THE COMMISSIONER OF INCOME TAX-I vs. GAYATRI DEVELOPERS

O/TAXAP/549/2008 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 549 of 2008 With TAX APPEAL NO. 489 of 2009 With TAX APPEAL NO. 492 of 2009 With TAX APPEAL NO. 323 of 2009 With TAX APPEAL NO. 317 of 2009 With TAX APPEAL NO. 304 of 2009 With TAX APPEAL NO. 1711 of 2008 With TAX APPEAL NO. 1490 of 2008 With TAX APPEAL NO. 581 of 2008 With TAX APPEAL NO. 577 of 2008 With TAX APPEAL NO. 574 of 2008 With TAX APPEAL NO. 573 of 2008 With TAX APPEAL NO. 572 of 2008 With TAX APPEAL NO. 570 of 2008 With TAX APPEAL NO. 568 of 2008 With TAX APPEAL NO. 566 of 2008 With TAX APPEAL NO. 565 of 2008 With TAX APPEAL NO. 561 of 2008 Page 1 of 42

O/TAXAP/549/2008 JUDGMENT With TAX APPEAL NO. 558 of 2008 With TAX APPEAL NO. 557 of 2008 With TAX APPEAL NO. 556 of 2008 With TAX APPEAL NO. 555 of 2008 With TAX APPEAL NO. 554 of 2008 With TAX APPEAL NO. 553 of 2008 With TAX APPEAL NO. 552 of 2008 With TAX APPEAL NO. 550 of 2008 With TAX APPEAL NO. 1709 of 2010 With TAX APPEAL NO. 1492 of 2010 With TAX APPEAL NO. 1156 of 2010 With TAX APPEAL NO. 1051 of 2010 With TAX APPEAL NO. 2228 of 2009 With TAX APPEAL NO. 1681 of 2009 With TAX APPEAL NO. 1424 of 2009 With TAX APPEAL NO. 1312 of 2009 With TAX APPEAL NO. 1311 of 2009 With TAX APPEAL NO. 1273 of 2009 With TAX APPEAL NO. 1272 of 2009 Page 2 of 42

O/TAXAP/549/2008 JUDGMENT With TAX APPEAL NO. 1265 of 2009 With TAX APPEAL NO. 1229 of 2009 With TAX APPEAL NO. 445 of 2009 With TAX APPEAL NO.495 OF 2009

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ THE COMMISSIONER OF INCOME TAX-I....Appellant(s) Versus MOON STAR DEVELPERS....Opponent(s) ================================================================ Appearance: MR MR BHATT with MRS MAUNA BHATT and MR KM PARIKH, ADVOCATES for the Appellant(s) MR SN SOPARKAR, SR. ADV. WITH MR B.S. SOPARKAR, ADVOCATES for Page 3 of 42

O/TAXAP/549/2008 JUDGMENT the Opponent(s) ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI

Date : 05 & 11/03/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. In this group of appeals,  two questions are raised by the Revenue for our consideration.  The first   issue   is   with   respect   to   the   claim   of deduction   by   the   respondents­assessees   under section 80IB(10) of the Income Tax Act,1961 (‘the Act’ for short).   The assessees are developers. They   had   developed   housing   projects   fulfilling the conditions     contained in section   80IB(10) of the Act and claimed deduction on the profits so   earned   from   sale   of   such   housing   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   the   land­owners   and   not   the assessees.     On   such   grounds,   the   Assessing Officer     declined   to   grant   the   benefit   of deduction   under   section   80IB(10)   of   the   Act, instead   treating   the   assessees   as     a   works contractors.  Such issues  reached the Income Tax Page 4 of 42

O/TAXAP/549/2008 JUDGMENT Appellate   Tribunal   (‘the   Tribunal’   for   short). The Tribunal ruled in favour of the assessees. The   Revenue   thereupon       filed   further   appeals before the High Court.  In the case  of CIT  v. Radhe Developers, 341 ITR  403 (Guj.), this Court dismissed the Revenue’s appeals and confirmed the view of the Tribunal.  We would  take note of the relevant   portion   of   such   judgment   at   a   later stage. 2. The   second     issue   also   arises   out   of   the assessees’   claim   for   deduction   under   section 80IB(10) of the Act.   The Assessing Officer in addition   to   raising   objection     to   the   entire claim   of   the   assessees   for     deduction   under section 80IB(10) of the Act further noticed that the assessees had not utililzed the full extent of the  Floor Space Index (FSI for short) of the land in question.     After putting the assessees to   notice   and   eliciting   their     response,   the Assessing   Officer,   concluded   that   the     profit which   could   be   relatable   to   the   sale   of unutilized   FSI   cannot   be   stated   to   have   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 under section 80IB(10)of the Act.  The Page 5 of 42

O/TAXAP/549/2008 JUDGMENT Tribunal on this issue also ruled in favour of the   assessees.     The   Revenue,   therefore,   raised this additional question in these appeals.   In Tax Appeals Nos.549/08, 552/08, 553/08, 554/08, 556/08, 557/08, 558/08, 561/08, 565/08, 566/08, 568/08, 570/08, 572/08, 573/08, 574/08, 577/08, 581/08  though such issue  arises, at the time of admission of the appeals, question relatable to this issue was not framed though it does arise out of respective judgment of the Tribunal. We therefore   permit   the   Revenue   to   raise   such additional question in such appeals.   In other appeals, such an additional question has already been   framed.     For   the   purpose   of   all   these appeals, therefore, we adopt the following common substantial

question

law

for

our consideration: “Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in   law   in   holding   that   full     deduction   under section 80IB(10) of the Act was available to the assessees   even   though   the   construction   was carried   out   only   utilizing   a     portion   of   FSI available?” 3. We may first, deal with issue No.1 which is possible of  summary disposal since the issue is already covered by a decision of this Court in the   case   of   Radhe   Developers   (supra).       Under identical circumstances, this Court   upheld the Page 6 of 42

O/TAXAP/549/2008 JUDGMENT assessees   claim   for   deduction   under   section 80IB(10) of   the   Act   making following observations: “31. 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 under Section 80IB(10) of the Act, such requirement must be read into the statute. We cannot accept such a contention. Firstly, as already noted, there is nothing under Section   80IB   (10)   of   the   Act   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. The Tribunal itself in the impugned order has traced different meanings of term developer explained in different dictionaries, which read as under:­ “a. The Webster's Encyclopedia unabridged of the English Language gives Following meaning of the term 'developer' as: “1. One who or that which develops; 2. A   person   who   invests   in   and   develops   the Urban or Suburban potentialities of real estate. b. Oxford Advanced Learners Dictionary of Current English   Fourth   Indian   Edition  gives   meaning   of the term 'developer' as persons or company that develops land. c. Random   House   Dictionary   of   the   English Language, the following can be found. Page 7 of 42

O/TAXAP/549/2008 JUDGMENT Develop: a. To bring out the capabilities or possibilities of; bring to a more advanced or effective state. b. To cause to grow or expand. Developer: a. The act or process of developing; progress. b.   Synonym:   Expansion,   elaboration,   growth, evolution, unfolding, maturing, maturation. d.  Webster Dictionary,the following definitions emerge: a. To realize the potential of; b. To aid in the growth of Strength, develop the biceps, c. To bring into being: make active (develop a business) d. To convert ( a tract of land) for specific purpose, as by building extensively. e. Law   lexicon   Dictionary: The   following

definitions could be seen: Development a. To act, process or result of development or growing or causing to grow; the  state

of being developed. b. Happening.” 32. Section   80IB(10)   of   the   Act   thus   provides for deductions to an undertaking engaged in the business of developing and constructing housing projects under certain circumstances noted above. It does not provide that the land must be owned by the assessee seeking such deductions. 33. It is well settled that while interpreting the   statute,   particularly,   the   taxing   statute, nothing can be read into the provisions which has not   been   provided   by   the   Legislature.   The condition   which   is   not   made   part   of   Section Page 8 of 42

O/TAXAP/549/2008 JUDGMENT 80IB(10) of the   Act,namely that of owning the land,   which   the   assessee   develops,   cannot   be supplied by any purported legislative intent. 34.   We   have   reproduced   relevant   terms   of development agreements in both the sets of cases. It can be seen from the terms and conditions that the assessee had taken full responsibilities for execution of the development projects. Under the agreements,   the   assessee   had   full   authority   to develop   the   land   as   per   his   discretion.   The assessee   could   engage   professional   help   for designing and architectural work. Assessee would enroll   members   and   collect   charges.   Profit   or loss   which   may   result   from   execution   of   the project belonged entirely to the assessee. It can thus be seen that the assessee had developed the housing project. The fact that the assessee may not   have   owned   the   land   would   be   of   no consequence. 35.   With   respect   to   the   question   whether   the assessee had acquired the ownership of the land for the purposes of the Income Tax Act and, in particular, Section 80IB (10) of the Act and to examine   the   effect   of   Explanation   to   Section 80IB(10)   introduced   with   retrospective   effect from 1.4.2001, since several aspects overlap, it would be convenient to discuss the same together. 36. We have noted at some length, the relevant terms   and   conditions   of   the   development agreements   between   the   assessees   and   the   land owners in case of Radhe Developers. We also noted the terms of the agreement of sale entered into between   the   parties.   Such   conditions   would immediately reveal that the owner of the land had received   part   of   sale   consideration.   In   lieu thereof he had granted development permission to the   assessee.   He   had   also   parted   with   the possession of the land. The development of the land was to be done entirely by the assessee by constructing residential units thereon as per the plans   approved   by   the   local   authority.   It   was specified   that   the   assessee   would   bring   in technical   knowledge   and   skill   required   for Page 9 of 42

O/TAXAP/549/2008 JUDGMENT execution of such project. The assessee had to pay   the   fees   to   the   Architects   and   Engineers. Additionally,   assessee   was   also   authorized   to appoint   any   other   Architect   or   Engineer,   legal adviser and other professionals. He would appoint Sub­contractor or labour contractor for execution of the work. The assessee was authorized to admit the   persons   willing   to   join   the   scheme.   The assessee   was   authorised   to   receive   the contributions and other deposits and also raise demands   from   the   members   for   dues   and   execute such   demands   through   legal   procedure.   In   case, for some reason, the member already admitted is deleted, the assessee would have the full right to   include   new   member   in   place   of   outgoing member.   He   had   to   make   necessary   financial arrangements   for   which   purpose   he   could   raise funds from the financial institutions, banks etc. The   land   owners   agreed   to   give   necessary signatures,   agreements,   and   even   power   of attorney to facilitate the work of the developer. In short, the assessee had undertaken the entire task of development, construction and sale of the housing units to be located on the land belonging to the original land owners. It was also agreed between the parties that the assessee would be entitled   to   use   the   the   full   FSI   as   per   the existing   rules   and   regulations.   However,   in future, rules be amended and additional FSI be available, the assessee would have the full right to use the same also. The sale proceeds of the units allotted by the assessee in favour of the members   enrolled   would   be   appropriated   towards the land price. Eventually after paying off the land owner and the erstwhile proposed purchasers, the   surplus   amount   would   remain   with   the assessee. Such terms and conditions under which the   assessee   undertook   the   development   project and took over the possession of the land from the original owner, leaves little doubt in our mind that the assessee had total and complete control over the land in question. The assessee could put the land to use as agreed between the parties. The   assessee   had   full   authority   and   also responsibility to develop the housing project by not   only   putting   up   the   construction   but   by Page 10 of 42

O/TAXAP/549/2008 JUDGMENT carrying out various other activities including enrolling   members,   accepting   members,   carrying out modifications engaging professional agencies and so on. Most significantly, the risk element was entirely that of the assessee. The land owner agreed to accept only a fixed price for the land in question. The assessee agreed to pay off the land owner first before appropriating any part of the sale consideration of the housing units for his   benefit.   In   short,   assessee   took   the   full risk of executing the housing project and thereby making profit or loss as the case may be. The assessee invested its own funds in the cost of construction and engagement of several agencies. Land   owner   would   receive   a   fix   predetermined amount   towards   the   price   of   land   and   was   thus insulated against any risk. 37. By no stretch of imagination can it be said that   the   assessee   acted   only   as   a   works contractor. The terms works contractor has been receiving judicial attention in several cases. xxxxxx xxxxxx 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   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 Page 11 of 42

O/TAXAP/549/2008 JUDGMENT 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.   vs     Commissioner   of Income   Tax   (supra),   and   in   the   case   of Commissioner of Income­Tax vs. Podar Cement Pvt. 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 vs. Uppal Agencies Private Limited and another (supra) was rendered in the background of the provisions of the Consumer Protection Act. In the case before Page 12 of 42

O/TAXAP/549/2008 JUDGMENT 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 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. xxxxx xxxxx 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.” 4. Under the circumstances, in the present group of Tax Appeals also, such question   is answered against   the   Revenue   and   in   favour   of   the assessees. 5. This   brings   us   to   the   second   question, pertaining to sale of unutilized FSI. Facts are slightly     different   in   each   appeal.     We   may, Page 13 of 42

O/TAXAP/549/2008 JUDGMENT however,   record   the   facts     as   arising   in   Tax Appeal No.549 of 2008, which has been treated as lead matter. 6. For   the   assessment   year   2003­04,   the respondent   assessee   M/s.Moon   Star   Developers, Baroda,  filed its return of income on 1.12.2003 declaring total income at nil.   In such return, the assessee had declared gross total  income of Rs.26,99,082/­   and   claimed   deduction   under section 80IB(10) of the Act on the entire income. The Assessing Officer   desired to scrutinize the claim.     He,   therefore,   issued   notice   under section 143(2) of the Act.   He noticed that the assessee   had   claimed       such   net   profit     of Rs.26.99 lacs (rounded off)  for development and building of a housing project. He noticed that the development permission granted by the local authority was in the name of one Shri Mustaqbhai Alibhai Patel and others who were the owners of the land. On the issue of deduction under section 80IB(10)   of   the   Act,   on   the   entire   profit,   he held as under: “7.12 The   plain   reading   of   section 80IB(10) makes it clear that profit in case of an undertaking       developing   and   building   housing project approved by a local authority shall be allowed deduction at 100% of profit derived from such housing project, if the conditions as laid down   in   sub­section   10   of   section   80IB   are Page 14 of 42

O/TAXAP/549/2008 JUDGMENT fulfilled.   However,   in   this   case,   as   discussed above,   the   firm   has   not   fulfilled   the   basic condition for claiming deduction, i.e. ownership of land on which  housing project is constructed and the approval of   local authority is not in the name of the assessee firm.  Here I would like to make clear that the partner and partnership firm   both   are   totally   separate   and   different entity   and   have   their   own   separate   rights   and obligations.     The   assessee   does   not   become eligible for deduction u/s 80IB of the Act on the plea that the land  of the project was owned by the partner.  The contention of the assessee that by   entering   into   development   contract   it   has acquired   ownership   right   of   the  land   has   been squarely dealt with  in the above discussion and therefore   not   acceptable.   Hence,   the   deduction u/s.80IB is not admissible.   The assessee firm has furnished inaccurate  particulars of income, therefore   penalty   proceedings   u/s.271(1)(c)   of the I.T. Act is separately initiated. Since   this   issue   is   already   concluded   by   this Court in the case of Radhe Developers, we may, for the present discussion, ignore it. 7. The   Assessing Officer,   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.  Though as per the approved   plan,   construction     had   been   carried out, there was balance FSI available on the plots Page 15 of 42

O/TAXAP/549/2008 JUDGMENT of   land     which   was   not   utilized.     He   was, therefore, of the opinion that the assessee could not claim deduction under section 80IB(10) of the Act   for   the   profit   relatable   to     sale   of unutilized FSI.   He, therefore, called upon the assessee to explain the same. 8. The 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) of the Act.   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 Page 16 of 42

O/TAXAP/549/2008 JUDGMENT further contended that the provisions of section 80IB     pertain   to   granting   of   benefits   to   the assessee,   the   same   should   be interpreted liberally. 9. The   Assessing   Officer, rejected   the assessee’s claim making following observations: “11. The   submission   of   assessee   firm   is   duly considered   but   the   same   was   not     tenable.   The argument that the assessee firm has developed the FSI available @ 40% of area for construction of ground floor  houses, therefore the assessee has complied the   condition prescribed.   The local authority has imposed restriction of construction on   ground   floor   @   40%   of   area   so   that   every residential unit have proper light, air and the parking   space.     Therefore,   though   anybody   can develop property to the   extent of 1.6 times of area   available   subject   to   maximum   ground   floor construction   @   40%   of   the   area   available. However,  the assessee has not consdiered the FSI available   on   the   ground   floor   i.e.   the   upper floor   of   the   residential   units.     Due   to   non development   of     of   this   available   FSI,   the question raised is still remains unanswered.  The fact of the matter  is that the assessee firm had undertaken to construct only a part of the FSI available   to   it   under   the   scheme   of   things sanctioned   by   the   local   authority.     The   other part of unutilized FSI relating to the approved units have not   been constructed or developed, but being sold directly, although as a composite part of unit of tenement itself.   From this, it emerges   that,   the   elements   of   profitability   is relatable to the first part of construction of the   approved   units   and   the   other   part   of   the profit earned by the assessee firm is relatable to the sale of unutilized FSI in respect of which no construction was undertaken.   The provisions of section 80IB(10) are     clear and unambiguous Page 17 of 42

O/TAXAP/549/2008 JUDGMENT in   as   much   as   it   serves   to   benefit   those assessees   who   had   derived   profits   from   the activity of development and construction of any housing project.  Appreciating the facts involved in this case, assessee firm can be said to have involved   in   the   partial   construction   of   the housing project at one hand and the other hand has enabled assessee firm to derive profit from sale of unutilized FSI, although it may be seen to   be   an   integral   part   of   the   housing   unit itself. 12. In the context of the above discussion, it is   observed   that   the   assessee   firm   had   not undertaken  the completion of the project in its entirely as far as development and  construction of the utilizable FSI is concerned.  The assessee firm had total plot area of 9620 sq. mtrs for development  after reduction on account of common plot and roads etc. Thus, it   was eligible   to construct super  built up area of 15392.40 @ 1.6 FSI.   The assessee   had constructed   a housing project by deploying construction of 3573.48 sq. mtrs of FSI. Thus, the FSI of 3573.48 sq. mtrs. Has   been   utilized   for   the   construction   of   the same,   out   of   permissible   FSI   of   15392.40   sq. mtrs.   The profits ensuing from entire   project for the year as per the profit and loss account, includes additional profit  attributable to sale of unutilised FSI   has also been booked by the assessee firm.  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.” He noted that considering 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 Page 18 of 42

O/TAXAP/549/2008 JUDGMENT 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. 9. The   assessee   carried   the   matter   in   appeal. CIT (Appeals), rejected the entire   claim under section 80IB(10) of the Act and therefore, did not find it necessary   to examine this separate aspect   of   claim   for   deduction     under   section 80IB(10) of the Act. He observed as under: “16. In view of the discussions given above, I do not intend to interfere with the action of the Assessing   Officer   in   disallowing   the   claim   of deduction u/s.80IB(10)   hence   the   same   is confirmed.     Since   the   disallowance   has   been confirmed   in   toto   the   alternative     finding regarding   profits   attributable   to   sale   of unutilized   FSI   is   not required   to   be considered.” 10. The assessee then carried the matter in appeal before the Tribunal.  The Tribunal allowed the

assessee’s

appeal

making

following observations: “..........     On   verification   of   the   sale   deed executed       in   favour   of   the   buyers   of   the residential houses, it is 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 Page 19 of 42

O/TAXAP/549/2008 JUDGMENT also the reference is with respect  to land area only. In both the documents,   assessee had   not acquired     rights   and   has   snot   relinquished rights   with   reference   to   FSI.     Further,   on verification   of   approved   map   for   each   unit   is with reference to built up area only.  Under the circumstances,     the   assessee   has   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 is of maximum permissible FSI and by giving such calculation   it   is   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   is   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. 64. The AO states  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 vis­a­ vis   the   entire     plot   of   land   available   for development with the assessee.  We find that the approved FSI in regard to the units constructed has been fully utililzed     as per the approved plan of the local Authority, namely the FSI is fully   utilized,   the   FSI   actually   passed   and permitted by the authorities for each project. 65. The AO observes assessee has sold unutilized FSI without  involving any process of development and construction, which is the primary criterion required to be satisfied for the purpose of the claim of deduction under section 80IB of the Act Page 20 of 42

O/TAXAP/549/2008 JUDGMENT have no force;   that the assessees have claimed deduction under section 80IB of the Act for the profit   derived   during   the   year   under consideration   from   the   business   of   development and   construction   of   a   housing   project   which though   includes   profit   earned   from   sales   of unutilized FSI of the housing project also and that the other part of unutilized FSI relating to the approved units have not been constructed or developed but being sold directly, although as a unrestrictive bundle of rights attached with the sale   of land plot.  As aforesaid, there is no requirement   as   to   FSAI   under   the   schcme   of provisions   of   Sec.80IB(10).     In   any   case   the assessee has not sold FSI of plot, even if the unutilized   FSI   rights   are     available   with   the assessee,   it   is   the   only   way   left   out   of utilizing   such   unutilized   FSI   is   to   make construction on top of the ground floor, which is already being sold to prospective buyers.   With this so called   unutilized FSI rights,   if the assessee wishes to make further construction then it will practically impossible as the assessee is left   with   no   Easement   rights   for   making construction     or   access   to   go   on   top   of   the ground   floor   as   the   ground     level   rights   are already   sold   to   prospective   customer.   In   this situation, it  would be practically impossible to make either construction   or to give access for construction   made. Thus the concept of element of unutilized FSI sold is imaginary; and based on surmises and conjunctures.” 11. In   rest   of   the   appeals,   facts   are similar.     Relevant     data   in   such   appeals,   as provided by the counsel for the assessees,    is as under: Tax Appeal No. Name of the Assessee Total FSI available FSI used Percentage of FSI used 549/2008 Moonstar Developer 15392 3573 23.21 550/2008 Sahajanand Associates 18985 5898 31.07 Page 21 of 42

O/TAXAP/549/2008 JUDGMENT 552/2008 Ambica Developer Paper missing 553/2008 Gayatri Developer 5281 2087 39.52 554/2008 Hari Om Developer 10132 2724 26.89 555/2008 Gayatri Developer 5280 2086 38 556/2008 Om Construction 3654 1428 39.08 557/2008 Arpan Developer 5386 1946 36.13 558/2008 Govardhan Developer 9239 3024 32.73 561/2008 Krishnadeep Developer 17823 3973 22.29 565/2008 Kismat Construction 8523 2120 24.87 566/2008 Bhakti Construction 12541 3807 30.36 568/2008 Shreenathji Developer 4979 1624 32.62 570/2008 Super Construction 20692 10673 51.58 572/2008 Ashiyana Developer 14911 3672 24.63 573/2008 Rutu Developer 3680 1566 42.55 574/2008 Avani Traders 10811 4087 37.8 581/2008 Jai Ambe Traders 16242 1810 11.14 1490/2008 Deep Developers 1711/2008 Satyanarayan Traders 76805 17461 22.73 304/2009 Parth Construction 2040 763 37.4 317/2009 Super Construction 20692 10674 51.59 323/2009 Sun Developer 8699 5725 65.81 492/2009 Sun Developers 1229/2009 Jay Ambe Traders 10227 2965 28.99 1265/2009 Shiv Developers 40671 20668 50.82 1272/2009 Harsh Developers 20335 6233 30.65 1273/2009 Harsh Developers 20335 6233 30.65 1311/2009 Shubham Developers 8640 2127 24.62 1312/2009 Shubham Developers 8640 2127 24.62 1424/2009 Bhagyalaxmi Construction 20295 4716 23.24 1681/2009 Shakti Builders 51164 17754 34.7 2228/2009 Shiv Developers 69654 14745 21.17 1051/2010 Pramukh Associates 15134 4026 26.6 1156/2010 Kirti Construction 51974 12992 25 1492/2010 Rutu Developers (Abhishek) 8762 3726 42.52 Page 22 of 42

O/TAXAP/549/2008 JUDGMENT 1709/2010 Someshwar Developers 11458 2546 22.22 445/2009 Ambica Traders 16074 5898 36.69 489/2009 Gayatri Developers 19385 6998 36.1 495/2009 Krishnadeep Developers 17897 4364 24.38 577/2008 Subhan Associates 14714 2777 18.87

O/TAXAP/549/2008 JUDGMENT would     bring   out   this     purpose.     Granting benefits   of   section   80IB   of   the   Act   in   the present case would frustrate such purpose. 14. Counsel   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.  For such purpose, he relied on the following decisions: (1) In the case of  CIT   v. Sterling Foods,  237 ITR 579. (2) In   the   case   of  Pandian   Chemicals   Ltd.     v. CIT, 262 ITR 278. (3) In the case of  Liberty India   v.   CIT,  317 ITR 218 (SC). 15. Learned   counsel   Shri   M.R.Bhatt   who appeared at our request  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   under section 80IB(10) of the Act.     He relied on a decision of this Court in the case of    CIT  v. Gautam Sarabhai Trust  in 173 ITR 216 in which in the context of exemption under section  47 of the Page 24 of 42

O/TAXAP/549/2008 JUDGMENT Act   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   is   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 under section 47(vii) of the Act. 16. Learned   advocate   Shri   Nitin   Mehta adopted the same arguments and drew our attention to a decision of the Delhi High Court   in the case of Honda Siel Power Products  Ltd.  v. CIT, 318 ITR 309 (Delhi) in   which   the Court held that   the   profits   derived   from   industrial undertaking from sale of imported machinery and spare   parts     used     for   providing   after   sale service   is   not   profit   derived   from   such industrial     undertaking   and   the   assessee   would not   be   entitled   to       special   deductions   under section 80HH or 80I of the Act. 17. On the other hand,  learned counsel Shri Saurabh Soparkar appearing     for the assessees opposed   the   appeals   contending   that   the   only requirement  under section 80IB(10) of the Act is development and building of housing project, of Page 25 of 42

O/TAXAP/549/2008 JUDGMENT course, within the parameters laid down therein. In the present case,  it is 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, he 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 is nothing in the section that compels the assessee to do so. 18. Counsel   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   is part and parcel of the residential units constructed   by   the   assessee   and   sold   to   the purchasers.   There   is   nothing   on   record   to suggest  that the purchasers carried out  further Page 26 of 42

O/TAXAP/549/2008 JUDGMENT extensive construction soon after the sale of the units. 19. Counsel   contended   that being   an exemption   scheme   aimed   at   encouraging     the activity   of   construction   of   residential   units, the   same   should   be   liberally   construed.       For such   purpose,   he   relied   on   the   following decisions: (1) In the case of CIT, Amritsar  vs.  Strawboard Mfg. Co. Ld. 177 ITR 431 (SC). (2) In the case of Bajaj Tempo Ltd.  v.  CIT, 196 ITR 188 (SC). 20. He 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,   he   relied   on decision in the case of  Commissioner of Central Excise, Surat I v.     Favourite   Industries,  2012 (278) ELT 145 (SC). 21. He   lastly   contended   that   the   entire profit   arose   out   of   development   of   housing project   and   sale   of   residential   units   so constructed.     He   drew   our   attention   to   the decision   of   this   Court   in   the   case   of    Nirma Page 27 of 42

O/TAXAP/549/2008 JUDGMENT Industries   Ltd.     v.     Deputy   CIT,  283   ITR   402 (Guj.)   in   which   the   assessee     had   received interest from  trade debtors towards late payment of sale consideration.   It was held   that such interest     would be included in the profits of the industrial undertaking and therefore eligible for deduction under section 80I of the Act. 22. Having heard the learned counsel for the parties   and   having   perused   the   documents   on record,   we   may   briefly   recapitulate   the   facts. The   respondents­assessees   were   engaged   in development of housing projects. In the case of M/s.Moon Star  Developers, against the total FSI of 15312 sq. meters available for construction, area of  only 3573 sq. meters was utilised.  The residential   units   were   constructed   only   on   the ground floor carrying   no further construction. Such residential units were  sold and  the entire surplus   was   claimed   as   profit   derived   from activity of   developing   housing   project deductible   under section 80IB(10) of the Act. Facts, with minor differences, are similar     in all the cases. 11.03.2014 23. Section   80IB(10)   of   the   Act   pertains   to deduction in respect of profit and gains   from Page 28 of 42

O/TAXAP/549/2008 JUDGMENT certain activities.  Sub­section (10) thereof, as is   well­known,       grants   100%   deduction   on   the profit   of   an   assessee   being   an   undertaking developing and building housing projects on the profit derived from such housing project subject to   conditions   laid   down   therein.     Sub­section (10)   of   the   section   80IB   as   it   stood   at   the relevant  time read as under: “(10) The amount of profits in case of an undertaking   developing   and   building   housing projects   approved   before   the   31st  day   of March   2005   by   a   local   authority,   shall   be hundred per cent of the profits derived in any previous year relevant to any assessment year from such housing project if ­­ (a) such   undertaking   has   commenced   or commences development and construction of the housing project on or after the 1st  day of October, 1998, (b) the project is on the size of a plot of land which has a minimum area of one acre, and (c) the   residential   unit   has   a     maximum built­up   area   of   one   thousand   square   feet where   such   residential   unit   is   situated within   the   cities   of   Delhi   or   Mumbai   or within   twenty­five   kilometers   from   the municipal   limits   of   these   cities   and   one thousand and five hundred square feet at any other place.” We may notice that   subsequently an explanation Page 29 of 42

O/TAXAP/549/2008 JUDGMENT came to be added at the end of     the said sub­ section by Finance Act of 2009 but with effect from 1.4.2001 which explanation read as under: “Explanation – For the removal of doubts, it is hereby declared that nothing contained in this   sub­section   shall   apply   to   any undertaking   which   executes   the   housing project as a works contract awarded by any person   (including   the   Central   or   State Government).” In   the   notes   on   clauses   explaining   the introduction of section 80IB of the Act, in the context   of     sub­section   (10)   thereof,   it   was stated as under: “The provision also seeks to provide that for approved   housing   projects   the   profits   of which are fully deductible, the built­up area in   regions   other   than   outside   twenty­five kms. of municipal limits of Delhi and Mumbai, the   built­up   area  of   the   residential   units does   not   exceed   one   thousand   fiver   hundred square feet.” 24. In the budget speech for the financial year   1999­2000,   the   Finance   Minister   in   the context of tax benefits under section 80IA of the Act   on   housing   projects,   while   increasing   the maximum limit  of the built­up area of the  units from   1000   sq.   ft.   to   1500   sq.   ft.   at   all locations   except   Mumbai   and   Delhi,   stated   as under: Page 30 of 42

O/TAXAP/549/2008 JUDGMENT “98.The   second   element   of   this   incentive package relates to the scheme   for housing projects   for   enjoying   a   tax   holiday   under Section   80­IA   of   the   Income   Tax   Act.   The existing   provision,   inter­alia,   requires that   the   built­up     are   of   dwelling   units should not exceed 1000 sq. feet.   There have been many representations that in towns other than   Mumbai   and   Delhi,   the   land   cost   is relatively less, and therefore, for the same capital expenditure investors can afford to purchase   dwelling   units   of   slightly   larger areas.     In   view   of   this,   it   has   been represented   that   the   ceiling   on   built­up areas for dwelling units in approved projects be increased from 1000 sq. ft to 1500 sq. ft at all locations except Mumbai and Delhi.  I propose   to   accept  this   suggestion  and  make suitable   modifications   in   the   law.     This amendment in the scheme for treating housing projects as infrastructure will, I believe, also   give   a   significant   fillip   to construction activities in the small towns.” 25. The said provision was added  for easing the housing   problem   particularly   for   the   middle income group  in urban areas.  In this context, in   the   decision   of   this   Court   in     Radhe Developers, it was observed as under: “30. The essence of sub­Section (10) of Section 80IB,   therefore,   requires   involvement   of   an undertaking   in   developing   and   building   housing projects   approved   by   the   local   authority. Apparently,   such   provision   would   be   aimed   at giving encouragement to providing housing units in the urban and semi­urban areas, where there is perennial   and   acute   shortage   of   housing, Page 31 of 42

O/TAXAP/549/2008 JUDGMENT particularly,   for   the   middle   income   group citizens. To ensure that the benefit reaches the people, certain conditions were provided in sub­ Section(10) such as specifying date by which the undertaking   must   commence   the   developing   and construction   work   as   also   providing   for   the minimum   area   of   plot   of   land   on   which   such project would be put up as well as maximum built up area of each of the residential units to be located thereon. The provisions nowhere required that only those developers who themselves own the land   would   receive   the   deduction   under   Section 80IB(10) of the Act.” 26. It   can   thus   be   seen   that   deduction under section 80IB(10) of the Act 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.   Some of the essential conditions for claiming such deduction are : (a) that the housing project should be approved by the local authority before a specified date (which was extended from time to time); (b) that   the   undertaking   commenced   development and construction of the housing project after a specified date; (c) that the project is on the size and plot of land  which is of minimum of one acre; Page 32 of 42

O/TAXAP/549/2008 JUDGMENT (d) That   each   residential   unit   has   a   maximum built up area  of 1500 sq. feet barring cities of Mumbai and Delhi and within a radius of 25 km  of municipal units of such cities where   such area should not exceed 1000 sq. ft. 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. 27. 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 Page 33 of 42

O/TAXAP/549/2008 JUDGMENT 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. 28. 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) of the Act?  The concept of FSI, is a wellknown 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 Page 34 of 42

O/TAXAP/549/2008 JUDGMENT 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. 29. 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 one­fourth or one­third of the permissible FSI. 30. For

any

commercial

activity

of construction,   be   it   residential   or   commercial Page 35 of 42

O/TAXAP/549/2008 JUDGMENT 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,   non­ utilization   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 Page 36 of 42

O/TAXAP/549/2008 JUDGMENT 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. 31. It is true that section 80IB(10) of the Act   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   under   section   80IB(10)   of the   Act   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) of the Act.  Surely, this cannot be stated to be development of a housing project qualifying for deduction   under   section   80IB(10)   of   the   Act. 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 Page 37 of 42

O/TAXAP/549/2008 JUDGMENT 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   under­ utilization, 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) of the Act 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. 32.     The   contention   of   the     counsel   for   the assessee   that   as   long   as   there   has   been   100% utilization   of   the   maximum   permissible   area   on Page 38 of 42

O/TAXAP/549/2008 JUDGMENT the   ground   floor,   deduction   under   section 80IB(10) of the Act 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. 33. What is available   for deduction under section 80IB(10) of the Act 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 (supra), 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 under section 80HH of the Act, in case   of     any   profit   or   gain   derived   from   an Page 39 of 42

O/TAXAP/549/2008 JUDGMENT 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. 34. In   case of Pandian Chemicals Ltd (supra), once   again,   the   assessee   claimed   deduction under   section   80HH   of   the   Act.     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     under section 80HH of the Act. 35. In   the   case   of   Liberty   India   (supra), 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 Page 40 of 42

O/TAXAP/549/2008 JUDGMENT such income cannot be stated to be derived from the industrial undertaking. 36. The case of Nirma Industries Ltd (supra) rested on different facts.   It was a case where the assessee had claimed  deduction under section 80IA   of   the   Act.   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. 37. 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. (AKIL KURESHI, J.) Page 41 of 42

O/TAXAP/549/2008 JUDGMENT (MS SONIA GOKANI, J.)

(vjn) Page 42 of 42