10. Slum Development

In the city of Mumbai, there are innumerable slum rehabilitation projects which are carried out by various undertakings engaged in development of housing projects.

These projects are approved by the Government of Maharashtra as Slum Rehabilitation project (SRA Project)

These SRA projects has to be in strict compliance of various rules and Act, which is again guided by the Circulars and Notification, therefore, the developer has no say in its implementation and execution.

S. 80IB(10) provides for a deduction of the profits of an undertaking developing and building housing project. One of the condition laid down is the project size should be more than one acre. However, by Finance (No.2) 2004, the legislature has removed the restriction of the project size by a proviso due to difficulties faced to developer in getting an area of one acre for development of a single society within the entire slum project.

As a result in most of the cases a developer undertakes several projects which are within the slum project but are not adjacent and they are more than one acre only cumulatively. Hence, eligibility of deductions in such situation is an important issue. When the competent authority for the slum rehabilitation holds that it is one project, can the Assessing Officer take the view that it is not one project, condition of one acre has to be satisfied for each permission and not combined together.

One derives the support from the subsequent Amendment by the Finance (No.2) Act 2004. The proviso was inserted in clause (b) whereby the restriction of size of plot was relaxed with view to rationalize the provision. It is submitted that the proviso was inserted to make the provision workable and avoid the difficulty. Interpretation should be made to bring effective result and avoid unjust result or discrimination. The proviso was inserted to cure the defect.

In Allied Motors (P) Ltd. vs. CIT (1997) 224 ITR 677 (SC) it was held that A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section to give the section a reasonable interpretation requires to be treated as retrospective in operation.

However even if the proviso is read as retrospective, assessee may be denied deduction as the SRA projects require approval of the CBDT and CBDT has not approved a single slum Rehabilitation Project till date.

11. Completion of Project

11.1 As per the requirement of section 80(IB)(10), the project is required to be completed by 31-3-2008. For the purpose, whether occupation certificate obtained from the appropriate authority to the effect that the development is as per the approval and is ready for occupation is sufficient or will the department insist on any other certificate like completion certificate from appropriate authorities?

11.2 In our opinion, the occupation certificate given by the BMC would be sufficient proof that the housing project is completed. Even in Dy. CIT vs. Ansal Properties & Industries Ltd. (2008) 22 SOT 45 (Del.) it was considered sufficient. But, occupation certificates are sometimes given building wise. If all the buildings constructed by the developer have occupation certificates before 31-3-2008, may be sufficient compliance.

11.3 If, by any reason, the occupation certificate was not granted or disputed, despite the fact that the project is completed, some other proof like the architect certificate may also help. It is preferable that the certificate should elaborately describe the completed project item wise. For example, the architect’s certificate must describe the buildings that have been completed, the utilities like water, electricity that are functional, the areas kept readily available to surrender to the BMC for reservation, setback, roads, etc.

11.4 When, construction is duly completed before 31-3-2008, but the sale of some flats take place in the subsequent year, whether deduction u/s. 80IB[10] would be available in the subsequent years from the incomes from such sales?

11.5 In our opinion generally, in incentive provisions granting tax holidays, there is always a specification as to the number of years the tax holiday can be enjoyed. But, in S. 80IB[10], there is no specification as to the number of years the tax holiday is available. As on date, it appears that once an approved project is completed before the cut off date fixed as per section 80-IB[10] and other eligibility conditions are also fulfilled, there is no terminal year for claiming the tax holiday.

11.6 The assessee will be entitled to deduction u/s. 80IB[10] in respect of the income from the sale, provided that the Legislature has not made any amendment curtailing the availability of the deduction up to A.Y. 2009-10 or deleted the provisions of section 80IB[10] w.e.f. 1-4-2010. It is settled principle in law that as regards income tax provisions, the law that is to be applied is the law that is in force on the first day of the assessment year.

A useful reference can be made to the decision of the Supreme Court in the case of Reliance Jute & Industries Ltd. vs. CIT (1979) 120 ITR 921 (SC).

12. Terrace

12.1 Whether terrace areas allotted to some flat owners for exclusive use should be clubbed with the built up areas of the flat to ascertain whether the maximum built up of the flat is less than 1000 sq. ft built up area in order to satisfy the eligibility condition in clause [c] of section 80IB[10]?

12.2 In our opinion a terrace is known as a paved outdoor area adjoining a residence. It adjoins the residence externally and is not part of the structure that composes the residential unit. A residential unit is enclosed in walls which stretch from the floor level to the roof; it has windows and is topped by a roof. A residential unit has provisions for amenities and security of the residents.

A terrace, on the other hand, hardly has the features of the residential unit. It is open to the sky and the height of its wall boundaries are no where similar to that of the residential unit. Windows are virtually non existent.

Both terrace and residential units can exist independently and can be used in mutually exclusive manner by the residents. A terrace may provide more beneficial enjoyment to the residential unit, but so does a garage or an open garden. A terrace independently is not competent to be used for habitable purposes.

13. Several Housing Projects

Some of the assessee’s have a division which carry out several housing projects. In such projects difficulty arise as to preparing separate balance sheets for each project as the resources are common. Rule 18BBB requires separate report [10CCB] for each “Undertaking or Enterprise” of the Assessee should be accompanied by Profit & Loss account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise was a distinct entity. Reading Rule 18BBB and section 80IB together means “undertaking” and “housing projects” mean two different things. Can it be interpreted that the requirement of Rule 18BBB is met if Balance Sheet of a Division [being treated as “Undertaking or Enterprise} covering various “Housing Projects” is common.

14. Business Income vs. Capital Gains

14.1 Whether a purchase and sale transaction of a land is an adventure in the nature of trade or not depends on the facts and circumstances of each case. It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not.

14.2 Land received as gift

CIT vs. Shahsi Kumar Agrawal (1992) 195 ITR 767 (All)

Assessee sold the same after plotting it out in order to secure a better price and because he was staying in a different place in connection with his official duties and not able to use it for agricultural operations. Surplus received from sale was not assessable as income from an adventure in nature of trade.

14.3 Ancestral land converted into non agricultural land

CIT vs. Premji Gopalbhai (1978) 113 ITR 785 (Guj.)

Land divided into several plots and sold as and when purchaser was available. Assessee is not dealer in land.

Ram Saroop Saini, HUF vs. Asst. CIT (2007) 15 SOT 470 (Del.)

It was held that fact that the assessee got the land converted into non-agricultural land before selling it is neither determinative nor conclusive to ascertain the nature of the transaction. It is the totality of the circumstances which have to be borne in mind to determine the character of the transaction.

14.4 CIT vs. R. V. Gupta (2002) 258 ITR 261 (Delhi) Assessee constructed six flats on land allotted to him and to his brother by DDA long ago and sold four flats, retaining the remaining two flats for their own use. It was held that the assessee was in service; no change in the character of the said plot had been effected from the years 1971 to 1989; there was no material on record from where it could be said that the assessee ever had the intention to exploit the plot as a commercial venture. Merely because six flats had been constructed, out of which four were sold to friends, it would not show that it was an adventure in the nature of trade.

15. Property vs. Business Income

15.1 With several malls and business centres emerging, taxability of rental income arising therefrom is an important issue. Supreme Court in Shambhu Investment (P) Ltd. vs. CIT (2003) 263 ITR 143 (SC) has held that income derived from letting assessable as income from property and not business income. In this case assessee was letting out furnished premises on monthly rent basis to various parties along with furniture, fixtures, light, air-conditioners, etc., for being used as "table space". Under the agreement assessee is also providing services like watch and ward staff, electricity, water and other common amenities to the occupiers. These services are not separately charged. Entire cost of property already recovered by way of interest-free advance by the assessee. Only intention was to let out the portion of premises to respective occupants. It was held that income derived from letting rightly held assessable as income from property and not business income.

15.2 However, in PFH Mall & Retail Management Ltd. vs. ITO (2008) 110 ITD 337 (Kol.) after considering Shambhu Investment (P) Ltd. it was held that income derived by assessee from shopping malls/business centres was assessable as business income and not as income from house property. It held that “The fact that the apex Court held that the income earned by Shambhu Investment (P) Ltd. is assessable as property income has no relevance in the facts and circumstances of the present case. Because in that case the facts showed that the main intention was to earn rental income. That was why the entire cost of the property was recovered from the tenants by way of interest-free advance. In the instant case, on the other hand, the assessee had taken bank loans to finance his projects like any other businessman. As discussed hereinabove, every action of the present assessee appears to be with the sole object of commercial exploitation of the premises.”

Mumbai Tribunal in case of M/s Omsagar Engineering Pvt. Ltd. vs. ACIT, ITA No. 2989/Mum/03, Bench–K, dated 30-11-2006, held that income from service centre is to be treated as business income.

CIT vs. Pateshwari Electrical & Associated Industries (P) Ltd. (2006) 282 ITR 61 (All) (After considering Shambhu Investments) Letting out of all the rooms of a property, used as a guest-house, by the assessee to a bank to be used as a training centre was a part of running of the lodge business and, therefore, income from such leasing was assessable as business income and necessary expenditure incurred thereon was allowable as business expenditure.

CIT vs. Sarabhai (P) Ltd. (2003) 263 ITR 197 (Guj.) When property has been let out not only as property but with services which is a complex letting, the income cannot be said to be derived from mere ownership of house property but may be assessable as income from business. If the owner of a property carries on upon the property some activities which result in profits and gains arising, not from the ownership of the property but from the owner’s use thereof, letting various services to the tenants, those profits and gains may be chargeable u/s. 28 as income from business, apart from the assessment u/s. 22 in respect of income from house property.

16. Full Value of Sale Consideration – S. 50C

16.1 Section 50C is inserted to prevent large scale undervaluation of the real value of the property in the sale deed so as to defraud Revenue. Constitutional validity of S. 50C has been upheld by the Madras high court in K. R. Palanisamy & Ors. vs. UOI & Ors. (2008) 219 CTR 323 (Mad.).

16.2 Reference to DVO – Not Discretionary

In Meghraj Baid vs. ITO (2008) 114 TTJ 841 (Jd) / (2008) 4 DTR 509 (JD) it was held that in case the AO does not agree with the explanation of the assessee with regard to lower consideration disclosed by him then he should refer the matter to DVO for getting its market rate established as on date of the sale to arrive at the correct sale consideration. If this provision is read in the sense that if the AO is not satisfied with the explanation of the assessee then he ‘may’ or ‘may not’ send the matter for valuation to the DVO then in that case this provision would be rendered redundant. In ITO vs. Smt. Manju Rani Jain (2008) 24 SOT 24 (Del.) Assessing Officer having taken market value adopted for stamp duty purposes as full value of consideration for purposes of computing capital gains in place of stated consideration, CIT(A) was justified in directing the Assessing Officer to first refer the properties to valuation cell and then do so in view of provisions of S. 50C(2).

16.3 Effect of DVO Valuation

Ravi Kant vs. ITO (2007) 110 TTJ 297 (Del.)

Where apparent consideration of land and/or building as shown in the document of transfer is less than the stamp duty valuation fixed by State Government, it is the latter which shall prevail for computation of capital gains. In case the assessee claims that the value fixed for stamp duty purposes is higher than fair market value, the Assessing Officer shall refer the matter to DVO under S. 50C(2) for determination of fair market value, which if less than the stamp duty valuation, shall be considered as fair market value; but if higher than the stamp duty valuation, the stamp duty valuation shall be treated by virtue of S. 50C(3), to be the fair market value. Assessing Officer cannot disregard the valuation fixed by DVO.

In Jitendra Mohan Saxena vs. ITO (2008) 117 TTJ 974 (Luck.) it was held that as the valuation arrived at by the DVO was higher than that adopted by stamp valuation authority, Assessing Officer was justified in adopting stamp valuation as full value of consideration.

In this case it was further held that Report of approved valuer is alien to the provisions of S. 50C. In case of variation between approved valuer’s report and that of DVO, there is no provision in the Act to make a reference to a third valuer.

16.4 No Registration- 50C Not Applicable

In Navneet Kumar Thakkar vs. ITO (2007) 112 TTJ 76 (Jd) / (2008) 110 ITD 525 (Jd.) it was held that S. 50C embodies the legal fiction by which the value assessed by the stamp duty authorities is considered as the full value of consideration for the property transferred. It does not go beyond the cases in which the subject transferred property has not become the subject-matter of registration and the question of valuation for stamp duty purposes has not arisen. It was further held that the value adopted or assessed by the stamp valuation authorities has to be of the very same property, which is the subject-matter of transfer. The language of this section provides in unambiguous terms that the value adopted or assessed by the stamp valuation authority has to be substituted with the sale consideration of "such property". It is wholly irrelevant to consider the assessed value of another property for stamp duty purposes as full value of consideration.

16.5 Section 50C does not apply to buyer for invoking S. 69B

ITO vs. Optec Disc Manufacturing (2008) 11 DTR 264 (Chd.)(Trib) it was held that Adoption of different value for stamp duty purposes cannot by itself distract from the consideration stated in the sale deed. Fiction created under S. 50C is applicable only for computing capital gains in the hands of seller and does not apply to buyer for invoking S. 69B.

16.6 Business Income

Provisions of section 50C cannot be applied where the income from transfer is business income. M/s. Inderlok Hotels Pvt. Ltd. vs. ITO, ITA No. 4376/M/2008, Bench “I”, dt. 5-2-2009

16.7 Development Right

Section 50C applies to land and building or both. In Section 269A(e) the definition of immovable property is very wide. It covers rights of the nature referred to in clause (b) of sub-section (1) of section 269AB. It may be possible to take a view that section 50C cannot be applied to development rights.

17. Joint Venture Business

17.1 We have been witnessing a new and different trend in relation to the Real Estate Development. Earlier, a builder would go for outright purchase of a piece of land from the landlord and develop the same at his own cost and risk. The scenario in this regard is undergoing a change. Now the landlord also desires to have a share in the profit of the project being undertaken by the builder and developer. On his part, the builder and developer desire(s) to share his risk in the development of the project. This change in the trend in relation to Real Estate Development is giving rise to a new concept of joint venture between the landlord and the builder/developer for the purpose of development of immovable properties. It is often the case, that the builder/developer is either a limited company or a partnership firm, whereas the landowner is either an individual, a Hindu undivided family or a partnership firm. The joint venture business is assessed as an Association of Persons for the purposes of taxation under the Income-tax Act, 1961.

17.2 Whether share of a member in the income of a joint venture business, taxed in the status of an Association of Persons, will again be liable to tax in his hands.

At the outset it may be stated here that an incentive deduction like deduction under section 80IA(4)(iii) or section 80IB(10), etc. of the Act, will also be available to an Association of Persons, if all the other relevant conditions are fulfilled. As per the second proviso, where no income-tax is chargeable on the total income of an Association of Persons/Body of Individuals, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income. In this context, the meaning of the expression "where no income-tax is chargeable on the total income of the Association of Persons/Body of Individuals", is relevant. The aforesaid expression means, incomes which do not form part of the total income. In this connection, it may be stated that a deduction or relief under section 80-IA, section 80-IB, section 80-I and section 80J, cannot be said to be income, profits and gains, not includible in the total income. In support of this proposition, reliance may be placed on the judgement in the case of ITO vs. Stumpp, Schuele & Somappa (P) Ltd. (1977) 106 ITR 399 (Kar.). This judgement of the Karnataka High Court was affirmed by the Apex Court in the case of ITO vs. Stumpp, Schuele & Somappa (P) Ltd. (1991) 94 CTR 160 (SC) / (1991) 187 ITR 108 (SC). Thus, the deductions available under sections 80IA and 80IB do not pose any problem in this respect. Otherwise also, if the total income of an Association of Persons is entitled to deduction under section 80IA or section 80IB, then the question of any tax liability on the share of a member in the income of the Association of Persons, will not arise, as the income of the Association of Persons or Body of Individuals would be nil and consequently share of the member includible in the total income would also be nil.

17.3 Whether share of a member (company) in the income of an Association of Persons, is required to be disclosed in the profit and loss account of such company.

One view could be “not required to be shown in the profit and loss account”. share of a company in the income of an Association of Persons does not form part of the result of the working of the company and further the same will also not constitute a transaction of the business of the company. Therefore, the share of a company in the income of an Association of Persons will not be includible in ‘book profit’ of the company and accordingly, Minimum Alternate Tax may not be applicable in respect of the same.

18. Accounting of Construction Contracts

18.1 Project Completion Possible

CIT vs. Bilahari Investments (P) Ltd. (2008) 299 ITR 1 (SC)

Recognition/identification of income under the 1961 Act, is attainable by several methods of accounting. Project completion method is one such method.

CIT vs. Advance Construction Co. (P) Ltd. (2005) 275 ITR 30 (Guj.)

Assessee-contractor having offered profits for tax on the basis of percentage completion method which is a standard accounting practice and has been constantly followed by the assessee in subsequent years, the same could not be rejected and impugned amount which has been deducted in working out the profit is not chargeable to tax in the year under consideration, same having been offered for taxation in later years

18.2 Disclosure in the course of Search – Whether income be taxed on completion of project.

Dhanvarsha Builders & Developers (P) Ltd. vs. DCIT (2006) 102 ITD 375 (Pune) – Assessee following project completion method. Undisclosed income in the form of ‘on money’ should be taxed in the respective assessment years as per method of accounting followed by the assessee.

18.3 Finance Cost Indirect Cost and Revenue CIT vs. Lokhandwala Construction Inds. Ltd. (2003) 260 ITR 579 (Bom.)

Construction project undertaken by the assessee-builder constituted its stock-in-trade and the assessee was entitled to deduction under s. 36(1)(iii) in respect of interest on loan obtained for execution of said project. Wall Street Construction Ltd. & Anr. vs. JCIT (2006) 101 ITD 156 (Mum.) (SB) – Assessee following project completion method of accounting, the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation.

ITO vs. Panchavati Developers (2008) 115 TTJ 139 (Mum.) – Assessee following project completion method, and advertisement expenses of the two projects being allocable to individual project, such advertisement expenses have to be capitalized as work-in-progress to be allowed deduction in the year of completion of project.

JCIT vs. K. Raheja (P) Ltd. (2006) 102 ITD 414 (Mum.) – Even though assessee was following competed contract method for returning its income, its claim of finance cost as a period cost in nature of interest was allowable in the year in which it was incurred or accrued, in accordance with AS – 7 issued by the ICAI.

DCIT vs. Thakker Developers (2008) 6 DTR 238 (Pune) – CIT vs. Advance Construction Co. (P) Ltd. (2005) 275 ITR 30 (Guj.)

Assessee following ‘modified project completion method’ which was accepted in the past, AO could not be allowed to partially detract from the same by making disallowance of part of interest and loan processing fee in respect of a particular project and allowing the balance of the interest, thereby creating an anomalous position and deviating from the rule of consistency.

19. Conclusion

It is very unfortunate that the CBDT has not issued any notification specifying the slum project. Dharavi of Mumbai which is considered as biggest slum of Asia was also not notified by the Board. The Federation may forward a representation to the Hon’ble Finance Minister and Chairman, CBDT. If there is no response, the Federation may request the Builders Association to approach the High Court by filing PIL.

Because of recession many housing projects may not be completed within specified time of four years from the end of financial year in which the housing project has been approved, hence, Federation may make a representation to extend the completion of project till 2012.

Delegates and readers may e-mail the issues or views on the subject, which may help us to understand the various issues for discussion. We are thankful to Mr. Anil Kumar Singh and organizers for giving us an opportunity for presenting the paper on the subject of “Real Estate Transactions – Some Important Issues – Income-tax Act, 1961”.

[Reproduced with permission from the Paper presented at AIFTP's Two Day National Tax Conference held on 7th and 8th March, 2009 at Varanasi]