AARTI PROJECTS AND CONSTRUCTIONS,MUMBAI vs. DCIT 5(1), MUMBAI

As per AO since the FSI sold to each of the persons mentioned in paragraph 2.1.5 of the assessment order was in excess of 1000 sq. ft M/s. Aarti Projects And Constructions, Mumbai there was violation of S. 80-IB(10)(iii)(c) of the Act. It was also observation of AO that the persons to whom FSI was sold were closely related with the assessee and, therefore, it was sold with intention to defraud the revenue, wherein the FSI was sold at very high rates so as to avail excessive deduction u/s.80-IB(10) of the Act.

By the impugned order CIT(A) confirmed the action of the AO observing that the rehabilitation building and sale of buildings are part of the same project, therefore, profit claimed as deduction u/s.80IB(10) of the Act was attributable to and not derived from sale of unutilized FSI and sale component of the housing project. Against this order of CIT(A) assessee is in further appeal before us.

It was vehemently argued by learned AR that the profit so earned by assessee on the rehabilitation project represented the consideration received for sale of unutilized FSI, therefore, eligible for claim of deduction u/s.80IB(10).

In support of claim of deduction, learned AR relied on the following judicial pronouncements.  ITO v. M/s. Suraksha Realtors for AY. 2007-08 in dated 21.10.2011  ITO v. M/s. Suraksha Realtors (Anik) for AY. 2008-09 in ITA No. 6760/Mum/2011 dated 12.09.2012  ITO v. Sonasha Enterprises for AYs. 2007-08 and 2008-09 in ITA Nos. 4911 & 4912/Mum/2010 dated 31.10.2011 M/s. Aarti Projects And Constructions, Mumbai  DCIT v. Sonasha Enterprises for A.Y. 2009-10 in dated 08.06.2012  Judgment of the Hon'ble Bombay High Court in CIT v. Sonasha Enterprises 10. On the other hand, learned DR submitted that profit claimed as deduction u/s. 80-IB(10) of the Act was not derived from the housing project; there was violation of S. 80-IB(10)(iii)(c) of the Act; the project of rehabilitation of building and sale of building were one and not separate; and that as per the interpretation of the phrase 'derived from' made in Liberty India v. CIT [317 ITR 218 (SC), the profit under consideration could not be considered as derived from housing project eligible for such benefit. It was further contended that what was sold in the cases considered by the Hon'ble Tribunal as relied upon by learned A.R. was TDR and not FSI and, therefore, they were distinguishable.

We have considered rival contentions and carefully gone through the orders of the authorities below and material placed before us. We had also deliberated on the judicial pronouncements referred by lower authorizes in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that the assessee was awarded a slum rehabilitation project on C.S. No. 47 (Pt.) of Lower Parel Division of Keshavrao Khade Marg, identified as Rajiv Nagar CHS by the Slum Rehabilitation Authority ('SRA' in short) in 2004 for which Letter of Intent (‘LOI’in short) was issued by the Executive M/s. Aarti Projects And Constructions, Mumbai Engineer vide No. SRA/Ch. E/10/GS/ML/LOI dated 16.09.2004 under D.C. Regulation No. 33(10) ['DCR 33(10)' in short] and Appendix-IV of amended D.C. Regulations granting 2.58 FSI out of which maximum FSI of 1.66 could be consumed on the plot subject to the terms and conditions stipulated therein. The LOI originally issued was subsequently amended, and a revised one sanctioning FSI of 2.636, out of which FSI of 2.41 could be consumed on the plot, was issued on 06.12.2010. Copies of the original LOI dated 16.09.2004 and the revised one dated 06.12.2010 were placed on pages 18-25 and 26-36 of PS No.

As per the revised LOI, the built-up area of the rehabilitation buildings was 2,911.41 sq. mtrs. The FSI received as consideration for the habitats constructed under the said Scheme could either be utilized for construction of saleable area in situ (on same plot of land) by developer, or sold to third parties for monetary value. In case both of the options mentioned above were not availed of, the other avenue for the assessee was to sell it off as Transferable Development Rights (‘TDR' in short) to third parties as permitted under clause (v) of DCR 33(1) which reads as under: V) The entire sale Built-up Area need not be constructed in-situ and full sale component or part thereof can be taken as TDR if there are physical or economic constraints.

Upon completion of construction of the rehabilitation buildings as per the terms and conditions specified in the revised LOI to the satisfaction of SRA in 2010, the assessee became entitled to construct

M/s. Aarti Projects And Constructions, Mumbai the saleable area of 2,209.84 sq. mtr on the basis of the FSI granted as consideration in situ or, in the alternative to sell it off as such, or in the form of TDR by virtue of clause (v) of DCR 33(1) extracted above. The assessee, therefore, made the requisite application to SRA on 08.12.2010 and it was granted by issuance of Commencement Certificate dated 04.10.2011. The assessee, thereafter, had disposed off the FSI received as consideration for construction of the rehabilitation tenements as permitted vide clause (v) of DCR 33(10) to third parties rather than undertaking construction of saleable area. In the premises, the profits realised by the assessee from the sale of the FSI did qualify for deduction u/s. 80-IB(10) of the Act. The provisions of S. 80-IB(10) of the Act did not mandate that for the purpose of availing the benefit the assessee should construct the tenements on the strength of the FSI received as consideration, however the assessee has a liberty to sell them off for monetary value and then find out the profit so as to make it 'derived from' the housing project. If that were the intention of the Legislature, the provision would have been drafted accordingly as in the case of S. 80-HHC of the Act, according to which the sale proceeds of the goods exported out of India are to be brought into homeland in convertible foreign exchange. Accordingly, the objection against the claim that the profit under consideration was not derived from the housing project was misplaced.

ITA Mumbai Bench followed the same decision in the assessment year 2008-09 vide order dated 12/09/2012.

Exactly under similar facts and circumstances, the Tribunal directed the AO to allow claim of deduction u/s. 80IB(10) in the case of Sonasha Enterprises & 4912/Mum/2010 vide order dated 31/10/2011. The precise observation of Tribunal was as under:- ”5.2 As regard the last contention of the revenue is that the assessee is not a builder and the income received by sale of TDR and not by sale of housing project is concerned, we find that there is no dispute about the fact that the assessee received the TDR as a consideration against the development of the project in question. We further note that the TDR was received only for residential portion of the housing project and not for the commercial establishment. Thus, when the TDR received by the assessee was immediately sold and the sale consideration was shown as receipt from the housing project, then, there is no other element in the said receipt against the sale of TDR other than the income from housing project.”

Above order of the Tribunal was followed by ITAT ‘E’ Bench in assessee’s own case for the assessment year 2009-10 in ITAT No.5292/M/2011 vide order dated 08/06/2012.

ITAT ‘G’ Bench in case of Akruti City Limited vide order dated 21/10/2011 has considered the same issue with regard to allowability of M/s. Aarti Projects And Constructions, Mumbai Section 80IB(10) deduction in respect of sale proceed of FSI and held that profit arising from sale of FSI was allowable for exemption u/s.80IB(10).

Now coming to the decision relied on by CIT(A) in the case of Moon Star Developers (367 ITR 621), wherein Hon’ble High Court found that assessee was earning because of purchase and sale of land and not because of the construction carried out in the weaker section of the society which is a legislative intention behind Section 80IB(10). Moreover in that case, the income from sale of unit was independent of the income from sale of unutilized FSI. In this case the assessee purchased the land which was having huge FSI. The assessee consumed only a very small part of available FSI and constructed certain residential tenements thereon. The project was sold and consideration was realized in cheque. It was found in that case that the consideration realized by the assessee was primarily towards unutilized FSI and not for the construction carried out. In effect, the assessee purchased the land (having some FSI) and sold the land after carrying out marginal construction and realized the consideration which was mainly for unutilized FSI. As a matter of fact, it was found that the assessee was earning because of purchase and sale of land/FSI and not because of the construction carried out for the weaker section of the society, which is the legislative intention behind S. 80-IB(10) of the Act. In view of these facts, the Hon’ble Gujarat High Court held that assessee was not eligible for deduction u/s.80IB(10) in respect of profit M/s. Aarti Projects And Constructions, Mumbai so earned on sale of unutilized FSI. However, in the instant case before us, the assessee had fully utilized the FSI as per the rehabilitation scheme. The consideration for construction of the rehabilitation building was received in the form of FSI which could either be used for sale, or for construction of the sale building. Unlike the facts of the case before the Hon'ble Gujarat High Court, the assessee had not acquired any land with FSI. The assessee's case was that the receipt of the consideration for developing housing project in the form of FSI which was encashed and converted by the assessee in monetary terms by sale of the said FSI. We had verified the P & L account of the assessee which reflects that the only source of Revenue out of the construction carried out was sale consideration of FSI. Accordingly, profit earned by assessee was entirely due to construction activity and not due to purchase and sale of land / FSI.

The facts of the case of Moon Star Developers was entirely different where only 10% of the project was completed. However, in the assessee’s case, entire project was constructed and completed to the satisfaction of Slum Rehabilitation Authorities (SRA), a Government body. In the case of Moon Star Developers, the consideration was primarily received for sale of unutilized FSI where as consideration in the instant case was received for handing over the constructed tenements to the Slum Rehabilitation Authorities free of cost. In the case of Moon Star Developers, consideration was received in the form of cash / cheque where as in the case of assessee, the consideration M/s. Aarti Projects And Constructions, Mumbai was by way of FSI after handing over constructed tenements to the Slum Rehabilitation Authorities.

Since the judgment of the Hon’ble Gujarat High Court in CIT v. Moon Star Developers (367 ITR 621) in which the ratio laid down in Liberty India v CIT (317 ITR 218 SC) was relied upon for the revenue was distinguished and shown to be inapplicable to the facts of the case, the attempt of AO to take support from that apex Court judgment was devoid of merit. Thus, the orders of the Hon’ble Tribunal are squarely applicable to the facts of the case of the assessee and the fact that there the profits arose out of sale of TDR was not a distinguishable feature. Conceptually, there is no difference between the Transferable Development Rights (TDR) and Floor Space Index (FSI). Both represent permissible construction area. The only difference between the two is while TDR can be transferred from one project/piece of land to another, FSI has to be used in situ, i.e. on the same piece of land. In the cases relied upon by the assessee as well as in the present case, the TDR/FSI was received as a consideration for construction carried out by the assessee in respect of rehabilitation building. Therefore, the decisions relied upon by the assessee are squarely applicable to the facts of the present case.

Now coming to the objection raised by the lower authorities to the effect that the FSI sold was part of the project under development, therefore the project itself was incomplete, therefore, on such M/s. Aarti Projects And Constructions, Mumbai incompleted project the assessee was not eligible for deduction u/s.80IB(10).

From the record, we found that the Commencement Certificate dated 04/10/2011 and permission for construction of the saleable area under the said Scheme would not have been issued in case the project meant for rehabilitation of the downtrodden was incomplete. Thus, the FSI for construction of the saleable area was the 'consideration' for undertaking construction of the rehabilitation buildings and by no stretch of imagination the revenue could have assumed that the State would have given the consideration before completion of construction of the awarded project. In any case, as per the proviso below clause (b) in S. 80-IB(10) of the Act neither clause (a) concerning completion of the project, nor clause (b) relating to the size of the land applies to a project constructed for rehabilitation of slum dwellers. Accordingly, the objection raised by Revenue authorities are devoid of any merit. However, the CIT(A) in his order inferred that the project undertaken by the assessee was not covered under DCR 33(10) as notified by the CBDT in Notification No. 67/20-10 dated 03.08.2010, as according to him, it was effective from the date of its publication, i.e. 03.08.2010 and, therefore, the assessee could not take benefit thereof since the project undertaken by it was approved much anterior, i.e. on 16.09.2004. The CIT (A) had also inferred that the other notification dated 05.01.2011 would also be of no help to the assessee since it pertained to scheme for slum redevelopment prepared by the Maharashtra Government u/s. M/s. Aarti Projects And Constructions, Mumbai 37(2) of the Maharashtra Regional Town Planning Act, 1966 and published vide Notification No. TPS-1891/973/CR-49/93A/UD-13 dated 26.02.2004 and the slum rehabilitation project undertaken by the assessee was not covered under the said scheme.

With regard to the above, we found that the said Notification was followed by a corrigendum dated 05.01.2011, a copy of which was placed on page 43 of PB No. I, by which the effective date of the first notification was made as '01.04.2004' in place of 03.08.2010. Thus, the aforesaid objection raised by the CIT (A) in ignorance of the corrigendum Notification No. 67/2010 dated 05.01.2011 is not tenable. Thus, the CIT(A) by placing reliance on an incorrect notification erroneously concluded so, once the aforesaid corrigendum notification is applicable, as per proviso to S. 80-IB(10)(b) of the Act, clause (a) directing completion of the project within four years from the date of approval, and clause (b) stipulating the area of the land on which the tenements are constructed would not be applicable. Since the project was approved on 16.09.2004, i.e. prior to 01.04.2005 the case of the assessee was covered by the judgment of the Hon'ble Supreme Court in the case of CIT v. Sarkar Builders (375 ITR 392).

Now coming to the objection of the AO to the effect that FSI sold to each of the person was in excess of 1000 sq.ft which was in violation of Section 80IB(10)(iii)(c) of the Act, we found that this objection of the AO was misconceived. The stipulation of limitation of the area of the constructed tenements prescribed in clause (c) of Section 80IB (10)((iii)

The AO has also objected to the price at which FSI were sold to the party on the plea that they were related to the assessee. In this regard, the AO observed that the purchasers of the FSI were closely related to the assessee and, therefore, it was an attempt to defraud the revenue also. We had carefully gone through the sale made to each and every party and we found that Smt. Kantarani Gulati was an independent buyer and she was erroneously mentioned as a related party. Similarly, Shri Hafeez Contractor was, and still is, a renowned Architect and the fact as to how he and Smt. Pearl Contractor were considered as related parties is a mystery. In so far as Smt. Kunjal Shah and Smt. Falguni Shah were concerned, they were not partners of the assessee but were having 7.03% and 8.74% shareholding in M/s. Hubtown Limited which was 27.25% stakeholder in the assessee. Therefore, the stake of Smt. Kunjal Shah and Smt. Falguni Shah were only to the extent of 1.91% and 2.38% respectively. As regards Shri Rushank Shah, he was having only 5% stake and, hence, none of the parties was closely associated M/s. Aarti Projects And Constructions, Mumbai with the assessee, as assumed by AO. However, we do not find any material having been brought on record by the AO to prove close connection between the buyers and the assessee, and any 'arrangement' between the parties so as to produce more profit to the assessee. For this purpose reliance can be placed upon the order of the Hon'ble Tribunal in the case of ACIT v. Ishwar Manufacturing Co. (P) Ltd [157 ITD 883, 890 (Chandigarh).

With regard to the observation of the AO to the effect that FSI sold was at inflated rates, we found that all the sales were at ‘arm’s length’. The rates at which FSI were sold to Smt. Kantarani Gulati and Shri Hafeez Contractor, who were independent and unrelated parties, were Rs.82,364/- (incorrectly mentioned by the Assessing Officer as Rs. 67,545/-) and Rs.72,874/- respectively, as against Rs.85,437/- to Shri Rushank Shah having 5% shareholding. In so far as Smt. Kunjal Shah and Smt. Falguni Shah having 1.91% and 2.38% stakes respectively through M/s. Hubtown Limited, it was sold at Rs.83,552/- and Rs. 83,543/- respectively. In view of these comparison the inference drawn by the Assessing Officer that the FSI sold was at inflated rates was contrary to his own record.

We further observe that stamp duty rate applied by the AO was not conclusive but at the most indicative. Even S.50C of the Act permits valuation by DVO which itself was an indicator that stamp duty rate was not conclusive and in support of this contention reliance can be placed upon the order of the Hon'ble Tribunal in the case of group concern