Chartered Accountant Finance: [aaykarbhavan] Judgments

GOVERNMENT OF ANDHRA PRADESH

COMMERCIAL TAXES DEPARTMENT

Office of the Commissioner of commercial Taxes

Andhra Pradesh, Hyderabad.

CIRCULAR

CCT's Ref No AII(3)-281-2012 Dated 13-08-2012

Sri Suresh Chanda I.A.S ., Commissioner of Commercial Taxes

***

Sub: Registrations- Registration of Lease Deeds of Rental Deeds-Compulsory Registerable under section 17 of Registration Act 1908-Request not to entertain unregistered lease Deeds/Rental Deeds-Huge amounts of DSD Detected –Amendment to Section 17 of Registration Act-Lease Deeds made compulsory Registerable –instructions issued –Reg.

Ref: 1. From Deputy Inspector General Registration and Stamps, Hyd.,

Ref. No Sec-73/1765/08, dt 21.07.2012 addressed to Assistant

Commissioner (CT), Cental Registration Unit, Hyderabad.

2. Act 4 of 1999 w.e.f 01.04.1999.

***

The attention of all the registering authorities in the State is invited to the reference cited, wherein the Deputy Inspector General (Registration and Stamps)Hyderabad informed that during the audit of different Commercial Taxes Offices it has noticed that Commercial Taxes Offices are issuing registrations after obtaining lease deed or rental deed which are found to be unregistered .It was also mentioned that perhaps officials of the Commercial Tax Department are under impression that rental deed with duration of 11(eleven) months or below need not be registered.

In this regard, he has informed that the Government of Andhra Pradesh has amended Sub-Section (d) of Section 17 of Registration Act with effect from 01-04-1999 by Act No 4 of 1999 making registration of lease deeds of immovable properties compulsory irrespective of tenure of lease (or) rental.

Further he has informed that when they are issuing notices to the parties for realization of deficit stamp duty some of Lessors complained that they never executed any Lease deeds indicating the fraudulent transactions that were taking place which is to be discouraged and requested to insist upon Registered Lease deeds or Rental deeds while issuing licenses to the business entrepreneurs to avoid legal complications as well as to avoid leakage of Revenue in view of the above statutory provision.

Therefore, all the Registering Authorities in the State are directed to insist upon registered lease deeds or rental deeds while issuing Registration Certificate wherever the applicants file unregistered lease /rental deeds.

Sd/-Sri Suresh Chanda

Commissioner of Commercial Taxes

All the Registering Authorities in the State,

Copy to all the Commercial Tax Officers /Deputy Commissioners in the State

Copy to DIG Registration & Stamp, Registration Bhawan ,Hyderabad

//t.c.f.b.o//

Additional Commissioner(CT)(G)

--
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On the date of issue of notice under section 148 on 31-3-2008 by the Assessing Officer for reopening of the assessment, the earlier view taken by the Assessing Officer in the assessment framed under section 143(3) on 31-3-2006 was supported by the decision of the Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra), and the decision of Delhi High Court in the case of CIT v. Eicher Ltd. [2006] 287 ITR 170. Further, the amendment to Explanation 1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from 1-4-2001. On the date of issue of notice for reassessment on 31-3-2008, there was no amendment to Explanation 1 to section 115JB providing for adding of the amount or amounts set aside as provision for dimunition in the value of any asset by way of debiting in the profit and loss account. Therefore, in view of the decision of the Bombay High Court in the case of Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54, the Assessing Officer could not have reasons to believe on 31-3-2008 that the income had escaped assessment on the ground that the provisions for bad and doubtful debts were not added back in computing the book profit under section 115JB. Therefore, there was no fresh material available with the Assessing Officer on the basis of which he could have justifiably formed reasons to believe that any income chargeable to tax had escaped assessment in the instant case. Therefore, initiation of reassessment proceedings in the instant case was bad in law and consequently the impugned order is liable to be cancelled.

IN THE ITAT CHENNAI BENCH 'C'

Saint Gobain Glass India Ltd.

Assistant Commissioner of Income-tax, Company Circle-VI (1)

IT Appeal No. 276 (Mad.) of 2012

[Assessment year 2003-04]

May 18, 2012

ORDER

N.S. Saini, Accountant Member – This is an appeal filed by the Assessee against the order of the Commissioner of Income Tax(Appeals) Large Taxpayer Unit, Chennai dated 18.11.2011 for Assessment Year 2003-04.

2. The assessee has taken the following grounds of appeal.

"1. The order of the Commissioner of Income Tax(A) is contrary to law, facts and circumstances of the case.

2.a. The Commissioner of Income Tax(A) erred in confirming the reopening of the assessment.

b. The Commissioner of Income Tax(A) ought to have appreciated that the reasons for reopening the assessment and unsustainable.

c. The Commissioner of Income Tax(A) ought to have appreciated that there is no escapement of income.

d. The Commissioner of Income Tax(A) failed to appreciated that the appellant had furnished fully and truly all the material facts necessary for the assessment and reassessment is merely on the basis of change of opinion.

f. The Commissioner of Income Tax(A) failed to appreciated that for deciding the question under Section 147, whether the assessee had disclosed fully and truly all material facts, the law applicable would be the law as it stood on the date of filing of the return.

g. The Commissioner of Income Tax(A) failed to appreciated that the appellant could not have assumed that a legislative amendment was going to be made in the year 2009 with retrospective from the year 2001.

3.a. The Commissioner of Income Tax(A) erred in disallowing the provision for bad & doubtful debts amounting to Rs. 1,49,46,022/- in the computation of book profits under Section 115JB of the Act.

b. The Commissioner of Income Tax(A) failed to appreciated that the clause (i) to Explanation (1) to Section 115JB of the Act has been inserted vide Finance Act, 2009 and the said provision did not exist while filing the return of income.

4.a. The Commissioner of Income Tax(A) erred in confirming the levy of interest under section 234B of the Act.

b. The Commissioner of Income Tax(A) failed to appreciated that the Appellant could not have assumed that a legislative amendment was going to be made in the year 2009 with retrospective effect from the year 2001 and paid the advance tax.

5. The Appellant craves leave to alter, amend or modify any of the foregoing grounds of appeal or add any additional grounds of appeal on or before or during the course of the hearing."

3. The Authorised Representative of the assessee submitted that in ground No.2 of the appeal of the assessee has challenged the reopening of the assessment on the ground that it was based on merely change of opinion on the very same facts on which the assessment was framed under section 143(3) of the Act on 10.03.06 and therefore, it was bad in law. He argued that in the present case of the assessee, the assessee filed return of income declaring loss of Rs. 16,19,41,536/- and the assessment was completed under Section 143(3) read with section 94C(4) on 10.03.2006 assessing the total loss of Rs. 15,90,36,808/- under normal computation and book profit at Rs. 11,19,72,308/-. It was submitted that in this assessment order, the Assessing Officer examined the issue of provision for bad and doubtful debts of Rs. 1,49,46,022/- charged to the profit and loss account by the assessee by issue of notice under Section 143(2) dated 21.07.08 wherein it was stated "as per provisions of Sec.115JB, the Provision for Bad & Doubtful Debts amounting to Rs. 1,49,46,022/- should have been added back while computing book profit under Section 115 JB". After examining the same, the Assessing Officer allowed the deduction of provision for bad and doubtful debts of Rs. 1,49,46,022/- in computation of book profit under Section 115JB of the Act. Thereafter, the Assessing Officer issued a notice under Section 148 on 09.12.09 repeating the reasons for reopening the assessment by stating as under:-

"2. As requested by you, the reasons for reopening the assessment under Section.147 and issuing notice under Section.148 for the Assessment Year 2003-04 are communicated as under:

Reasons: The assessee made provision of Rs. 1,49,46,022/-towards bad and doubtful debts. While computing book profit under Section.115JB, the above amount should have been added to the net profit as per P&L account and the same was not done by the assessee. Further, it was not considered in the order under Section.143(3) passed on 10.03.2006.

Therefore, I have reason to believe that income to the extent of Rs. 1,49,46,022/- escaped assessment. In view of the above, the assessment for the Assessment Year 2003-03 is reopened under Section.147 and notice under Section.148 issued on 28.03.2008.

3. As you have stated that the return of income already submitted on 28.11.03 for the Assessment Year 2003-04 to be treated as the return in pursuant to the notice under Section.148, notice under Section.143(2) has been issued separately and you are requested to comply with the notice."

4. The Authorised Representative of the assessee submitted that the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from 01.04.2001 by substituting the clause (i) as under:

"For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by -

[(i) the amount or amounts set aside as provision for diminution in the value of any asset"

It was the submission of the Authorised Representative of the assessee that notice of reassessment was issued on 31.03.08 and the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from First April, 2001 after the notice was issued by the Assessing Officer seeking to reopen the assessment. He submitted that the validity of the notice of the Assessing Officer seeking to reopen the assessment would have to be determined on the law as prevailed on the date of notice and for this, he placed reliance on judgement of Hon'ble Supreme Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282. The Authorised Representative of the assessee relied on the decision of Hon'ble Bombay High Court in the case of Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54 where on the similar facts and circumstances of the case, the Hon'ble Bombay High Court held that on the date on which the Assessing Officer purported to exercise his power to reopen the assessment under Section 147, the legislative amendment by the insertion of clause (i) to Explanation (1) to Section 115JB had not been brought into force on the statute book. Therefore, it seems, the amendment could not have been and has not the ground, which has been taken by the Assessing Officer while reopening the assessment. The validity of the notice issued by the Assessing Officer in seeking to reopen the assessment must be determined with reference to the reasons which are found in support of the reopening of the assessment. These reasons cannot be allowed to be supplemented on a basis, which was not present to the mind of the officer and could not have been so present on the date on which the power to reopen the assessment was exercised. Consequently, it is evident that the order of the Assessing Officer with reference to computation of book profit under Section.115JB was at least a probable view and as a matter of fact, the correct view to take in view of the decision of Hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409. It is well settled that the law laid down by the Supreme Court is declaratory of the position as it always stood. In any event, the view of the Assessing Officer was supported by the interpretation placed even contemporaneously in the judgement of the Bombay High Court in CIT v. Echjay Forgings (P.) Ltd. [2001] 251 ITR 15 and in the judgement of the Delhi High Court in the case of CIT v. Eicher Ltd. [2006] 287 ITR 170 and CIT v. HCL Comnet Systems & Services Ltd. [2007] 292 ITR 299. In the circumstances, there was no warrant for reopening the assessment in exercise of the power conferred under Section. 147. It was therefore, brought that the order of the Commissioner of Income Tax(A) should beset aside and the reassessment order should be cancelled as being bad in law.

5. On the other hand, the Departmental Representative supported the orders of the lower authorities.

6. After considering the rival submissions and perusing the materials available on record, we find that in the instant case, the assessee was assessed to tax on book profit of Rs. 11,19,72,308/- in an assessment made under Section 143(3) read with section 92C(4) on 31.03.06. The assessee contended that the Assessing Officer after examining the issue of provision for bad and doubtful debts of Rs. 1,49,46,022/- debited in the profit and loss account of the assessee by issue of notice under Section 143(2) dt.21.07.08. Thereafter, the Assessing Officer issued notice under Section.148 on 31.03.08 to reopen the assessment on the very same ground that the provision for bad and doubtful debts of Rs. 1,49,46,022/- should be added back in computing the book profit under Section 115JB of the Act. The Authorised Representative of the assessee has submitted that on the date of issue of notice under Section.148 on 31.03.08 by the Assessing Officer for reopening of the assessment, the earlier view taken by the Assessing Officer in the assessment framed under Section. 143(3) on 31.03.06 was supported by the decision of the Hon'ble Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) and the decision of Hon'ble Delhi High Court in the case of Eicher Ltd. (supra). Further, the Authorised Representative of the assessee has also submitted that the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from First April, 2001. Thus, on the date of issue of notice for reassessment on 31.03.08, there was no amendment to Explanation-1 to section 115JB providing for adding of the amount or amounts set aside as provision for diminution in the value of any asset by way of debiting in the profit and loss account. Therefore, in view of the decisions of Hon'ble Bombay High Court in the case of Rallis India Ltd. (supra), the Assessing Officer could not have reasons to believe on 31.03.08 that the income had escaped assessment on the ground that the provisions for bad and doubtful debts were not added back in computing the book profit under Section 115JB of the Act. The Departmental Representative could not controvert the above submissions of the Authorised Representative of the assessee. Therefore, in our considered opinion as on 31.03.2008 there was no fresh material available with the Assessing Officer on the basis of which he could have justifiable formed reasons to believe that any income chargeable to tax had escaped assessment in the instant case. Therefore, initiation of reassessment proceedings in the instant case was bad in law and consequently the impugned order is liable to be cancelled. We order accordingly. Thus, the grounds of appeal of the assessee are allowed.

7. In view of the above decision, the other grounds of appeal taken in this appeal have become infructuous and academic in nature. Hence, we are not adjudicating the same.

8. In the result, the appeal of assessee is allowed

Income tax - Whether when AE pays higher rate of interest on delayed payment as compared to third parties, no fault can be found with AO for initiating reassessment for transfer of profits to assessee eligible for Sec 80IA benefits - YES: HC

By TIOL News Service

AHMEDABAD, AUG 30, 2012: THE issue before the Bench is - Whether when the AE pays higher rate of interest on delayed payment as compared to third parties, no fault can be found with AO for initiating reassessment for transfer of profits to assessee eligible for Sec 80IA benefits. And the verdict goes against the assessee.

Facts of the case

Assessee-petitioner is a company registered under the Companies Act. For the AY 1999-2000, the assessee filed its return of income declaring total income of Rs.3,63,23,970/- u/s 115JA. Such return was taken in for scrutiny by the AO u/s 143(3) and the income was recomputed at Rs.5,10,02,030. During the scrutiny proceedings the AO found that the assessee had sold certain goods to its sister concern Aditya Medisales during the year under consideration. On delayed payments of such goods, Aditya Medisales paid interest at the rate of 24% which was much higher than the prevailing market rate of interest which varied between 15% to 18%. By adopting such modality, the assessee had reduced the taxable profit of Aditya Medisales and at the same time increased the profit of Silvasa unit of the assessee company which was eligible for deduction u/s 80-IA of the Act in clear violation of section 80-IA. These facts were not clear from the working out of deductions u/s 80IA along with the return of income. According to the AO, case of the assessee would be covered u/s 80IA(10). Therefore, interest payable to the assessee should have been restricted to 15% to 18% which would reduced the profit of the said unit and resultantly deduction u/s 80IA of the Act would also be reduced. The AO had raised in total four grounds. However, out of those four grounds three grounds were held invalid by this Court in assessee's own case vide order dated 31st July 2012, and hence the AO withdrew the same. The sole ground that survived was regarding the charging higher rate of interest to the sister concern of the petitioner.

The AR contended that the notice for reopening was without jurisdiction. He submitted that the assessee had disclosed the interest amount charged during the assessment and reopening the same was merely on the basis of change in opinion.

In the counter argument, the DR contended that assessee did give the total figure of interest received. However, from such figures, it was not possible to ascertain these vital facts. The assessee had submitted voluminous details along with the return of income which were not at all required to be filed only to confuse and complicate the matter pertaining to the assessment and thus the AO was of the opinion that the income had escaped assessment.

Having heard the parties, the High Court held that,

++ under the circumstances, the sole surviving issue for our consideration is whether on the basis of ground No.2 of the reasons recorded by the Assessing Officer, reopening would be permissible in the present case. In this respect also, we may notice that this very ground came up for consideration in Special Civil Application No.12468 of 2004 wherein we have upheld the right of the Assessing Officer to reopen the assessment making following observations that under the circumstances, if it is found that the assessee had charged higher rate of interest from the sister concern and thereby, arranged its business in such a way that the eligible profit for deduction under section 80IA of the Act was exaggerated, it was within the power of the Assessing Officer while computing the deduction to take amount of profit as may be reasonably deemed to have derived from such dealing. In exercise of such powers, therefore, when the Assessing Officer finds that there is exaggeration of income by an assessee, which is eligible for deduction 80IA of the Act dealing with closely associated entity, he would make necessary adjustments in this regard. Thus it was held that it cannot be said that belief of the Assessing Officer that income chargeable to tax had escaped assessment is baseless;

++ the issue being common, we see no reason to take a different view. In fact, we may notice that the above decision was rendered by us in a case where notice for reopening of the assessment was issued beyond the period of four years from the end of the relevant assessment year whereas in the present case, such notice is issued within four years. In that view of the matter, the contention of the counsel for the petitioner that full facts were available on record before the Assessing Officer when the assessment was previously framed after scrutiny would be of no avail. In the result, the petition fails and is dismissed.

(See 2012-TIOL-680-HC-AHM-IT)

IT : The fact that the assessment took place subsequent to the relevant year would not make section 50C inapplicable where the transfer is otherwise covered by it

FACTS

• The assessee sold his share of the land to fifteen buyers through separate conveyance deeds. While five such deeds were executed on 15-1-1998 and got registered after paying stamp duty on 22-2-1999, the remaining ten were executed on 26-5-2006 and got registered on 27-11-2007 when the stamp duty was finally assessed.

• The assessee returned 'LTCG' arising on the said transfers for the AY 2006-07. The AO increased the same by Rs. 76,18,080 on the basis of deemed sale consideration (as against actual) by invoking section 50C.

• The assessee contended that the assessment of the FMV of the land by the SVA was done only on 27-11-2007 and since there was no assessment by the end of the 31-03-2006, section 50C was not applicable because the words "or assessable" were brought on the statute only with effect from 1-10-2009.

• Commissioner (Appeals) agreed with the assessee and granted relief. Against it the revenue went in appeal.

HELD

• In the instant case the assessee himself declared a value and paid stamp duty thereon with reference to the prescribed circle rate which was subsequently assessed as such.

• Section 50C is applicable to the capital gains arising from transfer of any land or building or both chargeable under section 45 from AY 2003-04 onwards and therefore, the impugned capital gains being chargeable under section 45 in AY 2006-07, section 50C would apply.

• The circle rate prescribed under the Stamp Act is the relevant value to be adopted by the assessee while filing its return of income i.e., where no formal assessment has been made by the SVA.

• Since the value only seeks to determine the FMV of the relevant capital asset on the date of transfer, it would be of little consequence whether the assessee's assessment took place during the relevant year or subsequent thereto.

• The possible circumstance where the word "assessable" could draw a distinction is where the value under the Stamp Act comes to be stipulated only subsequent to the date of transfer, though from a retrospective date. In view of the words "or assessable", a higher prescription of rate could give rise to a controversy as to whether the transfer was at all covered by section 50C but no such controversy was present in the instant case.

• Merely because the assessment took place subsequent to the relevant year, it would not make section 50C inapplicable where the transfer is otherwise covered by it.

■■■

[2012] 24 taxmann.com 327 (Kolkata - Trib.)

IN THE ITAT KOLKATA BENCH 'A'

Deputy Commissioner of Income-tax, Circle-9

Bagri Impex (P.) Ltd.

SANJAY ARORA, ACCOUNTANT MEMBER

AND GEORGE MATHAN, JUDICIAL MEMBER

IT Appeal NO. 498 (KOL.) OF 2012

[ASSESSMENT YEAR 2006-07]

AUGUST 9, 2012

ORDER

Sanjay Arora, Accountant Member - This is an Appeal by the Revenue arising out of the Order by the Commissioner of Income-tax (Appeals)-XXXII, Kolkata ('CIT(A)' for short) dated 11-01-2012, allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income-tax Act, 1961 ('the Act' hereinafter) dated 04-08-2008 for the assessment year (A.Y) 2006-07.

2. The Revenue has raised three grounds per its present appeal, reading as under:-

"1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting fresh evidence which is in violation of Rule 46A of the I.T. Rules, 1962.

2. That on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in directing the A.O to delete the addition of Rs.76,18,080/- in the sale value consideration for computing long term capital gain.

3. That on the facts and circumstances of the cases and in law, Ld. CIT(A) has erred in not considering the fact that the Assessing Officer is within his right to adopt the sale consideration as per the valuation of stamp duty authority which is higher than the value declared by the assessee."

The matter was heard at length.

3. Qua the first ground, the Revenue's case is that while all the fifteen (15) conveyance deeds, per which the land in question was conveyed by the assessee, were produced before the first appellate authority, only one copy was supplied to the assessing authority. Toward this, the ld. AR clarified that all the relevant material was before the Assessing Officer (AO), and there has been no wrong assumption of any fact by him in deciding the assessee's case. Reference was made by him to the observation by the ld. CIT(A) to this effect in the operating part of his impugned order. Further, copy of the assessees's letter dated 16-07- 2008 to the AO was placed by him on record to exhibit that one copy each of the two deeds dated 15-01-1998 and 26-05-2006, i.e., the two dates on which the entire bunch of 15 deeds were executed, were filed as specimen copies before the AO; the other deeds being identical in all other respects. Had the AO wanted, he averred, the assessee could have supplied the copies of all the other deeds as well. The ld. DR, after seeking an adjournment for making verification, confirmed the said letter (dated 16/7/2008) as forming part of the assessment record. He also could not demonstrate any wrong assumption of fact/s by the AO. Under the circumstances, we find no merit in which Revenue's case qua its Ground No.1, so that the same is dismissed.

4. That leaves us with the issue on merits, which stand projected by the Revenue per its Ground Nos. 2 and 3 (supra).

4.1 At this stage, it would be relevant to delineate the background facts of the case. The assessee sold his 2/5th share in the land situate at 14A Burdwan Road, Kolkata, along with the two other co-owners, being group companies, i.e., Bagari Investments Pvt. Ltd. and Bagari Synthetics Pvt. Ltd., to fifteen (15) different buyers, per separate conveyance deeds, i.e., qua each conveyance. The respective agreements to sales were in all cases executed on 15-10-1996. While five (5) conveyance deeds were executed on 15-01-1998, and registered - after paying stamp duty - on 22-02-1999, the balance ten (10) were executed on 26-05-2006; the corresponding date of registration being 27-11-2007, when the stamp duty was finally assessed. The bulk of the sale consideration stood received, as well as possession made over, in almost all cases by January, 1998, whereat the five (5) deeds were executed. The assessee, however, returned long term capital gains ('LTCG' for short) arising on the said transfers for the current assessment year, i.e., A.Y. 2006-07, at Rs. 97,14,463/-. The AO, however, assessed it at Rs.1,73,32,543/- by deeming the sale consideration at Rs. 214.18 lakhs i.e., as against the actual sale consideration (i.e., in respect of the assessee's 2/5th share) of Rs.138 lakhs, or increasing it by Rs. 76,18,080/-. It is this enhancement of sale consideration, for the purpose of assessment of LTCG, by invoking the provision of section 50C of the Act, that is the subject matter of dispute between the assessee and the Revenue, with the assessee having been granted relief by the first appellate authority, so that the Revenue is in appeal before us.

4.2 The Revenue's case is that the provision of sec. 50C having come on the statute book with effect from 1-4-2003, and the capital asset which is the subject-matter of transfer, being land, the same would apply, and thus stands rightly invoked by the AO. The assessee's case, and on the basis of which it found favour with the first appellate authority, is that the transfer in the first five (5) cases stood effected much prior the relevant year, i.e., on 15-01-1998, so that it could not be subject to the rigor of section 50C. In fact, there is no dispute between the sale value adopted by the assessee and that assessed by the Stamp Valuation Authority ('SVA' for short) in these cases. For the balance 10 (ten), the assessment by the SVA took place only on 27-11-2007, i.e., subsequent to the date of transfer. The words "or assessable" in s. 50C(1) stand inserted in the section only by Finance (No.2) Act 2009, with effect from 1-10-2009. The amendment is prospective and, as such, would have no application for the current year. That is, prior to 01-10-2009, it is only where the transfer under reference is subject to assessment by the SVA in the same year, i.e., the year of transfer, that the legal fiction per section 50C would come into play. Reliance is placed on the decisions in the case of ITO v. Mangal Shree Estate Ltd. (ITA No.88/Jp/2011 dated 05-08-2011) and Smt. Rajshree Bihani v. ITO [2011] 48 SOT 594 (Kol) (copy on record).

4.3 We have perused the material on record, as well as the case law cited. The primary facts are not in dispute, and the only issue arising is of the applicability or otherwise of section 50C of the Act to the LTCG disclosed by the assessee for the relevant year in the given facts and circumstances of the case. Our first observation in the matter is that year of transfer is not in dispute. This aspect was got specifically confirmed by the Bench during hearing from both the parties, as there is no question of assessment of capital gains u/s. 45 for the current year, much less applicability of section 50C, if no transfer has taken place during the relevant year. In fact, we also observe no dispute with regard to this aspect before the authorities below and, consequently, no finding by them in the matter per their respective orders. The only issue, therefore, that survives, and which stood agitated before us (also refer ground nos. 2 and 3 by the Revenue) is the applicability or otherwise of section 50C to the impugned transfers per the 15 (fifteen) conveyance deeds in the facts and circumstances of the case.

4.4 Section 50C stands co-opted on the statute by Finance Act, 2002, with effect from 01-04-2003. Its relevant part reads as under:-

'Special provisions for full value of consideration in certain cases.

50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer."

The words "or assessable" stand inserted after the word "assessed" and before the words "by any authority" by Finance (No.2) Act, 2009 with effect from 1-10-2009.

4.5 Our first observation in the matter is that section 50C would apply in respect of capital gains arising on the transfer of any capital asset, being land or building or both, chargeable u/s. 45 of the Act for A.Y. 2003-04 or any subsequent year. As such, the impugned capital gains, being chargeable u/s. 45 for the current year, i.e., AY 2006-07, section 50C would be per se applicable.

4.6 Now let us examine the assessee's case, which is in two separate limbs, vis-à-vis the said provision. For the first five (5) deeds dated 15-01-1998, the issue is academic inasmuch as undisputedly there is no difference between the value assessed by the SVA and that disclosed by the assessee per the said deeds. There is no question, as has been done by the AO, of the value assessable for a subsequent year, i.e., subsequent to the assessment by the SVA, as being relevant or made applicable for the purpose of sec. 50C. As such, section 50C, though applicable in principle for the first 5 (five) deeds dated 15-01-1998, would be of no consequence, and no modification to the disclosed sale consideration could be made with reference to section 50C.

4.7 Next, we take up the assessee's case qua the balance ten (10) conveyance deeds for an aggregate disclosed sale consideration of Rs.96 lakhs, executed on 26-05-2006. The assessee's case is that the assessment of the fair market value of the property (land) by the SVA was done only on 27-11-2007 and, therefore, there being no assessment by it by the end of the relevant year, i.e., 31-03-2006, section 50C would not apply; the words "or assessable" having been brought on the statute only with effect from 01-10-2009.

We find no force in the argument. There is no dispute that a circle rate had been prescribed by the competent authority (of the State Government) under the Stamp Act for the relevant year and, further, that the transfer under reference is covered by sec. 50C. It is this value that is relevant, and to be adopted by the assessee while filing his return of income, i.e., where no formal assessment has been made by the SVA. Again, if it has been by the due date of filing of the return of income or the actual filing of return, the same being available, and only in relation to the transfer, capital gains on which has arisen for the relevant year, the same would stand to be adopted. The words "adopted" or "assessed" (as also "assessable") in s. 50C(1) qualify the word "value" preceding it, and not the word "transfer". The only condition is that the said value should be in respect of the relevant transfer, i.e., of a defined capital asset, capital gains on which is assessable for the relevant year. In our view, the purport or relevance of the word 'assessable', the prospective operation of which is being advanced by the assessee as the reason for non-applicability of the provision of s. 50C, would be where there is a difference between the value adopted or assessed, and that assessable, on the other. In fact, as we see it, the provision (50C(1)) contemplates no difference in value adopted or assessed or the value assessable by the SVA. It is to be appreciated that the value only seeks to estimate or determine the fair market value of the relevant capital asset on the date of transfer. As such, whether the assessee's assessment took place during the relevant year or subsequent thereto, would be of little consequence. The other circumstance where the word "assessable" could draw a distinction is where the value under the Stamp Act comes to be stipulated only subsequent to the date of transfer, though from a retrospective date. Clearly, no value having been provided for (in such a hypothetical case), no value could be said to have been adopted or assessed by SVA, so that it can be argued that such a transfer is not covered by section 50C. Similarly, would be the case where the guideline value available (under the Stamp Act) is subject to revision at the relevant time, and a higher value is prescribed subsequently, albeit with retrospective effect. The words "or assessable" would make a distinction inasmuch as the latter prescription (of rate) could give rise to a controversy as to whether the transaction (of transfer) is at all covered u/s.50C, or if the higher value would hold, as the case may be. No such controversy is present in the instant case; we clarifying at the outset, and also confirmed during hearing, that a circle rate obtained in respect of the land under reference during the relevant year (i.e., the previous year relevant to AY 2006-07), and at which it stood assessed, though subsequently. We have, in fact, read the provision considering the words "or assessable" as not present in the provision. Merely because the assessment takes place subsequent to the relevant year, would not make u/s. 50C inapplicable where the transfer is otherwise covered by it. Once a circle rate has been prescribed by the competent authority for the purpose, i.e., the payment of stamp duty, which is a pre-requisite for the registration of any transfer under the Registration Act, 1908, and which in turn is mandatory for the same to have a legal effect, it can fairly be said to be the value adopted by the competent authority, in respect the relevant transfer. One can understand a controversy where the value subsequently assessed is at variance with the value claimed to have been adopted by the said authority. However, no such controversy obtains in the instant case, with, rather, there being a separate procedure where the assessee contests the value as assessed (see s. 50C(2)), so that the same would need to be observed.

4.8 Finally, we may deal with the case law cited before us. The decision in the case of Mangal Shree Estate Ltd. (supra) is based on the decision in the case of Navneet Kumar Thakkar v. ITO [2008] 110 ITD 525 (Jd). In the facts of that (latter) case, the transfer, capital gains arising on which was subject to tax, was per an unregistered document. The transfer under the Act being complete, it was held that there was no warrant for the substitution of the actual sale consideration with the value adopted or that may be assessed by the SVA, i.e., if and when the said transfer is subject to registration, for the purpose of computing capital gains under the Act. Accordingly, the position existing prior to the co-option of section 50C of the Act would apply. In fact, this represents one more area or circumstance under which the word "assessable", which came on the statute only later, would become relevant. The 'transfer' in the case of Mangal Shree Estate Ltd. (supra) was, again, only per an unregistered document, with the tribunal finding the words 'assessable' in s. 50C (1) as operative from a later date, and which, as clarified earlier, have not been taken into consideration by us. The said decisions are clearly distinguishable on facts inasmuch as each transfer in the instant case stands executed per a registered document. In fact, as sought to be clarified earlier, the assessee himself declares a value, paying stamp duty thereon, with reference to the prescribed circle rate. The said decisions would thus have no application in the facts and circumstances of the present case. In the case of Smt. Rajshree Bihani (supra), the assessee, on the impugned transfer being sought to be subject to the rigor of section 50C, contended that transfer was effected in fact much earlier to the relevant assessment year (being A.Y. 2005-06), i.e., in A.Y. 2001-02. Also, the property purchased out of the sale proceeds was also within the stipulated time of the date of the transfer, so that the capital gains was not assessable even for that year, being exempt u/s.54F. It was in this situation that it was held by the tribunal that no cognizance of the subsequent deed for the purpose of computation of capital gains under the Act could be taken and, accordingly, section 50C could not be applied. In the facts of the present case, without doubt, the assessee has returned capital gains for the current year, and admits it to be the year of the transfer of the relevant land, and which, as clarified at the outset, is not the subject matter of dispute or determination. The capital gains being assessable for the current year, the provision of sec. 50C would apply. The assessee could not possibly take a stand that while capital gains would stand to be charged u/s. 45 for the current year, sec. 50C would not apply; the assessment year under reference being subsequent to AY 2002-03 (also refer para 4.3, 4.5). The said decision is thus, again, distinguishable, and would be of no assistance to the assessee. We decide accordingly.

5. In the result, the Revenue's appeal is partly allowed.

IT : Regional rural bank working over an area of entire district with object of both agricultural and other purposes, is not eligible for section 80P deduction

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[2012] 24 taxmann.com 278 (Indore - Trib.)

IN THE ITAT INDORE BENCH

Vidisha Bhopal Kshetriya Gramin Bank, Vidisha

Assistant Commissioner of Income-tax*

JOGINDER SINGH, JUDICIAL MEMBER

AND R.C. SHARMA, ACCOUNTANT MEMBER

IT APPEAL NOS. 215 & 216 (IND.) OF 2011

[ASSESSMENT YEARS 2007-08 & 2008-09]

JUNE 18, 2012

Section 80P of the Income-tax Act, 1961 - Deductions - Income of co-operative society - Assessment years 2007-08 and 2008-09 - Assessee was a regional rural bank engaged in banking and financing activity - It claimed deduction under section 80P - Assessing Officer rejected assessee's claim holding that assessee was neither a Primary Agricultural Credit Society (PACS) nor Primary co-operative Agricultural and Rural Development Bank (PCARDB) - It was noted from records that range of assessee's activities were not confined to one taluk but was extended to entire district and, thus, in view of Explanation to section 80P(4), assessee was not PCARDB - Further primary object as well as activities of assessee were not confined to agricultural purposes but other purposes also and, hence, assessee could not be regarded as PACS - Whether in view of above, impugned order of Assessing Officer rejecting assessee's claim was to be upheld - Held, yes [In favour or revenue]

Circulars and Notifications - Circular No. 6, dated 20-9-2010, Circular No. 319, dated 11-1-1982

FACTS

The assessee was a regional rural bank engaged in banking and financing activity. It claimed deduction under section 80P. The Assessing Officer disallowed the deduction on the ground that assessee was neither Primary Agriculture Credit Society nor Primary Co-operative Agricultural and Rural Development Bank. On appeal, the Commissioner (Appeals) upheld the disallowance.

On second appeal:

HELD

It was found from record that the assessee is a Regional Rural Bank engaged in the activity of banking/financing. The return was filed to claim deduction under section 80P in respect of its income. Section 80P, inter alia, provides for a deduction from the total income of the co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc. After insertion of sub-section (4) of section 80-P, by Finance Act, 2006, with effect from 1-4-2007, this deduction is available only to -

1. Primary Agricultural Credit Society (PACS)

2. Primary Co-operative Agricultural and Rural Development Bank (PCARDB)

Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of 'income'.

Section 80P has been amended by Finance Act, 2006, and sub-section (4) has been inserted. As per finding recorded by lower authorities , the assessee is neither PACS nor PCARDB and hence not eligible for deduction under section 80P.

A society fulfilling two conditions is a PCARDB as per Explanation to section 80P(4)

(a) Area of operation confined to a taluk

(b) The principal object of which is to provide for long term credit for agricultural and rural development activities.

The principal object of the assessee has been discussed in detail later while discussing that assessee is not PACS and the object of the assessee and the range of the activities is not confined to taluk but is extended to entire district of Bhopal & Vidisha. It is clear that the assessee is not fulfilling the second condition also. Hence, assessee is not PCARDB. Assessee is not PACS, as per the Explanation to section 80P(4). PACS has been defined as in Part-V of the Banking Regulation Act, 1949.

Primary object of principal business of PACS is to finance for agricultural purposes or purposes connected with agricultural activities. The primary object as well as activities of assessee are not confined to agricultural purposes but other purposes also. Hence, assessee is neither PACS nor PCARDB hence, no exemption is available to the assessee under section 80P. It was also submitted by the assessee during the assessment proceedings, 'the assessee is a Regional Rural Bank carrying on banking activities in Bhopal and Vidisha District under the provisions of section 22 of the RRB Act.

It is also not in dispute that the assessee is not claiming exemption as PACS for PCARDB. To clarify the amended provisions as brought by the Finance Act, 2006, the CBDT has also issued circular dated 28-12-2006, according to which after insertion of sub-section (4) in section 80P, the benefit of provisions of section 80P shall not apply in relation to any co-operative bank other than primary agricultural credit society or primary co-operative agricultural rural development Bank. Thus, income of business of banking has been brought under section 80P for all the co-operative societies except PACS and PCARDB. The legislative intent for insertion of sub-section (4) as per the speech of Union Finance Minister on 28-2-2006 clearly shows that co-operative Banks were excluded from the benefit of section 80P on the plea that like any other bank, the co-operative banks are also lending institution and should pay tax on their profits. Accordingly, co-operative banks were excluded from the scope of section 80P. [Para 9]

In view of above, there was no infirmity in order of lower authorities for decline of claim deduction under section 80P. [Para 12]

CASE REVIEW

M.P. State Coop. Agricultural. And Rural Development Bank Limited order dated 1st February, 2012. [Para 11] distinguished.

Anil Khabya for the Appellant. Keshave Saxena for the Respondent.

ORDER

R. C. Sharma, Accountant Member - These are appeals filed by the assessee against the orders of CIT(A) dated 4.7.2011 and 8.7.2011 for the 2007-08 & 2008-09, respectively.

2. Rival contentions have been heard and records perused. Common grounds have been taken in both the years under consideration which basically pertains to decline the claim of deduction u/s 80P. The assessee is a Kshetriya Gramin Bank i.e. Regional Rural Bank, which claimed deduction u/s 80-P of the Income-tax Act, 1961. After reopening the assessment, the Assessing Officer declined assessee's claim of deduction u/s 80P after having following observations :-

"Contention of the assessee is not acceptable as the deduction u/s 80P is available only to following Banks as discussed in Para-I.

1. Primary agricultural credit society (PACS)

2. Primary co-operative agricultural and Rural development Bank (PCARDB)

The inserted section 80P(4) does not allow deduction to any other co-operative bank. From the submission of assessee, it is clear assessee is not claiming exemption for being PACS or PCARDB. However assessee has taken a very hyper technical ground that assessee is co-operative society for the purposes of income tax act but not a Co-operative bank.

Assessee's only contention is that exemption has been withdrawn from Co-operative Bank but assessee is not a Co-operative Bank within the meaning of section 80P(4). Without prejudice to discussion in Para-l now it will be established that assessee is a co-operative bank for the purposes of income Tax Act also.

As per section 80P(4) "Co-operative Bank" has been defined to mean "Co-operative Bank" as defined in Part - V of the Banking Regulation Act, 1949.

As per Banking Regulation Act, 1949 Part V

Application of The Act to co-operative Banks (c) in section 5,-

(i) after clause (cc), the following clauses shall be inserted, namely."

'(cci) "co-operative bank" means a State co-operative bank, a Central co-operative bank and a primary co-operative bank ,

(ccv) "primary co-operative bank" means a co-operative society, other than a primary agricultural credit society,-

(1) the primary object or principal business of which is the transaction of banking business ;

(2) the paid-up share capital and reserves of which are not less than one lakh of rupees and

(3) the by-laws of which do not permit admission of any other co-operative society CIS a member:

Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose:

As per section 22 of RRB Act assessee is a deemed co-operative society for the purposes of Income Tax Act, 1961. As per section 22 of RRB Act:-

22. Regional Rural Bank to be deemed to be a Co-operative society for the purpose of "the Income tax act 1961. For the purpose of the Income Tax Act, 1961 (43 of 1961) or any other enactment for the time being in force relating to any tax on income, profits or gains, a regional rural bank shall be deemed to be a Co-operative society. Hence assessee is a Co-operative society for the purposes of Income Tax Act, 1961 ;.and fullfilling all the 3 conditions mentioned above. The fulfilment of all the 3 conditions is discussed as under :-

Condition -1

In para-1(b) it has been established that primary object or principal business of the assessee is the transaction of Banking business. Hence condition 1 of "primary co-operative bank" is fulfilled.

Condition - 2

As per RRB Act, 1976, :-

6. Issued capital.- 4[(1) The issued capital of each Regional Rural Bank shall, in the first instance, be such as may be fixed by the Central Government in this behalf, but it shall in no case less than twenty-five lakhs of rupees or exceed one crore of rupees.]

The assessee has paid up share capital of Rs. 1.00 Crore and Reserve & Surplus of Rs.24.81 Crores as on 31.03.2007 as per the annual report. Hence condition-2 of "Primary Co-operative bank" is also fulfilled.

Condition-3

As assessee is not a registered society under Registrar of societies but has been established under RRB Act and as per section 22 of RRB act assessee is a deemed society for the purposes of Income tax Act. There is as such no member of the assessee as in case of any other society registered under registrar of society. Counsel of the assessee has submitted that there are no members and assessee is only a deemed society under RRB Act.

The basic composition of the assessee is very close to the composition of a company. In case of assessee the composition has been defined in RRB Act as under :-

(2) Of the capital issued by a Regional Rural Bank under sub-section (1), fifty per cent. shall be subscribed by the Central Government; fifteen per cent by the concerned State Government and thirty-five per cent by the Sponsor Bank.

In case of assessee only share holders of the assessee can be inferred as members of the assessee bank. Also from, the annual report following are the observations.

Share Capital

The authorised share capital of banks is Rs. 5.00 Crore. The paid-up capital is Rs. 1.00 Crore, subscribed by Govt. of India, Govt. of Madhya Pradesh & State Bank of Indore (Sponsor Bank) in the ration of 50: 15: 35 respectively.

Also proviso to condition-3 (that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of Such cooperative society out of funds provided by the State Government for the purpose) makes it very clear that a share holder has been referred as a member. Rules and regulations and by-laws of the assessee are governed by RRB act. Under RRB Act the composition of the assessee has been fixed as 50% share holding of Central Government, 15% of State Government and 35% of Sponsor Bank that is State Bank of Indore. RRB Act prohibits introduction of any other share holder. Hence by-laws of assessee society do not permit admission of any other co-operative society as a member.

Hence assessee is fulfilling all the 3 conditions of Primary Co-operative Bank under banking regulation Act, 1949 and hence a "co-operative bank" under Banking regulation Act. Hence as per section 80P(4) assessee is co-operative bank for the purposes of Income Tax also. Hence no deduction u/s 80P is allowed to the assessee. I am also satisfied that inaccurate particulars of income were furnished and hence penalty u/s 271(1)(c) is initiated separately.

Para-3

As per the CBDT circular on finance act 2006 Circular no. 14/ 2006, dated 28-12-2006.

22.1 Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.

22.2 The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" have also been defined to lend clarity to them.

22.3 Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of 'income'.

22.4 Applicability - From assessment year 2007-08 onwards.

This makes it clear that income of business of banking has been brought under Section 80P of the Act for all the Co-operative societies except PACS and PCARDB. Hence no deduction u/s 80P is allowed to the assessee.

Para-4

The exemption and deduction clauses of the act cannot be interpreted liberally and these should be allowed strictly only to those for whom these clauses are really meant for RRBs are Banking institutions performing as par with the commercial banks and the amendment has been brought u/s 80P(4) to withdraw such deduction all such profit earning banks. The legislative intent is very clear from the blow part of speech given by then Hon'ble Union Minister of Finance Shri P. Chidambram on 28.02.2006 presenting the budget and proposing the said amendment :-

XIV Tax Proposals

Direct Taxes

166. Cooperative banks. like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies CPA CS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt (from tax under section 80P of the Income Tax Act However, I propose to exclude all other cooperative banks from the scope of that section.

From the speech it is very clear that only PACS and PCARDB have been provided a special status because of their focus on agriculture sector and it has been specifically stated that all the other co-operative banks have been excluded from the scope of the section 80P.

Hence no deduction u/s 80P is allowed to the assessee."

3. By the impugned order, the ld. CIT(A) confirmed the action of the Assessing Officer after having following observations :-

"I have gone through the assessment order and the submission made by the appellant. In this regard it is pertinent to quote circular no. 6 of 2010 dated 20th November, 2010 of CBDT, which reads as under :-

"Circular No.6 of 2010, dated 20th September, 2010. Subject: Eligibility of deduction under section 80P to regional rural banks Section 80P of the Income-Tax Act, 1961, provides for a deduction from the income of cooperative societies referred to in that section.

2. As regional rural bank (RRB) are basically corporate entities (and not cooperative societies), they were considered to be not eligible for deduction u/s 80P when the Section was originally introduced.

However, as Section 22 of the Regional Rural Bank Act provides that a RRB shall be deemed to be Co-operative Society for the purpose of the Income-tax Act, 1961, in order to make such banks eligible for deduction under section 80P, the CBDT issued a beneficial Circular No.319, dated January 11, 1982, which stated that for the purpose of section 80P, a Regional Rural Bank shall be deemed to be a Co-operative Society.

3. Section 80P was amended by the Finance Act 2006, with effect from April 1, 2007, introducing sub-section (4), which laid down specifically that the provisions of section 80P will not apply to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Accordingly, deduction under section 80P was no more available to any regional rural bank from the assessment year 2007-08 onwards.

As on dated August 25, 2006, addressed to the RBI was issued by Board clarifying that regional rural banks would not be eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards.

4. It has been brought to the notice of the Board that despite the amended provisions, some regional rural banks continue to claim deduction under section 80P on the ground that they are co-operative societies covered by section 80P(1) read with Board's Circular No. 319, dated January 11, 1982.

5. It is, therefore, reiterated that regional rural banks are not eligible for deduction under section 80P of the Income-tax Act, 1961, from the assessment year 2007-08 onwards. Furthermore, Circular No. 319, dated January 11, 1982, deeming any regional rural bank to be co-operative society stands withdrawn for application with effect from the assessment year 2007-08.

The field officers may take note of this position and take remedial action, if required."

In view of the above circular, I am not inclined to interfere with disallowance of 80P made by the AO and the disallowance of Rs. 5,30,07,997/- is, accordingly sustained. This ground of the appellant is dismissed."

4. Against the above order, the assessee is in further appeal and has taken following grounds :-

1. That the Id. CIT(A) erred in confirming re-opening of the assessment u/s 147 and further holding that the notice u/s 148 was not issued without jurisdiction.

2. That the learned CIT(A) erred in maintaining disallowance of Rs. 5,30,07,997- claimed as deduction u/s 80P of LT. Act, 1961.

3. That the learned CIT(A) erred in classifying the appellant Bank as 'Cooperative Bank' falling within the definition of 'cooperative bank' as defined in Part V of Banking Regulation Act, 1949 and thereby denying benefit of deduction u/s 80P applying provisions of Sec 80(P)(4) of the Act.

4. That the learned CIT(A) erred in relying merely on the circular of CBDT in denying benefit of deduction u/s 80P in spite of mandatory provisions contained in Section 22 of the Regional Rural Development Bank Act, 1976 deeming the appellant bank as a 'cooperative society' for the purpose of Income-tax Act.

5. Shri Anil Khabya, C.A. appeared on behalf of the assessee and submitted as under :-

"The benefit of provisions of section 80P was made available to Regional Rural bank till Ass. Yr. 2006-07. However, an amendment was made by Finance Act, 2006 inserting sub-section (4) to section 80P w.e.f. 1-04-2007. The sub-section (4) provided (4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agriculture and rural development bank. Explanation-For the purpose of this sub-section-

(a) 'Cooperative bank" and "primary agriculture credit society" shall have the meanings respectively assigned to them in Part-V of the Banking Regulation Act, 1949 (10 of 1949);

(b) "primary co-operative agriculture and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provided long term credit for agriculture and rural development activities.

From the plain reading of amended provision it emerges:-

(1) Provision of section 80P would not apply to any Cooperative bank other than a primary agriculture credit society or a primary co-operative agriculture and rural development bank.

(ii) "Cooperative bank" and "primary agriculture credit society" have been defined under the Explanation to sub-section (4) and they shall have the respective meaning assigned to them in Part-V of Banking Regulation Act, 1949.

(iii) To all other Cooperative Societies, the benefit hitherto available shall continue to apply.

Preamble of Part V of the Banking Regulation Act provides that Banking Regulation Act shall apply to Cooperative Societies subject to modifications. Provisions of Part V of the Banking Regulation Act applying on Cooperative Societies which have been registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-State Societies, or any other Central or State law relating to Co-operative Societies for the time being in force. (Kindly refer section 56(c)(i)(cciia) of Banking Regulation Act. The assessee, being a Regional Rural Bank constituted under special provisions of RRB Act is not a Cooperative Bank registered under any Cooperative Act. The provisions of Part V of Banking Regulation Act does not apply to a Regional Rural Bank constituted under a statute other than Cooperative Acts.

The A.O. has admitted that the assessee cannot be covered in Part V of Banking Regulation Act under the category (1) State Cooperative bank and Central Cooperative bank. The only recourse left with him to some how cover the assessee under the definition of primary Co-operative Bank. For this purpose he has labored under erroneous assumptions and stretched the limited legal fiction created by Section 22 of RRB Act for the purpose of Income -tax Act to provisions of the Banking Regulation Act and Cooperative Act. The analysis given by the A. O. in deeming the assessee a 'primary Co-operative Bank' is fallacious and devoid on any merit. To constitute a 'primary Co-operative bank' the basic fundamental condition is that it should be a cooperative society registered under the Provisions of Cooperative Societies Act, 1912 (2 of 1912) or any law relating to co-operative societies for the time being in force in any State. The deeming provisions of Section 22 of RRB Act Have been incorporated for limited purpose only and they cannot be stretched to cover provisions of Banking Regulation Act, Cooperative Act etc.

It is a settled proposition of law that in interpreting a provision creating a legal fiction, the Court is to ascertain for what purpose the fiction is created, and after ascertaining this, the Court is to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction. But in so construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of the section by which it is created. It cannot be extended by importing another fiction. And a legal fiction in terms enacted 'for the purpose of a particular Act' is normally restricted to that Act and cannot be extended to cover another Act. A legal fiction must be carried to its logical conclusion and not to an illogical length.

(Kindly refer: CIT v. Elphinstore Spinning & Weaving Mills Co. [1960] 40 ITR 142, 154 (SC); Rajputana Trading Co. Ltd. v. CIT [1969] 72 ITR 256 (SC); Dr. Baliram Waman Biray v. Justice B. Lentin [1989] 176 ITR 1, 27 (SC); CED v. Krishna Kumari Devi [1988] 173 ITR 561, 565 (All); Gulab Chand Motilal v. CIT [1988] 174 ITR 117, 122 (M.P.); CST v. Mohanlal Anil Kumar [1984] 57 STC 145-149 (Bom).

The CIT(A) did not allow the benefit of section 80P on the ground that the circular No. 319 dt. 11-11-1982 has been withdrawn by the Board and therefore benefit of deduction could not be allowed to the appellant. The CIT(A) did not appreciated that the benefit u/s 80P has not been conferred on the appellant by clarificatory circular of the Board but by the specific deeming provisions of Section 22 of the Regional Rural Development Bank which is still in force. The benefit of deduction is available with or without the clarificatory circular of the Board. Withdrawal of a clarificatory circular has no effect on the admissibility of deduction U/S 80P. It is a settled proposition of law that a departmental circular is not a law. It may bind IT authorities but the appellate authorities, Tribunal and Courts are not bound to take a judicial notice of circular. (Kindly refer 228 ITR 463(SC)- CIT v. Hero Cycle Ltd; 195 ITR 485 (All)- Indo Gulf Fertilizers & Chemicals Ltd.

It is respectfully submitted that Provisions of Part V of Banking Regulation Act are not applicable to our Bank. Our Bank is not covered under the definition of" Cooperative Banks" as defined in Part V of Banking Regulation Act. The provisions of Section 80(P)(4) excluding the benefit of Section 80P to certain Cooperative bank is not applicable in our case and we are entitled to claim benefit of Section 8OP which allows us benefit of deduction of entire profit earned from banking activities carried by our Bank. Therefore, in view of the clear cut provisions, the assessee is entitled to deduction u/s 80P of the Act because the exclusion must be specific and is to be construed strictly."

6. Ld. Authorized Representative placed reliance on the decision of Coordinate Bench in the case of M.P. State Coop. Agricultural. And Rural Development Bank Limited order dated 1st February, 2012.

7. On the other hand Shri Keshave Saxena, ld. CIT DR contended that the assessee is merely a cooperative bank and after insertion of sub-section (4) of Section 80-P, the deduction available to the Coop. Bank have been withdrawn and that after amendment this deduction was available only to the primary agricultural credit society and/or primary coop. agricultural and Rural Development Bank Limited.

8. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee is a Regional Rural Bank engaged in the activity of banking/financing in the District of Bhopal and Vidisha. Return was filed to claim all deduction u/s 80P in respect of its income. Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.

After insertion of sub-Section (4) of Section 80-P, by Finance Act, 2006, w.e.f. 1.4.2007, this deduction is available only to -

1. Primary Agricultural Credit Society (PACS)

2. Primary Co-operative Agricultural and Rural Development Bank (PCARDB)

Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of "income'."

Section 80P has been amended by Finance Act, 2006, and sub-Section (4) has been inserted.

As per finding recorded by lower authorities, the assessee is neither P ACs nor PCARDB and hence not eligible for deduction U/S 80P.

A society fulfilling two conditions is a PCARDB as per Explanation to section 80P(4)

(a) Area of operation confined to a taluk

(b) The principal object of which is to provide for long term credit for agricultural and rural development activities.

The principal object of the assessee has been discussed in detail later while discussing that assessee is not PACS and the object of the assessee and the range of the activities is not confined to taluk but is extended to entire district of Bhopal & Vidisha. It is clear that the assessee is not fulfilling the second condition also. Hence, assessee is not PCARDB. Assessee is not PACS, as per the explanation to section 80P(4) PACS has been defined as in Part-V of the Banking Regulation Act, 1949.

Primary object of principal business of PACS is to finance for agricultural purposes or purposes connected with agricultural activities. The primary object as well as activities of assessee are not confined to agricultural purposes but other purposes also. Hence, assessee is neither PACS nor PCARDB hence no exemption is available to the assessee u/s 80P. It was also submitted by the assessee during the assessment proceedings, "the assessee is a Regional Rural Bank carrying on banking activities in Bhopal and Vidisha District. Under the Provisions of section 22 of the RRB Act.

9. It is also not in dispute that the assessee is not claiming exemption as PACS for PCARDB. To clarify the amended provisions as brought by the Finance Act, 2006, the C.B.D.T. has also issued circular dated 28.12.2006, according to which after insertion of sub-Section (4) in Section 80P, the benefit of provisions of Section 80P shall not apply in relation to any cooperative bank other than primary agricultural credit society or primary cooperative agricultural rural development Bank. Thus, income of business of banking has been brought u/s 80P for all the cooperative societies except PACS and PCARDB. The legislative intent for insertion of sub-Section (4) as per the speech of Hon'ble Union Finance Minister on 28.2.2006 clearly shows that Coop. Banks were excluded from the benefit of Section 80P on the plea that like any other bank, the Coop. Banks are also lending institution and should pay tax on their profits. Accordingly, Coop. Banks were excluded from the scope of Section 80P.

10. To further clarify non eligibility of deduction of regional rural banks u/s 80P, CBDT vide Circular No. 6/2010 dated 20th September, 2010, provided as under :-

"Section 80P of the Income-Tax Act, 1961, provides for a deduction from the income of cooperative societies referred to in that section.

The field officers may take note of this position and take remedial action, if required."

11. Now coming to the decision of the Coordinate Bench in the case of M. P. State Agricultural Rural Development Bank relied on by the ld. Authorized Representative, we found that action of CIT(A) to allow benefit of Section 80P was confirmed by Tribunal on the finding that the assessee is an Agricultural and Rural Development Bank. It was also observed that as per the findings recorded by the ld.CIT(A), the assessee is a co operative land mortgaged bank, therefore, the benefit of Section 80P was available to the assessee despite insertion of sub-Section (4) of Section 80P. Thus, the facts of this case are quite distinguishable from the facts of the assessee's case where the assessee is a Regional Rural Bank. As the facts are distinguishable, therefore, proposition laid down therein cannot be applied to the assessee, which is a Regional Rural Bank engaged in banking activities, therefore, clearly excluded from application of Section 80P, after insertion of sub-Section (4) of Finance Act, 2006.

12. In view of the above discussion, we do not find any infirmity in the order of lower authorities for decline of claim of deduction u/s 80P of the Income-tax Act, 1961.

13. In the result, both the appeals of the assessee are dismissed.

IT : Deduction under section 80-IB(10) can be claimed on year-to-year basis where assessee shows profit from partial completion of project in each year

■■■

[2012] 24 taxmann.com 194 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'B'

Deputy Commissioner of Income-tax, Circle-3(2), Hyderabad

SMR Builders (P.) Ltd.*

CHANDRA POOJARI, ACCOUNTANT MEMBER

AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

IT APPEAL NOs. 671 (HYD.) OF 2010 and

1921 & 1948 (HYD.) OF 2011†

[ASSESSMENT YEARs 2005-06 & 2006-07]

JULY 12, 2012

I. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings - Assessment years 2005-06 and 2006-07 - Assessing Officer disallowed assessee's claim for deduction under section 80-IB in respect of residential housing projects by holding that assessee had sold flats in semi-finished stage and also assessee did not maintain separate accounts relating to project - Whether in terms of Circular No. 4 of 2009 deduction under section 80-IB(10) can be claimed on year-to-year basis where assessee was showing profit from partial completion of project in each year - Held, yes - Whether where profits of eligible unit could be clearly ascertained from accounts maintained, expenses incurred for project were known and all incomes, including indirect income arising to project had been considered and accounts had also been audited and a certificate had been filed, Assessing Officer had erred in holding that separate accounts were not maintained for eligible business as required under section 80-IB(10) - Held, yes - Whether, therefore, assessee's claim was to be allowed - Held, yes [In favour of assessee]

Circulars and Notifications : Circular No. 4 of 2009 dated 30-6-2009

II. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 2006-07 - Whether where assessee had borrowed interest-bearing funds but certain funds were advanced to sister concerns interest-free for non-business purpose, interest on said advance was to be disallowed under section 36(1)(iii) - Held, yes [In favour of revenue]

FACTS-I

In the assessment year 2005-06, the Assessing Officer disallowed the assessee's claim of Rs. 23,63,612 in respect of the residential housing projects "Metropolis" under section 80-IB by holding that the assessee had sold flats in a semi-finished stage as revealed by sale deeds. In fact, the assessee had sold undivided share of land with superstructure of semi-finished built-up area for a certain consideration and also, on the same date of execution of sale deed, a construction agreement was entered into with the transferee for further construction of the same flat by the builder itself. Thus, the assessee sold only semi-finished residential units which would not make the company eligible for claiming deduction under section 80-IB. Further, the Assessing Officer concluded that since the assessee did not maintain any separate accounts in respect of the eligible project it was not possible to work out the deduction under section 80-IB and, hence, no deduction. The Commissioner (Appeals), however, allowed the claim of the assessee.

On appeal by revenue:

HELD-I

As per Circular Instruction No. 4 of 2009, it was clear that deduction under section 80-IB(10) can be claimed on year-to-year basis where the assessee was showing profit from partial completion of the project in each year. In case it was found later that the project was not completed within four years, the deduction granted to the assessee in earlier years would be withdrawn. Therefore, it was to be concluded that the assessee could claim deduction under section 80-IB(10) on year-to-year basis. [Paras 29 and 30]

The stand of the Revenue with regard to semi-finished condition of flats was devoid of merit inasmuch as what was sought to be constructed and sold by the assessee was residential units and what was sought to be purchased by the individual buyer was the ownership of a residential unit and registration of flat in semi-finished condition was only to facilitate the convenience of the parties and agreement for development and completion of the balance work in relation to the flats registered was only an incidental formality to protect the interest of the parties which need not be viewed as fatal to the claim of the assessee for deduction under section 80-IB(10). Ultimately, the entire work from the stage of commencement to the stage of making residential units habitable had been carried out by the assessee only and the Revenue had no dispute whatsoever on this count. [Para 31]

It was the settled position of law that while interpreting the taxation statutes, more importantly incentives provisions thereof a liberal interpretation was called for. The approach while interpreting such provisions should be to advance the cause for which such provisions have been incorporated and not to frustrate the same. (para 32).

When the developer was offering profit under percentage completion method, the estimated profit that the developer would have on completion of the project was spread over the earlier years and offered every year the percentage of that profit based on percentage of project completion that year. Obviously, the contention of the Department that the assessee had not maintained any separate accounts to determine the profit from the housing project could not be upheld. The assessee claimed deduction on prorata basis, furnished the details as required under the provisions in Form 10CCB and if there was any doubt regarding the computation, the Assessing Officer was at liberty to verify the same. In the instant case, the assessee maintained regular books itself, and also maintained separate accounts of eligible units in the ledger. More specifically the assessee maintained details regarding Metropolis project. [Para 34]

The assessee had filed before the lower authorities during the remand proceedings the following accounts maintained with reference to the 'Metropolis Project' - (1) Sale of flats in Metropolis, (2) Finishing and Extra Works, (3) Labour (cost Centre Metropolis), (4) Material, (5) Structural Engg. Consultancy, (6) Land Development Charges, (7) Architecture fee, (8) Diesel and lubricants, (9) Indirect Incomes, (10) Salaries, (11) Postage and Telephones, (12) Printing & Stationery, (13) Repairs and Maintenance, (14) Security service charges, (15) Staff welfare, (16) Taxes and fees and (17) Water & Electricity. [Para 35]

Apart from these expenses such as expenditure on books and periodicals, conveyance charges, freight and transport, miscellaneous expenses etc. were also identified with reference to the eligible business. The assessee explained the allocation of common expenses such as remuneration, finance charges and interest and depreciation to the project. Such allocation was seen to be made as a proportion of the sales made. As per the statement, after considering the sales made by the project, the direct and indirect expenses incurred and the allocation of common expenses, the profit of the business was worked out at Rs. 21,17,268 for the assessment year 2005-06. [Para 36]

Section 80-IA(7) which is applicable to the provisions of section 80-IB requires the accounts of the eligible undertaking to be audited and a certificate to be filed. The essence of this requirement is that at any given time the financial position of the undertaking should be ascertainable. The intent is that the profits of the undertaking eligible for the deduction can be properly identified. This requires maintenance of accounts in such a fashion that the sales of the eligible business are known, the expenses - both direct and indirect are identifiable and the common expenses are apportioned. The details filed before Commissioner (Appeals) clearly demonstrated that in the case of the assessee, the profits of the eligible unit could be clearly ascertained from the accounts maintained. Expenses incurred for the project were known and all incomes, including indirect income arising to the project had been considered. The accounts had also been audited and a certificate, as required, had been filed. This being so, the Assessing Officer had erred in holding that separate accounts were not maintained for the eligible business and that the assessee was, therefore, not eligible for deduction under section 80-IB(10). It was, therefore, found that the assessee (1) maintained separate accounts relating to the project and (2) undertook to construct a complete residential unit. Being so, the findings of the Commissioner (Appeals) that the assessee was entitled for deduction under section 80-IB(10) was to be upheld. Since the facts relating to the assessment year 2006-07 were identical to the facts that were considered for the assessment year 2005-06, the order of the Commissioner (Appeals) was to be upheld for the assessment year 2006-07 on the issue relating to section 80-IB in this assessment year i.e. 2006-07 also. [Para 37]

FACTS-II

The assessee-company had invested Rs. 1,63,80,793 in firm 'S' as a partner and had received profit of Rs. 3,04,65,830 from that firm in the year under consideration which was considered exempted under section 10(2A). The assessee claimed deduction of Rs. 80,36,942 towards interest paid to bank and other loans. Admittedly, since income received from the firm was exempted, provisions of section 14A were applicable. The Assessing Officer opined that the proposed interest on the investment made in the firm was not for the purpose of business and, accordingly, he disallowed Rs. 12,00,000 out of the claim made by the assessee. The Commissioner (Appeals) upheld the disallowance.

On appeal by the assessee:

HELD-II

As per provisions of section 36(1)(iii), deduction for the interest on loans raised by the assessee for business purposes was available. Once the assessee claimed any such interest as deduction in its books of account, the onus always would be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpired that the assessee had advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of outstanding loans on which the assessee was incurring liability to pay interest, there was no justification to advance the loans to sister concerns for non-business purposes without charging any interest. Accordingly, there was no merit in the plea of the assessee that the entire interest paid on borrowing had to be allowed. [Para 42]

Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business that have the colour of business receipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. There is no reason to subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under section 36(1)(iii). That being the position, there was no escape from the finding that interest being paid by the assessee to the extent the amounts were diverted to sister concern on interest free basis were to be disallowed. [Para 43]

If the plea of the assessee was to be accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again would show a camouflage by the assessee as at the time of raising of loan, the assessee would show the figures of capital introduced by it as a margin for loans being raised and after the loans were raised, when substantial amount was diverted to sister concerns for non-business purposes without interest, a plea would be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea might be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case. [Para 44]

The view that where the amount was advanced from a mixed account or share capital or sale proceeds or profits, it would not be deemed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds was not correct. Once it was borne out from the record that the assessee had borrowed certain funds on which liability to pay tax was being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest was to be disallowed under section 36(1)(iii). [Para 45]

CASE REVIEW

Nagarjuna Homes v. ITO [2011] 46 SOT 287/2010] 7 taxmann.com 130 (Hyd.) (para 30); Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 32) and CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 33) followed.

CASES REFERRED TO

CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 220 ITR 84/87 Taxman 152 (AP) (para 26), Nagarjuna Homes v. ITO [2011] 46 SOT 287/[2010] 7 taxmann.com 130 (Hyd.) (para 30), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 32) and CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 33).

M.S. Rao for the Appellant. C.S. Subramanyam and V. Sivakumar for the Respondent.

ORDER

Chandra Poojari, Accountant Member - ITA No. 671/Hyd/2010 and ITA No. 1948/Hyd/2011 are by the Revenue and ITA No. 1921/Hyd/2011 is by the assessee directed against different orders of the CIT(A), Guntur for assessment years 2005-06 and 2006-07. Since the above appeals involve common issues, they are clubbed, heard and are being disposed of by this common order, for the sake of convenience.

2. Firstly, we will take up Revenue appeals in ITA No. 671/Hyd/2010 and ITA No. 1948/Hyd/2011. The Revenue raised the following grounds of appeal:

"ITA No. 671/Hyd/2010

2. The CIT(A) should have upheld the order passed by the AO as the assessee sold semi-finished unit.

3. The CIT(A) should have upheld the order passed by the AO as the assessee has not maintained any separate accounts in respect of 'SMR Metro Polis' project due to which the eligible deduction u/s. 80IA could not be worked out.

ITA No. 671/Hyd/2010

1. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though the semi-finished flats are registered in favour of the purchasers.

2. The CIT(A) erred in holding that the assessee is eligible for deduction u/s. 80IB even though contract for further construction of flats are being entered from the purchasers of the flats.

3. The CIT(A) ought to have held that the assessee is only a contractor and hence disallowed the deduction as per the amendment to section 80IB(10).

4. The CIT(A) ought to have considered only the year end balance for disallowance of interest as on 31st March and should have considered the opening balance and the utilisation of funds on transaction to transaction basis as held in Income-tax Act, 1961. No. 21/Hyd/2011 for the A.Y. 2007-08 in the case of M/s. Ambience Properties Ltd., by Hyderabad A Bench of the Hon'ble ITAT."

3. The facts relating to the both the assessment years are common in nature and hence, we consider the facts relating to the assessment year 2005-06. In this assessment year the Assessing Officer completed the assessment disallowing the assessee's claim u/s. 80IB of the Act. The assessee had claimed deduction of Rs. 23,63,612 as deduction u/s. 80IB of the Act in respect of the residential housing projects "SMR Metropolis". The assessee's claim u/s. 80IB(10) was for this project consisting of residential units ranging from 890 sq. feet to 1400 sq. feet of built up area. After verifying the details filed during the assessment proceedings, the Assessing Officer denied the assessee's claim for deduction u/s. 80IB(10).

4. The Assessing Officer held that from the details furnished it was seen that the assessee had sold flats in a semi finished stage. After verifying the sale deeds executed by the assessee company in favour of the transferee of flats, the Assessing Officer held that it was clear from the sale deed that the assessee company sold undivided share of land with super structure of semi finished build up area for a certain consideration. The Assessing Officer held that the assessee did not satisfy the condition prescribed in the section i.e., the assessee did not sell complete residential units in all respects. The Assessing Officer held that semi finished structures can never be considered as residential units since a residential unit is a place where a person can live. In this case, on the same date when the sale deed was executed a construction agreement was also entered into with the transferee for further construction of the same flats by the builder company itself. That is the company undertook to complete the flat which was purchased by the transferee in the semi finished stage. From this the Assessing Officer concluded that what was sold by the assessee company was only semi finished residential units which would not make the company eligible for claiming deduction u/s. 80IB of the Act.

5. The Assessing Officer further observed that the assessee was asked to produce the accounts maintained in respect of "Metropolis Project", but these accounts were not produced and that the Authorised Representative had submitted that only single material consumed accounts were maintained for all projects. The Assessing Officer held that the provisions of Sec. 80IB require the accounts of the undertaking in respect of which the deduction is claimed, to be audited and the audit report to be tiled along with the return of income. The Assessing Officer concluded that since the appellant company did not maintained any separate accounts in respect of the eligible project it was not possible to work out the deduction available to it u/s. 80IB and therefore it was not eligible for the deduction u/s. 80IB(10) of the Act.

6. Against this the assessee went in appeal before the CIT(A) and the CIT(A) allowed the claim of the assessee u/s 80IB of the I.T. Act. Against this the revenue is in appeal before us.

7. The learned DR submitted that as can be seen from the computation statement filed along with the return of income, the assessee claimed Rs. 23,63,612/- towards deduction u/s 80IB of the IT Act. When asked as to how the assessee company is eligible for such deduction, it was submitted that the assessee was eligible for deduction u/s 80IB in respect of Residential Housing Project "SMR Metro Polis" at Madeenaguda Village, Serilingampally Mandal and Municipality, Ranga eddy District. It was also mentioned that total land area of the project is Rs 1.4 acres and the housing project was approved by the local authorities i.e. Hyderabad Urban Development Authority and Serilingampally Municipality on 06.05.1999. Further it was also mentioned that the built up area of each residential flat is ranging from 890 sq. ft to 1400 sq. ft.

8. The learned DR submitted that the assessee is in the business of construction and sale of flats. During the accounting year, the assessee under took development of residential project by name "SMR Metro Polis". To make one eligible for deduction Section 80IB in respect of House Projects the following conditions should be complied with:

(i) The development and construction of the housing project should commence after 01.10.1998;

(ii) The plot area on which housing project developed should be minimum area of 1 acre;

(iii) The built up area of each unit should not exceed 1,500 sq. ft.

9. The DR further submitted that from the details furnished it is seen that the assessee sold the flats in semi finished stage. During the course of assessment proceedings copies of certain Sale Deeds executed by the assessee company in favour of transferees of flats are obtained and verified. From the description mentioned 'in the Sale Deeds it is clear that the assessee company sold undivided share of land with superstructure of semi finished built up area for certain consideration. Thus, from the details it can be seen that the assessee company did not sell complete residential unit in all respects. But the provision clearly mentions that the assessee should sell only residential units to make themselves eligible for deduction u/s 80-IB. He submitted that semi finished structure can never be called as a residential unit. Unless it is completed in all respects the semi finished unit cannot be called residential unit. A residential unit is a place where a person can live in. In that context a semi finished unit where a person cannot live, cannot be identified as a residential unit. It may also to be mentioned after selling the property, the assessee entered into "construction agreement" with the transferees for further construction of the same flats. He drew our attention to an example which is as follows:

"The assessee company executed a sale deed on 09.06.2004 in favour of Sri Niraj Kumar. The property sold was undivided share of 47 sq. yds and Flat No. 408 consisting of 1,065 sq. ft of semi finished built up area. The sale consideration mentioned was Rs. 6 lakhs. The Sale Deed was registered on 11.06.2006. The assessee company also entered into a "construction agreement" with Sri Niraj Kumar on 19.05.2004. As per the terms and conditions of the construction agreement, the assessee company has to carry on further construction of the flat for a consideration of Rs. 4,47,200/- The condition is that the assessee company has to under take and complete the flat which was purchased by the transferee in semi finished stage."

10. The learned DR submitted that from the above, it is clear that the transferee purchased flat along with undivided share of land in semi finished stage through the Sale Deed. The transferee entered into an agreement with the assessee company (the builder) for completion of the flat by paying substantial amount. This is an agreement executed on stamp paper without any registration. From the above, it is clear that the assessee sold the flats in semi finished stage and same are incomplete residential units. But as per Section 80-IB, the assessee company should sell only residential units if they want to make themselves eligible for claiming deduction u/s 80-IB. Thus in this case the assessee did not fulfil the conditions required u/s 80-IB of the LT. Act 1961.

11. The learned DR submitted that during the course of scrutiny proceedings when asked for accounts maintained in respect of "Metro Polis Project", the AR 'stated that they have maintained only single material consumed account for all projects and the details of materials consumed the each project can not be ascertained. In this connection it is to be mentioned that sub-section (13) of Section 80-IB clearly states that sub-section (5), (7) to (12) of Section 80IA shall apply to the eligible business under this section. Sub-section (7) of Section 80-IA clearly states that for the purpose of determining the quantum of deduction the same should be computed as if such eligible business was the only source of the income of the assessee during the previous year. For clarity the relevant sub-section is reproduced hereunder:-

"sub-section (7) [* * *] The deduction under sub-section (1) from profits and gains derived from an [***] undertaking shall not be admissible unless the accounts of the [* * * ] undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income the report of such audit in the prescribed form duly signed and verified by such accountant"

12. The DR submitted that in the assessee's case, the assessee did not maintain any separate accounts in respect of eligible project i.e. SMR Metro Polis. This is clear from the confirmation made by the assessee that they maintained single account for all the projects. In the absence of such separate accounts for eligible business it is not possible to work out the deduction u/s. 80IA. Further as the assessee did not comply with the condition laid down u/s 80IA(7) of the IT. Act, the assessee is not eligible for deduction u/s 80IB of the LT. Act.

13. The learned AR submitted that the assessee company filed its return declaring total income of Rs. 1,46,14,388. It claimed deduction of Rs. 23,63,312 u/s. 80IB of the I.T Act, 1961. During the course of assessment proceedings, it was explained to the Assessing Officer that the deduction was claimed in respect of a residential housing project called "SMR metropolis" situated at Madinaguda village, Serilingampally Mandal & Municipality. It was also explained that the total land area of the project was 1.4 acres and that the housing project was approved by the Hyderabad Urban Development Authority and the Serilingampally Municipality on 6-5-1999. Built-up area of each residential unit was from 890 Sq. ft to 1400 Sq. ft. On the strength of these facts, the assessee claimed deduction u/s. 80IB(10) of the I.T Act. The Assessee executed sale deeds in favour of the purchasers of flats and registered these sale deeds with the Sub-registrar. From the narration in these sale deeds the Assessing Officer concluded that the assessee sold the flats in semi-finished stage i.e., the assessee company sold undivided share of land and together with semi-finished superstructure. On account of this fact, he concluded that the assessee did not sell residential units. He was of the view that Sec. 80IB requires sale of residential units, that a residential unit is a place where a person can live in and in that context a semi finished residential unit cannot be called a residential unit. He denied the deduction claimed by the assessee u/s. 80IB(10).

14. The AR submitted that the assessee filed appeal before the Commissioner of income Tax (Appeals). It was submitted that the Assessing Officer noticed that the assessee entered into a "construction agreement" with the transferee for further construction of the same flats. As an example the Assessing Officer cited a specific case in which the details were as under:

"Assessee executed a sale deed on 9-6-2004 in favour of one Sri Niraj Kumar whereby undivided share of 47 sq. yds together with semi-finished flat of 1065 sq. ft was sold for Rs. 6 lakhs. The deed was registered on 11-06-2004. The assessee also entered into a "construction agreement" with the same person on 19-5-2004 (i.e., prior to the execution of the sale deed itself). As per this agreement the assessee was to carry on further construction of the flat for a consideration of Rs 4,47,200."

15. The AR submitted that the title to the property to an apartment is transferred through a registered document for undivided share of land. Section 80IB entitles deduction for profits derived from developing and building housing projects. The development activity involves conceptualization of a project, determining cost of the project, arranging debt and equity, getting appropriate approvals etc. Building involves the act of carrying out all physical activities that bring into existence a tangible building in existence. It was submitted that the facts recorded by the assessing officer actually demonstrates compliance or fulfilment of the same. The requirement of Sec. 80IB is that profits should be derived in the previous year relevant to any assessment year from developing and building housing projects approved before the 31st day of March, 2008 by a local authority. In the case of the assessee, the objection taken by the Assessing Officer is in respect of the fact that the assessee company registered a semi finished flat and that such a semi-finished flat does not fulfil the requirement of Sec. 80IB. It was submitted that the registration of a semi-finished flat to the buyer is only in accordance with mutual convenience of the seller and buyer and it does not signify the culmination of the assessee's responsibility to build and handover a completed residential unit. Considerations such as incidence of lesser amount of statutory levies like registration charges, insistence of buyers in getting legal title to property for ensuring compliance with exemption provisions under tax laws, necessity to produce documents before financing/lending institutions etc. are a few of the reasons that result in early registrations of residential units in favour of buyers. In the case of the assessee, the execution of the construction agreement signifies the continued commitment to build and deliver a residential unit. The view taken by the Assessing Officer was erroneous inasmuch as the registration of a semi finished flat does not result in the conclusion of the transaction with the client but it only results in the completion of one of the phases in the process of developing and building a residential flat. It is the assessee company and none else that is entitled to the profits of the housing project whether up to the stage of registration or thereafter. In this view of the matter, the Assessing Officer was not correct in holding that the assessee is not eligible for deduction u/s. 80IB(10) as claimed by it.

16. The AR further submitted that the sequence of transaction with each buyer as explained to learned CIT(A) together with copies of the documents is as follows. The sequence of the transactions as mutually agreed in the agreement to sell as noted by CIT(A) in her order is as follows:

"(1) That the vendee agreed to pay Rs. (x) to the vendors towards the sale consideration for the schedule of property within two weeks from the date of this agreement of sale.

(2) That the vendee entered into a construction agreement with Vendor 7 (the assessee) (on the same date) for finishing of the schedule of property for a cost of Rs. (y) which includes the proportionate cost of infrastructure and one car parking space in stilt floor and Rs. (z) towards corpus fund, as such the total comes to (y + z).

(3) That the vendors are hereby agreed to execute the registered sale deed and hand over the physical vacant possession of the schedule of property to the vendee immediately after receiving the total sale consideration and construction agreement amount.

(4) That the vendee is hereby agreed to bear the stamp duty and registration fees and expenditures for executing the agreement of sale, construction agreement and sale deed for the schedule of property.

18. The Authorised Representative of the appellant also filed copies of letters of possession issued by the appellant company in respect of flats in SMR Metropolis. These letters were issued to the site supervisor to hand over the flat and keys by the appellant in respect of individual flats on different dates evidence the completion of the construction of the flats in all respects. The Authorised Representative also filed receipts signed by authorized signatories of the financial institutions to show that after the registration of the sale deed and prior to the handing over of the possession of the completed unit, the bank certified the receipt of the registered sale deed from the appellant and that the liability of the builder was discharged.

19. The facts considered in the preceding paragraphs show that (i) the appellant enters into an agreement for both - sale of undivided portion of land and construction of the flat on the same date (ii) the sale agreement states that the sale would be registered only after the payments of consideration as per sale agreement and construction agreement (iii) the tripartite agreement; with the finance companies considers the total payment towards undivided portion of land and towards construction (iv) the letters show that the completed flats were handed over to the buyers.

20 It is clear that all the facts taken together show that the appellant company is constructing a complete residential unit. The consideration received is clearly reflected in the sale of agreement. The entire amount has been accounted for as sales by the appellant builder. The papers filed also show that the keys to the flat are handed over only after it is complete in all respects.

21. I therefore hold that the Assessing Officer erred in holding that the appellant only sold a semi-finished flat. In fact the appellant undertook to construct the flat in its entirely - the consideration which was separately determined for undivided portion of property and construction were both considered as sales made by the company. The Assessing Officer is not justified in holding that the appellant is intelligible to claim deduction u/s. 80 18(10) on this ground."

17. The AR submitted that the learned CIT(A) had undertaken a detailed examination of the progression of the transaction till the handing over of the completed residential flat to conclude that the AO erred in disallowing the claim u/s. 80IB.

18. Without prejudice to the submissions made above, it was also submitted by the AR that section 80IB envisages deduction in respect of the profits derived in the previous year in respect of approved hosing projects. Having regard to the fact that housing projects take more than one year to develop and complete, an eligible assessee stands to derive such profits over a period of more than one previous year. The extent of such profits relating to a particular year necessarily relate to income accrued in that year depending upon the system of accounting for recognition of income followed by the eligible assessee. Even according to Accounting Standard 7, two methods of accounting commonly followed are the percentage of completion method and the completed contract method. It is not mandated by the section that in order to be eligible fur deduction, profits should relate only to completed residential units. The section promulgates deduction of profits attributable to and arising from housing projects and the quantum of profits depends on the method of accounting followed by assessee. The segregation of the activity into registration and subsequent construction by the AO is not valid as both the activities are carried out by the specified undertaking claiming deduction u/s. 80IB. It is worth mentioning at this juncture that the reference to "residential unit" in the section arises in the context of fixing maximum built up area with respect to each individual unit within the housing project. Sub-section 10 of Sec.80lB starts with the sentence "The amount of deduction in the case of an undertaking developing and building housing projects ........... " clearly indicating that it is the profit derived from the developing and building housing projects that is eligible for deduction.

19. The AR submitted that the AO has put undue emphasis on technicalities. The AO has taken a hypertechnical view of the provisions, according to his own interpretation of the provisions, rather than a pragmatic view. It is a well accepted principle of interpretation that substance of law, if complied with weighs over form and more so while interpreting an incentive provision. Tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for concession, deduction, and relief should be construed reasonably and in favour of the assessee to advance the object rather than to defeat the same. It was explained before the CIT(A) that the bank funding the customers of the company provides the loan under the category of housing loan. In order to ensure the housing loan disbursed to the company is utilized for the purpose of construction of the residential house, it enters to agreement with the customer and developer (SMR) being the guarantor under the agreement. The guarantor (SMR) is required to complete the house and provide the registered sale deed to the bank after the appropriate inspection by the staff of the bank. Upon providing such registered document to the bank for mortgage, the bank discharges the guarantor company (SMR) from being guarantor to such loan disbursement.

20. The AR submitted that the CBDT, vide instruction 4/2009 dt. 30.06.2009 opined that deduction u/s. 80IB is available on year to year basis on partial completion of housing projects. This implies that semi finished houses are eligible for deduction u/s. 80IB. Copy of CBOT instruction No 4.2009 is submitted herewith.

21. The AR submitted that on the issue whether the assessee sold only semi-finished residential units which cannot be considered as a place where a person can live in, the CIT(A), held that the facts of the case show that the assessee is constructing a complete residential unit. The consideration received is clearly reflected in the sale agreement and the entire amount has been accounted for as sales by the assessee company. The learned Commissioner of income tax (Appeals) held that the assessee undertook to construct the flat in its entirety. The learned Commissioner of Income tax (Appeals) accordingly held that the Assessing Officer erred in holding that the assessee only sold a semi-finished flat. The learned Commissioner of Income Tax (Appeals) allowed the assessee's appeal. The learned Commissioner of Income Tax (Appeals) allowed the assessee's appeal on this issue.

22. Regarding maintenance of separate accounts for the eligible project, the AR submitted that the assessee got its accounts audited and complied with the requirement of filing audit report in Form No. 10CCB as required u/s. 80IB(13) read with Sec. 80IA(7). The Assessing Officer however held that the assessee should have maintained separate accounts in respect of the eligible project. He held that in the absence of separate accounts for the eligible project, deduction allowable u/s. 80IB could not be worked out. The Assessing Officer accordingly held that the assessee did not comply with the condition laid down u/s. 80IA(7) and denied the claim of deduction u/s. 80IB.

23. In this connection, the AR submitted that the assessee is engaged in development and execution of more than one housing project simultaneously. Accordingly, the assessee is required to maintain a common establishment for all the projects to facilitate coordinated activity in the areas of administration, client relations, advertisement, communications, transport, compliance with statutory obligations etc. It was submitted that the assessee had maintained Books of accounts with the use of a Computer Application which facilitated capturing of information/data relating to cost centres as a separate sub-ledger of the composite Books of accounts thus facilitating cost centre-wise details of direct expenditure and revenue. The assessee arrives at the results of the working of each project by adding the appropriate amounts of expenditure incurred by the common establishment. During the year under account also, the assessee maintained its accounts on the same basis. These set of accounts were also subject to audit as required by the statute. The assessee filed a revised Audit Report U/s. 80IB in Form 10CCB before the Commissioner of Income Tax (Appeals) which was forwarded to the Assessing Officer and a remand report was obtained. In his report the Assessing Officer admitted that the assessee produced soft copy of the account and the same were verified with reference to the vouchers produced and on verification has maintained separate accounts of the eligible unit. In spite of the fact that separate audit report in Form No. 10CCB was filed, the AO stated that the books of account were audited as a whole. He commented that had separate books been maintained, the assessee would have got its account audited separately. The Assessing Officer repeated his claim that separate books were not maintained.

24. The AR further submitted that The Commissioner of Income Tax (Appeals) was called upon to offer its comments on the remand report. The assessee replied stating that the AO failed to understand the method of maintaining the books of accounts when an entity has separate divisions for each kind of business. A entity may be having different business lines carrying out different business activities situated at different geographical locations. These divisions being an integral part of the legal entity (say a company) shall continue to have its business results such as sales, purchase, debtors, credit etc. as part of the general ledger of the entity (say company) to which such entity belongs. The business transactions of the division/undertaking are reflected as a sub ledger in the main ledger of the entity (say company) to which these divisions/undertaking belong to. In the instant case the eligible undertaking Metropolis is a division of SMR Builders Pvt Ltd. The ledger accounts relevant to Metropolis are reflected as "Cost Centres" in the main accounting records of SMR Builders Pvt Ltd. The accounting application allows the preparation of financial statements of the undertaking "Metropolis" separately. It was submitted that the AO failed to appreciate such position and incorrectly concluded by saying that separate books of accounts are not maintained. The Assessing Officer has also commented that the assessee got its accounts audited for the business as a whole and that had it maintained separate accounts; it would have got its accounts audited separately. The assessee submits that here again, the Assessing Officer has not appreciated the fact that the audit u/s. 44AB is required to be conducted for the business as a whole including the undertakings eligible for deduction U/s 80IB. Hence, the auditor has furnished the report required U/s. 44AB and also U/s 80IB(13) r.w.S. 80IA(7) based on the audit of such undertaking.

25. The AR submitted that the report furnished by the assessee reflects the profits of the eligible business as culled out from the separate account maintained by it for the whole business. The Assessing officer, though he examined the accounts and the report furnished by the assessee, for the eligible unit in course of remand proceeding chose to comment on the absence of a separate audit. The assessee reiterated that the claim made by it is in accordance with the provisions of Sec .80IB and requested that the deduction may be allowed.

26. The AR also submitted that notwithstanding the above position, the incentives by way of deduction from profits and gains of undertakings have been incorporated in various provisions in Chapter VIA-C of the LT Act and these provisions do not require maintenance of separate accounts. This has been judicially recognised in several cases. The AR cited the case of CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 220 ITR 84/87 Taxman 152 (AP) wherein the High Court has categorically held, after referring to the decisions of various High Courts, that relief (u/s. 80J in this case) cannot be denied to the assessee even though separate set of accounts were not maintained.

27. The AR submitted that regarding the maintenance of accounts relating to the eligible project, the learned Commissioner of Income Tax (Appeals) has given clear finding that the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes including indirect incomes arising to the project have been considered and that the accounts have also been audited and the requisite certificate was also filed. In the light of these factual findings, the learned Commissioner of income tax (Appeals) has held that the assessee company has fulfilled the requirement of maintenance of separate accounts and that the Assessing officer erred in concluding that the assessee is ineligible for deduction u/s. 80IB(IO) of the IT Act.

28. Accordingly, the learned AR submitted that the findings of the learned Commissioner of income Tax (Appeals) are based on critical examination of facts and the order is based on such factual findings and the same may be upheld and the appeal filed by the department is misconceived which deserves to be dismissed.

29. We have heard both the parties and perused the material on record. We have carefully gone through the circular Instruction No. 4 of 2009 dated 30.6.2009 which reads as follows:

"Under sub-section (1) of section 80IB an undertaking developing and building housing projects is allowed a deduction of 100% of its profits derived from such projects if it commenced the project on or after 01/10/1998 and completes the construction within four years from the financial year in which the housing project is approved by the local authority.

2. Clarifications have been sought by various CCsIT on the issue whether the deduction u/s 80-IB(1) would be available on a year to year basis where an assessee is showing profit on partial completion or if it would be available only in the year of completion of the project u/s 80-IB(1).

3. The above issue has been considered by the Board and it is clarified as under:-

(a) The deduction can be claimed on a year to year basis where the assessee is showing profit from partial completion of the project in every year.

(b) In case it is late, found that the condition of completing the project within the specified time limit of 4 years as stated in section 80-IB(1) has not been satisfied, the deduction granted to the assessee in the earlier years is should be withdrawn.

4. The above Instruction will override earlier clarification on this issue contained in Member(R)'s D.O. letter No. 58/Misc./2008/ CIT(IT&CT) dated 29/04/2008 and Member (IT)'s D.0. Letter No. 279/Misc/46/08-ITJ, dated 02/05/2008.

5. This may kindly be brought to the notice of all the Assessing Officers in your charge".

30. As per the above circular, it is clear that deduction u/s. 80IB(10) of the Act can be claimed on year to year basis where the assessee is showing profit from partial completion of the project in each year. In case it is found later that the project was not completed within four years, the deduction granted to the assessee in earlier year shall be withdrawn. The same interpretation was made in the case of Nagarjuna Homes v. ITO [2011] 46 SOT 287/[2010] 7 taxmann.com 130 (Hyd.). In that case the Tribunal held that it is not necessary for the assessee to complete the entire project in a particular year. Even on partial completion of the project the assessee is liable for deduction u/s. 80IB of the Act. Therefore, it was concluded that the assessee can claim deduction u/s. 80IB(10) of the Act on year to year basis.

31. The stand of the Revenue with regard to semi-finished condition of flats is devoid of merit inasmuch as what is sought to be constructed and sold by the assessee is residential units and what is sought to be purchased by the individual buyer is the ownership of a residential unit and registration of flat in semi finished condition is only to facilitate the convenience of the parties and agreement for development and completion of the balance work in relation to the flats registered, is only an incidental formality to protect the interest of the parties which need not be viewed as fatal to the claim of the assessee for deduction u/s. 80IB(10) of the Act. Ultimately, the entire work from the stage of commencement to the stage of making residential units habitable has been carried out by the assessee only and the Revenue has no dispute whatsoever on this count.

32. It is the settled position of law that while interpreting the taxation statutes, more importantly incentives provisions thereof a liberal interpretation is called for. The approach while interpreting such provisions should be to advance the cause for which such pro visions have been incorporated and not to frustrate the same. For this proposition, he relied on the judgement of Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 wherein held as follows:

" .. .A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418 (SC), the assessee, a co-operative society, claimed that the receipts from ginning and pressing activities was exempt under section 81 of the Income-tax Act. The question for interpretation was whether the co-operative society which carried on the business of ginning and pressing was a society engaged in 'marketing' of the agricultural produce of its members. The court held that the object of section 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental or ancillary to the activities mentioned in section 81(1), the assessee was entitled to exemption and the proviso did not stand in his way. In CIT v. Strawboard Manufacturing Co. Ltd. [1989] 177 ITR 431 (SC), it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. The question before the court was whether strawboard could be said to fall within the expression 'paper and pulp' mentioned in the Schedule relevant to the respective assessment years. The court held that since the words 'paper and pulp' were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit. "

33. We may also refer to the judgement Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 wherein the Court held that while interpreting the statutory provisions "if two reasonable constructions are possible, that construction which favours the assessee must be adopted."

34. When the developer is offering profit under percentage completion method, the estimated profit that the developer will have on completion of the project is spread over the earlier years and offer every year the percentage of that profit based on percentage of project completion that year. Obviously, the contention of the Department that the assessee has not maintained any separate accounts to determine the profit from the housing project cannot be upheld. The assessee claimed deduction on pro-rata basis, furnished the details as required under the provisions in Form 10CCB and if there is any doubt regarding the computation, the Assessing Officer is at liberty to verify the same. In the case of the assessee, the assessee maintained regular books itself, the assessee maintaining separate account on eligible unit in the ledger. More specifically the assessee maintained details regarding Metro Polis project.

35. The AR drew our attention to the details filed before the lower authorities during the remand proceedings. These comprise of the following accounts maintained with reference to the "Metropolis Project" - (1) Sale of flats in Metropolis, (2) Finishing and Extra Works, (3) Labour (cost Centre Metropolis), (4) Material, (5) Structural Engg. Consultancy, (6) Land Development Charges, (7) Architecture fee, (8) Diesel and lubricants, (9) Indirect Incomes, (10) Salaries, (11) Postage and Telephones, (12) Printing & Stationery, (13) Repairs and Maintenance, (14) Security service charges, (15) Staff welfare, (16) Taxes and fees and (17) Water & Electricity.

36. Apart from these expenses such as expenditure on books and periodicals, conveyance charges, freight and transport, miscellaneous expenses etc. were also identified with reference to the eligible business. The Authorised Representative explained the allocation of common expenses such as remuneration, finance charges and interest and depreciation to the project. Such allocation is seen to be made as a proportion of the sales made. As per the statement after considering the sales made by the project, the direct and indirect expenses incurred and the allocation of common expenses, the profit of the business is worked out at Rs. 21,17,268/- for the assessment year 2005-06.

37. Section 80IA(7) which is applicable to the provisions of Sec. 80IB requires the accounts of the eligible undertaking to be audited and a certificate to be filed. The essence of this requirement is that, at any given time the financial position of the undertaking, should be ascertainable. The intent is that the profits of the undertaking eligible for the deduction can be properly identified. This requires maintenance of accounts in such a fashion that the sales of the eligible business are known, the expenses - both direct and indirect are identifiable and the common expenses are apportioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act. We, therefore, find that the assessee (1) maintained separate accounts relating to the project and (2) undertaken to construct a complete residential unit. Being so, in our opinion, the findings of the CIT(A) that the assessee is entitled for deduction u/s. 80IB(10) is upheld. Since the facts relating to the assessment year 2006-07 is identical to the facts that we considered for the assessment year 2005-06, we are inclined to uphold the order of the CIT(A) for the assessment year 2006-07 on this issue relating to 80IB in this assessment year i.e. 2006-07 also.

38. In the result, revenue appeals in ITA No. 671/Hyd/2010 and ITA No. 1948/ Hyd/2011 are dismissed.

39. Now we take up the appeal in ITA No. 1921/Hyd/2011 by the assessee. The assessee raised the following grounds of appeal:

"1. The order of the learned CIT(A) is erroneous in law and on the facts of the case.

2. The learned CIT(A) erred in upholding the disallowance of an amount of Rs. 12,00,000/- out of the claim made by the appellant u/s. 36(1)(iii).

3. The learned CIT(A) ought to have appreciated that the expenditure incurred by the appellant by way of investment in M/s. SMR Builders was on account of commercial expediency and accordingly, the learned CIT(A) ought not to have considered the disallowance solely in the light of s. 14A.

4. The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if it is considered necessary."

40. Brief facts of the issue are that the assessee company is in the business of real estate and also a builder. It filed the return of income for the A.Y. 2006-07 on 29.11.2006, admitting total income at Rs. 1,78,69,784/-. In the computation of income, the assessee claimed deduction of Rs. 39,98,756/- u/s 80IB of the IT Act and the deduction was claimed in respect of a residential housing project called "SMR Vinay City". While completing the assessment, the Assessing Officer has rejected the deduction claimed u/s 80IB by the assessee company stating that the assessee did not maintain any separate accounts in respect of eligible project i.e. SMR Metro Polis and hence, it is not possible to work out the deduction u/s 80IA and also the assessee did not comply with the condition laid down u/s 80IA(7) of the IT Act, hence the assessee is not eligible for deduction u/s 80IB of the Act. The AO further opined that audit report in Form No. 10CCB was not furnished along with municipal approval and hence disallowed the claim. Besides the above, disallowance, the Assessing Officer has also disallowed (i) an amount of Rs. 1,10,18,185/- u/s 40(a)(ia) in the absence of any proof for payment of TDS, (ii) disallowed expenditure incurred for earning exempted income amounting to Rs. 12,00,000/- (iii) disallowed interest of Rs. 1,40,820/- as it is not related to manufacturing activity and (iv) proportionate disallowance of interest made on loans given to directors amounting to Rs. 12,35,000/-.

41. The CIT(A) held that he had considered the submissions filed by the appellant, gone through the remand report of the AO and heard the AR in person. The broad parameters set by the AO were not refuted by the assessee, i.e., interest bearing funds diverted to sister concern and the share of profit derived from the sister concern is not taxable and as such the provisions of section 14A are attracted. Either during the assessment proceedings or during the remand proceedings or during the appellate proceedings before him, the assessee has not tried to find out as to what is the exact interest element is involved in this regard. Except, saying that the AO has not furnished the working, no material has been furnished to counter the action of the AO. In the circumstances, he observed that the action of the AO in this regard requires no interference and dismissed the ground raised by the assessee. Against this, the assessee is in appeal before us.

42. We have heard both the parties and perused the material on record. The assessee claimed deduction of Rs. 80,36,942 towards interest paid to bank and other loans. The Assessing Officer noticed that the assessee-company is a partner in M/s. SMR Builders, a firm, and has invested Rs. 1,63,80,793 in that firm. The assessee has received a share of profit from that firm at Rs. 3,04,65,830 in the year under consideration. This income is exempted u/s. 10(2A) of the Act. The Assessing Officer was of the opinion that the proposed interest on the amount invested in the firm is not for the purpose of business and the same was disallowed. The admitted fact is that the income received from M/s. SMR Builders (firm) is exempted income and as such provisions of section 14A are applicable. As per provisions of section 36(1)(iii) of the Act, the interest on loans raised by the assessee for business purposes are available. Once the assessee claims any such interest as deduction in their books of account the onus always will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the assessee has advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the Assessing Officer to the effect that in spite of outstanding loans on which the assessee is incurring liability to pay interest, there was no justification to advance the loans to sister concerns for non-business purposes without charging any interest. Accordingly, there is no merit in the plea of the assessee that the entire interest paid on borrowing has to be allowed.

43. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed.

44. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea would be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case.

45. The view that where the amount is advanced from a mixed account or share capital or sale proceeds or profits, it would not be deemed `as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds is not correct. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act.

46. In view of the above discussion, we are of the opinion that there is no merit in the plea of the assessee. The various case-law relied on by the assessee are delivered on their own facts and have no application to the facts of the present case. Being so, we are not able to agree with the arguments of the assessee's counsel. The ground raised by the assessee is rejected.

47. In the result, assessee's appeal as well as the Revenue appeals are dismissed.

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Chartered Accountant Finance

Thursday, August 30, 2012

[aaykarbhavan] Judgments

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