2014 (4) TMI 1042 - HC - Income Tax

Land ownership not required for deductions, but profits from FSI sale ineligible under section 80IB(10)

The Commissioner of Income Tax-I Versus Moon Star Developers

The High Court upheld the Tribunal's decision allowing developers to claim deductions under section 80IB(10) despite not owning the land. However, the ... Deduction u/s 80IB(10) of the Act – Profits from sale of housing projects – Held that:- The decision in CIT v. Radhe Developers [2011 (12) TMI 248 - GUJARAT HIGH COURT] followed - the assessee had taken full responsibilities for execution of the development projects - the assessee had full authority to develop the land as per his discretion - The assessee could engage professional help for designing and architectural work - Assessee would enroll members and collect charges - Profit or loss which may result from execution of the project belonged entirely to the assessee - the assessee had developed the housing project - the Tribunal committed no error in holding that the assessees were entitled to the benefit u/s 80IB(10) of the Act even where the title of the lands had not passed on to the assessees and in some cases, the development permissions may also have been obtained in the name of the original land owners – Decided against Revenue. Sale of unutilized FSI – Construction done only on the portion of FS available – Held that:- Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim u/s 80IB(10) of the Act - Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, the case may stand on a different footing - in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged, bifurcation of profits arising out of such activity and that arising out of the net sell of FSI must be resorted to - none of the assessees have made any special ground for non-utilization of the FSI- Decided in favour of Revenue. Issues Involved:1. Claim of deduction under section 80IB(10) of the Income Tax Act, 1961 by developers who did not own the land.2. Denial of deduction for profits attributable to the sale of unutilized Floor Space Index (FSI).Issue-wise Detailed Analysis:1. Claim of Deduction under Section 80IB(10) by Developers Who Did Not Own the Land:The primary issue was whether developers who did not own the land but were responsible for the development and construction of housing projects could claim deductions under section 80IB(10) of the Income Tax Act, 1961. The Assessing Officer denied the deduction on the grounds that the land was not owned by the developers, and the development permission was in the name of the landowners. The Tribunal ruled in favor of the assessees, and the High Court upheld this decision by referring to the case of Radhe Developers, where it was established that ownership of the land is not a prerequisite for claiming deductions under section 80IB(10). The Court observed:'Neither the provisions of Section 80IB nor any other provisions contained in other related statutes were brought to our notice to demonstrate that ownership of the land would be a condition precedent for developing the housing project.'The Court emphasized that the term 'developer' has a broader connotation and that the developers had full control and responsibility over the housing projects, including financial risks. Therefore, the fact that the developers did not own the land was deemed inconsequential for the purpose of claiming deductions under section 80IB(10).2. Denial of Deduction for Profits Attributable to the Sale of Unutilized FSI:The second issue was whether the deduction under section 80IB(10) could be denied for profits attributable to the sale of unutilized FSI. The Assessing Officer observed that the developers had not utilized the full extent of the permissible FSI and segregated the profits from the sale of unutilized FSI from the total profits claimed under section 80IB(10). The Tribunal ruled in favor of the assessees, but the High Court reversed this decision.The Court noted that the concept of FSI is crucial in determining the extent of construction permissible on a given piece of land. It was observed that significant underutilization of FSI, where only a small portion of the available FSI was used, could not be considered as profits derived from the development and construction of a housing project. The Court stated:'The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized...the case may stand on a different footing.'However, in the present cases, the developers did not provide any special grounds for the underutilization of FSI. The Court concluded that the profits attributable to the sale of unutilized FSI could not be considered as derived from the development and construction of the housing project and thus were not eligible for deduction under section 80IB(10).Conclusion:The High Court upheld the Tribunal's decision regarding the first issue, allowing developers to claim deductions under section 80IB(10) even if they did not own the land. However, on the second issue, the Court ruled in favor of the Revenue, stating that profits from the sale of unutilized FSI were not eligible for deduction under section 80IB(10). The respective decisions of the Tribunal were reversed to this extent.