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Facts
The assessee, M/s. Macrotech Developers Ltd., claimed deduction under Section 80IB(10) of the Income Tax Act for AY 2014-15. The Assessing Officer (AO) disallowed a significant portion of this deduction, considering charges collected from flat purchasers for services like society formation and common area maintenance as not derived from the housing project. The CIT(A) upheld the AO's order.
Held
The Tribunal held that while some charges like Infrastructure Charges might have a direct nexus with the building and development activity, others like society formation charges and common area maintenance charges may not. The material on record was insufficient to determine the nexus of all collected charges with the eligible business.
Key Issues
Whether charges collected from purchasers, beyond the sale price of flats, are eligible for deduction under Section 80IB(10) as income derived from the housing project.
Sections Cited
Section 80IB(10), Section 80IB(1), Section 143(3)
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Income Tax Appellate Tribunal, ‘B‘ BENCH, MUMBAI
आदेश / O R D E R Per Rahul Chaudhary, Judicial Member 1. By way of the present appeal assessee has challenged the order, dated 18/06/2021, passed by the Ld. Commissioner of Income Tax (Appeals)-49, Mumbai [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2014-15, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 30/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The assessee has raised the following grounds of appeals: 1
“1) On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding the action of the learned Assessing Officer by restricting the deduction under section 801B of the Income Tax Act 1961 (Act'). to Rs. 2,52,881/- as against the claim of Rs. 93,69,494/- made by the Appellant 2) On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating the fact that excess recovery of society formation expenses, common area maintenance charges till handing over possession of building to society, the property taxes till handing over possession to clients, infrastructure charges, legal and other charges incurred during construction are integral part of the project and hence, derived from the project to be eligible for deduction under section 801B of the Act. 3) The appellant craves leave to add, amend, alter or delete the said ground of appeal.
3. The relevant facts in brief are that Appellant is a company engaged in the business of construction and development of real estate. The appellant had developed a housing project in Thane, Maharashtra in respect of which Appellant had claimed deduction of INR 93,69,494/- under Section 80IB(10) of the Act in the return of income for Assessment Year 2014-15. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that out of the aforesaid amount of INR 93,69,494/-, the amounts aggregating to INR 91,16,613/- were collected by the Appellant from the purchasers of the flat in the housing project on account of value added tax, service Tax, society formation & other charges, common area maintenance charges, property tax, building protection deposit, infrastructure charges, interest on delayed payments and legal & other charges. Therefore, the Appellant was asked to show-cause why deduction under Section 80IB(10) of the Act should be allowed to the Appellant in respect of the aforesaid charges. In response, vide letter dated 15/12/2016, the Appellant submitted 2
Assessment Year: 2014-15 that deduction of INR 93,69,494/- was claimed by the Appellant under Section 80IB(10) of the Act on the basis of certificate obtained from chartered accountant. Prior to the formation of society, the Appellant had incurred common area maintenance charges which was set off against the various charges collected by the Appellant and the balance amount of INR 91,16,613/-, being the excess amount, was retained by the Appellant and declared as business income eligible for deduction under Section 80IB(10) of the Act. The Assessing Officer was of the view that excess amount charges collected and retained by the Appellant from the purchasers of the flat in the housing project could not be considered as income derived from the housing project. Therefore, the Assessing Officer disallowed the deduction under Section 80IB of the Act in respect of the same and restricted the quantum of deduction under Section 80IB(10) of the Act to INR 2,52,881/- vide order, dated 30/12/2016, passed under Section 143(3) of the Act.
Being aggrieved, the Appellant preferred appeal before the CIT(A) against the Assessment Order, dated 30/12/2016. Before the CIT(A) it was contended on behalf of the Appellant that various charges collected by the Appellant were as per the agreement with the purchaser of flats in the housing project. Deduction under Section 80 IB of the Act was available in respect of profits from the housing project. A housing project encompassed within its fold various amenities and facilities connected with the developing and building of the housing project. Incurring of common area maintenance charges was an integral part of the housing project. All the charges collected by the Appellant were for developing and building of the housing project. Once a housing project alongwith its amenities and facilities was approved by the competent authority that profits derived from 3
Assessment Year: 2014-15 such housing project were eligible for deduction under Section 80IB(10) of the Act. However, the aforesaid submissions of the Appellant did not find favour with the CIT(A) who confirmed the assessment order and dismissed the appeal holding that only profits derived from the building and development of housing project were eligible for deduction under Section 80IB(10) of the Act. The expression ‘derived from’ required a direct nexus between the profits and gains and the activity of construction and development of housing project. The immediate source of income for the Appellant was excess charges collected and retained by the Appellant and not the construction or development of the housing project. The charges were collected for maintenance of the housing project after its building and development. The common area maintenance charges and other charges collected by the appellant could be at its best being regarded as incidental to the activities of construction and development of the housing project. Therefore, the Appellant was not entitled to claim deduction under Section 80IB(10) of the Act in respect of the same. Thus, the CIT(A) dismissed the appeal vide order, dated 18/06/2021.
Being aggrieved, the Appellant has preferred the present appeal against the order, dated 18/06/2021, passed by the CIT(A) dismissing the appeal on the grounds reproduced in paragraph 2 above.
We have heard rival submissions and perused the materials available on record. The ld. Authorised Representative for the appellant reiterated the submissions made before the authorities below and submitted that the appellant was entitled to claim deduction under Section 80IB of the Act in respect of various charges collected by the appellant form the purchasers of the flats 4
Assessment Year: 2014-15 in the housing project. It was submitted that a housing project could not be restricted to merely purchase or sale of flats. Therefore, the profits arising from the housing project would include profits including various charges recovered by the Appellant in relation to activities forming integral part of the housing project such as maintenance of common area, development of infrastructure, registration of society etc. It was submitted that the judicial precedents on which reliance was placed by the Assessing Officer while making the disallowance were not applicable and were distinguishable on the facts as the same pertained to claim of deduction under Section 80IB of the Act in respect of profits derived from sale of unutilized FSI.
Per contra, ld. DR placed reliance on the order passed by the CIT(A) and submitted that the various charges collected were retained by the appellant were not in the nature of profits derived from construction and development of housing project. It was further submitted that the as per applicable laws Appellant was under obligation to compress the amounts collected to the society on its formation and could not have retained the same.
We have considered the rival submission and perused the material on record.
Section 80IB(1) of the Act provides for deduction in respect of profits and gains ‘derived’ from eligible business specified therein Section 80IB(3) to 80IB(11B) of the Act to the extent specified therein.
As per Section 80IB(10) of the Act, business of developing and building a housing project is one of the eligible businesses. Section 80IB(10) of the Act, inter alia, provides that subject to fulfillment of the specified conditions, the amount of deduction in 5
Assessment Year: 2014-15 the case of an undertaking developing and building housing projects approved by a local authority shall be 100% of the profits ‘derived’ in the previous year relevant to any assessment year from such housing project.
Section 80IB(1) and 80IB(10) of the Act use the expression ‘derived from’ and ‘derived in the previous year relevant to any assessment year from’, respectively. The expression ‘derived from’ has a narrower connotation as compared to expression ‘attributable to’ [Cambay Electric Supply Industrial Co Ltd Vs. CIT: 113 ITR 84]. For application of words ‘derived from’ there must exist a direct nexus between the profits and the eligible business [Sterling Foods Vs State of Karnataka: 237 ITR 579]. Therefore, in our view only profits having direct nexus with eligible business of developing and construction of a housing project would be eligible for deduction in terms of Section 80IB(1) read with Section 80IB(10) of the Act.
The case of the Appellant is that charges collected by the Appellant from the purchasers of the flat have direct nexus to the activity of developing and construction of housing project. Whereas the Revenue has contended that the aforesaid charges collected & retained by the Appellant do not have direct nexus with development and construction of the housing project and are related to maintenance activity. In principle, we find merit in the contention of the Revenue and therefore, are not inclined to accept the contention of the Appellant that any/all receipts relating to the housing project would be eligible for deduction under Section 80IB(10) of the Act as such an interpretation would be contrary to the express provisions contained in Section 80IB(1) of the Act which provide for deduction in respect of profits and gains ‘derived’ from ‘eligible business’ only. However, 6
Assessment Year: 2014-15 on perusal of the various charges collected by the Appellant we find that some of the charges such as Infrastructure Charges may have direct nexus with the activity of building and development of housing project. On the other hand, it appears that charges such as society formation charges, common area maintenance charges, building protection deposit and legal charges do not have nexus with the activity of building and development of housing project. The material on record is not sufficient to arrive at a finding in respect of the nature of the various charges collected by the Appellant and their nexus with the eligible business of building and developing housing project. Accordingly, we deem it appropriate to remand this issue back to the file of the Assessing Officer with the following directions. The Appellant is directed to furnish complete break-up and details of all the charges collected from by the Appellant from the purchases of flats in the housing project along with the necessary documents and details so as to establish that the aforesaid charges have direct nexus with the building and development of housing project and therefore, eligible for deduction under Section 80IB(1) read with 80IB(10) of the Act. The Assessing Officer is directed to consider the details and documents furnished by the Appellant and decide the issue keeping in view our observations hereinabove. In terms of the aforesaid Ground No. 1 is allowed for statistical purposes while Ground No. 2 is dismissed as being infructuous.
In result the present appeal is allowed for statistical purposes.
Order pronounced on 27.03.2024.