S. 80-IB(10) – Deduction can’t be denied just because Assessee did not construct himself
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In the instant case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the Assessing Officer in the assessment order. The assessee entered into an agreement with Reddy Structures (P.) Ltd., for development of housing project on the land owned by the assessee. The assessee got 24 per cent share in the said project and sold 49 flats. The assessee also incurred certain expenses for electricity and water connection connected with the project and also made payment to BWSSB and KEB. From the terms of the agreement it is clear that the assessee was engaged in the property development and this fact has also been admitted by the Assessing Officer. The assessee got his agricultural land converted for non-agricultural purposes, i.e., for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned.
From yet another clause in the agreement, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party, i.e., Reddy Structures (P.) Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration. In the instant case, the Assessing Officer denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. The provision contained in section 80-IB(10) is perused.
On a joint reading of sub-section (10) of section 80-IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover, the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows that even if any undertaking is constructing the housing project under a works contractentered by a person is not eligible for deduction. The only condition for claiming the deduction under section 80-IB(10) is that the undertaking is developing and building housing projects approved by a local authority. In the instant case, it is not the case of the department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction under section 80-IB(10) to the assessee was that the assessee had not carried out any construction activity, it is held that said reason is not sufficient to deny deduction under section 80-IB(10). In the instant case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction under section 80-IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non-agricultural purpose and getting plan sanctioned. Therefore, considering the totality of the facts and following the ratio land down by the Jurisdictional High Court in the case of CIT v. Shravanee Constructions [2012] 22 taxmann.com 250 (Kar.), set aside the impugned order passed by the Commissioner (Appeals) and direct the Assessing Officer to allow the deduction under section 80-IB(10) to the assessee.
IN THE ITAT BANGALORE BENCH ‘B’
Abdul Khader
v.
Assistant Commissioner of Income-tax
IT APPEAL NO. 57 (BANG.) OF 2011
[ASSESSMENT YEAR 2006-07]
APRIL 30, 2012
ORDER
N.K Saini, Accountant Member – This is an appeal filed by the assessee against the order dated 8.12.2010 of the learned Commissioner of Income-tax (Appeals) – V, Bangalore.
2. The following grounds have been raised in this appeal :
“1. The order of the learned CIT(A)-V is not justified in law and on facts and circumstances of the case.
2. The learned CIT(A) is not justified in denying the benefit of sec. 80IB(10) to the appellant although the appellant satisfied all the requisite conditions in respect thereof.
3. The learned CIT(A) is not justified in holding that sec. 80IB(10) is applicable only to an undertaking involved in developing and construction by ignoring the legal position that sec. 80IB(10) is applicable to an undertaking of developing and building housing project and not developing and construction of housing project.
4. The lower authorities have failed to appreciate that sec. 80IB(10) does not require that the assessee himself should construct the housing project and it is sufficient if he undertakes the activity of developing and building the housing project.
5. The lower authorities have failed to appreciate that practically every major developer of housing project would outsource construction to third parties which act by itself would not make him any less a developer and would not make any him ineligible for deduction of sec. 80IB(10).
6. The lower authorities are not justified in falling to appreciate that sec. 80IB(10) does not insist on actual construction to be carried out by the eligible assessee and in term of Explanation, mere construction on works contract is in fact ineligible for deduction there under.
7. The lower authorities are not justified perversely holding that the appellant did not engage in developing but only contributed land for the project ignoring that apart from land contribution appellant incurred sizable expenditure in the development of housing project.
8. The lower authorities are not justified in holding that the appellant is a mere contributor of land ignoring that the appellant himself was engaged in the business of real estate, had converted his land holing for commercial purpose, had converted his land into stock-in-trade and had obtained requisite plan sanction, water and electricity for development and building of housing project in his name.
9. The lower authorities are not justified in falling to appreciate various terms of Joint Development Agreement which clearly indicated that the appellant was not mute contributor of land but was an active partner in development and building of housing project.
10. The lower authorities have ailed to appreciate that the appellant assumed significant risks associated with the development and building of housing project. Therefore, being co-venturer in the Joint Development Agreement, he is eligible for benefit of deduction u/s 80IB(10).”
3. From the above grounds, it is gathered that only grievance of the assessee relates to the denial of deduction claimed u/s 80IB(10) of the Income-tax Act 1961 ((hereinafter referred to as the ‘Act’, in short).
3.1 The facts of the case in brief are that the assessee is a proprietor of M/s Bilad Builders & Developers and filed its return of income on 31.10.2006 declaring a total income of Rs. 88,28,640/-. The assessee claimed deduction of Rs. 1,72,20,784/- u/s 80IB(10) of the Act out of the gross total income arrived at Rs. 2,60,49,397/-. The case was selected for scrutiny and the AO asked the details regarding the 80IB(10) project undertaken by the assessee. The AO noticed that the assessee is a land developer and converted his land at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Taluk. measuring 1 acre and 31 guntas on 1.9.2003 by putting the same for development by entering into joint development agreement on 3/11/2003 with M/s Reddy Structures Pvt. Ltd and offered the capital gain for tax u/s 45(2) of the Act in the year in which the complete stock in trade was sold. The AO pointed out that the assessee had entered into a joint development agreement with M/s Reddy Structures Pvt. Ltd., for development of the schedule property as per the terms and conditions contained in the joint development agreement. According to the AO, the joint development agreement clearly specifies that the assessees contribution towards the project at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Talulk. was only contributing the land and incurring expenses for statutory approval. The AO was of the view that the deduction u/s 80IB(10) should not be allowed to the assessee since he was only a land owner and the said land was transferred to M/s Reddy Structures Pvt. Ltd. for joint development and that the assessee had not carried out any construction activity as could be seen from the expenses claimed in the profit and loss account and also in the balance sheet. The AO observed that the claim of deduction u/s 80IB(10) of the Act by the assessee was erroneous, since the assessee had not done any construction activity and only transferred the land. The AO was also of the view that any undertaking involved in development and house building project was eligible for deduction, therefore, the developer and the builder should invariably be the same person. According to him, the assessee had not followed the basic requirement of the eligibility criteria for granting deduction u/s 80IB(10) of the Act. The assessee explained to the AO vide letter dated 24.11.2008 that in the terms of the joint development agreement, the assessee had incurred project expenses in relation to statutory approvals like BWSSB, KEB, plan sanction and the balance other expenses were incurred by M/s Reddy Structure Pvt. Ltd. The assessee also furnished the copy of cheque payments made to M/s BWSSB and KEB drawn on HDFC Bank and also copy of a bill for Rs. 2,04,080/- for misc. work done. The AO after considering the above explanation of the assessee observed that no payment relates to the construction activity carried out for the project like purchase of jelly, sand, cement, iron or any such related expenses, therefore, the very nature of expenses clearly proved that the assessee had not undertaken any development which was sin-quo-nor for deduction u/s 80IB(10). The AO held that since the assessee had not involved himself in the construction of the residential complex but merely contributed land for the same, therefore, he was not eligible for deduction u/s 80IB(10) of the Act. Accordingly, the claim of the assessee u/s 80IB(10) was disallowed.
4. The assessee carried the matter to the learned CIT(A) and submitted that the assessee was a joint developer along with M/s Reddy Structure Pvt. Ltd., in the development of the residential project and he was very much involved in the development of the project as he had incurred expenditure for getting statutory approvals necessary for undertaking the project. It was further stated that if a house building project complies with all the requirements of clause (a) to (d) of sec. 80IB(10) of the Income-tax Act, it was not open to the Revenue to look into any other criteria to say, whether the house building project was fully owned or co-owned or jointly undertaken or carried out on partnership basis or in any other pattern. It was accordingly submitted that the assessee was very much entitled for the deduction provided u/s 80IB(10) of the Act.
5. The learned CIT(A) after considering the submissions of the assessee observed that the deduction u/s 80IB(10) of the Act was available to any undertaking involved in development and construction of the housing project. But in the present case, the assessee was not involved in the development and construction of the housing project and only contributed land for the purposes of the project, therefore, he was not entitled for the said deduction. He accordingly confirmed the addition made by the AO.
6. Now the assessee is in appeal before us.
7. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee converted his agricultural land into non agricultural land and then converted into stock-in-trade on 1.9.2003 by putting the same for development by entering into joint development agreement with M./s Reddy Structures Pvt. Ltd. on 3.11.2003 and as per terms of the joint development agreement the assessee got 24% share while another developer got 76% share. He referred to para 2 of the assessment order and submitted that the AO himself admitted that assessee was a land developer. The learned counsel for the assessee stated that the assessee incurred expenses relating to the building project and the amount was spent by the assessee on the development. It was further stated that the assessee produced proof to show that the payments were made to BWSSB and KEB in connection with the development activities, therefore, the assessee was not simply a contributor of land but he is also a developer of the land, as such, the assessee was eligible for deduction u/s 80IB(10) of the Act. The learned counsel for the assessee contended that the assessee incurred expenses for getting electricity and water connection, so it cannot be said that the expenses incurred by the assessee were not related to the development of the housing project. A reference was also made to page No.32 of the assessee compilation, which is a copy of the letter written by the AO to M/s Reddy Structures Pvt. Ltd., who jointly developed the project with the assessee. It was pointed out that in the said letter dated 13.10.2008, the AO asked the information regarding project ‘Cornet’ jointly developed with Abdul Khader (the assessee). On the basis of the aforesaid document (the letter dated 13.10.2008), it was submitted that the AO himself admitted that the assessee developed the project jointly with M/s Reddy structures Pvt. Ltd., a reference was also made to page No. 36 of the assessee’s compilation which is a copy of amendment vide Finance (No. 2) Bill 2009 and it was submitted that objective of the tax concession under sub. Sec. (10) of sec. 80IB of the Act is to provide tax benefit to the person undertaking the investment risk i.e. actual developer and any other person undertaking pure contract risk is not entitled to the tax benefits. It was submitted that the assessee made the investment and contributed his land for the project, so there was investment risks and hence, the assessee was entitled for deduction u/s 80IB(10) of the Act, the reliance was placed upon the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. Shravanee Constructions[2012] 22 taxmann.com 250 (Kar.). Copy of the said order was furnished.
8. In his rival submissions, the learned DR strongly supported the orders of the authorities below and further submitted that the assessee had not made any payment relating to the construction activity and it was the responsibility of the assessee to get electricity and water connection because the ownership was lying with him, therefore, only on this basis that the assessee made the payment for electricity and water connection, it cannot be held that the assessee incurred expenses for development of the housing project and was eligible for deduction u/s 80IB(10) of the Act. It was further stated that the assessee only contributed the land for the project, therefore, he was not eligible to have the deduction u/s 80IB(10) of the Act.
9. We have considered the submissions of both the parties and carefully gone through the materials available on record. In the present case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the AO in para 2 of the assessment order dated 31.12.2008. The assessee entered into agreement with M/s Reddy Structures Pvt. Ltd., for development of housing project situated at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bangalore South Taluk, measuring 1 acre and 31 guntas. The assessee got 24% share in the said project and sold 49 flats as mentioned in page No. 6 of the assessee’s compilation, which is the copy of the bill and sale of flat during the financial year 2005-06. The assessee also incurred certain expense for electricity and water connection connected with the project and also made payment to BWSSB and KEB. The assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd. In the said agreement dated 3.11.2003, copy of which is placed at page Nos. 1 to 13 of the assessee’s paper book dated 28.2.2012, in the said agreement, it is mentioned at page No. 2 as under :
“WHEREAS the first is engaged in property development of the schedule property hence had applied for conversion of the said schedule property from agricultural to residential purpose before the Special Deputy Commissioner Bangalore District and the same was allowed by its order vide No. BDS. ALN.SR(s) 26/2002-2003 dated 28-12-2002.
AND WHEREAS the first party is developing the schedule property by putting up a residential housing enclave and the first party has entered into this agreement with the second party to undertakes the work of development of the schedule property jointly.”
10. From the above, it is clear that the assessee was engaged in the property development and this fact has also been admitted by the AO. The assessee got his agricultural land converted for non agricultural purposes i.e. for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned. The clause – (4) of the agreement entered by the assessee with M/s Reddy Structures Pvt. Ltd. states as under :
“It is hereby agreed that the first party has contributed the schedule property as his capital contribution for joint development & construction and the second party shall make investment on schedule property for joint development and construction. First party shall make investment for all statutory approvals including BWSSB, KEB, plan sanction etc., the first party shall retain 24% of the built up area in the schedule property along with 24% car parking. Both the parties to this agreement shall be entitled to all common rights and facilities in the common areas of the building proportionally as per their respective shares.”
11. From the above clause, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party i.e. M/s Reddy Structures Pvt. Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment on schedule property but the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration.
12. In the present case, the AO denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. Now, we have to analyze the provision contained in sec. 80IB(10) of the Act. The said provision read as under :
“The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of Mar, 2007 by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project.
13. The Explanation has been inserted to sub sec. (10) of sec. 80IB w.e.f. 1.4.2010 with retrospective effect from 1.4.2001 vide Finance (No.2) Act 2009. The said explanation read as under :
“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).”
14. On a joint reading of sub. sec (10) of sec. 80IB and explanation thereto it is clear that deduction as is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming the deduction u/s 80IB(10) is that the undertaking is developing and building, housing projects approved by a local authority. In the present case, it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s 80IB(10) of the Act to the assessee was that the assessee had not carried out any construction activity, in our opinion that reason is not sufficient to deny deduction u/s 80IB(10) of the Act. In the present case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction u/s 80IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non agricultural purpose and getting plan sanctioned. On a similar issue, their lordships of Hon’ble Jurisdictional High Court in the case of Shravanee Constructions (supra) at para 8 of the judgment dated 28th Feb., 2012 in ITA No. 421 and 422 of 2009 observed as under :
“In terms of the agreement, which are not in dispute, the assessee not only undertook the aforesaid development activities on the land in question, but in fact, he entered into an agreement of sale with the owners of the land, paid the entire consideration but he did not take a registered sale deed in his name. On the contrary, the procedure adopted is he in turn entered into a joint development agreement with the builder and the owner of the land was made a party to the said proceedings. Thus, the assessee contributed the land, undertook the aforesaid development activities in the said land and thus, complied with all other conditions, which have to be fulfilled before claiming benefit u/s 80IB(10) of the Act. The builder has invested the money in the construction. It is after completion of the building in terms of the agreement, the assessee was given 22% share of the building area. It is after sale of the built area, in terms of sec. 80IB(10), the assessee is claiming deduction. As is clear from the joint development agreement, the undertaking of developing and building housing project was jointly undertaken by the assessee and the builder. Therefore, in respect of the residential units numbering 211 in all, the persons who undertook this undertaking are entitled to the benefit of sec. 80IB(10) of the Act in proportion to the share to which they are entitled to in the built up area.”
15. In the present case also, the assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd., for development and building of the housing project on the land belonging to him. The assessee contributed the land, undertook the developmental activities in the said land and thus complied with all other conditions which have to be fulfilled before claiming the benefit u/s 80IB(10) of the Act. In the present case, it was agreed that after completion of the building in terms of the agreement, the assessee was given 24% of the share of the building area which he was entitled to sell to various persons, it was also clear from the joint development agreement that the undertaking of developing and building housing project was jointly undertaken by the assessee and M/s Reddy Structures Pvt. Ltd., therefore, the assessee was entitled for the benefit of deduction u/s 80IB(10) of the Act. We, therefore, considering the totality of the facts and respectfully following the ratio laid down by the Hon’ble Jurisdictional High Court in the above said referred case of Shravanee Constructions (supra), set aside the impugned order passed by the CIT(A) and direct the AO to allow the deduction u/s 80IB(10) of the Act to the assessee.
16. In the result, the appeal of the assessee is allowed.
CBEC's Draconian Circular - High Court Order
TIOL-DDT 2022
11.01.2013
Friday
THE report in yesterday's DDT on the AP High Court's Order evoked huge response, mostly from lawyers. They were all asking for a copy of the order. We carry the order today. Please see 2013-TIOL-23-HC-AP-CX
The whole order is as given below:
Petition under Section 151 of C.P.C. praying that in the circumstances stated in the affidavit filed in the W.P. the High Court may be pleased to grant stay of clarification issued vide Sl.No.3 of the Circular No.967/01/2013-CX dated 01.01.2013 and consequent Letter O.C.No.496/2012-13 dated 04.01.2013 issued by the Respondent No.2, pending disposal of WP No. 734 of 2013 on the file of the High Court.
The court, while directing issue of notice to the Respondents herein to show cause as to why this petition should not be complied with, made the following order.(The receipt of this order will be deemed to be the receipt of notice in the case).
ORDER
There shall be interim stay of recovery of the amount involved, till the appellate authority disposes of the application for stay.
There were nine such writ petitions challenging various provisions of the controversial circular. Though the High Court did not quash or stay the Circular, the recovery of the amount involved has been stayed.
In the next few days all High Courts in the Country will be flooded with such writ petitions - the lawyers should be grateful to the CBEC for this most unexpected prosperous New Year gift.
2013-TIOL-34-ITAT-BANG
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' BANGALORE
ITA No.1193/Bang/2011
Assessment Year: 2008-09
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-11(4), BANGALORE
Vs
M/s INDUS FILA LTD
NO 107, INDUSTRIAL SUBURB, II STAGE
YESHWANTHPUR, BANGALORE-560022
PAN NO:AAACI 5893C
N Barathvaja Sankar, VP and N V Vasudevan, JM
Dated: July 31, 2012
Appellant Rep by: Shri Sarangan, Sr. Counsel
Respondent Rep by: Shri Farahat Hussain Qureshi, CIT-II(DR)
Income Tax - Section 72A - Whether in view of the sanction of the scheme of amalgamation by the HC, the claim made by the assessee for set off of losses has to be allowed as per the provisions of section 72A.
The assessee was a company which is engaged in the business of manufacture of readymade garments. The TAPL was also engaged in similar line of business as that of the assessee. The assessee has been doing job work for TAPL. TAPL could not carry on its business profitably. Hence the proposal was that TAPL will merge with the assessee and cease to be a separate entity on merger with the assessee. A scheme of amalgamation of TAPL with the assessee was formulated, as per the said scheme with effect from the appointed day which was fixed in the scheme as 31.03.2008, TAPL will cease to be an entity and all the assets & liabilities of TAPL shall vest with the assessee. The High Court of Karnataka sanctioned the scheme of amalgamation. The assessee filed the return of income declaring business income of Rs.31,36,33,145. Consequent to the sanction of scheme of amalgamation by the HC, the assessee filed letter before the AO wherein the assessee claimed set off of carried forward losses of TAPL against the income declared by the assessee. This claim was made in view of the provisions of section 72A.The AO was of the view that the process of amalgamation has been used as a tool to wipe off the profits of a profit making entity against the loss of another entity. The AO concluded that the setting off of the losses is a colourable device and treated as such. To avoid the payment of taxes on the whopping profit of Rs.31,36,33,145, the assessee had resorted on the scheme of amalgamation and made a wrong claim of set off from the losses of another related party Therefore the set off of the losses was disallowed and the same amount was added back to the income of the assessee. The CIT(A) was of the view that the claim made by the assessee for set off of losses had to be allowed.
On Appeal before the Tribunal the DR reiterated the stand of the AO as reflected in the order of assessment, while the counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(A).
Having heard the parties, the Tribunal held that,
++ in view of the Marshall Sons & Co decision of the Supreme Court, we are of the view that the AO exceeded his jurisdiction in question the appointed day fixed under the scheme of amalgamation which is duly sanctioned by the High Court. Besides, there is contemporaneous evidence on record to show that the scheme of amalgamation had been proposed by the assessee as early as 11.03.2008 and such proposals have been duly communicated to the stock exchange (NSE & BSE). Apart from the above, in the notes to accounts for the period ending 2008-09, the assessee had duly highlighted the fact that the accounts of the assessee was prepared on a stand alone basis without setting off of losses of TAPL, because the proposal for amalgamation was still pending for consideration by the High Court;
++the observations of the AO expressing doubts regarding the scheme of amalgamation being a device to avoid taxes are all without any basis and are in the realm of suspicion and surmises. With regard to the non-filing of revised return of income, we are of the view that the provisions of section 72A are applicable, notwithstanding anything contained in other provisions and the set off of accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation has taken effect. In the present case, amalgamation is deemed to have been effected on 31.03.2008 and consequently the claim of the assessee for set off had to be allowed.
Revenue’s Appeal dismissed
Case followed:
Marshall Sons & Co. (India) Ltd. v. ITO 223 ITR 809.
ORDER
Per: N V Vasudevan:
This appeal by the revenue is against the order dated 19.09.2011 of the CIT(Appeals)-I, Bangalore relating to assessment year 2008-09.
2. Grounds No.1, 5 & 6 are general in nature and requires no adjudication. The other grounds of appeal raised by the revenue reads as under:-
“2. The learned CIT(Appeals) was not justified in allowing the assessee to set off of loss of amalgamating company (M/s. Tulip Apparels) with the profits of the appellant amalgamated company, without appreciating the facts and circumstances under which the same was disallowed by the Assessing Officer.
3. The learned CIT(Appeals) erred in allowing the relief without appreciating that the amalgamating company (M/s. Tulip Apparels) had already filed its return of income on 29.9.2008 for AY 2008-09 and that petition before the Hon’ble High Court for approval of merger was also after the due date for filing the return of income for the concerned Assessment Year by the assessee (amalgamated) company.
4. The learned CIT(A) erred in allowing the relief without considering that it is a case of colorable device considering the fact that the Board Resolution is itself taken on 31.1.2009, i.e., much after the due date for filing the return of income in the case of the assessee and after nine months from the end of the relevant financial year.”
3. The assessee is a company which is engaged in the business of manufacture of readymade garments. There was another company by name ‘Tulip Apparels Pvt. Ltd.’ (“TAPL” for short). This company was also engaged in similar line of business as that of the assessee. In fact, the assessee has been doing job work for TAPL. TAPL could not carry on its business profitably. The assessee and TAP therefore decided that it would be in the best interest of both the companies that TAPL merge with the assessee. The amalgamation could help achieve optimum utilization of single manpower, infrastructure, production and logistic facilities. The assessee will also have the benefit of trained and skilled manpower, which will enable the assessee to expand its garment manufacturing operations. The two companies therefore decided to amalgamate. The proposal was that TAPL will merge with the assessee and cease to be a separate entity on merger with the assessee.
4. On 11.03.08, the Board of Directors of the assessee resolved that the assessee will merge with TAPL subject to approval of shareholders of the assessee and TAPL, the Hon’ble High Court, stock exchange and other regulatory authorities. On 12.03.2008, the assessee informed the BSE as well as NSE regarding the proposed merger of TAPL with the assessee. A scheme of amalgamation of TAPL with the assessee was formulated, as per the said scheme with effect from the appointed day which was fixed in the scheme as 31.03.2008, TAPL will cease to be an entity and all the assets & liabilities of TAPL shall vest with the assessee. TAPL will stand dissolved without winding up. Between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Since the scheme of amalgamation required the sanction of the Hon’ble High court of Karnataka, TAPL as well as the assessee filed petition for sanction of the scheme of amalgamation in Company Petition No.97/2009 & Company Petition No.80/2009. By an order dated 06.02.2010, the Hon’ble High Court of Karnataka sanctioned the scheme of amalgamation as proposed by TAPL and the assessee.
5. The assessee filed the return of income for the A.Y. 2008-09 declaring business income of Rs.31,36,33,145. Consequent to the sanction of scheme of amalgamation by the Hon’ble High Court, the assessee filed letter before the Assessing Officer wherein the assessee claimed set off of carried forward losses of TAPL against the income declared by the assessee. This claim was made in view of the provisions of section 72A of the Act, which provides that where there is amalgamation, then the accumulated loss or unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected. We have already seen that the amalgamation was effected on 31.03.2008 which is the appointed day under the scheme of amalgamation which the Hon’ble High Court had sanctioned. TAPL has a loss of Rs.41,18,72,846. The assessee claimed in the course of assessment proceedings that the business income declared by the assessee should be set off against the loss of TAPL and if so set off, there will be no chargeable total income of the assessee.
6. The Assessing Officer examined the aforesaid claim of the assessee, he was of the view that the process of amalgamation has been used as a tool to wipe off the profits of a profit making entity against the loss of another entity. Thereafter, the AO proceeded to make the following observations:-
(a) The appointed date as per the scheme of amalgamation was 31.03.2008 and the Board of Directors of the transferee company viz., the assessee, approved the same only in their meeting held on 31.01.2009. Therefore the appointed day was arbitrarily fixed as 31.03.2008.
(b) The assessee failed to prove that during the assessment year 2008-09 or earlier to that date, the assessee and TAPL negotiated for amalgamation.
(c) TAPL existed as a company with the Registrar of Companies upto 09.03.2010 and therefore from 31.03.2008 to 08.03.2010, TAPL was in existence and carried on its business under the control of its Board of Directors.
(d) By the process of amalgamation, the assessee adopted a device seeking to set off the amalgamated losses of TAPL against its profits.
(e) The wisdom in fixing the effective date of scheme of amalgamation as 31.03.2008 was also questioned.
(f) The assessee did not file a revised return of income after the approval of the scheme of amalgamation by the Hon’ble High Court of Karnataka which was on 06.02.2010. The assessee could have filed a valid revised return of income u/s. 139(4) of the Act till 31.03.2010.
(g) Because of the set off of loss, the assessee had to pay taxes only as per the provisions of section 115JB i.e., MAT.
7. After making the aforesaid observations, the AO finally observed as follows:-
“8.7 In view of the foregoing, it is concluded that the setting off of the losses is a colourable device and treated as such. To avoid the payment of taxes on the whopping profit of Rs.31,36,33,145, the assessee had resorted on the scheme of amalgamation and made a wrong claim of set off from the losses of another related party Therefore the set off of the losses is hereby disallowed and the same amount is added back to the income of the assessee.”
8. The assessee preferred an appeal before the CIT(Appeals) and submitted that consequent to the sanction of the scheme of amalgamation, the loss of TAPL had to be adjusted against the income of the assessee company, both under normal computation of income as well computation u/s. 115JB of the Act. The assessee also pointed out that by virtue of the provisions of section 72A of the Act, the assessee was entitled to the claim of set off. The assessee also highlighted that it was not possible for the AO to question the scheme of amalgamation, which has been duly sanctioned by the Hon’ble High Court. The steps taken by the assessee for the amalgamation were also highlighted. The assessee also pointed out that even though the court’s sanction in a scheme of amalgamation comes at a later point of time, but the scheme of amalgamation takes effect from the effective date, unless the order of High Court sanctioning the scheme provides for a different effective date. The assessee also relied on the decision of the Hon’ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. v. ITO 223 ITR 809, wherein the Hon’ble Supreme Court has held that amalgamation takes effect on the date of transfer specified in the scheme and not on the date of court’s order. The court further held that the income of the transferor company from the date of transfer would be the income of transferee company.
9. The ld. CIT(Appeals) after considering the aforesaid submissions of the assessee, was of the view that the claim made by the assessee for set off of losses had to be allowed. He further observed as follows:-
“6.1 Though in the scheme of amalgamation, the effective date is mentioned as 31.03.2008 but it is seen that the date has really no connection with the scheme of amalgamation. It is seen that the terms of scheme of amalgamation appear to have been finalized on 31.01.2009, long after the transfer date 31.03.2008, as provided on the page no.3 and 4 of the scheme of amalgamation as quoted below:
‘The Board of directors of transferee company (i.e. Indus Fila), in its meeting held on 31.01.2009 approved and adopted the scheme of amalgamation wherein M/s. Tulip Apparels Pvt. Ltd. (the transferor company) incorporated under the Act and having its registered office in the state of Karnataka is proposed to be merged with the Transferee company. The transferee company made an application in C.A. No.169/2009 whence this court by order dated 06.04.2009 directed the convening and holding of the meetings of its shareholders and creditors, both secured and unsecured. By another application in C.A. No.224/2009, this court order dated 25.05.2009 permitted the change in chairman of the said meeting.’
10. Aggrieved by the order of the CIT(Appeals), the revenue has preferred the present appeal before the Tribunal.
11. The ld. DR reiterated the stand of the Assessing Officer as reflected in the order of assessment, while the ld. counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(Appeals).
12. We have considered the rival submissions. The Hon’ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) had to deal with a question as to the authority of the ITO calling upon the transferee company to file return of income for the period after the amalgamation has taken effect. The Hon’ble Supreme Court has observed as follows:-
“ ….. that since the company courts had not only sanctioned the scheme of amalgamation as presented to them, but had also not specified any other date as the date of transfer/amalgamation, it followed that the date of amalgamation/date of transfer was the date specified in the scheme as the transfer date. In such a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. Therefore, the notices issued by the Income-tax Officer were not warranted in law.” (emphasis laid)
13. The ratio laid down by the Hon’ble Supreme Court in the aforesaid decision is that the amalgamation takes effect from the appointed date as mentioned in the scheme of amalgamation which was duly sanctioned by the Hon’ble High Court without any change. The scheme also envisages that between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Therefore the amalgamation takes effect from 1.3.2008. As a naturally corollary, all losses of amalgamating company will be deemed to be the loss of the amalgamating company. In view of the aforesaid decision of the Hon’ble Supreme Court, we are of the view that the AO exceeded his jurisdiction in question the appointed day fixed under the scheme of amalgamation which is duly sanctioned by the Hon’ble High Court. Besides, there is contemporaneous evidence on record to show that the scheme of amalgamation had been proposed by the assessee as early as 11.03.2008 and such proposals have been duly communicated to the stock exchange (NSE & BSE). Apart from the above, in the notes to accounts for the period ending 2008-09, the assessee had duly highlighted the fact that the accounts of the assessee was prepared on a stand alone basis without setting off of losses of TAPL, because the proposal for amalgamation was still pending for consideration by the Hon’ble High Court.
14. In the light of above, we are of the view that the observations of the Assessing Officer expressing doubts regarding the scheme of amalgamation being a device to avoid taxes are all without any basis and are in the realm of suspicion and surmises. With regard to the non-filing of revised return of income, we are of the view that the provisions of section 72A are applicable, notwithstanding anything contained in other provisions of the Act and the set off of accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation has taken effect. In the present case, amalgamation is deemed to have been effected on 31.03.2008 and consequently the claim of the assessee for set off had to be allowed. The objections of the revenue as projected in the grounds of appeal in this regard therefore are devoid of any merit. The fact that TAPL filed the return of income for A.Y. 2008-09 is also of no consequence. In the light of the aforesaid discussion, we are of the view that the order of the ld. CIT(A) does not call for any interference, consequently the appeal by the revenue is dismissed.
(Pronounced in the open court on this 31.7.2012.)
Posted In Income Tax Case Laws
Judiciary
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In the instant case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the Assessing Officer in the assessment order. The assessee entered into an agreement with Reddy Structures (P.) Ltd., for development of housing project on the land owned by the assessee. The assessee got 24 per cent share in the said project and sold 49 flats. The assessee also incurred certain expenses for electricity and water connection connected with the project and also made payment to BWSSB and KEB. From the terms of the agreement it is clear that the assessee was engaged in the property development and this fact has also been admitted by the Assessing Officer. The assessee got his agricultural land converted for non-agricultural purposes, i.e., for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned.
From yet another clause in the agreement, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party, i.e., Reddy Structures (P.) Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration. In the instant case, the Assessing Officer denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. The provision contained in section 80-IB(10) is perused.
On a joint reading of sub-section (10) of section 80-IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover, the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows that even if any undertaking is constructing the housing project under a works contractentered by a person is not eligible for deduction. The only condition for claiming the deduction under section 80-IB(10) is that the undertaking is developing and building housing projects approved by a local authority. In the instant case, it is not the case of the department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction under section 80-IB(10) to the assessee was that the assessee had not carried out any construction activity, it is held that said reason is not sufficient to deny deduction under section 80-IB(10). In the instant case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction under section 80-IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non-agricultural purpose and getting plan sanctioned. Therefore, considering the totality of the facts and following the ratio land down by the Jurisdictional High Court in the case of CIT v. Shravanee Constructions [2012] 22 taxmann.com 250 (Kar.), set aside the impugned order passed by the Commissioner (Appeals) and direct the Assessing Officer to allow the deduction under section 80-IB(10) to the assessee.
IN THE ITAT BANGALORE BENCH ‘B’
Abdul Khader
v.
Assistant Commissioner of Income-tax
IT APPEAL NO. 57 (BANG.) OF 2011
[ASSESSMENT YEAR 2006-07]
APRIL 30, 2012
ORDER
N.K Saini, Accountant Member – This is an appeal filed by the assessee against the order dated 8.12.2010 of the learned Commissioner of Income-tax (Appeals) – V, Bangalore.
2. The following grounds have been raised in this appeal :
“1. The order of the learned CIT(A)-V is not justified in law and on facts and circumstances of the case.
2. The learned CIT(A) is not justified in denying the benefit of sec. 80IB(10) to the appellant although the appellant satisfied all the requisite conditions in respect thereof.
3. The learned CIT(A) is not justified in holding that sec. 80IB(10) is applicable only to an undertaking involved in developing and construction by ignoring the legal position that sec. 80IB(10) is applicable to an undertaking of developing and building housing project and not developing and construction of housing project.
4. The lower authorities have failed to appreciate that sec. 80IB(10) does not require that the assessee himself should construct the housing project and it is sufficient if he undertakes the activity of developing and building the housing project.
5. The lower authorities have failed to appreciate that practically every major developer of housing project would outsource construction to third parties which act by itself would not make him any less a developer and would not make any him ineligible for deduction of sec. 80IB(10).
6. The lower authorities are not justified in falling to appreciate that sec. 80IB(10) does not insist on actual construction to be carried out by the eligible assessee and in term of Explanation, mere construction on works contract is in fact ineligible for deduction there under.
7. The lower authorities are not justified perversely holding that the appellant did not engage in developing but only contributed land for the project ignoring that apart from land contribution appellant incurred sizable expenditure in the development of housing project.
8. The lower authorities are not justified in holding that the appellant is a mere contributor of land ignoring that the appellant himself was engaged in the business of real estate, had converted his land holing for commercial purpose, had converted his land into stock-in-trade and had obtained requisite plan sanction, water and electricity for development and building of housing project in his name.
9. The lower authorities are not justified in falling to appreciate various terms of Joint Development Agreement which clearly indicated that the appellant was not mute contributor of land but was an active partner in development and building of housing project.
10. The lower authorities have ailed to appreciate that the appellant assumed significant risks associated with the development and building of housing project. Therefore, being co-venturer in the Joint Development Agreement, he is eligible for benefit of deduction u/s 80IB(10).”
3. From the above grounds, it is gathered that only grievance of the assessee relates to the denial of deduction claimed u/s 80IB(10) of the Income-tax Act 1961 ((hereinafter referred to as the ‘Act’, in short).
3.1 The facts of the case in brief are that the assessee is a proprietor of M/s Bilad Builders & Developers and filed its return of income on 31.10.2006 declaring a total income of Rs. 88,28,640/-. The assessee claimed deduction of Rs. 1,72,20,784/- u/s 80IB(10) of the Act out of the gross total income arrived at Rs. 2,60,49,397/-. The case was selected for scrutiny and the AO asked the details regarding the 80IB(10) project undertaken by the assessee. The AO noticed that the assessee is a land developer and converted his land at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Taluk. measuring 1 acre and 31 guntas on 1.9.2003 by putting the same for development by entering into joint development agreement on 3/11/2003 with M/s Reddy Structures Pvt. Ltd and offered the capital gain for tax u/s 45(2) of the Act in the year in which the complete stock in trade was sold. The AO pointed out that the assessee had entered into a joint development agreement with M/s Reddy Structures Pvt. Ltd., for development of the schedule property as per the terms and conditions contained in the joint development agreement. According to the AO, the joint development agreement clearly specifies that the assessees contribution towards the project at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bengaluru South Talulk. was only contributing the land and incurring expenses for statutory approval. The AO was of the view that the deduction u/s 80IB(10) should not be allowed to the assessee since he was only a land owner and the said land was transferred to M/s Reddy Structures Pvt. Ltd. for joint development and that the assessee had not carried out any construction activity as could be seen from the expenses claimed in the profit and loss account and also in the balance sheet. The AO observed that the claim of deduction u/s 80IB(10) of the Act by the assessee was erroneous, since the assessee had not done any construction activity and only transferred the land. The AO was also of the view that any undertaking involved in development and house building project was eligible for deduction, therefore, the developer and the builder should invariably be the same person. According to him, the assessee had not followed the basic requirement of the eligibility criteria for granting deduction u/s 80IB(10) of the Act. The assessee explained to the AO vide letter dated 24.11.2008 that in the terms of the joint development agreement, the assessee had incurred project expenses in relation to statutory approvals like BWSSB, KEB, plan sanction and the balance other expenses were incurred by M/s Reddy Structure Pvt. Ltd. The assessee also furnished the copy of cheque payments made to M/s BWSSB and KEB drawn on HDFC Bank and also copy of a bill for Rs. 2,04,080/- for misc. work done. The AO after considering the above explanation of the assessee observed that no payment relates to the construction activity carried out for the project like purchase of jelly, sand, cement, iron or any such related expenses, therefore, the very nature of expenses clearly proved that the assessee had not undertaken any development which was sin-quo-nor for deduction u/s 80IB(10). The AO held that since the assessee had not involved himself in the construction of the residential complex but merely contributed land for the same, therefore, he was not eligible for deduction u/s 80IB(10) of the Act. Accordingly, the claim of the assessee u/s 80IB(10) was disallowed.
4. The assessee carried the matter to the learned CIT(A) and submitted that the assessee was a joint developer along with M/s Reddy Structure Pvt. Ltd., in the development of the residential project and he was very much involved in the development of the project as he had incurred expenditure for getting statutory approvals necessary for undertaking the project. It was further stated that if a house building project complies with all the requirements of clause (a) to (d) of sec. 80IB(10) of the Income-tax Act, it was not open to the Revenue to look into any other criteria to say, whether the house building project was fully owned or co-owned or jointly undertaken or carried out on partnership basis or in any other pattern. It was accordingly submitted that the assessee was very much entitled for the deduction provided u/s 80IB(10) of the Act.
5. The learned CIT(A) after considering the submissions of the assessee observed that the deduction u/s 80IB(10) of the Act was available to any undertaking involved in development and construction of the housing project. But in the present case, the assessee was not involved in the development and construction of the housing project and only contributed land for the purposes of the project, therefore, he was not entitled for the said deduction. He accordingly confirmed the addition made by the AO.
6. Now the assessee is in appeal before us.
7. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee converted his agricultural land into non agricultural land and then converted into stock-in-trade on 1.9.2003 by putting the same for development by entering into joint development agreement with M./s Reddy Structures Pvt. Ltd. on 3.11.2003 and as per terms of the joint development agreement the assessee got 24% share while another developer got 76% share. He referred to para 2 of the assessment order and submitted that the AO himself admitted that assessee was a land developer. The learned counsel for the assessee stated that the assessee incurred expenses relating to the building project and the amount was spent by the assessee on the development. It was further stated that the assessee produced proof to show that the payments were made to BWSSB and KEB in connection with the development activities, therefore, the assessee was not simply a contributor of land but he is also a developer of the land, as such, the assessee was eligible for deduction u/s 80IB(10) of the Act. The learned counsel for the assessee contended that the assessee incurred expenses for getting electricity and water connection, so it cannot be said that the expenses incurred by the assessee were not related to the development of the housing project. A reference was also made to page No.32 of the assessee compilation, which is a copy of the letter written by the AO to M/s Reddy Structures Pvt. Ltd., who jointly developed the project with the assessee. It was pointed out that in the said letter dated 13.10.2008, the AO asked the information regarding project ‘Cornet’ jointly developed with Abdul Khader (the assessee). On the basis of the aforesaid document (the letter dated 13.10.2008), it was submitted that the AO himself admitted that the assessee developed the project jointly with M/s Reddy structures Pvt. Ltd., a reference was also made to page No. 36 of the assessee’s compilation which is a copy of amendment vide Finance (No. 2) Bill 2009 and it was submitted that objective of the tax concession under sub. Sec. (10) of sec. 80IB of the Act is to provide tax benefit to the person undertaking the investment risk i.e. actual developer and any other person undertaking pure contract risk is not entitled to the tax benefits. It was submitted that the assessee made the investment and contributed his land for the project, so there was investment risks and hence, the assessee was entitled for deduction u/s 80IB(10) of the Act, the reliance was placed upon the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. Shravanee Constructions[2012] 22 taxmann.com 250 (Kar.). Copy of the said order was furnished.
8. In his rival submissions, the learned DR strongly supported the orders of the authorities below and further submitted that the assessee had not made any payment relating to the construction activity and it was the responsibility of the assessee to get electricity and water connection because the ownership was lying with him, therefore, only on this basis that the assessee made the payment for electricity and water connection, it cannot be held that the assessee incurred expenses for development of the housing project and was eligible for deduction u/s 80IB(10) of the Act. It was further stated that the assessee only contributed the land for the project, therefore, he was not eligible to have the deduction u/s 80IB(10) of the Act.
9. We have considered the submissions of both the parties and carefully gone through the materials available on record. In the present case, it is not in dispute that the assessee was a land developer and this fact has also been admitted by the AO in para 2 of the assessment order dated 31.12.2008. The assessee entered into agreement with M/s Reddy Structures Pvt. Ltd., for development of housing project situated at survey No. 26/1, Volagerahalli, Kengeri Hobli, Bangalore South Taluk, measuring 1 acre and 31 guntas. The assessee got 24% share in the said project and sold 49 flats as mentioned in page No. 6 of the assessee’s compilation, which is the copy of the bill and sale of flat during the financial year 2005-06. The assessee also incurred certain expense for electricity and water connection connected with the project and also made payment to BWSSB and KEB. The assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd. In the said agreement dated 3.11.2003, copy of which is placed at page Nos. 1 to 13 of the assessee’s paper book dated 28.2.2012, in the said agreement, it is mentioned at page No. 2 as under :
“WHEREAS the first is engaged in property development of the schedule property hence had applied for conversion of the said schedule property from agricultural to residential purpose before the Special Deputy Commissioner Bangalore District and the same was allowed by its order vide No. BDS. ALN.SR(s) 26/2002-2003 dated 28-12-2002.
AND WHEREAS the first party is developing the schedule property by putting up a residential housing enclave and the first party has entered into this agreement with the second party to undertakes the work of development of the schedule property jointly.”
10. From the above, it is clear that the assessee was engaged in the property development and this fact has also been admitted by the AO. The assessee got his agricultural land converted for non agricultural purposes i.e. for residential purposes and jointly undertook the development and construction of the schedule property by getting permission and plan sanctioned. The clause – (4) of the agreement entered by the assessee with M/s Reddy Structures Pvt. Ltd. states as under :
“It is hereby agreed that the first party has contributed the schedule property as his capital contribution for joint development & construction and the second party shall make investment on schedule property for joint development and construction. First party shall make investment for all statutory approvals including BWSSB, KEB, plan sanction etc., the first party shall retain 24% of the built up area in the schedule property along with 24% car parking. Both the parties to this agreement shall be entitled to all common rights and facilities in the common areas of the building proportionally as per their respective shares.”
11. From the above clause, it is clear that the assessee contributed his property in lieu of capital contribution for joint development and construction and the second party i.e. M/s Reddy Structures Pvt. Ltd., was required to make investment for joint development and construction, whereas the assessee was required to make investment on schedule property but the assessee was required to make investment for all statutory approvals including BWSSB, KEB, plan sanction etc. and in such type of cases, the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purpose the assessee was required to make investments. So, it cannot be said that the assessee did not make any investment for the project under consideration.
12. In the present case, the AO denied the deduction to the assessee by stating that the assessee only contributed the land and had not carried out any construction activities. Now, we have to analyze the provision contained in sec. 80IB(10) of the Act. The said provision read as under :
“The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of Mar, 2007 by a local authority shall be hundred per cent of the profits derived in the previous year relevant to any assessment year from such housing project.
13. The Explanation has been inserted to sub sec. (10) of sec. 80IB w.e.f. 1.4.2010 with retrospective effect from 1.4.2001 vide Finance (No.2) Act 2009. The said explanation read as under :
“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).”
14. On a joint reading of sub. sec (10) of sec. 80IB and explanation thereto it is clear that deduction as is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that for claiming this deduction, construction has to be carried out by the undertaker, moreover the explanation clarified that any undertaking which executed housing project as a works contract awarded by any person is not eligible for claiming this deduction which clearly shows even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming the deduction u/s 80IB(10) is that the undertaking is developing and building, housing projects approved by a local authority. In the present case, it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s 80IB(10) of the Act to the assessee was that the assessee had not carried out any construction activity, in our opinion that reason is not sufficient to deny deduction u/s 80IB(10) of the Act. In the present case, the assessee made the contribution of his capital in the shape of land and incurred the initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB etc. Therefore, merely on this basis that the assessee did not construct himself was not a ground to deny the deduction u/s 80IB(10), particularly when the assessee had undertaken the other work like making the land useful by getting it converted into non agricultural purpose and getting plan sanctioned. On a similar issue, their lordships of Hon’ble Jurisdictional High Court in the case of Shravanee Constructions (supra) at para 8 of the judgment dated 28th Feb., 2012 in ITA No. 421 and 422 of 2009 observed as under :
“In terms of the agreement, which are not in dispute, the assessee not only undertook the aforesaid development activities on the land in question, but in fact, he entered into an agreement of sale with the owners of the land, paid the entire consideration but he did not take a registered sale deed in his name. On the contrary, the procedure adopted is he in turn entered into a joint development agreement with the builder and the owner of the land was made a party to the said proceedings. Thus, the assessee contributed the land, undertook the aforesaid development activities in the said land and thus, complied with all other conditions, which have to be fulfilled before claiming benefit u/s 80IB(10) of the Act. The builder has invested the money in the construction. It is after completion of the building in terms of the agreement, the assessee was given 22% share of the building area. It is after sale of the built area, in terms of sec. 80IB(10), the assessee is claiming deduction. As is clear from the joint development agreement, the undertaking of developing and building housing project was jointly undertaken by the assessee and the builder. Therefore, in respect of the residential units numbering 211 in all, the persons who undertook this undertaking are entitled to the benefit of sec. 80IB(10) of the Act in proportion to the share to which they are entitled to in the built up area.”
15. In the present case also, the assessee entered into an agreement with M/s Reddy Structures Pvt. Ltd., for development and building of the housing project on the land belonging to him. The assessee contributed the land, undertook the developmental activities in the said land and thus complied with all other conditions which have to be fulfilled before claiming the benefit u/s 80IB(10) of the Act. In the present case, it was agreed that after completion of the building in terms of the agreement, the assessee was given 24% of the share of the building area which he was entitled to sell to various persons, it was also clear from the joint development agreement that the undertaking of developing and building housing project was jointly undertaken by the assessee and M/s Reddy Structures Pvt. Ltd., therefore, the assessee was entitled for the benefit of deduction u/s 80IB(10) of the Act. We, therefore, considering the totality of the facts and respectfully following the ratio laid down by the Hon’ble Jurisdictional High Court in the above said referred case of Shravanee Constructions (supra), set aside the impugned order passed by the CIT(A) and direct the AO to allow the deduction u/s 80IB(10) of the Act to the assessee.
16. In the result, the appeal of the assessee is allowed.
CBEC's Draconian Circular - High Court Order
TIOL-DDT 2022
11.01.2013
Friday
THE report in yesterday's DDT on the AP High Court's Order evoked huge response, mostly from lawyers. They were all asking for a copy of the order. We carry the order today. Please see 2013-TIOL-23-HC-AP-CX
The whole order is as given below:
Petition under Section 151 of C.P.C. praying that in the circumstances stated in the affidavit filed in the W.P. the High Court may be pleased to grant stay of clarification issued vide Sl.No.3 of the Circular No.967/01/2013-CX dated 01.01.2013 and consequent Letter O.C.No.496/2012-13 dated 04.01.2013 issued by the Respondent No.2, pending disposal of WP No. 734 of 2013 on the file of the High Court.
The court, while directing issue of notice to the Respondents herein to show cause as to why this petition should not be complied with, made the following order.(The receipt of this order will be deemed to be the receipt of notice in the case).
ORDER
There shall be interim stay of recovery of the amount involved, till the appellate authority disposes of the application for stay.
There were nine such writ petitions challenging various provisions of the controversial circular. Though the High Court did not quash or stay the Circular, the recovery of the amount involved has been stayed.
In the next few days all High Courts in the Country will be flooded with such writ petitions - the lawyers should be grateful to the CBEC for this most unexpected prosperous New Year gift.
2013-TIOL-34-ITAT-BANG
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' BANGALORE
ITA No.1193/Bang/2011
Assessment Year: 2008-09
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-11(4), BANGALORE
Vs
M/s INDUS FILA LTD
NO 107, INDUSTRIAL SUBURB, II STAGE
YESHWANTHPUR, BANGALORE-560022
PAN NO:AAACI 5893C
N Barathvaja Sankar, VP and N V Vasudevan, JM
Dated: July 31, 2012
Appellant Rep by: Shri Sarangan, Sr. Counsel
Respondent Rep by: Shri Farahat Hussain Qureshi, CIT-II(DR)
Income Tax - Section 72A - Whether in view of the sanction of the scheme of amalgamation by the HC, the claim made by the assessee for set off of losses has to be allowed as per the provisions of section 72A.
The assessee was a company which is engaged in the business of manufacture of readymade garments. The TAPL was also engaged in similar line of business as that of the assessee. The assessee has been doing job work for TAPL. TAPL could not carry on its business profitably. Hence the proposal was that TAPL will merge with the assessee and cease to be a separate entity on merger with the assessee. A scheme of amalgamation of TAPL with the assessee was formulated, as per the said scheme with effect from the appointed day which was fixed in the scheme as 31.03.2008, TAPL will cease to be an entity and all the assets & liabilities of TAPL shall vest with the assessee. The High Court of Karnataka sanctioned the scheme of amalgamation. The assessee filed the return of income declaring business income of Rs.31,36,33,145. Consequent to the sanction of scheme of amalgamation by the HC, the assessee filed letter before the AO wherein the assessee claimed set off of carried forward losses of TAPL against the income declared by the assessee. This claim was made in view of the provisions of section 72A.The AO was of the view that the process of amalgamation has been used as a tool to wipe off the profits of a profit making entity against the loss of another entity. The AO concluded that the setting off of the losses is a colourable device and treated as such. To avoid the payment of taxes on the whopping profit of Rs.31,36,33,145, the assessee had resorted on the scheme of amalgamation and made a wrong claim of set off from the losses of another related party Therefore the set off of the losses was disallowed and the same amount was added back to the income of the assessee. The CIT(A) was of the view that the claim made by the assessee for set off of losses had to be allowed.
On Appeal before the Tribunal the DR reiterated the stand of the AO as reflected in the order of assessment, while the counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(A).
Having heard the parties, the Tribunal held that,
++ in view of the Marshall Sons & Co decision of the Supreme Court, we are of the view that the AO exceeded his jurisdiction in question the appointed day fixed under the scheme of amalgamation which is duly sanctioned by the High Court. Besides, there is contemporaneous evidence on record to show that the scheme of amalgamation had been proposed by the assessee as early as 11.03.2008 and such proposals have been duly communicated to the stock exchange (NSE & BSE). Apart from the above, in the notes to accounts for the period ending 2008-09, the assessee had duly highlighted the fact that the accounts of the assessee was prepared on a stand alone basis without setting off of losses of TAPL, because the proposal for amalgamation was still pending for consideration by the High Court;
++the observations of the AO expressing doubts regarding the scheme of amalgamation being a device to avoid taxes are all without any basis and are in the realm of suspicion and surmises. With regard to the non-filing of revised return of income, we are of the view that the provisions of section 72A are applicable, notwithstanding anything contained in other provisions and the set off of accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation has taken effect. In the present case, amalgamation is deemed to have been effected on 31.03.2008 and consequently the claim of the assessee for set off had to be allowed.
Revenue’s Appeal dismissed
Case followed:
Marshall Sons & Co. (India) Ltd. v. ITO 223 ITR 809.
ORDER
Per: N V Vasudevan:
This appeal by the revenue is against the order dated 19.09.2011 of the CIT(Appeals)-I, Bangalore relating to assessment year 2008-09.
2. Grounds No.1, 5 & 6 are general in nature and requires no adjudication. The other grounds of appeal raised by the revenue reads as under:-
“2. The learned CIT(Appeals) was not justified in allowing the assessee to set off of loss of amalgamating company (M/s. Tulip Apparels) with the profits of the appellant amalgamated company, without appreciating the facts and circumstances under which the same was disallowed by the Assessing Officer.
3. The learned CIT(Appeals) erred in allowing the relief without appreciating that the amalgamating company (M/s. Tulip Apparels) had already filed its return of income on 29.9.2008 for AY 2008-09 and that petition before the Hon’ble High Court for approval of merger was also after the due date for filing the return of income for the concerned Assessment Year by the assessee (amalgamated) company.
4. The learned CIT(A) erred in allowing the relief without considering that it is a case of colorable device considering the fact that the Board Resolution is itself taken on 31.1.2009, i.e., much after the due date for filing the return of income in the case of the assessee and after nine months from the end of the relevant financial year.”
3. The assessee is a company which is engaged in the business of manufacture of readymade garments. There was another company by name ‘Tulip Apparels Pvt. Ltd.’ (“TAPL” for short). This company was also engaged in similar line of business as that of the assessee. In fact, the assessee has been doing job work for TAPL. TAPL could not carry on its business profitably. The assessee and TAP therefore decided that it would be in the best interest of both the companies that TAPL merge with the assessee. The amalgamation could help achieve optimum utilization of single manpower, infrastructure, production and logistic facilities. The assessee will also have the benefit of trained and skilled manpower, which will enable the assessee to expand its garment manufacturing operations. The two companies therefore decided to amalgamate. The proposal was that TAPL will merge with the assessee and cease to be a separate entity on merger with the assessee.
4. On 11.03.08, the Board of Directors of the assessee resolved that the assessee will merge with TAPL subject to approval of shareholders of the assessee and TAPL, the Hon’ble High Court, stock exchange and other regulatory authorities. On 12.03.2008, the assessee informed the BSE as well as NSE regarding the proposed merger of TAPL with the assessee. A scheme of amalgamation of TAPL with the assessee was formulated, as per the said scheme with effect from the appointed day which was fixed in the scheme as 31.03.2008, TAPL will cease to be an entity and all the assets & liabilities of TAPL shall vest with the assessee. TAPL will stand dissolved without winding up. Between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Since the scheme of amalgamation required the sanction of the Hon’ble High court of Karnataka, TAPL as well as the assessee filed petition for sanction of the scheme of amalgamation in Company Petition No.97/2009 & Company Petition No.80/2009. By an order dated 06.02.2010, the Hon’ble High Court of Karnataka sanctioned the scheme of amalgamation as proposed by TAPL and the assessee.
5. The assessee filed the return of income for the A.Y. 2008-09 declaring business income of Rs.31,36,33,145. Consequent to the sanction of scheme of amalgamation by the Hon’ble High Court, the assessee filed letter before the Assessing Officer wherein the assessee claimed set off of carried forward losses of TAPL against the income declared by the assessee. This claim was made in view of the provisions of section 72A of the Act, which provides that where there is amalgamation, then the accumulated loss or unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected. We have already seen that the amalgamation was effected on 31.03.2008 which is the appointed day under the scheme of amalgamation which the Hon’ble High Court had sanctioned. TAPL has a loss of Rs.41,18,72,846. The assessee claimed in the course of assessment proceedings that the business income declared by the assessee should be set off against the loss of TAPL and if so set off, there will be no chargeable total income of the assessee.
6. The Assessing Officer examined the aforesaid claim of the assessee, he was of the view that the process of amalgamation has been used as a tool to wipe off the profits of a profit making entity against the loss of another entity. Thereafter, the AO proceeded to make the following observations:-
(a) The appointed date as per the scheme of amalgamation was 31.03.2008 and the Board of Directors of the transferee company viz., the assessee, approved the same only in their meeting held on 31.01.2009. Therefore the appointed day was arbitrarily fixed as 31.03.2008.
(b) The assessee failed to prove that during the assessment year 2008-09 or earlier to that date, the assessee and TAPL negotiated for amalgamation.
(c) TAPL existed as a company with the Registrar of Companies upto 09.03.2010 and therefore from 31.03.2008 to 08.03.2010, TAPL was in existence and carried on its business under the control of its Board of Directors.
(d) By the process of amalgamation, the assessee adopted a device seeking to set off the amalgamated losses of TAPL against its profits.
(e) The wisdom in fixing the effective date of scheme of amalgamation as 31.03.2008 was also questioned.
(f) The assessee did not file a revised return of income after the approval of the scheme of amalgamation by the Hon’ble High Court of Karnataka which was on 06.02.2010. The assessee could have filed a valid revised return of income u/s. 139(4) of the Act till 31.03.2010.
(g) Because of the set off of loss, the assessee had to pay taxes only as per the provisions of section 115JB i.e., MAT.
7. After making the aforesaid observations, the AO finally observed as follows:-
“8.7 In view of the foregoing, it is concluded that the setting off of the losses is a colourable device and treated as such. To avoid the payment of taxes on the whopping profit of Rs.31,36,33,145, the assessee had resorted on the scheme of amalgamation and made a wrong claim of set off from the losses of another related party Therefore the set off of the losses is hereby disallowed and the same amount is added back to the income of the assessee.”
8. The assessee preferred an appeal before the CIT(Appeals) and submitted that consequent to the sanction of the scheme of amalgamation, the loss of TAPL had to be adjusted against the income of the assessee company, both under normal computation of income as well computation u/s. 115JB of the Act. The assessee also pointed out that by virtue of the provisions of section 72A of the Act, the assessee was entitled to the claim of set off. The assessee also highlighted that it was not possible for the AO to question the scheme of amalgamation, which has been duly sanctioned by the Hon’ble High Court. The steps taken by the assessee for the amalgamation were also highlighted. The assessee also pointed out that even though the court’s sanction in a scheme of amalgamation comes at a later point of time, but the scheme of amalgamation takes effect from the effective date, unless the order of High Court sanctioning the scheme provides for a different effective date. The assessee also relied on the decision of the Hon’ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. v. ITO 223 ITR 809, wherein the Hon’ble Supreme Court has held that amalgamation takes effect on the date of transfer specified in the scheme and not on the date of court’s order. The court further held that the income of the transferor company from the date of transfer would be the income of transferee company.
9. The ld. CIT(Appeals) after considering the aforesaid submissions of the assessee, was of the view that the claim made by the assessee for set off of losses had to be allowed. He further observed as follows:-
“6.1 Though in the scheme of amalgamation, the effective date is mentioned as 31.03.2008 but it is seen that the date has really no connection with the scheme of amalgamation. It is seen that the terms of scheme of amalgamation appear to have been finalized on 31.01.2009, long after the transfer date 31.03.2008, as provided on the page no.3 and 4 of the scheme of amalgamation as quoted below:
‘The Board of directors of transferee company (i.e. Indus Fila), in its meeting held on 31.01.2009 approved and adopted the scheme of amalgamation wherein M/s. Tulip Apparels Pvt. Ltd. (the transferor company) incorporated under the Act and having its registered office in the state of Karnataka is proposed to be merged with the Transferee company. The transferee company made an application in C.A. No.169/2009 whence this court by order dated 06.04.2009 directed the convening and holding of the meetings of its shareholders and creditors, both secured and unsecured. By another application in C.A. No.224/2009, this court order dated 25.05.2009 permitted the change in chairman of the said meeting.’
10. Aggrieved by the order of the CIT(Appeals), the revenue has preferred the present appeal before the Tribunal.
11. The ld. DR reiterated the stand of the Assessing Officer as reflected in the order of assessment, while the ld. counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(Appeals).
12. We have considered the rival submissions. The Hon’ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) had to deal with a question as to the authority of the ITO calling upon the transferee company to file return of income for the period after the amalgamation has taken effect. The Hon’ble Supreme Court has observed as follows:-
“ ….. that since the company courts had not only sanctioned the scheme of amalgamation as presented to them, but had also not specified any other date as the date of transfer/amalgamation, it followed that the date of amalgamation/date of transfer was the date specified in the scheme as the transfer date. In such a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. Therefore, the notices issued by the Income-tax Officer were not warranted in law.” (emphasis laid)
13. The ratio laid down by the Hon’ble Supreme Court in the aforesaid decision is that the amalgamation takes effect from the appointed date as mentioned in the scheme of amalgamation which was duly sanctioned by the Hon’ble High Court without any change. The scheme also envisages that between the appointed day till the date on which the scheme finally takes effect i.e., the effective date, the business which is carried on by TAPL shall be deemed to have been carried on for and on behalf of assessee and in trust for the assessee. Therefore the amalgamation takes effect from 1.3.2008. As a naturally corollary, all losses of amalgamating company will be deemed to be the loss of the amalgamating company. In view of the aforesaid decision of the Hon’ble Supreme Court, we are of the view that the AO exceeded his jurisdiction in question the appointed day fixed under the scheme of amalgamation which is duly sanctioned by the Hon’ble High Court. Besides, there is contemporaneous evidence on record to show that the scheme of amalgamation had been proposed by the assessee as early as 11.03.2008 and such proposals have been duly communicated to the stock exchange (NSE & BSE). Apart from the above, in the notes to accounts for the period ending 2008-09, the assessee had duly highlighted the fact that the accounts of the assessee was prepared on a stand alone basis without setting off of losses of TAPL, because the proposal for amalgamation was still pending for consideration by the Hon’ble High Court.
14. In the light of above, we are of the view that the observations of the Assessing Officer expressing doubts regarding the scheme of amalgamation being a device to avoid taxes are all without any basis and are in the realm of suspicion and surmises. With regard to the non-filing of revised return of income, we are of the view that the provisions of section 72A are applicable, notwithstanding anything contained in other provisions of the Act and the set off of accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation has taken effect. In the present case, amalgamation is deemed to have been effected on 31.03.2008 and consequently the claim of the assessee for set off had to be allowed. The objections of the revenue as projected in the grounds of appeal in this regard therefore are devoid of any merit. The fact that TAPL filed the return of income for A.Y. 2008-09 is also of no consequence. In the light of the aforesaid discussion, we are of the view that the order of the ld. CIT(A) does not call for any interference, consequently the appeal by the revenue is dismissed.
(Pronounced in the open court on this 31.7.2012.)
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