Section 80-IB(10) is available to developer and not to Work contractor

K. Ravi, Advocate for the Appellant. Dr. B. Nischal, JCIT for the Respondent.

ORDER

Chandra Poojari, Accountant Member – This appeal by the assessee is directed against the order of the Commissioner of Income-tax(Appeals) dated 12.2.2013 for the assessment year 2009-10.

2. The grievance of the assessee in this appeal is with regard to non-granting of deduction under sec. 80-IB of the I.T. Act, 1961.

3. The facts of the case are that the assessee firm is engaged in the business of property development. The assessee filed its return of income for the assessment year 2009-10 admitting total income as ‘NIL’ after claiming deduction of Rs. 3,86,83,668/- u/s 80-IB of the Act. The Assessing Officer denied the deduction claimed u/s. 80-IB by observing that the assessee is not a developer of housing project but it works as a contractor. Aggrieved by this, the assessee went in appeal before the Commissioner of Income-tax(Appeals), who confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before us.

4. 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 section 80-IB(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 section 80-IB(10) cannot be applied. He also drew our attention to the Joint Development Agreement(JDA) entered into between the assessee and M/s. Prime Textiles Ltd. dated 17.1.2005. He took us to various clauses of Joint Development Agreement, which reads as follows:

4.1 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 after the AO had given a finding that the assessee herein is involved in the development of the property for the ay 2007-08 and 2008-09, he cannot invoke the Explanation to section 80-IB(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 JDA which is the master agreement and has failed to understand that the assessee is a developer and not merely a contractor.

4.2 According to the ld. AR, the CIT(Appeals) has erred in considering that the owner of the property Prime Textiles Ltd. had secured the requisite sanctions and approvals from Tiruppur Muncipal Corporation and concerned public authorities on the ground that no Power of Attorney was executed by the owner to the assessee. The ld. AR also submitted that the CIT(Appeals) has erred in concluding that a power of attorney to be executed by the owner of the property and the developer is mandatory, as it is a custom in the business of development. In the instant case the owner of the property Prime Textiles Ltd holds 50% share in the assessee’s firm as a partner.

4.3 The ld. AR drew our attention to the definition of the words “power of attorney” and submitted that as per Legal Glossary, 2001 Edition at p.253 the words “Power of Attorney” may be defined as a formal instrument by which one person empowers another to represent him or act in his stead for certain purposes. The expression Power of attorney is defined as an authority whereby one is set in the turn, stead or place of another to act for him. According to Longman American Dictionary at pg. 1126 the words “Power of attorney” means the legal right to do things for another person in their personal or business life, or a document giving this right.

4.4 Further, the ld. AR relied on the decision of the Supreme Court in the case of State of Rajasthan v. Basant Nahata[2005] 12 SCC 77, wherein it was held in paras 13 & 52 as under:—

“13. A grant of power of attorney is essentially governed by Chapter X of the Contract Act. By reason of a deed of power of attorney, an grant is formally appointed to act for the principal in one transaction or a series of transaction or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power of attorney is executed by the principal in favour or the grant. The agent derives a right to use his name and all acts, deeds and things done by him subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power of attorney is. as is well known. a document convenience.

52. Execution of a power of attorney in terms of the provisions of the Contract act as also the Power of Attorney act is valid. A power of attorney, we have noticed hereinbefore, is executed by the donor so as to enable the donee to act on his behalf. Except in cases where power of attorney is coupled with interest, it is revocable. The donee in exercise of his power under such power of attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power of attorney for his own benefit. He acts in a fiduciary capacity. Any act of indifferent of breach of trust is a matter between donor and donee.”

4.5 The ld. AR submitted that from the above paragraphs it is clear that a Power of Attorney is a document of convenience and the developer for the purpose of applying to the statutory authorities for the grant of permission for the project enters into this agreement. According to him, in the case, the owner of the property holds the majority share in the assessee firm and hence there was no need for a power of attorney to be given to the assessee. 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, which is given in the form of ledger extracts along with dates of payments made are as annexure C for reference. 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. Further, he relied on the following judgments:

5. 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 only 14% 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 section 80-IB(10) introduced w.r.e.f. 1.4.2001 is applicable, as the assessee is only undertaking works contract and not entitled for deduction under Section 80-IB(10) of the Act.

6. We have heard both the parties and perused the material on record. The provisions of section 80-IB(10) reads as follows:—

“80-IB. (10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, 2007 1031st 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 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).”

6.1 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 under section 80-IB(10) of the Act. Now, we have to examine as to whether the assessee can be called as a “developer” within the meaning of section 80-IB(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 under section 80-IB(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 Orissa [1989] 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 State of Tamil Nadu v. Anandam Viswanathan [1989] 1 SCC 613 in which it was held that the 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.

6.2 We find that the words ‘developer’ and ‘contractor’ have not been defined in or for the purposes of section 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 (SC) in which it was held that the ordinary dictionary meaning of a word cannot be disregarded.

6.3 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 chiefly spec. 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.

6.4 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.

7. In the present case, the assessee, M/s. Prime Developers has entered into a Joint Development Agreement (unregistered) with the land owner, M/s Prime Textiles Limited on 27.01.2005 for development of vacant land to the extent of 3.91 acres into multi-storied residential complex. The main terms of the agreement are reproduced as under:—

7.1 Thereafter, the owner (M/s Prime Textiles Ltd.) obtained the necessary permissions from the local authority for construction of the residential apartments. The plan was approved on 3.5.2005. After obtaining the approval, the owner of the land sold the undivided co-ownership right in the property to various purchasers vide registered sale deeds. Clause ‘H’ in the sale deed reads as under:—

“The purchaser has evinced Interest in purchasing an undivided co-ownership right in scheduled;property which, undivided share is more fully described in schedule. B hereto (hereinafter) referred to as schedule B property in order that the PURCHASER may have constructed for himself/herself an Apartment in the Residential Complex “PRIME ENCLAVE” through Mls Prime Developers (hereinafter referred to as the developer)”

7.2 Thereafter, the purchasers of undivided, co- ownership right in the property entered into separate Construction Agreements with the assessee, M/s. Prime Developers on various dates. The relevant clauses of the construction agreement are mentioned as under:—

Construction Agreement

‘This Construction Agreement entered into on this the 20th day of’ August, Two thousand Eight. AND BETWEEN PRIME DEVELOPERS; a partnership firm registered and having its place of business at 110, Avinashi Road, Gandhinagar, P.O.,, Tirupur 641 603 (Tamilnadu) represented by its partner Mr. Purusottam Das Patodia and the purchaser.

NOW THIS AGREEMENT BETWEEEN THE DEVELOPERS AND THE PURCHASER ENTERED INTO WITNESSES AS FOLLOWS:-

The PURCHASER hereby appoints the DEVELOPER as the contractor and the DEVELOPER accepts the appointment to construct or cause to be constructed for the PURCHASER an Apartment on SCHEDULE A PROPERTY as described in SCHEDULE-C hereto and according to. the specifications given in SCHEDULE-D hereto and as per the approved, plan i for the agreed consideration of Rs. 26,24,214/- (Rupees Twenty six lakhs twenty four thousand two hundred and fourteen only) Copy of typical floor plan for the said Apartment Is attached hereto as Annexure C.

The DEVELOPER undertake and agree that the construction of the SCHEDULE C PROPERTY by. the, Developer for the PURCHASER shall be of good quality materials and. conform to specifications given in SCHEDULE D and shall be proper and of acceptable standard and also without structural defects of any kind.’

7.3 From the above recitals of the Construction Agreement, it is clear that the owner has secured the requisite sanctions and approvals from Tirupur Municipal Corporation and concerned Public authorities for the layout of the SCHEDULE A property and Building Plans for the construction of Residential Complex therein. The owner has also obtained the requisite commencement certificate dated 1.6.2005. It is noteworthy to mention here that the developer has not got any Power of Attorney from the owner i.e. M/s. Prime Textiles Limited.

7.4 Coming to the merits of the case as to whether the assessee is a developer or a works contractor, no doubt there is an unregistered agreement for developing the property between the parties M/s Prime Textiles Ltd., and the assessee firm M/s Prime Developers, 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 development agreement without making any reference to the construction agreements entered into with various buyers of the undivided co-ownership right in the property. The land owner i.e. M/s Prime Textiles Ltd., sold undivided co-ownership right in the property to various individuals and these individuals in turn entered into the construction agreement with the assessee, M/s. Prime Developers on various dates.

Entity – ‘A’

8. The owner of the land i.e. “A” was earlier owner of the ATL Textiles Ltd. whose name changed to Prime Textiles and further changed the name of Prime Urban Developers (I) (P.) Ltd. The entity ‘A’ was the owner of the land who have sold the undivided share of land to various purchasers i.e. to the flat owners. Further this entity i.e. Prime Textiles Ltd. has obtained approval from the tirupur Municipal Corporation for construction of the flats. After completion of the flat construction, a certificate from the Tirupur Municipal Corporation was also obtained in the name of Prime Textiles.

Entity – ‘B’

M/s. Prime Developers though called developer is only a contractor according to the Assessing 0ffiicer. The issue to be decided is whether M/s. Prime Developers 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 “A” and have entered into a construction agreement with “B” i.e. Prime Developers.

9. From the above recitals of the construction agreement, it is very clear even though the assessee has entered into joint development 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, separate construction agreements 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 section 80-1B(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. ITO 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 section 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 M/s Prime Textiles Ltd. 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 proves 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. The assessee can produce this agreement before the Central Excise/Service Tax Authority to show that the assessee is not liable for service tax, as it is acting as a contractor and not as a developer. 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. 80-IB 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. 80-IB 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 para 6.3 of the assessment 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) for the assessment year 2006-07. Since we have observed that the assessee is a contractor, there is no question of going to the merits of the case, as non- production of completion certificate of the project. The assessee is not eligible for deduction under section 80-IB(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 the assessee is dismissed.