M/S/ SINGHANIA MERLIN ESTATE,KOLKATA vs. ACIT CIRCLE 31, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘B’, KOLKATA [Before Shri P.M. Jagtap, AM and Shri S.S. Viswanethra Ravi, JM] I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate..............................…………………………………..Appellant Merlin Oxford, 2nd Floor, 22, Prince Anwar Shah Road, Kolkata - 700033 [PAN : ABNFS8932M] ACIT, Circle 31, Kolkata ……………………………………………….......................Respondent 10, Middleton Row, Kolkata – 700 071 Appearances by: Shri Rakesh Jain, FCA appearing on behalf of the Assessee. Md. Usman, CIT (DR) appearing on behalf of the Revenue. Date of concluding the hearing : October 09, 2017 Date of pronouncing the order : November 30 , 2017 ORDER Per P.M. Jagtap, AM This appeal filed by the assessee is directed against the order of Ld. Principal CIT – 11, Kolkata dated 10.11.2017 passed under section 263 of the Income Tax Act 1961. 2. The assessee in the present case is a company which is engaged in the business of Real Estate Development and Building Construction. The return of income for the year under consideration was filed by it declaring a total income at nil after claiming deduction of Rs. 8,32,05,695/- under section 80IB of the Act. In the assessment completed under section 143(3) vide an order dated 26.03.2015, the total income of the assessee as declared in the return of income at nil was accepted by the A.O. thereby allowing its claim under section

2 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate 80IB fully. The records of the said assessment subsequently came to be examined by the Ld. Principal CIT and on such examination, he found that the assessment made by the A.O. under section 143(3) was suffering from the following errors which were prejudicial to the interest of the revenue: “(i) It was observed from the Profit & Loss A/c for the year 2011-12 that the total receipts of Rs. 48,38,66,198/- included other income of Rs. 1,81,42,455/- (Club Membership Fees of Rs. 77,30,000/- and Electrical & Installation charges of Rs. 1,04,12,455/-). As per Section 80IB(10) of Income Tax Act, 1961, deduction is allowable only on the profit by constructing flats & selling the ready Flats (including Electric installation & other installations etc.). In the instant case, the assessee firm booked the other income along with the sale value of the Flats and expenditure for earning other income along with the expenditure for construction of the flats in the P & L A/c for getting deduction u/s 80IB. In practice, as the other income from ‘Club Membership’ & ‘Electric Installation’ are received from some of the selective allotees as per their additional requirement for alteration & modernization work other than mandatory work to make the flat saleable to a customer, it is no way related to the business for which the assessee firm is entitled to the deduction u/s 80IB and therefore, the same is required to be considered for taxation. However, A.O. while assessing the case, allowed the said other income of Rs. 1,81,42,455/- as eligible income for the deduction under section 80IB(10) of the IT Act, 1961. (ii) It was observed from the assessment record that the assessee firm had constructed 368 flats covering 3,57,600 sq.ft. built up area for 1BHK, 2BHK and 3BHK flats other than 555 saleable parking space covering area 1,07,507 sq.ft. (4,65,107 sq.ft. – 3,57,600 sq.ft). On verification of the list of the allottees, it was observed that in many cases more than one flat (like 1BHK, 2BHK and 3BHK measuring more than 1500 sq.ft.) had been allotted to the same person / related person(s). It is also seen that though the flats were booked in the year 2008 i.e. prior to 2009-10, the assessee firm was required to restrict the sale of 1 (one) flat measuring within 1500 sq.ft. against 1 (one) person / related person(s) at the time of selling the flats during the F.Y. 2011-12, in order

3 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate to get the deduction u/s 80IB(10) [as amended from the A.Y. 2010-11] for the A.Y. 2012-13. The conditions laid down in such sections (e) and (f) of section 80IB(10) are that the built-up area of each residential unit should be 1,500 sq.ft. at any other place other than Delhi and Mumbai and if the allottee is an individual, no other unit in the said housing project should be allotted to the same individual and / or any of the persons as mentioned in the section ‘Non-adherence to the above condition would make the assessee not eligible for deduction under section 80IB(10) of the Act. The sale value of more than one flat to one person measuring more than 1500 sq.ft. comes to Rs. 4,25,32,878/-. Therefore, the profit component, derived from selling of these flats to one person measuring more than 1500 sq.ft. considering profit on the sale price of the flats (profit Rs. 8,32,05,695/-, sales & other income Rs. 48,38,66,198/-), Rs. 73,15,655/- (17.20% of Rs. 4,25,32,878/-) was required to be issued while passing the assessment order. (iii) On verification of the details, it was noticed that there is interest on borrowed capital with simultaneous existence of debit balance in partner’s capital account. The A.O. has failed to consider the provisions of section 36(1)(iii) while passing of the assessment order u/s 143(3) of the I.T. Act dated 26.03.2015. 3. A show cause notice under section 263 accordingly was issued by the Ld. CIT (A) to the assessee pointing out the above errors and seeking the explanation of the assessee thereto. In reply, the following explanation was offered by the assessee in writing: “(i) The buyers of the flat were given an incentive to have the club membership which was an incentive for promotional sale. Both the above items part and parcel of collection towards cost incurred for the housing reject and as a measure of accountancy prudency and promotional sales the same have been collected under different heads. This is further certified by the auditors in their report under section 10CCB, where the gross sales have been shown to be inclusive of club membership and electric installation charges. [copy enclosed]. As per section 80IB(10) of the Income Tax Act, 1961, deduction is allowable on the ‘hundred percent of the profits derived in the previous year relevant

4 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate to any assessment year from such housing project’. Club and electrical installation are the part of the housing project. Accordingly ‘club membership fees’ and ‘electrical installation charges’ are the receipts from such housing project only. It is found that Hon’ble Bombay High Court in the case of CIT vs Vandana Properties (2012) has observed as under: 17. The first question to be considered herein is, whether, in the facts of the present case, construction of ‘E’ building constitutes building a ‘housing project’ under section 80IB(10) of the Act. 18. The expression ‘housing project’ is neither defined under section 2 of the Act nor under section 80IB(10) of the Act. Even under the Mumbai Municipal Corporation Act, 1988 as also under the Development Control Regulation for Greater Mumbai1991, the expression housing project’ is not defined. Therefore, ‘housing project’ in section 80IB(10) would have to be construed as commonly understood. 19. As rightly contended by Mr. Imandar, learned Senior Advocate appearing on behalf of the assessee and Mr. Mistri, learned Senior Advocate and Mr. Joshi, learned Advocate appearing on behalf of the interveners, the expression ‘housing project’ in common parlance would mean constructing a building or group of buildings consisting of several residential units. In fact, the Explanation in section 80IB(10) supports the contention of the assessee that the approval granted to a building plan constitutes approval granted to a housing project. Therefore, it is clear that construction of even one building with several residential units of the size not exceeding 1000 square feet (‘E’ building in the present case) would constitute a ‘housing project’ under section 80IB(10) of the Act. In view of the above, ‘Club Membership fees” amounting to Rs. 77,30,000/- and ‘Electrical and Installation charges’ amount to Rs. 1,04,12,455/- is eligible for deduction u/s 80IB. In any case, the membership fees for club are one time receipt and therefore the same are capital receipts and not liable to taxable as income in view of the various judicial pronouncements. The firm had to incur expenses for the club and electric installation expenses and part of the same has been recovered from the buyers’ of the flats under different nomenclature. The receipts under the two heads are not income but gross receipts and substantial expenditure has been incurred for the same. Without prejudice, this is to submit that the ld. A.O. while

5 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate completing the assessment u/s 143(3) looked into the receipts for club membership and electric installation charges, applied his mind for the same and then considered it as part of receipts for housing project. Therefore any change of opinion or review of the issue under the provisions of section 263 are unauthorised unwarranted. (ii) The assessee has allotted more than one flats to same person / individual. The said allotment was made in the Financial Year 08-09 i.e. relevant to Financial Year ending 31.03.2009. The clause (e) and clause (f) enumerating the condition restricting allotment of 1(one) Flat admeasuring 1500 sq.ft. against 1)one) individual / company has been inserted by the Finance No. 2 Act, 2009, w.e.f 1.4.2010 i.e. relevant to AY 2010-11. The aforesaid clause does not restricts sale of 1(one) Flat admeasuring 1500 sq.ft. against 1(one) individual / company during the relevant previous year when allotment was made. Thus it may be stated that the assessee did not fail to fulfil the conditions (e) & (f) for availing eligible deduction under section 80IB(10). Therefore profit component on abovementioned flats was not required to be taxed at all. The law regarding allowability of deduction u/s 80IB(10) is applicable as prevailing on the date of commencement of project and not affected by any subsequent amendment of law as decided by various courts of law and tribunals. The law applicable to the housing project shall be the then existing law which was applicable at the time of sanction of plan. When the plan was sanctioned, there was no restriction regarding sale of flats to same individual or his relative/s. Hence the law relating to allotment of flat to any related person could not be applied in the year under appeal as the project was sanctioned long before the new law reg. The same came into force. The project had started well before the date. The definition of area of the flat – built up area has been defined in the act:: the agreements by the company has been entered into reference to SUPER BUILT UP AREA. WHEREAS THE act restrict the area to 1500 sq.ft. with reference to built up area. Therefore, this restriction is not applicable in the case of the firm. Without prejudice, this is to submit that the individuals as referred in your show cause notice have been sold one flat only. The other portion, being utility area is not a flat. The flat in normal description menas a place habitable with kitchen, bedroom, etc. In the smaller area sold to each one of the individual referred to in your query is not a flat at all. Considering the aforesaid, the Ld. A.O. has lawfully and correctly allowed deduction u/s 80IB(10) and the same should be reviewed u/s 263.

6 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate

(iii) The credit balance in partners a/c is much more than the nominal debit balance. As interest free funds are available from the partners themselves, the question of any disallowance u/s 36(1)(iii) was not to be made. More so in view of the terms of deed of partnership, where no interest is provided, no interest could have been charged on any debit balance in partner’s a/c in the circumstances, it is prayed that the proceedings under section 263 may kingly be dropped.” 4. The above explanation offered by the assessee was not found satisfactory by the CIT. According to him, the profits derived by the assessee from club membership fees and electrical installation charges had no direct nexus with the development and construction of its housing project and the same having no first degree connection with the project, the assessee was not entitled for deduction under section 80IB. He also held that even though the housing project of the assessee had started well before the restriction regarding sale flat to the same individual or his relatives came into force by way of the condition laid down in clause (f) of sub-section (10) of section 80IB w.e.f. 01.04.2010, the deduction under section 80IB was allowed by the A.O. without verifying the fulfilment of the condition laid down therein by the assessee. He accordingly, set aside the assessment order passed by the A.O. under section 143(3) in respect of point no 1 and 2 of the show cause notice issued by him under section 263 and directed the A.O. to pass a fresh assessment order on the said points in accordance with the relevant provisions of law after carefully going through all the materials on record. Aggrieved by the order of the Ld. CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

7 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate 5. At the outset, it is noted there is delay of 3 days on the part of the assessee in filing this appeal before the Tribunal. In this regard, the assessee has filed an application seeking condonation of the said delay and keeping in view the reasons given therein which are duly supported by an affidavit filed by the authorised representatives of the assessee, we are satisfied that there was a sufficient cause for the delay of 3 days on the part of the assessee in filing this appeal before the Tribunal. Even the learned DR has not raised any objection in this regard. We, therefore, condone the said delay and proceed to dispose of the appeal of the assessee on merit. 6. The learned counsel for the assessee submitted that club membership fees and electrical installation charges were collected by the assessee from the flat holders of the project as per the agreement in addition to the total consideration agreed for the flats. In this regard, he invited our attention to the copy of sample agreement placed at page no 57 to 59 of the Paper Book and submitted that electrical installation as well as club was the integral part of the project developed and constructed by the assessee. Relying on the decision of the Hon’ble Delhi High Court in the case of Principal CIT vs Omaxe Buildhome (P) Ltd. 76 taxman.com 104 (Delhi), he contended that infrastructural facilities and amenities are to be treated as part of the housing project for allowing deduction under section 80IB. He also took us through the copies of written submission filed by the assessee before the A.O. during the course of assessment proceedings placed in his Paper Book to show that the issue relating to the

8 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate assessee’s claim for deduction under section 80IB was property enquired into by the A.O. and the deduction under section 80IB was allowed by him after applying his mind. 7. As regards the other error allegedly pointed out by the Ld. CIT in the order of assessment passed by the A.O., the learned counsel for the assessee submitted that the housing project of the assessee was sanctioned on 30.03.2007 whereas restriction regarding sale of flat of having more than 1500 sq.ft. area to the same individual was imposed by way of amendment made with effect from A.Y. 2012-13. Relying on the decision of the Hon’ble supreme Court in the case of CIT vs Sarkar Builders 57 taxman.com 313, he contended that the said amendment thus was not applicable in the case of the assessee and there was no question of any error in the order of assessment passed by the A.O. under section 143(3) on this issue as alleged by the Ld. CIT in his impugned order passed under section 263. 8. The Ld. CIT DR, on the other hand, invited our attention to the assessment year passed by the A.O. u/s 143(3) and submitted that there is no discussion whatsoever made by the A.O. on the issue of the assessee’s claim for deduction u/s 80IB. He contended that the said order passed by the A.O. in a very brief and cryptic manner shows complete non-application of mind. He contended that the assessee is entitled for deduction under section 80IB only in respect of profit derived from the housing project and the issue as to whether the electrical installation charges and club membership fees received by

9 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate the assessee can be treated as profit derived from the project was not at all considered or examined by the A.O. during the course of assessment proceedings. He submitted that the issue of ownership of club, whether it remained with the assessee or was handed over to the flat holders, was vital in this regard and no enquiry was made by the A.O. on this vital aspect before allowing the claim of the assessee for deduction under section 80IB fully. He contended that similarly the nature of electrical installation charges received by the assessee was not verified or examined by the A.O. He also contended that even if the housing project of the assessee was sanctioned before the relevant amendment made in section 80IB w.e.f. 01.04.2010, the issue relating to the applicability of the said amendment to the year under consideration was not examined by the A.O as rightly pointed out by the Ld. CIT in his impugned order passed under section 263. He contended that the assessment order passed by the A.O. under section 143(3) thus was erroneous as well as prejudicial to the interest of the revenue and the Ld. CIT was fully justified in revising the same by exercising the power conferred upon him under section 263. 9. In the rejoinder, the learned counsel for the assessee invited our attention to the copy of order-sheet entries placed on record to show that the case of the assessee was heard by the A.O. on 14 & 15 occasions. He contended that proper and sufficient enquiry thus was made by the A.O. on the issue of assessee’s claim for deduction under section 80IB and after having satisfied with all the relevant documents and details filed by the assessee, the claim of the assessee

10 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate for deduction under section 80IB was allowed by the A.O. He contended that the order of assessment made by the A.O., in these facts and circumstances of the case, therefore, cannot be said to be erroneous merely because the same does not contain any specific discussion on the issue. 10. We have considered the rival submissions and also perused the relevant material available on record. It is observed from the sample copy of agreement entered into by the assessee with the flat purchases of project as placed at page no 56 to 59 of the Paper Book that the following extra development charges were collected by the assessee from the flat holders as per Schedule D in addition to the agreed sale consideration of the flat. (1) Electrical charges @ Rs. 25 per sq.ft. on Super Built up (SBU) area (Proportionate Costs & charges for arranging installation of sub- station and giving L.T. Connection therefrom to the flat. (2) Providing backup electricity through generator @ Rs. 10/- per sq. ft. On SBU area. (3) Club Membership @ Rs. 20,000/- plus service tax (one family). 11. It is thus clear that electrical installation charges and club membership fees were received by the assessee from the flat holders of the project on account of common facilities and amenities provided to the flat holders in the housing project developed by it. In the case of CIT vs Omaxe Buildhome (P) Ltd. (supra) cited by the learned counsel for the assessee, Hon’ble Delhi High Court has held that housing

11 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate schemes are not only consisted of built up residential building, but also separate common facilities and amenities provided for residential unit of housing project. It was held that such common facilities and amenities are an integral part of the housing project and the assessee, therefore, would be entitled to deduction under section 80IB. Keeping in view the decision of Hon’ble Delhi High Court in the case of Omaxe Buildhome (P) Ltd. and having regard to the facts of the present case which clearly show that the copy of the relevant sample agreement was filed by the assessee before the A.O. during the course of assessment proceedings to explain the nature of electrical installation charges and club membership fees received by the assessee, we are of the view that that there was no error in the order of the A.O. in allowing the claim of the assessee for deduction under section 80IB in respect of electrical installation charges and club membership fees received from the flat holders of the project. 12 As regards the other error allegedly pointed out by the Ld. CIT in the order of the A.O, we find merit in the contention of the learned counsel for the assessee that the relevant amendment to section 80IB(10) having been made with effect from 01.04.2010 i.e. much after the sanction of the housing project of the assessee on30.03.2007, the same was not applicable in the case of the assessee as held in the case of CIT vs Sarkar Builders (supra) and the order of the A.O. cannot be regarded as erroneous on the ground that the applicability of the said amendment in the case of the assessee was not considered by him. In our opinion, there were thus no errors in

12 I.T.A. No. 628/Kol/2017 Assessment Year: 2012-13 M/s. Singhania Merlin Estate the order of assessment made by the A.O. under section 143(3) as alleged by the Ld. CIT warranting revision under section 263. In that view of the matter, we set aside the impugned order passed by the Ld. CIT under section 263 and restore that of the A.O. passed under section 143(3). 13. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 30th November, 2017. Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30/11/2017 Biswajit, Sr. PS Copy of order forwarded to: 1. M/s. Singhania Merlin Estate, Merlin Oxford, 22, Prince Anwar Shah Road, 2nd Floor, Kolkata – 700033. 2. ACIT, Cir 31, 10, Middleton Row, 2nd Floor, Kolkata – 700071. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata