FORTALEZA DEVELOPERS,MUMBAI vs. ITO 15(1)(3), MUMBAI

We have gone through the orders passed by the lower authorities as well as the order of the Tribunal and Hon’ble High Court passed in earlier years. The background of the issue and brief facts in this case are that the assessee is an AOP (Association of Persons) and engaged in the business of real estate developer. It has two members namely M/s Ravi Raj Kothari and Company (RKC) and M/s Sanand Properties Pvt. Ltd (SPPL). An agreement was entered between the two members on 29.04.2003 as per which an AOP was constituted for the construction of the residential and commercial buildings on SPPL owned development rights on a land measuring 37,976.90 sq. mts. The arrangement between the members of AOP to share revenue/profits is as under:

During the course of assessment proceedings, the AO recomputed the business income of the assessee by excluding 35% of the sale proceeds, and thus he computed the business income only on the basis of remaining 65% of the revenue. It was noted by the AO that the perusal of the aforesaid agreement revealed that it was a revenue sharing agreement and not a profit sharing arrangement because SPPL, i.e. one of the members of the AOP was entitled to 35% of the gross sale proceeds of the project constructed on land belonging to SPPL and contributed to AOP and remaining 65% of the sale proceeds was to be utilised by the assessee for meeting expenditure on construction and marketing etc and only the balance remained as profit of the other member of the AOP, viz. M/s Raviraj Kothari & Co. It was further found by the AO in the accounts of the assessee that share in sale proceeds of SPPL was not debited and the same was shown as part of net profit upon which deduction was claimed u/s 80IB(10). During the course of assessment proceedings, AO issued show cause notice to the assessee stating that profit as per profit and loss account was at Rs. 10,17,23,315/- and 35% of the same comes to Rs.3,56,03,160. The sales were at Rs.16,85,48,129/- and 35% of that comes to Rs.5,89,91,145/-. As Rs,5,89,91,145 was allocated to M/s. Sanand Properties Pvt. Ltd which was 35% of the sales proceeds, amounts received by M/s Sanand Properties was not share of profits but a share of revenue/sale proceeds of the project. AO thus asked the assessee to show cause why claim of deduction u/s 80IB(10) should not be restricted to Rs.4,27,32,169/- instead of Rs.10,41,81,525/-. The Assessing Officer was not satisfied with the reply of the assessee and relying upon his orders for earlier years, i.e. A.Ys 2007-08, 2008-09 and 2009-10, he recomputed the business income of the assessee and granted the benefit of deduction u/s 80IB(10) accordingly.

During the course of hearing before us it has been demonstrated by the Ld. Counsel that this issue had been threadbare discussed and clarified by the Tribunal in preceding years as well as by Hon’ble High Court and thus, this issue is no more res integra.

We have gone through the orders passed by the Tribunal and High Court in earlier years and we shall deal with them one by one hereunder: 11.1 It is noted by us that in A.Y. 2007-08, this issue was raised for the first time by the CIT by passing order u/s 263. The matter reached before the Tribunal and the Tribunal decided this issue in favour of the assessee by its order dt 12-10-2012 reported in 141 ITD 133. It is noted by us that the Tribunal not only quashed the order u/s 263 but also discussed and adjudicated the issue involved therein on its merits. Therefore, we find it relevant to refer and reproduce the relevant portion of the order passed by the Tribunal hereunder:

Ground 2: In this ground, the assessee has contested the action of lower authorities in taxing the interest on FDR of Rs.320,34,472 received on account of the funds to be used by the proposed society.

The brief facts are that the Assessing Officer noted during the course of assessment proceedings that the assessee had earned during the year under consideration, a sum of Rs.30,34,472/- from Union Bank on account of interest of FDRs, which was not offered to tax by the assessee. Accordingly, the Assessing Officer issued show cause notice to the assessee for bringing the same to tax. The assessee submitted vide its submission dt 21-02-2012 to the Assessing Officer that the aforesaid interest income was not taxable in its hands. The assessee submitted that assessee was bound by the agreement entered with the purchasers to form a Society and to transfer the entire funds including the impugned interest income for the maintenance of the housing project developed by it and, therefore, the aforesaid interest income was not income of the assessee at all, and therefore, the same was not taxable in its hands. The relevant part of assessee’s submission is reproduced below: “We submit that the assessee is contractually obliged to follow the agreed terms. It is submitted that the amount kept deposited by the flat purchaser was only for their use for mutual use of the members of the common organization only. The assessee is an agent of the members for collection and keep the corpus as per the specific directions as mentioned above. The facts are that all flat purchasers will become members of the common object of maintenance and upkeep of the common fund for financing the cost of common object of maintenance and upkeep of the common amenities/ buildings for mutual interest and have no dealings or relations with any outside body. The concept and principal of mutuality has been elaborately examined by the Apex Court and followed in several decisions of High Courts and Tribunals. There are three conditions for applicability of the principle of mutuality, which are as follows:- Where a number of reasons combine together contribute to a a) common fund for the financing of some venture or object; They have no dealings or relation with any outside body; and b) Surplus generates a not spent for any other purpose c) accepting for the welfare of the principles. On this basis, courts clearly held that even if there was an income earned by the society in the form of interest by keeping the funds generated from the members in the bank. It is submitted that the amount collected the flat purchaser as corpus has been kept in Fixed Deposits and had not been diverted for any other purpose. In view of principle of mutuality the interest accrued is not a taxable income. The assessee has prepared separate balance sheet and receipt payment account got audited and submitted to the members. As explained above the assessee declared interest income of Rs.59, 972/- and claimed TDS on this amount only. The interest amount Rs.29, 74,500/- pertaining to flat purchasers has been kept separate and included in the separate balance sheet and receipt payment account prepared, got audited and submitted to the members."

However, the Assessing Officer did not accept the submissions of the assessee and assessed the aforesaid interest income as income of the assessee mainly on the ground that assessee has not produced the proof that the said interest income has been remitted to the society as the society was not still formed.

Being aggrieved, the assessee filed appeal before the Ld. CIT(A) where exhaustive submissions were made. The assessee also submitted various evidences to clarify the doubts raised by the Assessing Officer and to show that entire funds which were received by the assessee were transferred to the Society including whatever amount of interest was received from the bank and no amount was used by the assessee for its own use or benefit. Ld. CIT(A) did not accept arguments about application of the principle of mutuality in view of the facts of the case and relying upon the judgment of the apex court in the case of Bangalore Club vs CIT dt 14-6-2013, and the aforesaid amount of interest was held to be rightly taxed in the hands of the assessee.

Before us, the ld. Counsel of the assessee vehemently made detailed arguments and placed before us, sample copy of agreement entered with the buyers to show that these funds were received by the assessee in a fiduciary capacity from the buyers which were to be transferred to the Society along with amount of interest received thereon. Our attention was also drawn upon relevant provisions of Maharashtra Ownership Flats (Regulations and the Permission of Construction, Sale, Management & Transfer) Act, 1963 (hereinafter called, MOFA) and it was argued that the assessee was bound by these regulations and accordingly assessee was bound to keep these funds in fiduciary capacity to be handed over to the Society for maintenance of the building constructed by the assessee. During the course of hearing, Ld. Counsel submitted that though in the A.Ys 2012-13 & 2013-14 similar interest income was offered to tax by the assessee inadvertently, but he gave an undertaking at the bar on behalf of the assessee that in case this addition is deleted in the impugned year, then the assessee shall not seek any rectification in assessment years 2012-13 and 2013-14 in pursuance to order of the Tribunal.

Per contra, the Ld. DR relied upon the orders of the lower authorities and further submitted that these facts are still not available on records that whether the assessee has transferred this amount in totality to the Society or some portion has been appropriated by the assessee.

We have gone through the facts of the case and orders passed by the lower authorities. The admitted facts are that assessee, an AOP, had collected deposits as per the provisions of the agreement executed witch the buyers of the Flats towards corpus for maintenance and related jobs till the formation of the Society. As per the agreement, the amount was to be transferred to the Society for maintenance of the flats. In the meantime, till the amount was transferred, the deposits were kept in FDR by the assessee (AOP) with the bank and interest was credited by the bank upon these FDR. Thus, the moot question that arises here is whether, the interest so credited by the bank on this FDR shall form part of the income of the assessee or not?

We have analysed this issue and to begin with our analysis, we have referred to the relevant clause of the sample agreement which the assessee has entered into with one of its customers. It is noted that clause 14 of the agreement clearly stipulates about the obligation of the purchaser to pay a particular amount towards corpus in the name of security deposit for maintenance and upkeep of the common amenities and buildings. It also stipulates and casts an obligation upon the developer builder (i.e. the assessee AOP) to put the entire amount collected from the purchasers towards corpus for the maintenance and upkeep of the common amenities and buildings in the FDR and also to give detailed account thereof to the buyer. It is further noticed by us that the assessee is also bound by the strict regulations of the MOFA. It is noted that section 5 of MOFA provides as under:

It is further noted that section 13(1) & (2) of MOFA deal with offences of promoter and consequences on conviction, provide as under:

Thus, from the perusal of various clauses of the agreement entered with the buyers and strict provisions of MOFA, as reproduced above, we can conclude that assessee was bound to keep the amount of security deposit received from its customers (buyers of Flats) in a separate account to be spent for the designated purposes and to transfer the balance amount to the Society for this purpose. The assessee had no discretion or permission or any type of liberty or flexibility to use it for its own purposes or for any other purpose not stipulated in the agreement. Under these circumstances, it can safely be concluded that this amount was retained in a fiduciary capacity. There was no distinction between the amount of principal and amount of interest credited by the bank, as far as the assessee is concerned. Thus, for the assessee it was simply an amount received in advance which was to be transferred to the Society or to be spent for the designated purposes. It has no character or element of income as far as assessee is concerned. It was simply held in the form of an obligation / liability. The assessee was a trustee or custodian simpliciter of the said amount. The real income theory as is followed under income tax law does not permit assessment of an amount as income unless it has got elements or characteristics of income in the hands of its recipient. Under these circumstances, we find that principally speaking the impugned amount of interest cannot be treated as income in the hands of the assessee.

Ld. CIT(A) has held it to be taxable on the ground that principles of mutuality does not apply here. We agree with the Ld. CIT(A) that principles of mutuality does not apply where the amount of interest income is received from a third source, i.e. a bank here. It has been so clarified now by Hon’ble Supreme Court also in the case of Bangalore Club vs CIT (supra). There is no dispute or doubt on that. But the said issue (of application of principle of mutuality) needs to be examined in the hands of the society where this income shall be finally appropriated / exhausted. The assessee being merely a conduit for transferring the impugned amount from the buyers to the Society or it can be described at best as a custodian/trustee of this amount, it cannot be held to be an assessee liable to be taxed for this amount which is held in fiduciary capacity. The issue of taxability of this amount can of course be examined in the hands of the Society. The Revenue is free to do so, as permitted under the law keeping in view the aforesaid judgment of the Hon’ble Supreme Court or any other law / judgment as may be applicable and also keeping in view applicability of the principles of mutuality.

The other apprehension raised by the Ld. DR was that in A.Ys. 2012-13 & 2013-14 the assessee has itself paid tax on the amount of interest on these deposits and therefore, position in these years should not be disturbed irrespective of the fact that whatever decision is taken by the Tribunal in the impugned year. In reply, the Ld. Counsel submitted that though the tax was paid in A.Ys. 2012-13 & 2013-14 by mistake and inadvertently, still the assessee hereby undertakes not to seek any kind of refund/ rectification in these two years. In this regard, the assessee also submitted an undertaking by way of its letter dt 20-07-2016, the relevant part of which is reproduced hereunder: “1 Kindly refer to the captioned matter that was heard before Your Honours on 20.07.2016 2. The assessee AOP had been collecting deposits as per the provisions of agreement executed with the buyers of the flat towards corpus for maintenance, etc. till the formation of the society. The said amount which was held in fiduciary capacity by assessee AOP was kept in Fixed Deposit and interest was received therefrom.

The same was not offered to tax in A.Y. 2010-11 and 2011- 12 since the same belonged to the buyers of the flat and was held in fiduciary capacity by assessee.

However, in A.Y. 2012-13 and 2013-14, interest on ED was received and by oversight was offered to tax by assessee. We hereby undertake and confirm that we shall not retract from the above position by way of moving any rectification application by filing additional ground of appeal before appellate authority or by any other means whatsoever. Further, the tax paid on interest received on ED for A.Y. 2012- 13 and 2013-14 will also not be claimed back as refund or otherwise.”

The other objection of Ld. CIT(A) which has been reiterated by the Ld. DR also before us was that there was no clarity on facts with regard to transferring of impugned Security Deposit amount to the Society by the assessee in entirety. In fact, from the arguments of the Ld. DR it transpires that this is the only objection left to be addressed as per final stand of the Revenue. Thus, in all fairness to both the parties, we find it appropriate to send this issue back to the Assessing Officer for verification of these facts. The assessee shall bring on record all requisite evidences to demonstrate that the impugned amounts received by way of deposits from the customers along with the amount of interest credited by the bank thereon have been transferred to the concerned Society. In case, any amount has been appropriated by the assessee in violation of the agreement or in violation of the regulations of MOFA, then corresponding amount of interest thereon can be brought to tax in the hands of the assessee. Thus, with these directions, this issue is sent back to the file of the Assessing Officer. The Assessing Officer shall give adequate opportunity of hearing to the assessee before deciding this ground afresh. It is also directed that the assessee shall abide by its undertaking dt 20-07-2016 which has been reproduced above. The Assessing Officer shall also verify relevant facts in this regard. As a result, this ground of appeal

During the course of hearing, it was brought to our notice by the ld. Counsel of the assessee that the Revenue had carried this matter before the Hon’ble High Court and Hon’ble High Court has affirmed the order of the Tribunal and dismissed the appeal of the Revenue and thus this issue now stands settled in favour of the assessee by the order of the Hon’ble jurisdictional High Court. 28. Per contra, ld. DR relied upon the orders of the lower authorities and did not make any distinction on facts or law. 29. We have gone through the orders of the lower authorities. It is noted that the benefit of deduction u/s 80IB was denied by the Assessing Officer on the ground that certain Flats were having constructed area of more than 1500 sq.ft. and thus, violated the conditions of section 80IB (10). The Tribunal decided this issue in favour of the assessee in A.Y. 2007-08 confirming the order of the Ld. CIT(A) and held as under: “4.3. This factual aspect has been disputed before us. Therefore, when each of the facts have been constructed as per the plan duly approved by the local authorities and also completed as per the completion certificate, wherein the built up area of each flats has been shown less than 2500 sq.ft., then receiving the consideration by the assessee for more than 2500 sq.ft. showing as saleable area of the flats / residential units as per the sanctioned plant and completion certificate. 4.4. In view of the above discussion as well as in the facts and circumstances of the case we do not find any error or illegality in the order of the CIT(A), qua this issue.” …………. 6.2 Therefore, as per the pre-amended provisions of sec 80IB(10), once the project has been approved by the local authorities, then in the absence of any such condition of commercial area in the provisions of sec.80IB(10), deduction cannot be denied on this point. Hence, we do not find any reason to interfere with the impugned order of the CIT(A), qua this issue.” ……………. “7. We have heard the ld Ld. Departmental Representative as well as the ld Ld. Authorized Representative of the assessee and considered the relevant material on record. In view of our finding that the assessee is entitled for deduction u/s 80IB (10), the issue of addition has become infructuous as it become revenue neutral. Accordingly, we uphold the order of the CIT(A) on this issue also.

In the result, the appeal filed by the revenue is dismissed.”

It is further noted that this issue reached before the Hon’ble Bombay High Court which was decided in favour of the Revenue by the Hon’ble High Court. The Revenue carried the matter before the Hon’ble Apex Court where it was decided as part of batch of appeals and is reported as CIT vs Sarkar Builders & Ors 375 ITR 392 (SC) wherein it has been inter alia held that where housing project was sanctioned before the amendment but has been completed after April 1, 2005, when the amended provisions came into operation, the assessee would be entitled to deduction u/s 80IB (10) and conditions mentioned in clause (d) would not apply. It has been stated that assessee’s project was approved prior to the said date which has not been disputed by the Revenue. Thus, respectfully following the decisions of the Tribunal and judgement of the Hon’ble Bombay High Court in assessee’s own case for earlier years, we find no substance in the appeal of the revenue for the impugned year and, therefore, ground No.1 raised by the Revenue is dismissed.

Ground 2: In this ground the Revenue has contested the action of the Ld. CIT(A) in allowing the claim of the assessee u/s 80IB(10) despite the fact that the Ld.CIT(A) had upheld the action of the AO in excluding the share of SPPL from Revenue of the assessee while computing the business income of the assessee. It was stated by both the parties that this ground is consequential to ground 1 of assessee’s appeal and if ground 1 of assessee’s appeal is allowed, then ground 2 of Revenue’s appeal wiil become infructuous. 32. We have already allowed ground 1 of assessee’s appeal wherein it was held that for computing the business income of the assessee, the share of SPPL was not required to be excluded. Thus, the present ground raised

As a result, assessee’s appeals are partly allowed and Revenue’s appeals are dismissed. Order pronounced in the court on this _21st day of September, 2016.