2025 (5) TMI 2042 - AT - Income Tax

Property owners who construct for consideration remain eligible for section 80IB(10) deduction despite executing work contracts

The Assistant Commissioner of Income-tax Corporate Circle 1 (1) Kochi. Versus Skyline Builders Skyline House, Ernakulam

ITAT Cochin held that assessee was eligible for deduction under section 80IB(10) despite executing work contracts. The tribunal rejected revenue's ... Deduction u/s. 80IB(10) - assessee is not a contractor within the meaning of sec.80IB(1) rather has executed work contract, and hence, not eligible for deduction - HELD THAT:- We are of the view that there is no error in the judgment of the CIT(A) so far as the reliance of the learned DR in the case of K.Raheja Development Corporation [2005 (5) TMI 7 - SUPREME COURT] is concerned. We observe that recently in the case of CIT v. Vishal Developers [2014 (12) TMI 483 - GUJARAT HIGH COURT] has considered the judgment of K.Raheja Development Corporation [2005 (5) TMI 7 - SUPREME COURT] and held that the same is not applicable under the provisions of Income-tax Act. The Hon’ble Gujarat High Court has held that the definition of “works contract” as interpreted by the Hon’ble Supreme Court does not make a distinction based on who carries on the construction activity and held that even owner of the property may also be said to be carrying on a work contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. Decided against revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals are:(a) Whether the appellant, a partnership firm engaged in building and development, is eligible for deduction under section 80IB(10) of the Income-tax Act for the relevant assessment years, given the nature of its business activity.(b) Whether the appellant qualifies as a 'contractor' within the meaning of section 80IB(1) or is to be treated as a 'works contractor,' thereby affecting eligibility for deduction under section 80IB(10).(c) Whether the minimum land area requirement under section 80IB(10) is satisfied by the appellant's development of two projects on a combined land area exceeding one acre, and whether the condition applies to each project individually or to the aggregate land.(d) Whether income such as interest, rent, and miscellaneous income included in the appellant's accounts can be considered for deduction under section 80IB(10), or whether only income from construction activity is eligible.(e) The applicability of the Supreme Court judgment in K. Raheja Development Corporation v. State of Karnataka regarding the classification of the appellant as a works contractor versus an independent builder/developer.2. ISSUE-WISE DETAILED ANALYSIS(a) Eligibility for Deduction under Section 80IB(10) and Nature of Business ActivityRelevant Legal Framework and Precedents: Section 80IB(10) grants deduction to builders/developers subject to prescribed conditions, including the nature of the business activity and completion of the construction project. The distinction between a builder/developer and a works contractor is crucial. The Hon'ble ITAT Cochin Bench's decisions in Desai Homes vs. DCIT and Kalpaka Builders Pvt Ltd vs. Addl. CIT provide detailed analysis on this distinction.Court's Interpretation and Reasoning: The Tribunal examined whether the appellant was a works contractor or a builder/developer. It relied on the principle that ownership of land and obtaining building permissions are significant indicators of a builder/developer. The Tribunal noted that the appellant owned the land, obtained local body approvals, constructed the building as per the approved plans, and sold flats to individual buyers. The buyers did not have the option to award work to the appellant; they purchased completed flats. This scenario aligns with the facts in Desai Homes, where the Tribunal held that individual purchasers cannot be said to have awarded works contracts to the builder.Key Evidence and Findings: The appellant's ownership of land, local body approvals, project completion certificate, and sale agreements were examined. The Tribunal rejected the AO's reliance on nomenclature in the Profit & Loss account (e.g., 'Contract Receipts') as determinative of the nature of business activity, emphasizing the need to consider the entire factual matrix.Application of Law to Facts: Applying the legal principles and precedents, the Tribunal concluded that the appellant is a builder/developer and not a works contractor. The AO's disallowance of deduction under section 80IB(10) on this ground was held to be erroneous.Treatment of Competing Arguments: The Revenue contended that the appellant was a works contractor based on the nomenclature and the Supreme Court's decision in K. Raheja Development Corporation. The Tribunal distinguished the facts of the present case from that precedent and relied on the jurisdictional ITAT's decisions and subsequent High Court rulings to reject the Revenue's argument.Conclusions: The appellant qualifies as a builder/developer and is eligible for deduction under section 80IB(10) on this issue.(b) Minimum Land Area Requirement under Section 80IB(10)Relevant Legal Framework and Precedents: Section 80IB(10)(b) requires the project to be on a plot of land with a minimum area of one acre. The statute does not specify that each individual project must be on a separate plot of one acre, nor does it prohibit multiple projects on a combined land area exceeding one acre.Court's Interpretation and Reasoning: The Tribunal accepted the appellant's submission supported by approved plans showing two projects (Aster and Lavender) developed on a combined land area of 221.498 cents (approximately 2.2 acres). The AO's conclusion that the Aster project was on less than one acre was found to be a mere impression not supported by facts.Key Evidence and Findings: The approved plans and local body certificates were considered. The Tribunal noted the absence of any statutory requirement for each project to be on a separate one-acre plot.Application of Law to Facts: The Tribunal applied the statutory language and held that the appellant satisfied the minimum land area condition for deduction under section 80IB(10).Treatment of Competing Arguments: The AO's restrictive interpretation was rejected as contrary to the statute and judicial precedents cited by the appellant.Conclusions: The appellant complied with the minimum land area requirement, and the deduction claim on this ground was upheld.(c) Inclusion of Non-Construction Income for Deduction under Section 80IB(10)Relevant Legal Framework and Precedents: Deduction under section 80IB(10) applies to profits from eligible housing projects. Income from interest, rent, and miscellaneous sources is generally not eligible for this deduction.Court's Interpretation and Reasoning: The AO observed that the appellant included other incomes while computing deduction, which was impermissible. The appellant submitted project-wise profit and loss accounts certified in Form 10CCB audit report, showing that only construction income was considered for deduction.Key Evidence and Findings: The audit report and project-wise accounts were examined. The AO did not quantify or specify the amounts of non-construction income included.Application of Law to Facts: The Tribunal found the AO's observation unsubstantiated and not sustainable in the absence of specific evidence of inclusion of non-eligible income.Treatment of Competing Arguments: The appellant's explanation was accepted, and the AO's disallowance on this ground was rejected.Conclusions: Deduction under section 80IB(10) was allowable on the construction income as claimed by the appellant.(d) Applicability of the Supreme Court Judgment in K. Raheja Development CorporationRelevant Legal Framework and Precedents: The Supreme Court in K. Raheja Development Corporation held that an owner entering into an agreement to construct for consideration may be treated as carrying on a works contract. However, this interpretation was considered in the context of sales tax law.Court's Interpretation and Reasoning: The Tribunal noted that the Gujarat High Court in CIT v. Vishal Developers distinguished the K. Raheja judgment, holding it not applicable under the Income-tax Act provisions. The High Court clarified that the definition of 'works contract' for sales tax purposes does not translate directly to income tax provisions.Key Evidence and Findings: The Tribunal relied on the recent High Court ruling to reject the Revenue's reliance on K. Raheja Development Corporation.Application of Law to Facts: The Tribunal held that the appellant's status as a builder/developer under the Income-tax Act was unaffected by the Supreme Court ruling on sales tax law.Treatment of Competing Arguments: The Revenue's reliance on K. Raheja was respectfully overruled in light of the High Court decision and the facts of the case.Conclusions: The appellant is not a works contractor for the purposes of section 80IB(10), and the Revenue's appeal on this ground was dismissed.3. SIGNIFICANT HOLDINGS'As rightly submitted by the Id. representative for the assessee when a prospective purchaser intends to purchase the flat on the 16th floor of the building, the assessee could not hand over the flat on sixteenth floor unless the sixteenth floor of the building was constructed. Some of the flats in some of the floors may remain to be sold also. But the assessee has to construct the entire building as per the approved plan and create infrastructure facilities like parking area, drainage facility, drinking water facility, fire extinguishment, lift, etc. These facilities cannot be provided by the individual purchaser of a particular flat. This Tribunal is of the considered opinion that the assessee being the owner of the land and developer of the housing project constructed the flat by creating all infrastructure facilities and sold the same to the individual purchasers. The individual purchasers cannot award any work to the assessee. In fact, it is not the choice of the individual purchasers to award work to the assessee.''The section does not specify that each projects should be on a vacant land of one acre. It also does not prohibit more than one project in land extending more than one acre. Further, the section also does not specify the size or the number of projects that are required to be undertaken on a plot having a minimum area of one acre.''The observation made by the AO is based on wrong appreciation of facts. We have furnished the audit report in Form 10CCB which includes project wise profit and loss account and copy of the same is furnished herewith. As per the project-wise profit and loss account attached to the audit report, only the income from the construction project is considered as income. The observation of the AO that interest, rent and miscellaneous income are included in the profit from the project is not correct.''Respectfully following the verdict of the Hon'ble Gujarat High Court, cited supra, we dismiss these appeals of the Revenue.'The Tribunal's final determination was to dismiss the Revenue's appeals and uphold the CIT(A)'s orders allowing the appellant's claim of deduction under section 80IB(10) for the relevant assessment years, holding that the appellant is a builder/developer and not a works contractor, the minimum land area condition is satisfied on aggregate basis, and only construction income is relevant for deduction.