MUKON CONSTRUCTIONS P.LTD,MUMBAI vs. ASST CIT 6(30, MUMBAI

The brief facts of the case are that the assessee filed its return of income on 31.10.2007 declaring taxable income of Rs. NIL after claiming deduction u/s 80IB (10) of Rs. 4,71,15,704/-which was processed under section 143(1) of the Act on 14.10.2008. Thereafter the case of the assessee was selected for scrutiny and the statutory notices under section 143(2) and 142(1) was issued and served upon the assessee. The assessee company is a Developer and engaged in the business of Development and construction. During the year under consideration the assessee company has developed second phase of project at Dharavi, Mumbai for Slum Rehabilitation Authority. The appellant entered into a MOU dated 27.05.2002 with Shri Momi Maneckji Netarwalla for purchase of plot of land admeasuring 15096Sq Mtrs for a consideration of Rs. 1,75,00,000/- which was later on reduced to Rs. 1,65,00,000/- when the area of land was found to be 12298 Sq Mtrs. Thereafter Mr Bomi Maneckji Netarwalla (Vendor) , the Mukon Construction the assessee and Slum Rehabilitation Authority (SRA) entered into an tripartite agreement where under the assessee was to construct rehabilitation tenements of the size admeasuring 225 Sq Fts on the said land which was approved by the SRA which would be surrendered free of cost to SRA for rehabilitation of slum dwellers who encroached the land. The assessee 3 developer would receive the TDR as a consideration from SRA on completion. Accordingly the project was undertaken in two phases in terms of the commencement certificate dated 15.09.2003 issued by SRA. Phase1 was completed in AY 2004-05 and TDR allotted as consideration were sold in the open market for Rs. 5,50,95,533/- and assessee claimed deduction u/s 80IB(10) in respect of the profits which was allowed by the department. Similarly the Phase II was completed and the assessee company has received as consideration in the form of TDR of 3150 Sq. mtrs from SRA project which was sold to M/s Topshop Export Pvt Ltd in the open market for a consideration of Rs.8,13,75,840/-. The AO during the course of assessment proceedings, observed from the perusal of profit and loss account that only sales in the profit and loss account was on account of sale of TDR amounting to Rs.8,13,75,840/- and scrap sale of Rs.9,532/- thereby showing net profit of Rs.4,71,15,704/- which was claimed as deduction u/s 80IB(10) of the Act. Accordingly, the AO issued notice to the assessee to justify is claim of deduction u/s 80IB(10) of the Act. The assessee replied to the said show cause notice vide its written submissions dated 8.12.2009 which is reproduced below: "The expression "Work Contract" means that there is an agreement for carrying out the matter mentioned therein. One of test to find out whether a given case is "Sale of Goods" or "Works Contract" is to see if the work done by a person is a work done on his own chattel, or on the chattel of someone else. Lf it is on his own chattel and that the chattel is later on sold, then it is "sale of goods", but if the work is done on the customer's chattel them it is "works contract" as stated in 4 the case of S. V.Motor Co. Ltd. Vs. State of Mysore, (1964) 15 STC 771 (Mys). Further the context in which the word :chattel" in the above paragraph used means "Real Chattel" as against "Personal Chattel", such as concern real property, such as leasehold estates,' interests issuing out of, or annexed to , real estate; such chattel interest as devolve after the manner of reality. In the case of our above-mentioned client, it is clearly highlighted from the Deed of Conveyance dated 05.04.2003 that the assessee has a vested interest issuing out of, or annexed to, the development and building of housing project and then selling it to the Slum Rehabilitation Authority (SRA) viz., the benefit that it has received in the form of Slum Transfer of Development Right (TOR) & from issuance of Development Right Certificates (DRC). The same relevant clause (vii) & clause (ix) are reproduced as below:- "vii) The Developers have offered SRA, a package deal of surrendering free of cost in lieu of grant of slum TOR the constructed rehab units on the portion of the open plot within the said entire property bearing C.S.No.316 (pt.) and delineated on the plan thereto annexed as Annexure '8' thereon surrounded by a red coloured. boundary fine herein after called "the said property" and more particularly described in the Second Schedule hereunder written. ix) The Deputy Directors of Town Planning SRA have accepted the proposal from the Developers and has approved the scheme in principle on the said property. as Slum Rehabilitation Scheme under clause 3. (1 of Appendix IV of DCR No.33(10) sanctioned by the Govt. under UOO Resolution NO.1095/1029/CR273/95/UD-11 dated 15.10.97 against which SRA snail give benefit of Transfer of Development Right (slums) (hereinafter called TOR) and cause to issue Development Right. Certificates (slums) (hereinafter called "ORC") to the Developers under Appendix VII B of DCR in the manner hereinafter provided." Needless to mention that the. rate at which the TOR would be sold is also entirely dependent on the prevailing market conditions at the time 5 of sale. However, the. consideration that is to be received under the works contract is predetermined and fixed. Hence, the newly inserted" explanation to Section 80-18(10) stating that the sub-section shall not apply to undertakings which executes the housing project as a works contract , does not apply to our above- named client by any stretch of imagination and therefore we request your goodself to allow the deduction u/s 80-IB(10) of the Act and oblige”

The AO after considering the submissions and contentions of the assessee as incorporated in para 3.3 of the assessment order came to the conclusion that housing project undertaken on behalf of SRA was a contract awarded by the State Government and therefore not eligible for deduction under section 80IB(10) of the Act by rejecting the contentions of the assessee that the housing project under SRA was not work contract for the reasons that the consideration received under the work contract was predetermined and fixed in the form of TDR which was sold in the open market at the prevailing rates. Ultimately the AO framed the assessment under section 143(3) of the Act vide order dated 21.12.2009 assessing the total income of the assessee at Rs.471,15,700 by rejecting the deduction claimed under section 80IB(10) of the Act on the ground that no deduction u/s 80IB(10) could be allowed to the assessee in respect of profit from a work contract. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld. CIT(A), who after considering the contentions and 6 submissions of the assessee as incorporated in para 4.3 of the appellate order observed and held as under : “4.4. I have carefully considered the 'order of the assessing officer and the submission of the appellant. I find that the main dispute in the case is regarding grant of deduction under section 80 IB to the appellant, The assessing officer has; denied the same stating that as the appellant was executing the works contract the case of the appellant fell under the provision of .the explanation to section (10f) of section ·80IB and therefore the deduction was not allowed to the appellant. The appellant on the other r hand has argued that it was a developer having a principal to principal relationship with the SRA and was not executing a works contract. 4.5. Section 80 IB of the Income Tax Act makes it very clear that the deduction is available to a developer and not to a contractor. The explanation after subsection (10) of section 80 IB has been inserted so as to provide that nothing contained in this subsection shall apply to any undertaking which takes the housing project as a work contract awarded by any other person (including Central or State Government). Under the circumstances it is to be seen whether the appellant fell in the current category of a contract or a developer as this benefit is not denied to a developer but only to a contractor. In the first instance it is very necessary to see whether the applicant fulfils the conditions of the said section that is 1. whether the appellant is the owner of the land. 2. Who is the actual developer i.e. who is the actual person undertaking the investment risk as any person undertaking just contract risk is not entitled to tax benefits. Investment is important to take benefit under section 80 IB (10) of the Income Tax Act. This is because it is only the actual developer who would be undertaking the investment risk. Therefore what has to be seen is that whether in reality the appellant was the owner of the land and has undertaken the investment risk or not.

7 4.6. The term works contract has not been defined in the Income Tax Act and therefore_ it is to be interpreted by examining the agreements and other documents. A reading of the deed of E:onveyance dated 5/4/2003 shows that the ownership of the land vested with one Bomi. Maneckji Netarwalla with two other parties having interest in it. The appellant had approached the owner of the land with a scheme of developing and sale of the property, and then approached SRA with a scheme which is approved in principle. A letter of intent was issued subject to the terms and conditions mentioned therein and it is only on the execution of- these terms and conditions that the SRA agreed to give the benefit of TOR to the appellant. The appellant in turn was compelled to construct tenements on the said property as per the terms and conditions of the SRA. A reading of; the agreement also shows that the ownership of the property was transferred in the name of the appellant however this transfer was subject to the development to be done. It was not as if that the appellant had first purchased the land and had become its'. owner and then invested in the development project as an actual developer. The agreement clearly says that the appellant got the possession of the. said property for and behalf of the SRA with the right. to carry out construction of the tenements -and develop the same in accordance with the terms of the agreement dated the 5 April 2003. It has further been stated in the agreement that the development has to be carried out as per terms of agreement. The first confirming party has a special lien on the said possession which shall not be dlsturbed by SRA. A reading of the agreement also shows that it is for the SRA to convey this property to another after all the benefits of the TOH are given to the appellant. Therefore it stands that the ownership of the proper-ty was actually never of the appellant The appellant was orilv ,given development right in it by the original owner and after approachiriq the SRA under terms and conditions very clearly defined the oriqina] owner conveyed the property in the name of the appellant with the payments being subject to the TDR received by the appellant from the SRA for the work done as per terms and conditions. It therefore clearly stands that the assessing officer is very correct in concluding that what .the appellant had was a works contract for which it received fixed amount of 'TDR. It is immaterial that the TDR was sold at a greater value in the open market by the appellant. It is also seen from records that the appellant simply held the land in its name on behalf of the SRA. The appellant never had the rights of the actual/veal owner of the property. It did not have the right to cancel the contract with the SRA and develop the land according t; its own plans/initiatives.

The ld. AR vehemently submitted before the Bench that the assessee has received TDR as consideration for execution of project for SRA, Govt. of Maharashtra awarded by the Govt. of Maharashtra. The ld. AR while attracting the attention of the Bench to the order of ld.CIT(A) dated 26.5.2006 for the assessment year 2004-05, a copy of which is placed at pages 32 to 36 of the assessee’s paper book submitted that the ld.CIT(A) has allowed similar deduction in the assessment year 2004-05 in respect of phase-1. The ld. AR also took us through the Memorandum of Understanding dated 27th Day of May,2002 entered between Bomi Maneckji Netarwalla and M/s General Estate and Agencies filed at paper book pages 37 to 45, Deed of Conveyance dated 5.4.2003 placed at pages 46 to 63 of the paper book, commencement certificate No.SRA/CHE/DDTP/129/GN/PL/AP dated 15.9.2003 in favour of M/s Mukon Construction Pvt Ltd. filed at pages 64 to 76 of the paper book, a copy of letter issued by Municipal Corporation of Greater Mumbai dated 20.3.2007 on the issue of DRC for TDR generated 9 in SRA on the land bearing CS No.316(pt) of Dharavi division Netrawala Compound/estate, Dharavi placed at pages 92 to 96 of the paper book and a letter dated 17.12.2009 issued by Dy.Chief Eng.(DP)I, regarding issue of DRC for TDR generated in SRA on the land bearing CS No.316(pt) of Dharavi division Netrawala Compound/estate, Dharavi in favour of the assessee. The ld. AR submitted that in view of all these documents and evidences as referred to above it was abundantly clear that the assessee has received TDR from SRA in lieu of construction undertaken free of cost which was sold in the open market and profit generated thereon to the tune of Rs.4,71,15,704/- were claimed under section 80IB(10) of the Act. Further, the ld. AR also controverted the findings of the FAA that explanation to section 80IB (10) was not attracted in the present cases as the assessee has not worked as works contractor but has received TDR from SRA as a consideration for carrying out construction of rehabilitation tenements free of cost under a contract awarded by the Govt. of Maharashtra for rehabilitation of slum dwellers and all the certificates and evidences also substantiated that the assessee was entitled to TDR as issued by SRA in the name of the assessee as a consideration for the project executed for SRA. The ld. AR in defence of his arguments relied on the following case law: A) Ramesh Gunshi Dedhia V/s ITO(2014) 148 ITD 356; B) ACIT V/s Smt C Rajini – 9 Taxman.com 115 (Chennai-ITAT); C) CIT V/s Radhe Developers (2008 23 SOT 420) (Ahd); 10 D) CIT V/s Radhe Developers (Guj) High Court E) Unity Infra projects V/s DCIT(ITAT Mum) decided on 10.10.2014; F) ITO V/s Saubhagyalaxmi Developer (ITAT Pune) decided on29.1.2016 and G) ITO V/s Sonasha Enterprises (ITAT Mumbai) 5. On the other hand, the ld. DR relied heavily on the orders of authorities below and prayed before the bench that the order passed by the ld.CIT(A) should be upheld.

Heard both the parties at length, perused the material placed before the Bench including the orders of authorities below as well as the orders relied upon by the assessee. The facts on records reveal that the assessee received TDR from SRA on rate contract awarded by the Govt. of Maharashtra for which the commencement certificate dated 15.9.2003 was issued in favour of M/s Mukon Construction Pvt Ltd qua erection of tenements at plat no. CS No.316(pt) of Dharavi division Netrawala Compound/estate, Dharavi by the Dy.Chief Engineer, SRA. We also find that the certificate was issued in favour of M/s Mukon Construction Pvt Ltd by Municipal Corporation of Greater Mumbai ( Development Right Certificate) dated 29.10.2007 as is placed at pages 93 to 96 of the paper book which show that the assessee has received /earned development right of SRA in consideration of execution of contract awarded by Govt.of Maharashtra. The said TDRs were sold in the open market for a consideration of Rs.