2014 (12) TMI 561 - AT - Income Tax

Tribunal grants full deduction under Section 80IB(10) for housing project, buyers' modifications don't affect eligibility.

The Tribunal granted the full deduction under Section 80IB(10) to the assessee for the entire housing project, dismissing the revenue's appeal for ... Entitlement for claim of deduction u/s 80IB(10) – Built up area of more than 1000 Sq. Ft. - Whether the CIT(A) erred in holding that 1BHK flats where-ever converted into duplex had built up areas of more than 1000 sq ft and such flats exceeded the limits u/s 80IB(10) with the knowledge and connivance of the assessee and the profits attributable to such flats did not qualify for deduction u/s 80IB(10) – Held that:- The assessee started a project named ‘Garden Estate’ with A and B Wings with 96 and 95 flats respectively - The project was approved by the local authorities to construct 1-BHK, 2-BHK and 3-BHK flats and accordingly, the built up area of each of these flats so approved does not exceed 1000 sq ft. - No duplex flats are to be envisaged in the project - assessee pleaded that the assessee merely made provision as a part of the marketing strategy for selling the 1-BHK flats and such a provision was made use of by the flat buyers after taking possession of the flats. Relevance of the discrepancies noticed during the survey action on 11/03/2008, when the profits of project are assessable to tax in AY 2009-10 based on Project C Method – Held that:- AOs who made the assessments for the AY 2005-06 to 2008-09, were under the bona fide belief that the profits of the project needs to be recognized based on the percentage completion (WIP) method in place of ‘project completion method adopted by the assessee - impounding of the brochure with details of method of merger of 1-BHK flats into a duplex, cannot be used against the assessee as it only provides the design of merger - the owners of duplex have merged the flats after taking possession of their flats using the design provisions supplied by the assessee in the brochure. Relevance of the Intention of the assessee – Held that:- The assessee got the approval for constructing 1-BHK flats from the Authorities and completed the constructed as per the approved plans - what is required to be seen should include, what are the plans, designs of the project and built up areas particulars of the residential units at the approval stage, construction stage and finally at sales point - from the approval stage till the stage of issuance of the completion certificate, there is no violation by the developer - the merger of flats if any taken place after the sale of the said 1-BHK flats by the flat buyers and, may be using the design made available by the developer, the assessee cannot be penalized and denied the claim of deduction. Ignoring the confirmation filed by the flat buyers – Held that:- The revenue authorities have decided the issue against the assessee prejudicially and ignored the evidences that are given against the revenue. Absence of any direct evidence to suggest that the assessee constructed the duplex flats – Held that:- When 1-BHK flats are otherwise built and sold as such, mere making a provision to help the flat buyers to merge them to suit their convenience during the post-sale, should not disentitle to the assessee to make claim of deduction u/s 80IB(10) - few 1-BHK flats remain so without any merger despite the provision of ‘hole’ left and others are merged into duplex during the post sale using such provision - the developer cannot be penalized by denying the deduction - claim of deduction was found allowable by the then CIT(A) who decided the issues in earlier AY. Scope of the legal pronouncements on the merger of flats by the buyers and by assessee at the instance of flat buyers – Held that:- There is iota of direct eveidence to demonstrate that it is the assessee who merged the two 1-BHK flats in to duplex one with one kitchen - there is evidence to suggest that the flat buyers have done it so to their better living in the residential units - mere making a provisions of hole and providing methods/design vide the brochure to the advantage of the flat buyers does not amount to construction of duplex flats by the developer, who is aware of the consequences in matters of claims of deduction one side as well as the obtaining the completion /occupancy certificates from the Authorities, who approved the project with 1 to 3 BHK flats only and not to the duplex flats. The discrepancy of mere providing a hole for intended stair case for flat buyers and supplying of the design to merge the flats into a duplex flat in our opinion constitutes a marketing strategy to boost the sale of the 1-BHK - there is no prohibition for sale of the more flats to the members of a family - The amendments are undisputedly inapplicable to the projects under consideration - the assessee is entitled to deduction in respect of the profits attributable to all the 1-BHK flats of the project too – thus, the order of the CIT(A) is set aside – Decided in favour of assessee. Issues Involved:1. Eligibility for deduction under Section 80IB(10) of the Income Tax Act.2. Interpretation of the built-up area condition under Section 80IB(10).3. Impact of post-sale modifications by buyers on eligibility for deduction.4. Pro-rata deduction for eligible parts of the project.Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 80IB(10):The primary issue was whether the assessee was eligible for the deduction under Section 80IB(10) of the Income Tax Act. The assessee, an AOP, developed a housing project named 'Garden Estate' with two wings, A and B, each consisting of 1-BHK to 3-BHK flats, all approved with built-up areas of less than 1000 sq. ft. The project was approved in A.Y. 2005-06 and completed before March 2009. During a survey, it was found that some 1-BHK flats were constructed in a manner that allowed them to be combined into duplex flats, potentially exceeding the 1000 sq. ft. limit. The Assessing Officer (AO) interpreted this as a violation of Section 80IB(10) and denied the deduction.2. Interpretation of the Built-up Area Condition:The AO argued that the provision of a 'square-shaped hole' between two 1-BHK flats and the impounded brochure indicating a duplex floor plan suggested the intention to sell duplex flats, thus violating the built-up area condition. The assessee contended that each 1-BHK flat was constructed and sold independently, and any post-sale modifications by buyers to combine flats into duplexes should not affect the eligibility for deduction. The CIT(A) partially accepted the assessee's contention but denied the deduction for profits attributable to the 18 flats that were converted into duplexes.3. Impact of Post-sale Modifications by Buyers:The assessee argued that the modifications to combine flats into duplexes were made by buyers after taking possession and were not part of the original construction plan. The AO's investigation confirmed that some flats were not combined, and others were combined at the buyers' request after possession. The Tribunal found that the assessee's provision for a hole and a single kitchen was a marketing strategy and not a violation of Section 80IB(10). The Tribunal emphasized that the assessee constructed and sold the flats as per the approved plan, and any post-sale modifications by buyers should not affect the deduction eligibility.4. Pro-rata Deduction for Eligible Parts of the Project:The AO, without prejudice, suggested that if the assessee was found ineligible for the entire deduction, a pro-rata deduction should be allowed for the portion of the project that complied with Section 80IB(10). The CIT(A) upheld this view, allowing a pro-rata deduction for 92.75% of the project. However, the Tribunal, considering the binding judicial precedents, concluded that the assessee was entitled to the full deduction under Section 80IB(10) for the entire project, as the original construction complied with the approved plans.Conclusion:The Tribunal allowed the appeal of the assessee, granting the full deduction under Section 80IB(10) for the entire project, and dismissed the revenue's appeal for pro-rata deduction. The Tribunal emphasized that post-sale modifications by buyers should not affect the eligibility for deduction if the original construction complied with the approved plans and conditions of Section 80IB(10).