Income Tax Appellate Tribunal - Bangalore
M/S Sobha Developers , Bangalore vs Department Of Income Tax on 13 December, 2011
Page 1 of 15 1 ITA Nos.1026 & 1027/Bang/2010
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'B'
BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA Nos.1026 & 1027/Bang/2010
(Asst. Years 2006-07 & 2007-08)
The Additional Commissioner of Income-tax,
(LTU), Bangalore. - Appellant
Vs
M/s Sobha Developers,
42, II Floor, Dickenson Road,
Bangalore-58. - Respondent
PA No.AABCS7723E
Date of hearing : 13/12/2011
Date of pronouncement : 16/12/2011
Appellant by : Smt. Archana Chowdhry, CIT-II
Respondent by : Shri S Venkatesan, C.A.
ORDER
PER GEORGE GEORGE K :
These appeals instituted by the department are directed against the consolidated order of the CIT(A)-LTU, Bangalore dated 30/06/2010.. The relevant asst. years are 2006-07 and 2007-08.
2. Since common issues are involved in these appeals and they relate to the same assessee, they are disposed off by this consolidated order.
Page 2 of 15 2 ITA Nos.1026 & 1027/Bang/2010ITA No.1026/Bang/2010 (AY 2006-07)
3. The revenue has raised five grounds of appeal. Ground Nos.1, 5 and 6 are general in nature and no specific adjudication is required and hence, they are dismissed as infructuous.
3.1 Remaining effective grounds, namely, ground nos.2, 3 and 4 reads as follows:-
2) The CIT(A) has erred in not holding allocation of common expenses in ratio of turnover of a project to the total turnover of the company for 80IB deduction.
3) The CIT(A) has erred in holding "percentage of completion method" for allocating overhead expenses for claiming 80IB deduction.
4) The CIT(A) has erred in allowing 80IB deduction in respect of profit on sale and development of land.
3.2 Brief facts in relation to the above grounds are as follows:-
The assessee is a company. It is engaged in the business of development of real estate and execution of construction contracts. Return of income for the asst. year 2006-07 was filed on 29.11.2006 declaring an income of Rs.54,18,32,997/- after claiming deduction u/s 80IB(10) of the Act amounting to Rs.56,80,76,159/-. The assessment was completed on 24/12/2008 fixing the total income at Rs.70,65,43,646/-. The AO, while completing the assessment, recomputed the deduction u/s 80IB of the Act and restricted the same to Rs.40,33,65,510/- instead of Rs.54,18,32,997/-
claimed by the assessee. The deduction u/s 80IB of the Act was reduced mainly on account of two reasons, viz. -Page 3 of 15 3 ITA Nos.1026 & 1027/Bang/2010
(i) difference in the method of allocation of general overhead expenses and
(ii) exclusion of the profit on sale of undivided interest in land in respect of certain project.
Difference in the method of allocation of general overhead expenses
4. Ground nos. 2 and 3 relate to the above issue raised by the revenue. In the course of assessment proceedings, the AO, while perusing the P&L account of the various housing projects along with the working of the allocation of common expenses, found that the total administrative expenses of the company was to the tune of Rs.111,38,45,460/-. After debiting various expenses directly attributable to the different projects, it was noticed that the assessee had shown a net figure of Rs.68,11,90,719/- as the office expenses not debited to any particular project. This common expenditure was allocated by the assessee to the projects claiming deduction u/s 80IB in the ratio of cost incurred during the year in the project to the total expenditure of the company. The AO asked the assessee why cost incurred during the year should be adopted as a basis for allocation of overhead expenses to the individual projects. According to the AO, the turnover would be a better basis for the allocation of expenditure. 4.1 In reply, the assessee filed its objections vide letter dated 19/11/2008. The relevant extract of assessee's letter reads as follows:-
"As briefed during our personal appearance, the costing principles prefer allocation of overheads to each project based on expenditure incurred rather than turnover Page 4 of 15 4 ITA Nos.1026 & 1027/Bang/2010 because, the turnover does not reflect the real activity level. Assuming that there are no sales during the year (in respect of projects which have a completion percentage of less than 25%), expenses of corporate office do not get allocated in such cases, though such projects need to be loaded with the proportionate overheads. Similarly, on assuming a hypothetical situation of projects getting completed in the first year without any sales and the entire project getting sold out in the second year, in both the years the overheads do not get allocated to the projects. Considering the above anomalies in considering the turnover as the base for allocation of overheads to the projects, the cost has been taken as the base".
4.2 The objections raised by the assessee was rejected by the AO for the reasons mentioned in para 2.1.5 and 2.1.6 of the impugned assessment order. The Assessing Officer concluded that the allocation of the overhead expenses of the year on the basis of turnover is a fair method to arrive at the true profits derived from the 80IB project and is more reasonable than the cost basis as the revenue recognized on the basis of percentage of completion is a good indicator of level of activity. This view is also supported by the ITAT, Delhi Bench in the case of Food Specialities Ltd. v ACIT (54 ITD 352).
4.3 The difference in the method of allocation of the overhead expenses resulted in a reduction of the profits from the project and the consequent deduction claimed u/s 80IB(10) of the Act in respect of the various projects as under:-
Page 5 of 15 5 ITA Nos.1026 & 1027/Bang/2010
Sl. Name of the Project Expenses allocated by Expenses allocated by Difference in the No. the appellant the AO allocable expenses (Rs.) (Rs.) (Rs.)
1. Sobha Dahlia 1,89,56,067/- 2,99,58,722/- 1,10,02,655/-
2. Sobha Hibiscus 1,39,95,236/- 1,91,05,669/- 51,10,433/-
3. Sobha Iris 2,98,07,045/- 5,19,96,902/- 2,21,89,857/-
4. Sobha Mayflower 1,90,66,198/- 2,96,64,140/- 1,05,97,942
5. Sobha Primrose 1,42,52,889/- 2,12,65,291/- 70,12,402/-
6. Sobha Rose 2,46,66,608/- 4,00,55,185/- 1,53,88,577/-
7. Sobha Daisy 1,32,70,699/- 1,29,73,518/- [2,97,181/-] TOTAL 13,40,14,742/- 20,50,19,427/- 7,10,04,685/-
4.4 Aggrieved by the allocation of the overhead expenses on the basis of turnover, the assessee carried the matter in appeal before the first appellate authority.
4.5 The first appellate authority, following the order of the Tribunal in assessee's own case for the asst. year 2005-06 (ITA No.965/Bang/09 dt.31.5.2010), allowed the appeal of the assessee.
4.6 The revenue being aggrieved is in appeal before us.
4.7 At the outset, the learned counsel for the assessee pointed out that the issue is squarely covered by the order of the Tribunal in assessee's own case cited supra.
4.8 The learned DR fairly submitted that the issue is covered by the above said order of the Tribunal. However, the matter is pending in appeal before the Hon'ble High Court.
4.9 We have heard the rival submissions and perused the material on record. We find the issue in question is squarely covered by the order of the Tribunal in assessee's own case for the asst. year 2005-06. The gist of Page 6 of 15 6 ITA Nos.1026 & 1027/Bang/2010 findings/conclusions of the Tribunal are given in detail in para 6 of the impugned order of the CIT(A) and hence, it is not reiterated again. The Tribunal had categorically found that the allocation of overhead expenses of the year on the basis of the turnover is not a fair method and more reasonable is the cost/expenditure basis. The facts being identical, following the coordinate bench decision cited supra, we hold that the order of the CIT(A) is correct and in accordance with law and no interference is called for. Hence, ground nos. 2 and 3 raised by the revenue are dismissed.
Exclusion of the profit on sale of undivided interest In land in respect of certain project
5. While completing the assessment for asst. year 2006-07, deduction u/s 80IB(10) was recomputed by excluding the profit from the sale of undivided interest in land in respect of the following projects:-
Sl. Name of the Project Profit on sale of Company in which the land was No. land excluded by originally purchased before the AO transfer to appellant
1. Sobha Dahlia 2,50,34,176/- Sobha Innercity Technopolis
2. Sobha Mayflower 3,16,37,025/- Sobha Innercity Technopolis
3. Sobha Primrose 41,47,715/- Sobha Innercity Technopolis
4. Sobha Rose 2,32,56,408/- Sobha Technocity
5. Sobha Daisy 96,30,639/- Sobha Innercity Technopolis Total 9,37,05,963/-
The reason by the AO for the exclusion of the profit on the sale of land in computing deduction u/s 80IB are mentioned at 4.1 of the impugned order of the CIT(A).
Page 7 of 15 7 ITA Nos.1026 & 1027/Bang/20105.1 On further appeal before the first appellate authority, the CIT(A), following the order of the Tribunal in assessee's own case for the asst. year 2005-06, decided the matter in favour of the assessee. The CIT(A) directed the AO that the profits derived by the assessee by way of sale of undivided interest in land should not be excluded while computing deduction u/s 80IB of the Act.
5.2 The revenue being aggrieved is in appeal before us. 5.3 The learned counsel for the assessee submitted that the issue in question is covered by the order of the Tribunal in assessee's own case for the asst. year 2005-06 in favour of the assessee (ITA No.965/Bang/2009 dated 31.5.2010).
5.4 The learned DR was unable to controvert the submission of the assessee's counsel that the issue is covered in favour of the assessee by the order of the Tribunal cited supra.
5.5 We have heard the rival submissions and perused the material on record. The issue in question is covered by the order of the Tribunal in assessee's own case for the asst. year 2005-06. The relevant finding of the Tribunal at para 19 to 19.4 reads as follows:-
"Aquamarine:
19. The main finding of the authorities below was that there was no registered sale deed conveying the lands in question in favour of the assessee. As per the Agreement of sale dated: 3.1.2005, [Source: Page 146 of P.B - A.R], STPL had Page 8 of 15 8 ITA Nos.1026 & 1027/Bang/2010 sold the lands to the assessee. Since the land was still in the name of STPL in the revenue records; STPL was made a party to the transaction of sale of apartments to fulfill the legal requirements, in spite of a fact that the assessee was the legitimate owner and the physical possession of the land as per the agreement of sale dt.3.1.2005. This arrangement doesn't culminate that the assessee was a mere builder on the strength of the documents executed for the purposes of conveyance of the flats developed under the peculiar circumstances as explained by the ld. A.R. It is a fact that any builder cannot venture to construct apartments without any land. As could be seen from the records that the assessee was developing the project as agreed upon with its sister concern to purchase the land from it and subsequently the advances already taken from the assessee was, perhaps, advanced for the transfer of the said land, the very fact has not been denied by the Revenue.
19.1. The agreement of sale entered into by the assessee with STPL which was subsisting and that the physical possession of the land by the assessee was not disproved by the AO with any documentary evidence. Another vital point which clinches the issue to strengthen the argument of the assessee was that STPL had offered the proceeds on sale of land as its business income, as agreed upon in the agreement of sale dated 3.1.2005, in its return of income which, according to the assessee, has been accepted by the Department. Furthermore, the AO had assessed the profit from sale of land as income in the hands of assessee and the same has not been excluded. However, when the issue of determining the claim of deduction u/s 80IB came into fore, the AO came forward to deny the claim of the assessee. The AO's stand that deduction u/s 80IB (10) of the Act was availed only for building a housing project and not for the development of land was rather misconceived. As a matter of fact, the AO had failed to see that the assessee had not developed any land, but, constructed a housing project and that there cannot be a development or a building of a housing project without any land. As could be seen from the commencement Certificate of the BDA [P.151 of PB-AR], no doubt that the certificate was issued in the name of H.R. Page 9 of 15 9 ITA Nos.1026 & 1027/Bang/2010 Chandrashekar, C/o Sobha Developers Pvt. Ltd. No.E-106, Sunrise Chambers, 22, Ulsoor, Bangalore.42. The goes to clear the air that since the said Chandrashekar was the original owner of the said land as per the revenue records and as per the rules, the commencement certificate for construction could be issued to a person whose name was finding a place in the records at the relevant time of issuing such certificate.
Accordingly, the said certificate was obtained in the name of Chandrashekar. Had Chandrashekar himself been an inclination to venture a construction project on his own, he would not have gone with the address of - C/o M/s.Sobha Developers Pvt. Ld. No.E-106, Sunrise Chambers, 22, Ulsoor Road, Bangalore.42? This proves without any iota of doubt that the commencement certificate was obtained by the assessee only for the commencement of the said housing project. The name of Chandrashekar could have been used as a ploy to obtain the said certificate, as his name, according to the assessee, was appearing in the revenue records as the owner of the land in question at that relevant period. Had the AO doubted the bona fide of the assessee's claim, this fact could have been got cross verified with the records of the BDA to bring out the truth? This exercise had not precisely been carried out by the Revenue to nail the assessee on this count, if the AO had doubted the assertion of the assessee. When the assessee had discharged its onus, the Revenue had, in our view, not discharged the onus which was placed at its doorstep; instead, it went on to build a mansion only on assumption.
19.2. When the authorities have duly assessed the profit on sale of land as admitted by the assessee as its income, the Revenue cannot take a different stand that the assessee was not the owner of the land only to deny the deduction to the assessee u/s 80IB of the Act.
19.3. It is not uncommon in housing sector that when the developer or the owner sells the apartments to customers and the sale of apartment would generally be achieved by entering into an agreement for sale of undivided interest in land together with a construction agreement for constructing and delivering the built-up area. Even though, there were two Page 10 of 15 10 ITA Nos.1026 & 1027/Bang/2010 separate agreements to convey the undivided interest in land and the built-up area, but, in practice, there would be a single and composite transaction, i.e., sale of apartment. The consideration for sale of an apartment would be fixed based on the extent of built-up area and the sale price. Once the deal was struck, the builder or the owner, as the case may be, make a bifurcation of sale proceeds towards the sale of undivided interest in land and that of the sale of the built up area. This bifurcation could be resorted to mainly for the registration of the undivided interest in land in favour of the buyer which cannot be categorized that there were two different transactions between the builder and the buyer of the apartment. In fact, there would be a composite transaction for sale of an apartment as sale of apartment culminates the ownership of the undivided interest in land to be transferred to the buyer. The developer classifies the profit as on sale of land purely for the purpose of accounting entries passed in his/its books of account, however, the fact remains that the profit derived by the developer was from the development of the housing project only and nothing else. 19.4. In an overall consideration of the facts and circumstances of the issue, the entire profit earned by a developer was part and parcel of the over all profits derived from the housing project. We are, therefore, of the considered view that the exclusion of the profit on the sale of land on a sole ground that the assessee had shown the profits separately and the same would not relate to the assessee was misconceived and, thus, exclusion of the profit on sale of land was rather unjustified. It is ordered accordingly". 5.6 The facts being identical, following the coordinate bench decision of the Tribunal for the asst. year 2005-06, we hold that the order of the CIT(A) requires no interference, since it is in accordance with law. Hence, ground no.4 mentioned above raised by the revenue is dismissed. Page 11 of 15 11 ITA Nos.1026 & 1027/Bang/2010 ITA No.1027/Bang/2010 (AY 2007-08)
6. The revenue has raised seven grounds. Ground Nos. 1, 6 and 7 are general in nature and no specific adjudication is called for. Hence, they are dismissed.
7. Ground Nos. 2, 3 and 4 relate to the issue of allocation of common expenses and deduction u/s 80IB in respect of profit on sale and development of land.
7.1 These issues have been considered by us in ITA No.1026/Bang/2010 concerning asst. year 2006-07. Both sides are in agreement that the facts and circumstances for assessment year 2006-07 are mutatis mutandis similar to those of the assessment year 2007-08, but for variation in the figures. Therefore, the finding/conclusion of ours in respect of asst. year 2006-07 holds good for this asst. year also. For assessment year 2006-07, we have dismissed the grounds raised by the revenue; hence, for the reasons recorded at para 4.9, 5.5 & 5.6 (supra), ground nos. 2 to 4 are dismissed. Accordingly, the order of the CIT(A) on this count is affirmed.
8. The other ground, namely ground no.5 reads as follows:-
The CIT(A) has erred in deleting the addition made u/s 14A in respect of expenditure relating to earning of exempt income.
8.1 Brief facts in relation to the above ground are as follows:-Page 12 of 15 12 ITA Nos.1026 & 1027/Bang/2010
In the course of assessment proceedings, the AO, while perusing the annual report for the financial year 2006-07, noticed that the assessee had invested 500.70 million in purchase of certain units. The assessee was show-caused to explain why the expenditure in relation to those units whose income was exempt should not be disallowed.
8.2 In response, the assessee, vide letter dated 22.12.2009, stated that the assessee has no direct expenditure nor interest payment on earning such income, since it has come out with IPO during the year amounting to Rs.32 crores. It was further stated that the expenditure incurred for bringing out the IPO was not claimed as expenditure in the books of accounts. The AO however rejected the contention relying on section 14A(3) and determined the expenditure in relation to the exempted income by invoking Rule 8D of the I T Rules, 1961. The relevant finding of the AO reads as follows:-
"6.4 As per rule 8D 1(iii) the income on the first day of the previous year is zero and income at the end of the previous year is Rs.500.70 million, hence the expenditure in relation to income not includable in total income works out to 1.25175 millions which is 0.5% of the average of value of investment (500.70/2 * 0.5% = Rs.12,51,750/-).
(Addition = Rs.12,51,750/-)".
8.3 On further appeal, the CIT(A), followed the judgement of the Hon'ble Punjab and Haryana High Court in the case of CIT v Hero Cycles Ltd. (2010) 323 ITR 518 and allowed the appeal of the assessee. The CIT(A) held, "In the instant case, in the absence of any such finding or evidence of Page 13 of 15 13 ITA Nos.1026 & 1027/Bang/2010 any expenditure having been actually incurred to earn the exempt income, I am of the opinion that the disallowance of Rs.12,5`,750/- is not permissible". 8.4 The revenue being aggrieved is in appeal before us, 8.5 The learned DR relied on the judgement of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v DCIT 328 ITR 81 and contended that the matter should be remitted back to the AO so that he can determine whether the assessee has incurred any expenditure, (direct or indirect), in relation to earning of exempted income. It was submitted that in the instant case, the Assessing Officer applied Rule 8D without examining whether the expenditure is actually incurred for earning exempted income.
8.6 The learned AR on the other hand reiterated the submissions made before the income tax authorities.
8.7 We have heard the rival submissions and perused the material on record. In the instant case, the Assessing Officer has applied Rule 8D and notionally disallowed a sum of Rs.12,51,750/-. He has not entered a finding whether any expenditure has been incurred for earning the exempted income. The Hon'ble Bombay High Court in the case cited supra has categorically held that Rule 8D would apply w.e.f. Asst. year 2008-09. Therefore, application of Rule 8D for the concerned assessment year, namely 2007-08, is bad in law. However, the Hon'ble Bombay High Court had remitted back the issue to the AO for determination whether the assessee had incurred any expenditure in relation to the exempted income as Page 14 of 15 14 ITA Nos.1026 & 1027/Bang/2010 contemplated u/s 14A of the Act. The relevant finding of the Hon'ble Bombay High Court reads as follows:-
"That the provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case".
8.8 In view of the above judgement of the Hon'ble Bombay High Court, the matter is remitted back to the file of the AO to determine whether the assessee has incurred any expenditure (direct or indirect) in relation to the exempted income/income not forming part of the total Page 15 of 15 15 ITA Nos.1026 & 1027/Bang/2010 income, as contemplated u/s 14A of the Act. Therefore, ground no.5 raised by the revenue is allowed for statistical purposes.
9. In the result, the appeal filed by the revenue for the assessment year 2006-07 is dismissed, whereas, the appeal preferred by the revenue for assessment year 2007-08 is partly allowed for statistical purposes.
Order pronounced in the open court on 16th day of December, 2011 Sd/- Sd/-
(N K SAINI) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to:-
1. The Revenue 2. The Assessee 3. The CIT concerned 4. The CIT(A)
concerned 5. The DR 6. GF
MSP/- By Order
Asst. Registrar, ITAT, Bangalore.