Section 80-IB deduction not available to Works contractor

ORDER

Chandra Poojari, Accountant Member — This appeal by the assessee is directed against the order of the Commissioner of Income-tax(Appeals) dated 17.12.2015.

2. The only ground in this appeal is with regard to allowability of deduction u/s.80IB(10) of the Act.

3. The facts of the case are that the assessee filed e return of income for AY 2011 -12 on 30.9.2011 declaring total income at ‘Nil’. Thereafter, the assessee filed revised return of income and claimed deduction u/s.80IB(1) for Rs.17.35 crores. The case was selected for scrutiny under CASS. The Assessing Officer after carrying out the detailed scrutiny found that the assessee was not eligible for claim of deduction u/s. 80IB(1) for Rs.17.35 crores. Therefore, the AO added the amount of Rs.17.35 crores and assessed the income at Rs.7,31,07,760/-. Aggrieved, the assessee went in appeal before the CIT(Appeals).

4. On appeal, the CIT(A), after differing from the findings of the Tribunal order in assessee’s own case in ITA No.385/Mds/2013 for the AY 2009-10, observed that the assessee is a partnership firm and is in the business of construction/promotions. The partners of M/s. Arihant Heirloom partnership firms are :—

The CIT(Appeals), further observed that in the partnership deed it is mentioned that the capital of the firm shall be contributed by the partners as per the mutual agreement between them from time to time. But there is no document showing any agreement or transfer of land owned by the individuals in favour of the firm. The land was purchased by the individuals in the year 2005 i.e.7.4.2006. No capital gains were written by the individuals on the gains from the transfer of land. Even assuming that the lands were transferred in the year 2006 on the date of forming the partnership, there ought to be some appreciation of lands and it cannot be the case of a land value remaining the same over a period of six months. Therefore, it is clear that there was no actual transfer of land to the firm and the individuals only after holding the lands on which flats were constructed.

4.1 The CIT(Appeals) observed that the sale agreements and sale deeds of the undivided share of the land to the ultimate purchaser of the flats were executed by one Shri O.P. Madhav, who was designated as power of attorney agent of the three owners of the land namely Shri A.V.Krishnan, Shri R. Raghvan & Smt. R. Vasanthalaxmi. Though Shri O.P.Madhav is mentioned as the representative of the company M/s. Arihant Foundation and Housing Ltd., the company has never vested any rights in the landed property. Land ownership by three of the four partners is totally different from land ownership by all four partners. When only three partners out of four of the assessee firm are the owners of the land, it cannot be said that land is owned by the partnership firm. Further, nowhere in the registered sale deed, the name of the partnership firm, M/s. Arihant Heirloom appears. It is the three partners represented by their power of attorney agent and the fourth partner, M/s. Arihant Foundation and Housing Ltd., who have sold the undivided share of land to the customer.

4.2 According to the CIT(Appeals), it is not a case where the three land owner partners have contributed their land either towards the capital in the partnership firm transfer the ownership in favour of the partnership firm for adequate consideration. This fact is evidenced by the partner’s capital accounts where no such contribution of land was shown as a capital contribution. As per the sale agreement, which is not a registered document, the four partners of the firms are stated as “owners of the land”. The firm, M/s. Arihant Heirloom is to construct flats and the payment for the sale of undivided share and construction are receivable by the partners as well as the firm separately, which goes to prove that the firm is only a work contractor and cannot be considered as an undertaking engaged in development of residential project.

4.3 Further, the CIT(Appeals) observed that the firm, M/s. Arihant Heirloom ought to have constructed and sold the flats in order to be eligible for deduction u/s.80IB(1) of the Act. For this purpose only the land by the firm will be pre requisite for getting approval etc. but in this case, the partners have sold the undivided share of land and the firm has only constructed the flats, however, the deduction u/s.80IB(1) is fully claimed by the firm. Even though, the act does not specify owning of land by the undertaking, in general concessions are approved by competent authorities on lands owned by the individuals or undertakings. Approval is obtained in the name of Shri O.P.Madhav only and are not in the name of firm, M/s. Arihant Heirloom.

4.4 According to the CIT(Appeals), Shri O.P.Madhav in the capacity of register power of attorney agent of the three land owners has executed the sale agreements and sale deeds for UDS with the purchaser of the flats. The name of the assessee firm, M/s. Arihant Heirloom appears in the combined sale agreement for undivided share of land and construction as party of the second part, they have agreed to construct the various flats in the complex for the stated consideration to be paid by the purchasers. Therefore, the CIT(Appeals) observed that the assessee firm has never acquired any legally vested ownership rights in the land on which the residential apartments were constructed. The undivided shares were sold by the individual owners and the construction part was undertaken by the assessee as per all the sale agreements with the purchaser of the flat. Hence, according to the CIT(Appeals), the assessee firm is only a contractor, who is undertaking the construction work entrusted by the flat purchasers as per the specifications required. Therefore, it cannot be said that the assessee firm has developed and constructed the said housing project as an undertaking.

4.5 Further, the CIT(Appeals) observed that Explanation to sec.80IB(10) of the Act introduced in the Finance Act, 2009 with retrospective effect from 1.4.2001 clearly prohibits the allowance of deduction u/s.80IB(10) to works contractors. Moreover, purpose of granting deduction u/s.80IB(10) of the Act is that cost of projects becomes affordable to the middle class people of the society how in the scheme of M/s. Arihant Heirloom there are luxurious amenities like swimming pool, tennis court, well equipped gymnasium, steam room, barbecue pavilion, garden, games room, pull table, table tennis room, multipurpose hall and minimart etc. the cost on account of all these luxurious amenities making the prospects of purchasing houses by the middle class or the lower middle class people to a very minimal. The assessee tries to take income tax benefit on built up area where the super built-up area premises were charged to the customers. Therefore, the CIT(Appeals) observed that if the benefits of tax deductions are to reach the deserving class of people then super built-up area which has been charged to the customers becomes the qualifying built-up area for the purpose of availing deduction u/s.80IB(1) of the Act. And accordingly, in the scheme, there are flats more than the size of 1500 sq.ft. of area which makes assessee disqualified for deduction u/s.80IB(10) of the Act. After considering the case laws, cited, referred and relied on by the assessee, the CIT(Appeals) concluded that the assessee is not able to satisfy the qualification criteria to make him eligible for deduction of claim u/s.80IB(1) of the Act and he confirmed the disallowance made by the AO for an amount of Rs.17,40,37,793/- u/s.80IB(10) of the Act. Against this the assessee is in appeal before us.

5. The ld. AR submitted that [ground No.2 to last] is not justified in concluding and confirming the stand of the AO that the specific purpose of business of the firm is buying land, doing construction project on the same. Hence, the assessee is a work contractors and not entitled to deduction u/s.80IB(1) of the Act. Further, the ld. AR submitted that the CIT(Appeals) has erred in confirming the ground of the AO stating that deduction should be allowed only to low cost residential products and not to projects having swimming pools, gyms, tennis courts etc. and hence does not benefit to middle class people and not entitled to deduction u/s.80IB(10) of the Act.

5.1 Further, the ld. AR submitted that the AO was not justified in stating that the partners of the firm have not transferred the land holdings to the firm for adequate consideration, which was confirmed by the CIT(Appeals). According to the ld. AR, the CIT(Appeals) has also erred in confirming that as per the law, it is decided on various judgments of the High Court all over India and by other jurisdictional High Courts in Chennai, it was held that the assessee need not own a land to be entitled to claim deduction u/s.80IB of the Act and treating the assessee as not a land owner and only partners are land owners, hence the assessee is not entitled to deduction u/s.80IB of the Act. According to him, all the partners in their individual capacity owned the property and they joined as partners of a firm and firm is not a distinct legal entity, apart from partners. He relied on the judgement of Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. The ld. AR also submitted that the assessee is a developer and the same was not considered by the CIT(Appeals), which was decided by this Tribunal in assessee’s own case in ITA No.385/Mds/2013. Further, the ld. AR, relied on the decision of the Tribunal in assessees’ own case in ITA No.385/Mds/13, wherein it was observed vide paras 9 and 10 as under:—

6. The ld. DR, supported the orders of the lower authorities.

7. We have heard both the parties and perused the material on record. The ld. AR submitted that similar deduction was granted to the assessee in earlier previous year and, therefore, denial of deduction in the assessment year under consideration is not justified. It goes against the principle of consistency and according to him, the orders of the lower authorities to be quashed. He drew our attention to the provisions of sec.80IB(10) of the Act. According to him, the assessee is engaged in the development of property and not engaged in works contract. Being so, the provisions of sec.80IB(10) cannot be applied. He also drew our attention to the Sale Agreement for Undivided share of Land and Construction) entered into between the assessee and Vendors and purchasers dated 30.1.2010. He took us to various clauses of that Agreement. The ld. AR submitted that the CIT(Appeals) has not considered the fact that the assessee is involved in the development of the property and not merely in the execution of the works contract and it was submitted that the CIT (A) cannot invoke the Explanation to sec.80IB(10) , which is applicable only for works contractors. The ld. AR further submitted that the CIT(Appeals) has erred in disallowing the claim of the assessee even after considering the above agreement and has failed to understand that the assessee is a developer and not merely a contractor.

7.1 According to the ld. AR, the CIT(Appeals) has erred in considering that the assessee is not owner of the property. The ld. AR further submitted that the CIT(Appeals) erred in the assumption that all the permissions from the Municipal Corporation and Local authority, plan approvals and commencement certificate were obtained by the owner of the property and not the assessee, who is the developer. It was contended that it was paid by the assessee firm, – According to the ld. AR, the assessee is a developer and not merely a contractor. Thus, according to the ld. AR, the assessee is a developer who has undertaken construction of flats with various owners though the assessee is not an owner of the land.

7.2 On the other hand, the ld. DR relied on the order of the lower authorities. Further, the ld. DR submitted that the assessee is not the owner of the land and also the plan is not in the name of the assessee. The assessee entered into an agreement with prospective buyers of individual flat along with land lord and received a portion of the total consideration towards the work carried on by the assessee. This amount is nothing but for the labour contracts undertaken by the assessee. Further, the ld. DR, submitted that the assessee was undertaken works contract and not developed the housing project. The project was conceived and executed by the land-lord and not by the assessee and the flat was sold to independent prospective purchasers by the land lord. According to the ld. DR, Explanation to sec.80IB(10) introduced w.r.e.f. 1.4.2001 is applicable, as the assessee is only undertaking works contract and not entitled for deduction u/s.80IB(10) of the Act. 6. We have heard both the parties and perused the material on record. The provisions of sec.80IB(10) reads as follows :—

(10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, [2008] by a local authority shall be hundred per cent. of the profits derived in the previous year relevant to any assessment year from such housing project if,-

Explanation For the purposes of this clause,-

Explanation For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government).

7.3 The contention of the ld. AR is that the assessee is a developer and not mere a contractor and being so, the assessee is entitled to deduction u/s.80IB(10) of the Act. Now, we have to examine as to whether the assessee can be called as a “developer” within the meaning of sec.80IB(10) read with Explanation I herein above. The ld. AR submitted that the work carried on by the assessee made it a developer entitled for deduction u/s.80IB(10) of the Act. According to him, a developer is a person who develops the facility and such person may or may not be a contractor. On the other hand, a contractor is stated to be a legal term whose rights and duties vis- à-vis contractee are determined by way of legal document called the contract. According to the ld. AR, the assessee has undertaken all risks involved in the project including technological inputs, entrepreneurial inputs etc. Besides, there is heavy financial involvement in terms of deployment of man and machine as well as all materials. At this point, it is pertinent to note that the judgment of the Supreme Court in the case of Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 327 in which it has been observed that in a contract for work, the person producing has no property in the thing produced as a whole, even if part or whole of the material used by him may have been his property earlier. Further, in another judgment of the Supreme Court in the case of Tamil Nadu v. Anandam Viswanathan [1989] 1 SCC 613 in which it was held that nature of contract can be found only when the intention of parties are found out. The fact that in the execution of the works contract some material are used and the property in the goods so used passes to the other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the material. It was, therefore, argued that the developer is a person who brings in additional resources by way of investment and technical expertise for developing the infrastructure facilities. Since the assessee had simply done a part of work of civil construction relating to the housing project, he stated that it is not eligible for deduction.

7.4 We find that the words ‘developer’ and ‘contractor’ have not been defined in or for the purposes of s. 80-IB(10). The primary question which arises is that how to find out the meaning of a word or an expression which is not defined in the Act. It is a settled legal position that ordinarily the meaning or definition of a word used in one statute cannot per se be imported into another as has been held by the Supreme Court in the case of Union of India v. R.C. Jain [1981] 2 SCC 308. Therefore, the meaning of the words developer and contractor, as put forth before us by the rival parties from other legislations, be they State or Central enactments, cannot be automatically applied in the present context. In order to ascertain the meaning of a word not defined in the Act, a useful reference can be made to the General Clauses Act, 1897. If a particular word is not defined in the relevant statute but has been defined in the General Clauses Act, such definition throws ample light for guidance and adoption in the former enactment. According to s. 3 of the General Clauses Act the definitions given in this Act shall have applicability in all the Central Acts unless a contrary definition is provided of a particular word or expression. On scanning s. 3 of the General Clauses Act we observe that neither the word ‘contractor’ nor ‘developer’ has been defined therein. Thus, the General Clauses Act is also of no assistance in this regard. Going ahead, when these words are neither defined in the IT Act, 1961 nor in the General Clauses Act, the next question is that wherefrom to find the meaning of such words. There is no need to wander here and there in search of an answer which has been aptly given by the Supreme Court in the case of CWT v. Officer-In-Charge (Court of Wards) [1976] 105 ITR 133 in which it was held that the ordinary dictionary meaning of a word cannot be disregarded.

7.5 Coming back to our point of ascertaining the meaning of the words ‘contractor’ as well as ‘developer’, which have neither been defined in the Act nor in the General Clauses Act, we fall upon Oxford Advanced Learner’s Dictionary to find out their meaning. According to this dictionary “developer” is a person or company that designs and creates new products, whereas “contractor” is a person or a company that has a contract to do work or provides services or goods to another. The New Shorter Oxford Dictionary defines the word “contractor” as : “A person who enters into a contract or agreement. Now, a person or firm that undertakes work by contract, especially for building to specified plans”. In the light of the meaning ascribed to these words by the dictionaries it is observed that the developer is a person who designs and creates new products. He is the one who conceives the project. He may execute the entire project himself or assign some parts of it to others. On the contrary the contractor is the one who is assigned a particular job to be accomplished on the behalf of the developer. His duty is to translate such design into reality. There may, in certain circumstances, be overlapping in the work of developer and contractor, but the line of demarcation between the two is thick and unbreachable. When the person acting as developer, who designs the project, also executes the construction work, he works in the capacity of contractor too. But when he assigns the job of construction to someone else, he remains the developer simpliciter, whereas the person to whom the job of construction is assigned, becomes the contractor. The role of developer is much larger than that of the contractor. It is no doubt that in certain circumstances a developer may also do the work of a contractor but a mere contractor per se can never be called as a developer, who undertakes to do work according to the pre- decided plan.

7.6 So, in order to be eligible for deduction, the development should be that of housing project as a whole and not a particular part of it, as has been contended by the ld. AR. It may be possible that some part of the housing project is assigned by the land lord to some contractor for doing it on his behalf. That will not put the doer of such work in the shoes of a developer.

8. In the present case, the assessee, the assessee has entered into a Agreement with the land owner, for development of vacant land into the multi-storied residential complex.

8.1 Coming to the merits of the case as to whether the assessee is a developer or a works contractor, there is an agreement for developing the property between the parties and the main activity of construction of flats is undertaken by virtue of the construction agreement into between the assessee and the buyers of the undivided co-ownership right in the property as a contractor. The AR only highlighted about the so called agreement without making any reference to the construction agreements entered into with land lord of the property. The land owner who was represented by M/S Arihant Foundations and Housing Ltd sold undivided co-ownership right in the property to various individuals and these individuals given the construction work to the assessee. The owner of the land, which have sold the undivided share of land to various purchasers i.e. to the flat owners. Further this has obtained approval from Municipal Corporation for construction of the flats. The assessee though called developer is only a contractor according to the Assessing 0ffiicer. The issue to be decided is whether assessee is a contractor or a developer entitled to claim under Section 80lB of the Income-tax Act. However, the flat owners have purchased land from land owner and have entered into a construction with assessee.

9. From the recitals of the agreement, it is very clear even though the assessee has entered into agreement with the land owner, the land owner in turn sold the undivided co-ownership right in the property to various prospective buyers who in turn entered into, construction agreements jointly with the assessee as a contractor. The AR’s argument that the assessee is primarily a developer who has taken the development work such as planning development of the properties etc. is not a clinching factor in deciding the issue as to the eligibility for deduction under sec. 801B(10) of the Act, as the main revenue earned by the assessee was in the nature of works contractor by virtue of the written agreements entered into with various owners of undivided co-ownership right in property. It is relevant to mention here that on similar facts the Tribunal, Indore Bench in the case of Sky Builders & Developers v. I.T.O [2011] 48 SOT 51(URO) clearly held that where the assessee sold plots to respective customers by registering a sale deed and thereafter assessee constructed building at an agreed price, it had to be concluded that assessee merely acted as building contractor and not as a developer and, therefore, assessee’s claim for deduction under sec. 80 1B(10) could not be allowed. The facts of the above case are similar to the facts of the present case in hand, as in this case also the land owner sold the undivided co-ownership right in the property to various persons and the purchaser in turn entered into agreement with the assessee as a contractor. The recitals in the construction agreement clearly prove that the assessee is a works contractor.

10. A perusal of the above recital indicates the real intention of the assessee. The assessee has entered into only a construction agreement with the flat owners which legally indicates that it is only acting as a contractor. However, when the income-tax authority based on the above document, finds that it is only a contractor and not a developer for taking a decision on sec.80IB of the Act, the assessee states that it is a contractor only in name but a developer in spirit. Thus, the assessee by jugglery of words has managed to avoid paying service tax to the Central Excise Authorities, as it is only a contractor and claims deduction u/s.80IB as not being a contractor but as a developer. This jugglery of words and interpretation of the construction agreement has far reaching implications for the Revenue.

11. For the sake of clarity in holding that the assessee is only a contractor and not a developer, we reiterate the following point:—

“The assessee was not denied the benefit of 80IB by the Assessing Officer not solely because of the fact that he was not the owner of the land. The AO has given his reasons in he e assessment order which is “The above act of the assessee entering into an agreement with the land owner is not a governing factor for claiming deduction under these provisions of the Act. What is the governing fact is relationship between the flat buyers and the assessee for whom he -has worked as a contractor. His entire income is the receipt from the contract which is received from flat buyers only as contractor after entering into a work contract.”

12. Thus, in our opinion, the assessee is engaged in the construction work of buildings as a contractor and when the assessee’s job includes only controlling and directing the work of building construction as per plan and design by the land lord and hand over the constructed flats on behalf of the land lord to the eligible flat owners who have got registered undivided right in the property. It is only performed the work as a contractor and the assessee’s job is not included designing the project and selling of the project and the assessee would not get any share in the constructed area and in the undivided property and the assessee cannot be said to have invested its own money to carry on the project. Similar view has been taken by the Tribunal, Indore Bench in the case of Sky Builders & Developers (supra). The assessee is not eligible for deduction u/s.80IB(10) of the Act. The various case law relied on by the ld. AR is not applicable to the facts of the present case, as those judgments were delivered on its own facts.

13. In the result, the appeal of assessee is dismissed.