TaxTMI 
TaxTMI 
2012 (10) TMI 19
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....the assessee has not maintained any separate accounts in respect of 'SMR Metro Polis' project due to which the eligible deduction u/s. 80IA could not be worked out. ITA No. 671/Hyd/2010 1. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though the semi-finished flats are registered in favour of the purchasers. 2. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though contract for further construction of flats are being entered from the purchasers of the flats. 3. The CIT(A) ought to have held that the assessee is only a contractor and hence disallowed the deduction as per the amendment to section 80IB(10). 4. The CIT(A) ought to have considered only the year end balance for disallowance of interest as on 31st March and should have considered the opening balance and the utilisation of funds on transaction to transaction basis as held in Income-tax Act, 1961. No. 21/Hyd/2011 for the A.Y. 2007-08 in the case of M/s. Ambience Properties Ltd., by Hyderabad A Bench of the Hon'ble ITAT." 3. The facts relating to the both the assessment years a....
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....ct of which the deduction is claimed, to be audited and the audit report to be tiled along with the return of income. The Assessing Officer concluded that since the appellant company did not maintained any separate accounts in respect of the eligible project it was not possible to work out the deduction available to it u/s. 80IB and therefore it was not eligible for the deduction u/s. 80IB(10) of the Act. 6. Against this the assessee went in appeal before the CIT(A) and the CIT(A) allowed the claim of the assessee u/s 80IB of the I.T. Act. Against this the revenue is in appeal before us. 7. The learned DR submitted that as can be seen from the computation statement filed along with the return of income, the assessee claimed Rs. 23,63,612/- towards deduction u/s 80IB of the IT Act. When asked as to how the assessee company is eligible for such deduction, it was submitted that the assessee was eligible for deduction u/s 80IB in respect of Residential Housing Project "SMR Metro Polis" at Madeenaguda Village, Serilingampally Mandal and Municipality, Ranga eddy District. It was also mentioned that total land area of the project is Rs 1.4 acres and the housing project was approved ....
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....built up area. The sale consideration mentioned was Rs. 6 lakhs. The Sale Deed was registered on 11.06.2006. The assessee company also entered into a "construction agreement" with Sri Niraj Kumar on 19.05.2004. As per the terms and conditions of the construction agreement, the assessee company has to carry on further construction of the flat for a consideration of Rs. 4,47,200/- The condition is that the assessee company has to under take and complete the flat which was purchased by the transferee in semi finished stage." 10. The learned DR submitted that from the above, it is clear that the transferee purchased flat along with undivided share of land in semi finished stage through the Sale Deed. The transferee entered into an agreement with the assessee company (the builder) for completion of the flat by paying substantial amount. This is an agreement executed on stamp paper without any registration. From the above, it is clear that the assessee sold the flats in semi finished stage and same are incomplete residential units. But as per Section 80-IB, the assessee company should sell only residential units if they want to make themselves eligible for claiming deduction u/s 80-IB....
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....lis" situated at Madinaguda village, Serilingampally Mandal & Municipality. It was also explained that the total land area of the project was 1.4 acres and that the housing project was approved by the Hyderabad Urban Development Authority and the Serilingampally Municipality on 6-5-1999. Built-up area of each residential unit was from 890 Sq. ft to 1400 Sq. ft. On the strength of these facts, the assessee claimed deduction u/s. 80IB(10) of the I.T Act. The Assessee executed sale deeds in favour of the purchasers of flats and registered these sale deeds with the Sub-registrar. From the narration in these sale deeds the Assessing Officer concluded that the assessee sold the flats in semi-finished stage i.e., the assessee company sold undivided share of land and together with semi-finished superstructure. On account of this fact, he concluded that the assessee did not sell residential units. He was of the view that Sec. 80IB requires sale of residential units, that a residential unit is a place where a person can live in and in that context a semi finished residential unit cannot be called a residential unit. He denied the deduction claimed by the assessee u/s. 80IB(10). 14. The AR....
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....perty for ensuring compliance with exemption provisions under tax laws, necessity to produce documents before financing/lending institutions etc. are a few of the reasons that result in early registrations of residential units in favour of buyers. In the case of the assessee, the execution of the construction agreement signifies the continued commitment to build and deliver a residential unit. The view taken by the Assessing Officer was erroneous inasmuch as the registration of a semi finished flat does not result in the conclusion of the transaction with the client but it only results in the completion of one of the phases in the process of developing and building a residential flat. It is the assessee company and none else that is entitled to the profits of the housing project whether up to the stage of registration or thereafter. In this view of the matter, the Assessing Officer was not correct in holding that the assessee is not eligible for deduction u/s. 80IB(10) as claimed by it. 16. The AR further submitted that the sequence of transaction with each buyer as explained to learned CIT(A) together with copies of the documents is as follows. The sequence of the transactions ....
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....e buyers. 20 It is clear that all the facts taken together show that the appellant company is constructing a complete residential unit. The consideration received is clearly reflected in the sale of agreement. The entire amount has been accounted for as sales by the appellant builder. The papers filed also show that the keys to the flat are handed over only after it is complete in all respects. 21. I therefore hold that the Assessing Officer erred in holding that the appellant only sold a semi-finished flat. In fact the appellant undertook to construct the flat in its entirely - the consideration which was separately determined for undivided portion of property and construction were both considered as sales made by the company. The Assessing Officer is not justified in holding that the appellant is intelligible to claim deduction u/s. 80 18(10) on this ground." 17. The AR submitted that the learned CIT(A) had undertaken a detailed examination of the progression of the transaction till the handing over of the completed residential flat to conclude that the AO erred in disallowing the claim u/s. 80IB. 18. Without prejudice to the submissions made above, it was also submit....
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.... advance the object rather than to defeat the same. It was explained before the CIT(A) that the bank funding the customers of the company provides the loan under the category of housing loan. In order to ensure the housing loan disbursed to the company is utilized for the purpose of construction of the residential house, it enters to agreement with the customer and developer (SMR) being the guarantor under the agreement. The guarantor (SMR) is required to complete the house and provide the registered sale deed to the bank after the appropriate inspection by the staff of the bank. Upon providing such registered document to the bank for mortgage, the bank discharges the guarantor company (SMR) from being guarantor to such loan disbursement. 20. The AR submitted that the CBDT, vide instruction 4/2009 dt. 30.06.2009 opined that deduction u/s. 80IB is available on year to year basis on partial completion of housing projects. This implies that semi finished houses are eligible for deduction u/s. 80IB. Copy of CBOT instruction No 4.2009 is submitted herewith. 21. The AR submitted that on the issue whether the assessee sold only semi-finished residential units which cannot be conside....
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....n the same basis. These set of accounts were also subject to audit as required by the statute. The assessee filed a revised Audit Report U/s. 80IB in Form 10CCB before the Commissioner of Income Tax (Appeals) which was forwarded to the Assessing Officer and a remand report was obtained. In his report the Assessing Officer admitted that the assessee produced soft copy of the account and the same were verified with reference to the vouchers produced and on verification has maintained separate accounts of the eligible unit. In spite of the fact that separate audit report in Form No. 10CCB was filed, the AO stated that the books of account were audited as a whole. He commented that had separate books been maintained, the assessee would have got its account audited separately. The Assessing Officer repeated his claim that separate books were not maintained. 24. The AR further submitted that The Commissioner of Income Tax (Appeals) was called upon to offer its comments on the remand report. The assessee replied stating that the AO failed to understand the method of maintaining the books of accounts when an entity has separate divisions for each kind of business. A entity may be having....
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....visions do not require maintenance of separate accounts. This has been judicially recognised in several cases. The AR cited the case of CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 220 ITR 84/87 Taxman 152 (AP) wherein the High Court has categorically held, after referring to the decisions of various High Courts, that relief (u/s. 80J in this case) cannot be denied to the assessee even though separate set of accounts were not maintained. 27. The AR submitted that regarding the maintenance of accounts relating to the eligible project, the learned Commissioner of Income Tax (Appeals) has given clear finding that the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes including indirect incomes arising to the project have been considered and that the accounts have also been audited and the requisite certificate was also filed. In the light of these factual findings, the learned Commissioner of income tax (Appeals) has held that the assessee company has fulfilled the requirement of maintenance of separate accounts and that the Assessing officer erred in concluding that the assessee is inel....
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....hdrawn. The same interpretation was made in the case of Nagarjuna Homes v. ITO [2011] 46 SOT 287/[2010] 7 taxmann.com 130 (Hyd.). In that case the Tribunal held that it is not necessary for the assessee to complete the entire project in a particular year. Even on partial completion of the project the assessee is liable for deduction u/s. 80IB of the Act. Therefore, it was concluded that the assessee can claim deduction u/s. 80IB(10) of the Act on year to year basis. 31. The stand of the Revenue with regard to semi-finished condition of flats is devoid of merit inasmuch as what is sought to be constructed and sold by the assessee is residential units and what is sought to be purchased by the individual buyer is the ownership of a residential unit and registration of flat in semi finished condition is only to facilitate the convenience of the parties and agreement for development and completion of the balance work in relation to the flats registered, is only an incidental formality to protect the interest of the parties which need not be viewed as fatal to the claim of the assessee for deduction u/s. 80IB(10) of the Act. Ultimately, the entire work from the stage of commencement t....
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.... 88 ITR 192 wherein the Court held that while interpreting the statutory provisions "if two reasonable constructions are possible, that construction which favours the assessee must be adopted." 34. When the developer is offering profit under percentage completion method, the estimated profit that the developer will have on completion of the project is spread over the earlier years and offer every year the percentage of that profit based on percentage of project completion that year. Obviously, the contention of the Department that the assessee has not maintained any separate accounts to determine the profit from the housing project cannot be upheld. The assessee claimed deduction on pro-rata basis, furnished the details as required under the provisions in Form 10CCB and if there is any doubt regarding the computation, the Assessing Officer is at liberty to verify the same. In the case of the assessee, the assessee maintained regular books itself, the assessee maintaining separate account on eligible unit in the ledger. More specifically the assessee maintained details regarding Metro Polis project. 35. The AR drew our attention to the details filed before the lower authoritie....
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.... the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act. We, therefore, find that the assessee (1) maintained separate accounts relating to the project and (2) undertaken to construct a complete residential unit. Being so, in our opinion, the findings of the CIT(A) that the assessee is entitled for deduction u/s. 80IB(10) is upheld. Since the facts relating to the assessment year 2006-07 is identical to the facts that we considered for the assessment year 2005-06, we are inclined to uphold the order of the CIT(A) for the assessment year 2006-07 on this issue relating to 80IB in this assessment year i.e. 2006-07 also. 38. In the result, revenue appeals in ITA No. 671/Hyd/2010 and ITA No. 1948/ Hyd/2011 are dismissed. 39. Now we take up the appeal in ITA No. 1921/Hyd/2011 by the assessee. The assessee raised the following grounds of appeal: "1. The order of the learned CIT(A) is erroneous in law and on the facts of the case. 2. The learned CIT(A) erred in upholding the disallowance of an amount of Rs. 12,00,000/- out of the claim made by the appellant u/s. 36(1)(iii). 3. The learned CIT(A) ought to have appreciated....
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....nd proceedings or during the appellate proceedings before him, the assessee has not tried to find out as to what is the exact interest element is involved in this regard. Except, saying that the AO has not furnished the working, no material has been furnished to counter the action of the AO. In the circumstances, he observed that the action of the AO in this regard requires no interference and dismissed the ground raised by the assessee. Against this, the assessee is in appeal before us. 42. We have heard both the parties and perused the material on record. The assessee claimed deduction of Rs. 80,36,942 towards interest paid to bank and other loans. The Assessing Officer noticed that the assessee-company is a partner in M/s. SMR Builders, a firm, and has invested Rs. 1,63,80,793 in that firm. The assessee has received a share of profit from that firm at Rs. 3,04,65,830 in the year under consideration. This income is exempted u/s. 10(2A) of the Act. The Assessing Officer was of the opinion that the proposed interest on the amount invested in the firm is not for the purpose of business and the same was disallowed. The admitted fact is that the income received from M/s. SMR Builde....
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....that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 44. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea would be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be accept....