Commissioner of Income Tax vs Sahajanand Associates

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Akil Abdul Hamid Kureshi, J.—These appeals were admitted by a common order dated April 6, 2009, along with other appeals. The following two common questions were famed in all appeals:

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction under section 80-IB(10) read with section 80-IB(1) to the assessee when the approval by the local authority as well as the completion certificate was not granted to the assessee but to the land owner and the rights and the obligations under the said approval were not transferable, and when the transfer of swelling units in favour of the end users was made by the land owner and not by the assessee?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction under section 80-IB(10) read with section 80-IB(1) to the assessee on profit derived from sale of unutilized FSI not being the element of profits derived from the business activity of development and construction of the housing project relating to the sale of tenements?"

Having heard the learned counsel for the parties, we notice that question No. 1 is covered by the decision of this court in the case of The Commissioner of Income Tax-I Vs. Radhe Developers, holding in favour of the assessee making following observations (page 422):

"Neither the provisions of section 80-IB nor any other provisions contained in other related statutes were brought to our notice to demonstrate that ownership of the land would be a condition precedent for developing the housing project. It was perhaps not even the case of the Revenue that under the other laws governing construction in urban and semi-urban areas, there was any such restriction. It is, however, the thrust of the argument of the Revenue that in order to receive benefit under section 80-IB(10) of the Act, such requirement must be read into the statute. We cannot accept such a contention. Firstly, as already noted, there is nothing under section 80-IB(10) of the Act requiring that ownership of the land must vest in the developer to be able to qualify for such deduction. Secondly, the term ''developer'' has been understood in common parlance as well as in legal sense carrying a much wider connotation. The Tribunal itself in the impugned order has traced different meanings of the term ''developer'' explained in different dictionaries, which read as under:

''a. The Webster''s Encyclopedia unabridged of the English language gives the following meaning of the term developer as:

One who or that which develops;

A person who invests in and develops the urban or suburban potentialities of real estate.

b. Oxford Advanced Learners Dictionary of Current English, Fourth Indian Edition, gives meaning of the term "developer" as persons or company that develops land.

c. Random House Dictionary of the English Language, the following can be found.

Develop

a. To bring out the capabilities or possibilities of; bring to a more advanced or effective state.

b. To cause to grow or expand.

Developer

a. The act or process of developing; progress.

b. Synonym: Expansion, elaboration, growth, evolution, unfolding, maturing, maturation.

d. Webster Dictionary, the following definitions emerge:

a. To realize the potential of;

b. To aid in the growth of strength, develop the biceps,

c. To bring into being: make active (develop a business)

d. To convert (a tract of land) for specific purpose, as by building extensively.

e. Law lexicon Dictionary: The following definitions could be seen.

Development

a. To act, process or result of development or growing or causing to grow; the state of being developed.

b. Happening''

Section 80-IB(10) of the Act thus provides for deductions to an undertaking engaged in the business of developing and constructing housing projects under certain circumstances noted above. It does not provide that the land must be owned by the assessee seeking such deductions.

It is well settled that while interpreting the statute, particularly, the taxing statute, nothing can be read into the provisions which has not been provided by the Legislature. The condition which is not made part of section 80-IB(10) of the Act, namely, that of owning the land, which the assessee develops, cannot be supplied by any purported legislative intent.

We have reproduced the relevant terms of development agreements in both the sets of cases. It can be seen from the terms and conditions that the assessee had taken full responsibilities for execution of the development projects. Under the agreements, the assessee had full authority to develop the land as per his discretion. The assessee could engage professional help for designing and architectural work. The assessee would enroll members and collect charges. Profit or loss which may result from execution of the project belonged entirely to the assessee. It can thus be seen that the assessee had developed the housing project. The fact that the assessee may not have owned the land would be of no consequence.

With respect to the question whether the assessee had acquired the ownership of the land for the purposes of the Income-tax Act and, in particular, section 80-IB(10) of the Act and to examine the effect of the Explanation to section 80-IB(10) introduced with retrospective effect from April 1, 2001, since several aspects overlap, it would be convenient to discuss the same together.

We have noted at some length, the relevant terms and conditions of the development agreements between the assessees and the land owners in the case of Radhe Developers. We also noted the terms of the agreement of sale entered into between the parties. Such conditions would immediately reveal that the owner of the land had received part of sale consideration. In lieu thereof he had granted development permission to the assessee. He had also parted with the possession of the land. The development of the land was to be done entirely by the assessee by constructing residential units thereon as per the plans approved by the local authority. It was specified that the assessee would bring in technical knowledge and skill required for execution of such project. The assessee had to pay the fees to the architects and engineers. Additionally, the assessee was also authorised to appoint any other architect or engineer, legal adviser and other professionals. He would appoint sub-contractor or labour contractor for execution of the work. The assessee was authorised to admit the persons willing to join the scheme. The assessee was authorised to receive the contributions and other deposits and also raise demands from the members for dues and execute such demands through legal procedure. In case, for some reason, the member already admitted is deleted, the assessee would have the full right to include new member in place of outgoing member. He had to make necessary financial arrangements for which purpose he could raise funds from the financial institutions, banks, etc. The land owners agreed to give necessary signatures, agreements, and even power of attorney to facilitate the work of the developer. In short, the assessee had undertaken the entire task of development, construction and sale of the housing units to be located on the land belonging to the original land owners. It was also agreed between the parties that the assessee would be entitled to use the full FSI as per the existing rules and regulations. However, in future, rules be amended and additional FSI be available, the assessee would have the full right to use the same also. The sale proceeds of the units allotted by the assessee in favour of the members enrolled would be appropriated towards the land price. Eventually after paying off the land owner and the erstwhile proposed purchasers, the surplus amount would remain with the assessee. Such terms and conditions under which the assessee undertook the development project and took over the possession of the land from the original owner, leaves little doubt in our mind that the assessee had total and complete control over the land in question. The assessee could put the land to use as agreed between the parties. The assessee had full authority and also responsibility to develop the housing project by not only putting up the construction but by carrying out various other activities including enrolling members, accepting members, carrying out modifications engaging professional agencies and so on. Most significantly, the risk element was entirely that of the assessee. The land owner agreed to accept only a fixed price for the land in question. The assessee agreed to pay off the land owner first before appropriating any part of the sale consideration of the housing units for his benefit. In short, the assessee took the full risk of executing the housing project and thereby making profit or loss as the case may be. The assessee invested its own funds in the cost of construction and engagement of several agencies. The land owner would receive a fix predetermined amount towards the price of land and was thus insulated against any risk.

By no stretch of imagination can it be said that the assessee acted only as a works contractor. The terms ''works contractor'' has been receiving judicial attention in several cases . . .

In the present case, we find that the assessee had, in part performance of the agreement to sell the land in question, was given possession thereof and had also carried out the construction work for development of the housing project. Combined reading of section 2(47)(v) and section 53A of the Transfer of Property Act would lead to a situation where the land would be for the purpose of the Income-tax Act deemed to have been transferred to the assessee. In that view of the matter, for the purpose of income derived from such property, the assessee would be the owner of the land for the purpose of the said Act. It is true that the title in the land had not yet passed on to the assessee. It is equally true that such title would pass only upon execution of a duly registered sale deed. However, we are, for the limited purpose of these proceedings, not concerned with the question of passing of the title of the property, but are only examining whether for the purpose of benefit under section 80-IB(10) of the Act, the assessee could be considered as the owner of the land in question. As held by the apex court in the case of M/s Mysore Minerals Limited, M.G. Road, Bangalore Vs. The Commissioners of Income Tax, Karnataka, Bangalore, , and in the case of Commissioner of Income Tax, Bombay etc. Vs. M/s. Podar Cement Pvt. Ltd. etc., , the ownership has been understood differently in different context. For the limited purpose of deduction under section 80-IB(10) of the Act, the assessee had satisfied the condition of ownership also; even if it was necessary.

In the case of Shakti Corporation similarly the assessee had entered into a development agreement with the land owners on similar terms and conditions. It is true that there were certain minor differences, however, in so far as all material aspects are concerned, we see no significant or material difference. Here also the assessee was given full rights to develop the land by putting up the housing project at its own risk and cost. Entire profit flowing therefrom was to be received by the assessee. It is true that the agreement provided that the assessee would receive remuneration. However, such one word used in the agreement cannot be interpreted in isolation out of context. When we read the entire document, and also consider that in form of "remuneration" the assessee had to bear the loss or as the case may be take home the profits, it becomes abundantly clear that the project was being developed by him at his own risk and cost and not that of the land owners. The assessee thus was not working as a works contract. Introduction of the Explanation to section 80-IB(10) therefore in this group of cases also will have no effect.

We may at this stage examine the ratio of different judgments cited by the Revenue. The decision in case of Faqir Chand Gulati Vs. Uppal Agencies Pvt. Ltd. and Another, was rendered in the background of the provisions of the Consumer Protection Act. In the case before the apex court, the land owner had entered into an agreement with the builder requiring him to construct apartment building on the land in question. Part of the constructed area was to be retained by the owner of the land. In consideration of the land price remaining area was free for the builder to sell. When the land owner found series of defects in the construction, he approached the Consumer Protection Forum. It was in this background the apex court was considering whether the land owner can be stated to be a consumer and the builder a service provider. It was in this background that the apex court made certain observations. Such observations cannot be seen out of context nor can the same be applied in the present case where we are concerned with the deduction under section 80-IB(10) of the Act. . .

Under the circumstances, we are of the opinion that the Tribunal committed no error in holding that the assessees were entitled to the benefit under section 80-IB(10) of the Act even where the title of the lands had not passed on to the assessees and in some cases, the development permissions may also have been obtained in the name of the original land owners."

Accordingly, question No. 1 is answered in favour of the assessee and against the Revenue.

Question No. 2 pertains to the deduction claimed by the assessee on the profit derived from sale of unutilized FSI in the course of development and construction of a housing project. The basic figures in all the appeals are as under:

Such question came to be considered in a recent judgment dated March 5, 11, 2014 The Commissioner of Income Tax Vs. Moon Star Developers, . The court made the following observations (page 638):

"Having heard the learned counsel for the parties and having perused the documents on record, we may briefly recapitulate the facts. The respondents-assessees were engaged in development of housing projects. In the case of M/s. Moon Star Developers, against the total FSI of 15312 sq. metres available for construction, the area of only 3573 sq. metres was utilised. The residential units were constructed only on the ground floor carrying no further construction. Such residential units were sold and the entire surplus was claimed as profit derived from activity of developing housing project deductible under section 80-IB(10) of the Act. Facts, with minor differences, are similar in all the cases.

Section 80-IB(10) of the Act pertains to deduction in respect of profit and gains from certain activities. Sub-section (10) thereof, as is well known, grants 100 per cent, deduction on the profit of an asses-see being an undertaking developing and building housing projects on the profit derived from such housing project subject to conditions laid down therein. Sub-section (10) of section 80-IB as it stood at the relevant time read as under:

''(10) The amount of profits in case of an undertaking developing and building housing projects approved before the 31st day of March 2005 by a local authority, shall be hundred per cent, of the profits derived in any previous year relevant to any assessment year from such housing project if,--

(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998;

(b) the project is on the size of a plot of land which has a minimum area of one acre; and

(c) the residential unit has a maximum built-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place.''

We may notice that subsequently an Explanation came to be added at the end of the said sub-section by Finance (No. 2) Act of 2009 but with effect from April 1, 2001, which the Explanation read as under:

''Explanation.--For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government).''

In the notes on clauses explaining the introduction of section 80-IB of the Act, in the context of sub-section (10) thereof, it was stated as under:

''The provision also seeks to provide that for approved housing projects the profits of which are fully deductible, the built-up area in regions other than outside twenty five kms. of municipal limits of Delhi and Mumbai, the built-up area of the residential units does not exceed one thousand five hundred square feet.''

In the Budget Speech for the financial year 1999-2000, the Finance Minister in the context of tax benefits under section 80-IA of the Act on housing projects, while increasing the maximum limit of the built up area of the units from 1000 sq. ft. to 1500 sq. ft. at all locations except Mumbai and Delhi, stated as under (see [1999] 236 ITR (St.) 1, 24):

''98. The second element of this incentive package relates to the scheme for housing projects for enjoying a tax holiday under Section 80-IA of the Income-tax Act. The existing provision, inter alia, requires that the built-up are of dwelling units should not exceed 1000 sq. feet. There have been many representations that in towns other than Mumbai and Delhi, the land cost is relatively less, and therefore, for the same capital expenditure investors can afford to purchase dwelling units of slightly larger areas. In view of this, it has been represented that the ceiling on built-up areas for dwelling units in approved projects be increased from 1000 sq. ft. to 1500 sq. ft. at all locations except Mumbai and Delhi. I propose to accept this suggestion and make suitable modifications in the law. This amendment in the scheme for treating housing projects as infrastructure will, I believe, also give a significant fillip to construction activities in the smaller towns.''

The said provision was added for easing the housing problem particularly for the middle income group in urban areas. In this context, in the decision of this court in Radhe Developers, it was observed as under (page 421 of 341 ITR):

The essence of sub-section (10) of section 80-IB, therefore, requires involvement of an undertaking in developing and building housing projects approved by the local authority. Apparently, such provision would be aimed at giving encouragement to providing housing units in the urban and semi-urban areas, where there is perennial and acute shortage of housing, particularly, for the middle income group citizens. To ensure that the benefit reaches the people, certain conditions were provided in sub-section (10) such as specifying date by which the undertaking must commence the developing and construction work as also providing for the minimum area of plot of land on which such project would be put up as well as maximum built-up area of each of the residential units to be located thereon. The provisions nowhere required that only those developers who themselves own the land would receive the deduction under section 80-IB(10) of the Act.''

It can thus be seen that deduction under section 80-IB(10) of the Act was granted to give fillip to the construction of residential units for persons of middle income group in urban and semi-urban areas of large cities and even small towns where there would be dearth of supply of such residential units. Some of the essential conditions for claiming such deduction are:

(a) that the housing project should be approved by the local authority before a specified date (which was extended from time to time);

(b) that the undertaking commenced development and construction of the housing project after a specified date;

(c) that the project is on the size and plot of land which is of minimum of one acre;

(d) That each residential unit has a maximum built-up area of 1500 sq. feet barring cities of Mumbai and Delhi and within a radius of 25 km. of municipal units of such cities where such area should not exceed 1000 sq. ft.

Further conditions were later on added which included restriction of not allotting more than one residential unit to any person who is not an individual. In case of allotment of residential unit to an individual, it was further provided that no other residential unit in such housing project be allotted to such individual or his/her spouse, minor children or Hindu undivided family if such individual is a karta and any person representing such individual, the spouse or the minor children of such individual or the Hindu undivided family in which such individual is the karta.

At the relevant time, these later conditions were not in operation. Nevertheless, what can be seen from the conditions which prevailed at the relevant time is that deduction was aimed at providing 100 per cent, tax exemption to an undertaking which was involved in developing and building of housing projects in order to make affordable residential units available for middle income group citizens in urban and semi-urban areas. To ensure even distribution of such units and to avoid hoarding, additional conditions in the form of restriction on allotment to the same person or his near relatives were added.

In this context, we may examine, whether the decision of the Assessing Officer to treat the income of the assessees from sale of FSI separate and excludable from the purview of section 80-IB(10) of the Act? The concept of FSI, is a well-known one. Local authorities, such as corporations, municipalities and panchayats, frame regulations for regulating activities of development of lands within their local areas. Such regulations are popularly referred to General Development Control Regulations (GDCR). In addition to providing different zones controlling development activities in different areas for regulated and orderly development of urban areas, these regulations also provide for various other details such as maximum height up to which the construction can be carried out, maximum area on the ground floor or on other floors which can be covered under construction, margin to be left on sides, parking facilities to be provided depending on the nature of building and most importantly, the maximum construction that can be carried out on a given piece of land. The last element, namely, the ratio of the land area versus the maximum construction permissible on such land, is referred to as floor space index (FSI for short). It is this FSI which will decide the maximum area of construction that can be carried out on any given piece of land. It is, therefore, not difficult to appreciate that besides several other factors of situational and other advantages and disadvantages, FSI permissible for the land in question would be an important factor in the context of development of the land. Given all other factors same, higher the FSI, the greater the value of the land.

It is in this context, we have to appreciate the underutilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the earlier portion of the judgment, we can gather that such utilization of the FSI by the assessees ranges from the minimum of 11.14 per cent, of the full FSI available to a maximum of 65.81 per cent. In majority of the cases, the assessees have covered barely about one fourth or one-third of the permissible FSI.

For any commercial activity of construction, be it residential or commercial complex the maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built-up area. It can thus be seen that given the rate of constructed area remaining same, non-utilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25 per cent, of FSI and sells the unit leaving 75 per cent. FSI still available for construction, he obviously works out the sale price bearing in mind this special feature.- Let us compare two instances. In the same area two residential schemes are developed. Both have residential units of 1500 sq. feet. In one scheme 100 per cent. FSI is used in another 25 per cent. FSI is used and 75 per cent, is passed on to the buyer of the unit. The price of the unit in the later scheme would for apparent reason be considerably higher than the former because the buyer there gets not only a residential unit of 1500 sq. feet, he also gets the right to build further construction of 4500 sq. feet. Whether this includes open land or not is not important. In terms of construction business, it is equivalent to sale of land. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from the sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer.

It is true that section 80-IB(10) of the Act does not provide that for deduction, the undertaking must utilize 100 per cent, of the FSI available. The question, however, is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction under section 80-IB(10) of the Act on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80-IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80-IB(10) of the Act. This is not to suggest that for claiming deduction under section 80-IB(10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80-IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80-IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify underutilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80-IB(10) of the Act and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the asses-sees have made any special ground for non-utilization of the FSI.

The contention of the counsel for the assessee that as long as there has been 100 per cent, utilization of the maximum permissible area on the ground floor, deduction under section 80-IB(10) of the Act cannot be declined, cannot be accepted. As noted earlier, in the case of M/s. Moon Star Developers and many other assessees, such full utilization of the ground floor area available for construction resulted into barely 20 per cent, to 25 per cent, of the FSI being used, remaining more than 75 per cent, being left unused.

What is available for deduction under section 80-IB(10) of the Act is the profit of an undertaking derived from developing and building a housing project. Mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits cannot be said to have been derived from such housing project. The terms ''derived from'', ''arising out of and ''attributable to'' are often times used in the context of income tax in different connotation. In the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, , the assessee was engaged in processing prawns and other sea food which it exported. In the process, the assessee earned import entitlements to use itself or sell the same to others. During the year under consideration, the assessee included such sale proceeds for claiming relief under section 80HH of the Act, in case of any profit or gain derived from an industrial undertaking in backward areas. In this context, the apex court held that the import entitlements cannot be said to be derived from the industrial undertaking of the assessee. For the application of the words derived from, there must be a direct nexus between the profits and gains and the industrial undertaking and in the case on hand, the nexus was not direct but only incidental."

In the result, question No. 2 is answered in favour of the Revenue. The judgment of the Tribunal stands reversed to that extent. The appeals are allowed in part and disposed of.