2019 (10) TMI 469 - AT - Income Tax

Tribunal grants deduction under Section 80-IB(10) to assessee, rejects disallowance, finds no profit manipulation

The Tribunal allowed the appeals filed by the assessee, directing the Assessing Officer to permit the deduction claimed under Section 80-IB(10) of the ... Deduction under Section 80-IB(10) of the Act - joint development agreement - guideline value versus market value - shifting of income / suppression of profit - books of account maintained in ordinary courseDeduction under Section 80-IB(10) of the Act - joint development agreement - guideline value versus market value - shifting of income / suppression of profit - books of account maintained in ordinary course - Claim for deduction under Section 80-IB(10) of the Income-tax Act, 1961 by the assessee partnership firm engaged in a housing project and the validity of Assessing Officer's and CIT(A)'s disallowance on grounds of alleged suppression/ income shifting and undervaluation of land. - HELD THAT: - The Tribunal examined whether the disallowance was justified by material showing that the land transfer and profit declaration were a device to reduce tax. The authorities below relied on: (i) valuation of land at guideline value (allegedly below market rate), (ii) induction of land owners' children as partners (35% stake) and (iii) high profit margin (around 50%) to infer diversion or suppression. The Tribunal observed that Section 80-IB(10) pertains to housing projects and that no provision of Section 80-IA(10) alters that analysis. The assessee maintained books of account in the regular course and no defect in the books was pointed out. Guideline value as fixed by the registration authorities is not conclusive evidence of market value; market value fluctuates with location and other factors and guideline value may be higher or lower than actual market value. The presence of third party partners (not related to the land owners) who also had capital at risk undermined the Revenue's theory that the land owners could agree to an undervalue transfer collusively to benefit solely their children. There was no material showing that the declared profit was fabricated or that cost of land was diverted as concealed consideration; the profit shown was supported by books maintained in the ordinary course. Absent positive material of collusion, suppression or shifting of income, the Assessing Officer and CIT(A) were not justified in disregarding the assessee's claim or in treating the land consideration as a device to inflate deductible profit. [Paras 11, 12, 13, 14, 15]Orders of the Assessing Officer and CIT(A) disallowing the deduction under Section 80-IB(10) set aside; deduction under Section 80-IB(10) to be allowed as claimed and Assessing Officer directed to give effect.Final Conclusion: Both appeals allowed: Tribunal found no material to sustain Revenue's conclusion of undervaluation or income shifting and directed grant of deduction under Section 80-IB(10). Issues Involved:1. Disallowance of deduction claimed under Section 80-IB(10) of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Disallowance of Deduction under Section 80-IB(10)The primary issue in both appeals is the disallowance of the deduction claimed by the assessee under Section 80-IB(10) of the Income-tax Act, 1961. The assessee, a partnership firm, developed a housing project and claimed deductions under the said section. The Assessing Officer (AO) disallowed the claim on the grounds that the profit on the sale of land was suppressed and that the transaction was dubious due to the involvement of the landowners' children as partners in the firm.Arguments by the Assessee:The counsel for the assessee argued that the firm was an independent and separate assessable unit. The landowners, Shri V. Chandrasekaran and Smt. Saraswathi Chandrasekaran, entered into an agreement with the assessee and executed a power of attorney in favor of Shri Mehul H. Doshi. The undivided share of land was sold by Shri Mehul H. Doshi, and the sale proceeds were credited to the assessee's books. The market value of the land was paid to the landowners, and the entire sale consideration received from prospective purchasers was passed on to the landowners. The AO’s observation that the transaction was dubious due to the involvement of the landowners' children as partners was unfounded, as the children were independent and separate assessable units.The counsel further argued that the landowners’ share of sale proceeds was a composite one, consisting of consideration for the sale of undivided share of land as well as the built-up area. The gain on the sale of land was also eligible for deduction under Section 80-IB. The partnership firm, constituted on 01.10.2008, developed the land by constructing multi-storied residential flats. The landowners had executed an agreement for sale and an irrevocable power of attorney for sale of land to prospective buyers 21 months before the formation of the partnership firm.Arguments by the Department:The Departmental Representative (DR) argued that the landowners entered into a joint development agreement and executed a power of attorney for the sale of undivided share of land. The AO concluded that the land was sold at a rate below the market value to reduce taxable income and claim sale proceeds as exempt from taxation by introducing their children as partners in the firm. The AO also found that the profit margin was exorbitant and included the cost of land sold by the landowners, and a part of the cost was diverted as share of profit to the landowners' children.Tribunal's Findings:The Tribunal noted that the assessee-partnership firm maintained books of account in the regular course of business, and no defect was pointed out by the AO or the CIT(Appeals). The AO’s observation that the land was transferred at the guideline value to increase the profit of the firm was not supported by any material. The Tribunal found that the market value of the land is not a constant or fixed price and may fluctuate depending on various factors. The contention that the land was transferred at a lower rate since the children of the landowners were partners was not justified, as there were other partners who were not related to the landowners.The Tribunal concluded that the profit generated by the firm, supported by the books of account, was not exorbitant or improbable. The children of the landowners, holding 35% of the stake, were naturally eligible for 35% of the profit, and 65% of the profit would go to the other partners. There was no arrangement to shift the profit to the partnership firm to claim a higher rate of deduction under Section 80-IB(10).Conclusion:The Tribunal set aside the orders of the lower authorities and directed the AO to allow the deduction under Section 80-IB(10) as claimed by the assessee. Both appeals filed by the assessee were allowed.