ITAT Grants Proportionate Deduction u/s 80IB(10), Excluding Profits from Two Row Houses Sold to Spouses.

The ITAT allowed the assessee's appeal, affirming the CIT(A)'s decision for a proportionate deduction under section 80IB(10). The Tribunal concluded that only the profits from the two row houses sold to a husband and wife should be excluded, while the remaining project qualifies for the deduction, dismissing the Revenue's appeal.

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Issues Involved:
1. Denial of deduction under section 80IB(10) due to violation of sub-clause (f) by selling adjacent row houses to husband and wife.
2. Proportionate deduction under section 80IB(10) when conditions are violated for only some units in the project.

Issue-wise Analysis:

1. Denial of Deduction under Section 80IB(10) due to Violation of Sub-clause (f):
The assessee, a partnership firm engaged in promoting and building residential and commercial projects, filed a return of income for A.Y. 2010-11, declaring a total taxable income of Rs. Nil and claiming a deduction of Rs. 8,35,95,698 under section 80IB(10) for the housing project "Sukhwani Oasis." The Assessing Officer (AO) disallowed this deduction, citing a violation of sub-clause (f) of section 80IB(10) because adjacent row houses (Nos. 38 and 39) were sold to husband and wife. The AO concluded that the assessee was aware of this relationship, which breached the conditions stipulated in section 80IB(10)(f). The assessee argued that it was under the genuine impression that the purchasers were not related, as they had used different names and addresses. However, the AO found this explanation unacceptable and denied the entire deduction.

2. Proportionate Deduction under Section 80IB(10) when Conditions are Violated for Only Some Units:
The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the AO's decision to deny the deduction due to the violation of clause (f) but granted partial relief by limiting the denial to the profits derived from the sale of row houses Nos. 38 and 39. The CIT(A) noted that the appellant firm failed to exercise due diligence expected of it, despite the misrepresentation by the purchasers. However, the CIT(A) also considered the intention behind clauses (e) and (f) of section 80IB(10), which aim to prevent the circumvention of unit size limitations. The CIT(A) concluded that disallowing the entire deduction for the project due to violations in just two units would be too harsh. Therefore, the CIT(A) directed the AO to recompute the deduction, limiting the denial to the profits from the two row houses in question.

Tribunal's Decision:
The Income Tax Appellate Tribunal (ITAT) considered both the assessee's and the Revenue's appeals. The ITAT found no fault in the CIT(A)'s order, which relied on the decision of the Pune ITAT in the case of Pharande Developers, allowing proportionate deduction. The ITAT also referred to the Madras High Court's decision in CIT Vs. Arun Excello Foundations (P.) Ltd, which approved the principle of proportionate deduction. The ITAT held that the assessee had exercised normal due diligence expected of a normal businessman, given the different addresses and names provided by the purchasers. The ITAT concluded that the assessee could not be denied the deduction for the entire project and allowed the deduction under section 80IB(10) for the remaining project, excluding the profits from the two row houses.

Conclusion:
The ITAT allowed the assessee's appeal and dismissed the Revenue's appeal. The final order pronounced that the assessee is entitled to the deduction under section 80IB(10) for the housing project, excluding the profits from the two row houses sold to the husband and wife.

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