. Various conditions contained in the said section would bring out this purpose. It was further contended that the profit relatable to sale of unused FSI cannot be stated to have been derived from the assessee’s activity of development and construction of housing project. It was further contended that the sale of unutilized FSI cannot be considered as a part of development of a housing project. Profit relatable to such activity, therefore, must be excluded for the purpose of deduction u/s 80IB(10). It had relied on a decision of HC in the case of CIT v. Gautam Sarabhai Trust in 173 ITR 216 in which in the context of exemption u/s 47 from payment of capital gains on amalgamation of companies, the Court ruled that such exemption would be available only to transfer of shares on amalgamation and if besides the share or shares in the amalgamated company, the shareholder was alloted something more, such as bonds or debentures in consideration of the transfer of his share or shares in the amalgamating company, he cannot get benefit u/s 47(vii).
On the other hand, the assessee's counsel had contended that the only requirement u/s 80IB(10) was development and building of housing project, of course, within the parameters laid down therein. In the present case, it was not even the ground of the Revenue that any of the conditions were breached. Merely because a portion of the FSI available for construction was not fully utilized would not disentitle the assessee from such deduction. In case of M/s.Moon Star Developers, it was pointed out that almost entire ground floor area available for construction was so covered by the housing units constructed by the assessee. Full FSI on the ground floor was thus utilised. The assessee had put up a scheme of residential units with only ground floor. The Revenue cannot compel the assessee to design the residential units in a particular manner. To utilize the full FSI, the assessee would have to build three additional floors. There was nothing in the section that compels the assessee to do so. It was further submitted that in the present case, the entire profit of the assessee was derived from development of a housing project. There was no segregation between sale of residential unit and the unutilized FSI. Such FSI was part and parcel of the residential units constructed by the assessee and sold to the purchasers. There was nothing on record to suggest that the purchasers carried out further extensive construction soon after the sale of the units. It was further contended that being an exemption scheme aimed at encouraging the activity of construction of residential units, the same should be liberally construed. It was contended that even if the scheme was to be strictly construed, once the assessee was covered within the scheme, the terms of the scheme for exclusion should be liberally constructed. In this context, it had relied on decision in the case of CIT, Surat I v. Favourite Industries, (2012-TIOL-30-SC-CX). It had lastly contended that the entire profit arose out of development of housing project and sale of residential units so constructed.
A) ++ the issue is already covered by a decision of HC in the case of Radhe Developers. Under identical circumstances, HC upheld the assessee's claim for deduction u/s 80IB(10) after observing that neither the provisions of Section 80IB nor any other provisions contained in other related statutes were brought to our notice to demonstrate that ownership of the land would be a condition precedent for developing the housing project. It was perhaps not even the case of the Revenue that under the other laws governing construction in urban and semiurban areas, there was any such restriction. It is, however, the thrust of the argument of the Revenue that in order to receive benefit u/s 80IB(10), such requirement must be read into the statute. We cannot accept such a contention. Firstly, as already noted, there is nothing u/s 80IB (10) requiring that ownership of the land must vest in the developer to be able to qualify for such deduction. Secondly, term developer has been understood in common parlance as well as in legal sense carrying a much wider connotation. In that case it was observed that assessee had, in part performance of the agreement to sell the land, 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 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 u/s 80IB (10), the assessee could be considered as the owner of the land in question. As held by the SC in the case of Mysore Minerals Ltd. vs CIT, and in the case of CIT vs. Podar Cement Pvt. Ltd. and others, the ownership has been understood differently in different context. For the limited purpose of deduction u/s 80IB(10), the assessee had satisfied the condition of ownership also; even if it was necessary. Under the circumstances, we are of the opinion that the Tribunal committed no error in holding that the assessees were entitled to the benefit u/s 80IB(10) 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. Under the circumstances, in the present group of Tax Appeals also, such question is answered against the Revenue and in favour of the assessees;
B) ++ it can thus be seen that deduction u/s 80IB(10) was granted to give fillip to the construction of residential units for persons of middle income group in urban and semiurban areas of large cities and even small towns where there would be dearth of supply of such residential units. Further conditions were later on added which included restriction of not allotting more than one residential unit to any person who is not an individual. In case of allotment of residential unit to an individual, it was further provided that no other residential unit in such housing project be alloted to such individual or his/her spouse, minor children or Hindu undivided family if such individual is a karta and any person representing such individual, the spouse or the minor children of such individual or the Hindu undivided family in which such individual is the karta. At the relevant time, these later conditions were not in operation. Nevertheless, what can be seen from the conditions which prevailed at the relevant time is that deduction was aimed at providing 100% tax exemption to an undertaking which was involved in developing and building of housing projects in order to make affordable residential units available for middle income group citizens in urban and semiurban areas. To ensure even distribution of such units and to avoid hoarding, additional conditions in the form of restriction on allotment to same person or his near relatives were added. In this context, we may examine, whether the decision of the Assessing Officer to treat the income of the assessees from sale of FSI separate and excludable from the purview of section 80IB(10). The concept of FSI, is a well known one. Local authorities, such as Corporations, Municipalities and Panchayats, frame regulations for regulating activities of development of lands within their local areas. Such regulations are popularly referred to General Development Control Regulations (GDCR). In addition to providing different zones controlling development activities in different areas for regulated and orderly development of urban areas, these regulations also provide for various other details such as maximum height upto which the construction can be carried out, maximum area on the ground floor or on other floors which can be covered under construction, margin to be left on sides, parking facilities to be provided depending on the nature of building and most importantly, the maximum construction that can be carried out on a given piece of land. The last element, namely, the ratio of the land area versus the maximum construction permissible on such land, is referred to as floor space index (FSI for short). It is this FSI which will decide the maximum area of construction that can be carried out on any given piece of land. It is, therefore, not difficult to appreciate that besides several other factors of situational and other advantages and disadvantages, FSI permissible for the land in question would be an important factor in the context of development of the land. Given all other factors same, higher the FSI, the greater the value of the land;
++ it is in this context, we have to appreciate the underutilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the earlier portion of the judgment, we can gather that such utilization of the FSI by the assessees ranges from the minimum of 11.14% of the full FSI available to a maximum of 65.81%. In majority of the cases, the assessees have covered barely about one fourth or one third of the permissible FSI. For any commercial activity of construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remaining same, nonutilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Let us compare two instances. In the same area two residential schemes are developed. Both have residential units of 1500 sq. feet. In one scheme 100% FSI is used in another 25% FSI is used and 75% is passed on to the buyer of the unit. Price of the unit in the later scheme would for apparent reason be considerably higher than the former because the buyer there gets not only a residential unit of 1500 sq. feet, he also gets the right to build further construction of 4500 sq. feet. Whether this includes open land or not is not important. In terms of construction business, it is equivalent to sale of land. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer;
++ it is true that section 80IB(10) does not provide that for deduction, the undertaking must utilize 100% of the FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction u/s 80IB(10) on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80IB(10). Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80IB(10). This is not to suggest that for claiming deduction under section 80IB (10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the assessees have made any special ground for nonutilization of the FSI;
++ the contention of the counsel for the assessee that as long as there has been 100% utilization of the maximum permissible area on the ground floor, deduction u/s 80IB(10) cannot be declined, cannot be accepted. As noted earlier, in case of M/s.Moon Star Developers and many other assesses, such full utilization of the ground floor area available for construction resulted into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused. What is available for deduction u/s 80IB(10) is the profit of an undertaking derived from developing and building a housing project. Mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits cannot be said to have been derived from such housing project. Terms “derived from”, “arising out of” and “attributable to” are often times used in the context of income tax in different connotation. In the case of Sterling Foods, the assessee was engaged in processing prawns and other sea food which it exported. In the process, the assessee earned import entitlements to use itself or sell the same to others. During the year under consideration, the assessee included such sale proceeds for claiming relief u/s 80HH, in case of any profit or gain derived from an industrial undertaking in backward areas. In this context, the Apex Court held that the import entitlements cannot be said to be derived from the industrial undertaking of the assessee. For the application of the words “derived from”, there must be a direct nexus between the profits and gains and the industrial undertaking and in the case on hand, the nexus was not direct but only incidental;
++ in case of Pandian Chemicals Ltd, once again, the assessee claimed deduction u/s 80HH. This claim included interest on deposit made with Electricity Board for supply of electricity. The Apex Court held that the interest derived by the industrial undertaking of the assessee on such deposits made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself and was not profit earned or gain derived by the undertaking for the purpose of special deduction u/s 80HH. In the case of Liberty India, the assessee was engaged in infrastructure development and claimed deduction under section 80I, 80IA and 80IB, etc. on the draw back receipts and DEPB benefits. The Court held that such income cannot be stated to be derived from the industrial undertaking. The case of Nirma Industries Ltd rested on different facts. It was a case where the assessee had claimed deduction under section 80IA. Such claim included the interest received from trade debtors towards late payment of sale consideration. This became a matter of dispute between the assessee and the Revenue. The Court held in favour of the assessee holding that such additional consideration can also be stated to be derived from the business. It was observed that when the purchaser pays a higher sale price, if it delays payment of sale proceeds, there is a converse situation to offering of cash discount. In principle, thus the transaction remains the same and there is no distinction as to the source. In view of the above discussion, the question is answered in favour of the Revenue. All Tax Appeals to this extent are allowed. Respective decisions of the Tribunal are reversed to that extent. Appeals are disposed of accordingly.