Income Tax Appellate Tribunal - Delhi
Dlf Commercial Developers Ltd.,, New ... vs Department Of Income Tax on 13 December, 2013
1 ITA No. 2503/Del/13
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'B' NEW DELHI
BEFORE SHRI G. D. AGRAWAL, VICE PRESIDENT
AND
SHRI A. D. JAIN, JUDICIAL MEMBER
I.T.A .No. 2503Del/2013
(Assessment Year: 2008-09)
DCIT vs M/s DLF Commercial Developers
Circle 10 (1) Ltd.
New Delhi New Delhi
(RESPONDENT)
(APPELLANT)
Appellant by Dr. Sudha Kumari, CIT DR
Respondent by Sh. R. S. Singhvi, CA
ORDER
PER A. D. JAIN, JM
This is Department's Appeal for A.Y 2009-10 contending that the Ld. CIT(A) was not justified in deleting the addition of Rs.4003367733/- made on account of disallowance of deduction u/s 80IAB of the I.T Act and in treating the income from sale of assets as business income against the capital gain assessed by the AO.
2. The facts as per the record are that the assessee company was incorporated on 1/1/2002. This company has been engaged in the business of developing, operating and maintaining real estate projects, which includes development of SEZ and all related infrastructure. The assessee company filed its return of income showing an income of Rs.291,48,67,717/-. Thereafter, the assessee company filed a revised return of income declaring in income of Rs.3,50,69,770/-
2 ITA No. 2503/Del/13after claiming deduction of Rs.400,33,67,733/- u/s 80IAB of the I.T Act. The revised return was filed on account of demerger of non SEZ activities from the assessee company w.e.f. 1/4/2008, as per scheme of amalgamation and approval granted by Delhi High Court. In the assessment order passed for the year under consideration, the Assessing Officer disallowed the deduction claimed by the assessee u/s 80-IAB of the I. T. Act amounting to Rs. 400,33,67,733/- for developing special economic zone at Hyderabad.
3. The Ld. CIT(A), by virtue of the impugned order, deleted the disallowance made by the AO.
4. The Ld. DR has contended that the Ld. CIT(A) has erroneously deleted disallowance/addition correctly made by the AO, wrongly treating the incomes of the assessee from the sale of assets as business income, whereas the same has rightly been assessed by the AO as capital gain.
5. The Ld. Counsel for the assessee, on the other hand, has placed strong reliance on the impugned order. It has been submitted that the matter stands squarely covered in favour of the assessee by the decision dated 13/12/2013 of the Delhi Bench of the Tribunal in the assessee's own case for the immediately preceding assessment year, i.e. A.Y, 2008-09, in ITA No. 2560/Del/13 ( copy placed on record). Reliance has also been placed on the order dated 21/2/2014, passed by the Delhi Bench of the Tribunal in ITA Nos. 5469 & 5366/Del/12 (A.Y 2008-09) and ITA Nos. 5470 & 5367 /Del/12 (A.Y 2008-09), in the case of DLF Info City Developers Chennai Ltd., a sister concern of the present assessee. The Ld. CIT(A), while deleting the disallowance, has held, inter-alia, as follows:-
" 7.3 I have considered the submission of the appellant, remand report, rejoinder to remand report and of CIT(A), Faridabad order. it is seen that appellant is engaged in the business of real estate and the development of such commercial projects is the main object of the appellant. The appellant had been following the Percentage of Completion Method 3 ITA No. 2503/Del/13 (POCM) method for recognizing revenue of various projects as per the Accounting Standards issued by the Institute of Chartered Accountants of India and it has been accepted by the department since inception.
It is seen that the appellant has been following mercantile system of accounting and has been recognizing the revenue in accordance with the Accounting Standard AS-7 & AS-19 issued by the Institute of Chartered Accountants of India. It is now a judicially recognized preposition that in case of contracts or business of construction, in order to ascertain the income, one need not wait till the contract is completed. The Assessing Officer however cannot apply any other method for recognizing the revenue and has to accept the accounting policy followed by the appellant, therefore, when the appellant has recognized the income following percentage of completion method as per AS-7 issued by the Institute of Chartered Accountants of India, the profits derived on account of development considerations of bare shells would constitute the profits and gains derived from business of developing Special Economic Zone within the meaning of Section 80IAB of the Act.
The accounting treatment of warm shells by the co-developer in its books of accounts as an asset would not make any difference as far as the appellant is concerned. The admitted fact remains tht the appellant has computed its income under the Percentage of Completion Method (POCM) which is prescribed for calculating profits and gains of business of real estate developer under the mandatory accounting standard issued by the Institute of Chartered Accountants or India. The Assessing Officer's observations by referring to the classification of assets shown by the co- developer was a sale of capital asset subjected to capital gain is against the very principle of the Act when the bare shell buildings were neither part of capital work in progress nor fixed assets of the appellant. A perusal of the assessment order reveals that the Assessing Officer has not categorically held the income of the appellant under the head 'Capital Gains' as no such specific addition has been made. The Assessing Officer has only made his observations without prejudice to his decision in disallowing the entire claim of deduction u/s 80IAB.
It is seen that observations of the Assessing Officer are not based on correct appreciation of facts. The appellant has shown work in progress in the business of construction and by no stretch of imagination work in progress can be treated as capital asset. The stock in trade is specifically excluded from the definition of 'Capital asset'. The stock in trade is specifically excluded from the definition of 'Capital Asset' u/s 2 (14) of the Act. The development of the bare shell buildings in the SEZ and 4 ITA No. 2503/Del/13 subsequent transfer thereof cannot be considered as giving rise to short term capital gain, considering the business of the appellant and accounting treatment adopted in the books of account irrespective of the treatment by the co-development in the books of accounts as fixed assets. The observations of the Assessing Officer on this issue are erroneous, legally untenable and misdirected in holding that the income can be assessed as capital gains. I have gone through the judicial rulings relied upon by the appellant in support to its claim which are squarely applicable to the facts of the appellant's case. Therefore, the observation of the Assessing Officer of assessing the income from sale of bare shell and cold shell as income from capital gain is erroneous and not based on correct appreciation of facts. Hence, the findings of the Assessing Officer are rejected.
6. The Ld. CIT(A), it is seen, has also taken into consideration the following facts:-
"The appellant has contended that the Assessing Officer has exceeded his jurisdiction in disregarding the approvals granted to the appellant by the Board of Approvals constituted under the SEZ Act. In this regard, it is noticed that:-
The appellant was granted approval by the Ministry of Commerce & Industry (SEZ Section) for setting up a sector specific SEZ for IT/ITES sector at Rangareddy District, Hyderabad (Andhra Pradesh). An area of 10.617 Hectares situated in Gachibowli Village, Shirlingampali Mandal, Rangareddy District in state of Andhra Pradesh was notified by the Ministry of Commerce & Industry vide notification dated 26/4/2007.
The authorized operations to be undertaken by the appellant were also approved by a separate approval by the Govt. of India, Ministry of Commerce & Industry (SEZ Section) vide letter dated 21/6/2007. The appellant entered into a MoU dated 29/11/2006 (wrongly mentioned as 29/11/2007 in the MOU which was rectified by corrigendum dated 6/11/2007) with the co-developer and filed the same for approval before the Board of Approvals.
An addendum thereto was also entered into amending the terms of the original MOU on 29/11/2006. The appointment of co-developer M/s DLF Assets Pvt. Ltd. was approved by the Ministry of Commerce vide their letter dated 1/5/2007.
The authorized operations to be taken up by the co-developer in the said Hyderabad SEZ was also approved by the Ministry of Commerce & 5 ITA No. 2503/Del/13 Industry (SEZ Section) vide letter dated 18/6/2007 which included an operation of development of office space (Warm Shell). In order to consolidate the MOU and addendums thereto a co-developer agreement was entered into between the appellant and DLF Assets Pvt. Ltd on 20/3/2008 which was also filed before the Board of Approvals and the approval was also granted to this agreement vide letter dated 1/6/2009 by the Ministry of Commerce & Industry (SEZ Section).
The appellant has filed all these approvals and notifications which are contained in the paper book. In support of its claim the appellant has also filed copies of POCM chart, a certificate from the Chartered Account in Form No. 10CCB which is placed in the paper book.
It is seen that as per the MOU dated 29/11/2006 the developer agreed to appoint DLF Assets Pvt. Ltd as co-developer for developing, operating and maintaining the said SEZ by granting DAPL the exclusive right to execute a part of the authorized operations and the co-developer has agreed to fund and execute the said authorized operations specifically allocated to it by the developer.
In this MOU it was stated that the developer will create in favour of the co- developer in the said property and building thereon a 49 years lease on terms to the mutually agreed upon. The co-developer shall be entitled to use the said property for carrying out co-developer operations. Pursuant to the completion of building, the co-developer will be entitled to identify customers for occupying the built up units within the project and shall have the right to sub-lease the units in the project or part thereof. The co- developer shall be treated as owner of the additions, modifications equipments etc. which are installed by the co-developer in building or project.
This MOU was approved by the Ministry of Commerce & Industry, Deptt of Commerce (SEZ Section) vide letter dated 1/5/2007 and the MOU was made part of the approval letter as mentioned in para-2 of the said letter. It is evident from the above that there was a clear approval of both the appellant and the co-developer fro development, operation and maintenance of aforesaid SEZ wherein the initial arrangement by the appellant was to carry out part development and lese out the land and building thereon to co-developer for a lease period of 49 years. However, it has been stated that, in the addendum to the MOU certain amendments were made to the MOU which inter alia include clause 2.3 wherein the phrase 'Developer will create, in favour of the co-developer in the said property and the buildings there upon, a 49 years lease.......' was replaced by lease.......' and the bare shell buildings constructed by the appellant 6 ITA No. 2503/Del/13 were proposed to be handed over to the co-developer for a development charge which was fixed at Rs.4845/- per Sq. Ft.
In the 32nd meeting of the Board of Approvals held on 23/2/2009 four proposals of DLF Group were discussed. In this meeting, the representative of department of revenue pointed out that these proposals have already been approved and the amendments in the earlier approvals are now being filed after a gap of considerable time. The fresh approval may be sought if any material changes are made in the agreements. Accordingly, the Board decided to defer the proposals and decided that these cases can be examined on file.
Subsequently, the appellant filed a definitive co-developer agreement executed with the co-developer dated 20/3/2008 wherein the development consideration was finally revised to a minimum of Rs.5250/- per Sq.Ft. of the built up space within the SEZ Buildings vide clause 2.6 of the agreement."
6.1 The Ld. CIT(A), it is seen, has further taken into consideration the following facts:-
" Consequent upon the decision taken in the 32nd meeting of the Board of Approvals on 23/2/2009 to examine the matter on file, the note sheet was prepared, which the appellant has filed and accepted as additional evidence collected by the appellant under the Right to Information Act. It is seen from the additional evidences filed by the appellant that the matter was referred to director (ITA-1) CBDT pursuant to objections raised by the representative of the Department of Revenue (DOR) in the 32nd meeting after the Board of Approvals clarifying the position as under:-
1. The developer is not selling the land to the co-developer but is only leasing it out.
2. Normally after the land is released, the co-developer will construct the building. In this case the developer has already constructed the shell which is being transferred to the co-developer for a consideration. The co-developer will finish the shells, leased it out to the units and collect rentals. In other cases also, the same activity is carried, the only difference in this case is the ready availability of the shells.
3. The transfer and hand over deed is in respect of the shells which the co-developer cannot proceed further.7 ITA No. 2503/Del/13
4. At no stage the developer sells the land to the co-developer and at the end of the lease period the land reverts to the developer. The developer continues to be responsible for the developer operations.
5. The co-developer will have all the rights and exclusive possession of the SEZ buildings (which are being developed by him) such are necessary to execute the co-developer operations.
In principle the Department of Commerce approved the revised co- developer agreements.
The matter was referred to the Central Board of Direct Taxes for their comments vide letter dated 8/4/2009. The director (ITA-1, CBDT vide letter dated 26/5/2009 communicated to the department of commerce vide paras 3 & 4 as under:-
"3. An examination of the agreements made available shows the developers propose to lease land to the co-developers for a period of 30 years or more in exchange for payment of substantial amount of consideration being paid on lump sum basis. The owner proposes to transfer cold shell of the building on handover basis which would be further developed and maintained it by the co-developer.
4. The issue regarding transfer of land by developers on an indefinite/long lease which virtually amounts to a sale has been brought to the notice of DOC on earlier occasions. After protracted discussion on the issue and also taking into account the advice of Ministry of Law, it was agreed to approve such proposals subject to the inclusion of disclaimer in the letter of approval that the approval will have no bearing on tax treatment of income arising out of such transaction which will be decided as per the relevant provisions of the Income Tax Act, 1961."
After taking into account the above correspondences the approval letter was issued to DLF Assets Pvt. Ltd. on 1/6/2009 conveying the approval, relevant clauses of which read as under:-
"(2) Your revised agreement dated 20/3/2008 entered into with the developer of the aforesaid sector specific special economic zone of DLF Commercial Developer Limited for providing common facilities shall form part of this approval.
(3) (xvii) Approval given by Board of Approvals for co-developer for particular terms and conditions of lease agreement will not have any bearing on the treatment of the income by way of lease rentals/down payment/premium etc. for the purposes of assessment under the prevalent Income Tax Act and Rules. The Assessing Officer will 8 ITA No. 2503/Del/13 have the right to examine the taxability of these amounts under the Income Tax Act."
7. The Ld. CIT(A) also observed that as per the qua letters dated 18/1/2011 & 20/1/2011 issued by the Ministry of Commerce, Deptt of SEZ, as filed by the assessee, the assessee and the co-developer had performed the authorized operations duly approved by the Board of Approvals. It was observed that these letters had been field before the AO in the assessment proceedings; that the letter dated 20/1/2011 made it clear that the assessee could transfer bare shell and cold shell buildingsto the co-developer by executing transfer and handing over deed and in consideration thereof, the co-developer would make payment of such amount as development consideration in favour of the developer, as agreed to between the parties; and that in view of such clarification, the AO's observation that the transfer of bare shell buildings by the assessee to the co-developer was not an authorized operation, was not based on the correct appreciation of the documents filed by the assessee; and that from the said clarifications issued by the Ministry of Commerce, as also the correspondence between the Ministry of Commerce and the CBDT, there remained no doubt that the disclaimer referred by the AO in the approval letter dated 1/6/2009 was applicable only to the transaction of transfer of land in the guise of long term lease by receiving lease rentals/down payments/premium commensurate with the sale value of the land, as was evident from para 4 of letter dated 26/5/2009 sent by the Director (ITA -1) CBDT to the Deptt of Commerce and Industries. The Ld. CIT(A) observed that therefore, the disclaimer vide point 3 (XVII) of the co-developer approval letter, on which the AO had relied, was not applicable to the transfer of bare shells and cold shells for a consideration; that the transfer of bare shells and cold shells for a consideration had been approved as authorized operations as per the approval issued by the B.O.A; that the Ministry of Commerce had, in their clarification 9 ITA No. 2503/Del/13 dated 18/1/2011 explicitly clarified that all leases of land were subject to the general condition contained in Para 3 (XVII) of letter dated 1/6/2009 and this general condition was applicable to the terms and conditions of the land lease agreement only.
8. It was on the basis of the above that the Ld. CIT(A) observed as under:-
" Keeping in view, the discussions above it is clear that the appellant has been duly approved by the Board of Approvals as a developer, the land in Village Gachibowli Shirilingampalli Mandal, Rangareddy District in the state of Andhra Pradesh was notified. The contents of letter dated 1/6/2009 applies only to transfer of land or one time lease rental/one time down payment/premium etc. received against eh land as clarified by the Ministry of Commerce in the clarification dated 18/1/2011 and correspondence made between the Ministry of Commerce and Department of Revenue as filed by the appellant during the course of appellate proceedings as additional evidence.
In view of the facts discussed above, I agree with the submission of the appellant that the disclaimer condition mentioned in the co-developer approval letter dated 1/6/2009 is primarily put in by the Board of approvals in the approvals to put a curb on the wrong practices of leasing the land for long periods and receiving onetime payment in the form of lease rental/down payments/premiums etc. which tantamount to sale of land in the guise of long term lease. The appellant has obtained requisite approval from the Board of Approvals by disclosing all facts. The entire controversy as to whether the transfer of bare shell buildings to the co- developer was an authorized operation has been set at rest by the correspondents made between the Ministry of Commerce and Department of Revenue and also by clarification letters issued dated 18/1/2011 & 20/1/2011 by Ministry of Commerce. The appellant has made an agreement with the co-developer giving the land on lease for 49 years and yearly lease rentals are being received by the appellant. There is no lumsum payment in the form of lease rentals/down payments/premiums etc. received by the appellant against the land during the year. I as satisfied that all the conditions as required to be satisfied under the SEZ Act/Rules are fulfilled and the appellant is an approved developer for all intent and purpose of Section 8oIAB of the Act. Consequent upon approval granted by the Board of Approvals for the transfer of bare shells to the co- developer for a consideration is an authorized operation and income 10 ITA No. 2503/Del/13 derived from such transfer of cold shell or bare shells is eligible for deduction u/s 80IAB of the Income Tax Act, 1961.
Regarding the observation of the Assessing Officer that the land and building are one composite and cannot be separated, the appellant has stated that the Indian Law recognizes separate ownership of the land and building and this position has been recognized by various High Courts including the Hon'ble Supreme Court wherein it has been held that the maxim, what is annexed to the soil goes with the soil has not been accepted as an absolute rule of law of this country."
9. Accordingly, the Ld. CIT(A) held and, in our considered opinion, rightly so that the assessee had not violated any of the conditions laid down in the SEZ Rules before us, the Department has not been able to refute these well reasoned observations and findings of fact recorded by the Ld. CIT(A).
10. Too, as correctly contended on behalf of the assessee, the matter is covered in favour of the assessee by the two Tribunal decisions, one in the case of the assessee itself, for the immediately preceding assessment year and the other in the case of DLF Info City Developers (Chennai Ltd.) a sister concern of the assessee. In the assessee's own case for A. Y 2008-09, the Tribunal has, inter- alia, observed as follows:-
" 9.4. It is clearly emerges that by the end of the 263 hearing the CIT brushed aside the consideration of issue by holding that he has no sufficient time to go into the material, therefore, the assessment is set aside to the assessing Officer who will carry out detailed inquiry. In our considered view, CIT failed to discharge his statutory duty and instead of taking a clear call and demonstrating errors made by Assessing Officer and prejudice caused to the revenue, the buck has been passed on to assessing officer by setting aside assessment order, which is against the letter and spirit of provisions of Section 263. Where the authority fails to carry out its statutory obligation, the order cannot be held as tenable and is liable to be quashed.
9.5 Apropos the issue of sale of bare shell buildings being authorized activity, it is amply clear that the SEZ Act authorized activities include construction of bare shell/cold shell/warm shell buildings and transfer thereof. BOA has approved it and clarified the same. There is enough material on the record to hold that the transfer of bare shell buildings to 11 ITA No. 2503/Del/13 co-developers constitute authorized activity. Thus, we see no error on any count as held by CIT in the order of assessing officer allowing deduction u/s 80-IAB."
11. In the case of the sister concern of the assessee, DLF Info City Developers, the Tribunal has held, inter-alia, Page 40 to 41.
"36. Thus, as discussed above, the admitted and undisputed fact remain that the assessee has been duly approved by the BOA as a developer, the land owned by the assessee at Chennai was notified by the Govt. of India for establishment of SEZ, the authorized operations to be under taken in the said SSEZ were approved by BOA, the co-developer agreement dated 20/3/2008 executed with the co-developer contemplating transfer of "bare shells" to the co-developer has been duly approved by the BOP; the DAPL has been approved as a co-dev eloper, the transfer of bare shell to the co- developer has been approved as an authorized operation b y the BOP and the disclaimer contained in Clauses 3(XVII) of the approval letter dated 1/6/2009 applies only to the lease of land as clarified by the approval letter dated 1/6/2009 applies only to the lease of land as clarified by the Ministry of Commerce in the clarification dated 18/1/2011 and not to the transfer of bare shells. Noting these material facts we are of the view that the Ld. CIT(A) has rightly agreed with the plea of the assessee that the tax disclaimer condition mentioned in t he co-developer approval is primarily to be in by the BOA in the approvals granted to put a curb on the wrong practice of leasing the land for long periods and receiving one time payment in the form of lease rentals/down payments/premium etc which tantamount to sale of land in the guise of long term lease. The assessee has obtained requisite approvals from the BOA in most transparent manner by disclosing not only development consideration but also the basis for determining the same. The entire controversy as to whether transfer of bare shell buildings to the co-developer was an authorized operation has been set at rest by further clarifications dated 18/1/2011 and 201/2011 issued by the Ministry of Commerce. The BOA, being the statutory process of law after duly considering and examining all the facts and documents on record in accordance with relevant provisions of SEZ Act and SEZ Rules. Thus, the consequential benefits that is available to a developer under the Income Tax Act cannot be denied. The AO does not have any jurisdiction to question the validity or the legality of authorized operations which have been approved by the BOA/Central Government 12 ITA No. 2503/Del/13 Section 27 of SEZ Act provides for modification of Income Tax Act to the extent of second schedule of SEZ Act.
Page 42.
" 37. The second schedule of SEZ Act contends bare text of certain provision including Section 80IAB to be incorporated in the Income Tax Act present to the Section 80IAB (having the same in as mentioned in SEZ Act) has been broadly incorporated into the Income Tax Act. Section 51 of SEZ Act having an over riding effect over any other law, reads as under:-
"51.(1) The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act."
38. Thus, it is clear from the above that the provisions of SEZ Act shall have over riding effect even if anything inconsistent is contained in the Income Tax Act. The SEZ Act has been enacted containing the specific legislation to be brought in other statutes. When the terms like SEZ, authorized operations, developers etc have been specifically defined under the SEZ Act, it is not open to any authority to relook at the meaning of terms already defined under the SEZ Act."
Page 45.
"39. We thus find that assessee is a developer under the SEZ Act and is in the business of developing a SEZ, the SEZ has been notified on the first day of April 2005 under the Special Economic Zone Act 2005; and the profits have been derived from the business of development, operation and maintenance of SEZ. We thus fully agree with the finding of the Ld. CIT(A) that all the conditions as required to the satisfied under the SEZ Act/ Rules are fulfilled and the assessee is approved developer for all the intent and purposes of Section 80IAB of the I.T. Act. Consequent upon approval granted by the BOA for transfer of bare shell to the co-developer, the profits arising to the assessee from such an authorized transaction are eligible for deduction u/s 80IAB of the Act."
Page 45 "40. Thus, we find that the issues discussed and view suppressed thereon hereinabove in the preceding paragraphs will cover the issue raised in additional ground of the appeal preferred by the Revenue and the issues raised in Ground Nos. 6,7,8,9,10 & 14 of the Revenue's appeal. In result all these grounds of the appeal of the revenue are rejected.
41.Consequently, appeal preferred by the assessee is allowed and that of the Revenue is dismissed."
13 ITA No. 2503/Del/1312. The assessee's case, it is seen, also finds support from the above Tribunal decision in the case of its sister concern, Delhi Info City Developers (Chennai Ltd) for A. Y 2007-08.
13. In "Commissioner of Income Tax Vs. Tata Communication Services Ltd, in ITA No. 531/2011, vide order dated 8/82011 (copy placed on record), the Hon'ble Jurisdictional High Court of Delhi has held that deduction u/s 80IA of the Act cannot be denied after having been granted in the first year of claim, as the restraint of Section 80 IA (3) cannot be considered for every year of claim of deduction, but can be considered only in the year of formation of the business.
14. No decision contrary to the above case laws has been put forwarded before us by the Department.
15. In the above discussed facts and circumstances, we do not find any error in the action of the Ld. CIT(A) in deleting the disallowance of deduction u/s 80 IB of the Act, as claimed by the assessee. The order of the Ld. CIT(A) is, accordingly, upheld and the grievance of the Department stands rejected.
16. In the result, the appeal filed by the Department is dismissed.
The order is pronounced in the open court on 17th of April 2014.
Sd/- Sd/-
(G. D. AGRAWAL) (A.D. JAIN)
VICE PRESIDENT JUDICIAL MEMBER
Dated: 17/04/2014
*R. Naheed*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
14 ITA No. 2503/Del/13
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI