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2011-TIOL-387-ITAT-MUM (Also see analysis of the case ) IN THE INCOME TAX APPELLATE TRIBUNAL BENCHES 'B' MUMBAI ITA ITA ITA ITA No.6504/Mum/2008 No.4219/Mum/2009 No.4728/Mum/2007 No.6505/Mum/2008 : : : : Assessment Assessment Assessment Assessment Year: Year: Year: Year: 2002-2003 2003-2004 2004-2005 2005-2006

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ASSISTANT DEPUTY COMMISSIONER OF INCOME TAX 1(1), MUMBAI Vs BOMBAY REAL ESTATE DEVELOPMENT COMPANY PVT LTD MUMBAI PAN NO:AAACB2092E Dated: June 03, 2011

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war, President and T R Sood, AM

nt Rep by: Mr Satbir Singh dent Rep by: Mr Arvind Sonde

tax Sections 40A(2), 80IB(10) Whether when assessee enters into ent with a builder to construct a building and also get approvals from authorities, it is merely a case of transfer of right in the land and Sec ) benefits cannot be allowed to the assessee - Whether no ance can be made u/s 40A(2) without comparing the payment made by mpanies to similarly qualified and capable Managing Directors and has been brought on record to show that the payment was excessive or nable.

essee was engaged in the business as builder and developer it claimed n u/s 80IB(10) AO asked the assessee to justify the claim of deduction

had undertaken the activities for development of the project, which activities he assessee to claim deduction the assessee contributed the land for ment whereas EBPL undertook the construction activity as well as finance cum g activities and the profits from the project were to be shared between the and EBPL in the ratio of 43 : 57.

ssed the claim of the assessee observing that the assessee should be both a r and a builder to be eligible for the deduction, that it was EBPL which actually d and constructed the housing project, that the assessee merely provided the dental services such as obtaining FSI and all statutory permissions, putting up ne up to the boundary of the project, setting up the infrastructure and Excise Service FEMA DGFT SEZ Misc Pitara Budget g with the conditions imposed by MMC and these activities do not amount to Tax ng and building the housing project.

Case Laws Cestat contended that the assessee isCasea developer of housing Instruc AA has not Laws HC projects and it Settlement Case Laws Case ided some services to EBPL which is actually the developertions therefore the and Case Transf is not entitled to the deductionMiscellane Laws - mere ownership of land by the assessee is not Commission Laws er compliance with section 80- IB(10) and the assessee has to undertake further Advance Settlement ous SEZ for development of the housing project, in which case alone he would be Commission ATFE Act Promot o the deduction it was a simple case of transfer of land by the assessee for Advance Advance Case 2005 ion ation, which gives rise to capitalRuling and Laws gains not business profits - the fact that Ruling see was described as a developer or joint developer in the various agreements Excise FAQ SEZ Recruit onclusive of the matter and that these agreements actually concealed the real Amendment to transfer the land for a surplus - what the FEMA Rules ment of the assessee, which was only to do under the various agreements was only to complete Clean Finance Act 2005 Rules was actually obliged Energy the Act, 1994 formalities to put throughCess transfer of the land. FEMA DGEP Transf

llowed the appeal of the assessee stating FEMA appellant prepared the land Notifications Notifications Notificatio that the Notific MISC SC Deputa ng the Housing Project till the issue of commencement certificates as a Non Tariff Non ns Manual ations Case tion r, appellant jointly contributed the cost of the entire housing project and jointly Notifications for construction of flats, entire proceeds Laws Posts Tariff State of the flats d the contractors the sale Circulars Notifications Circulars account Circula SEZ deposited in the jointly operated current FEMA number and their respective SC Case Circulars their HC Servic ere subsequently transferred to SCbankNotificati rsThus, Actsappellant was accounts. the the housing project and section 80-IB(10) does not News SC Case Case Laws ons Case e to develop and build HC Case Laws HC the proportion of developing and building SC project the assessee was housing Public Notific Laws or deduction under HC Case Case the extent of its business income as the section 80-IB to Laws Case Notices ations The was a developer and builder. Cestat Laws Cestat Laws CST Insider

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ssee paid Rs. 4.45 crores to its Managing Director on account of salary, exgratia Rules er cal reimbursement. AO was of the view that it was on the higher side in Policy on with the payment made to the other Directors of the company. Assessee FEMA d the details of the payment made but did not submit any justification regarding Regulatio impugned A.Y. the Trainin cability of section 40A(2) AO observed that in the ns g ation was three times more than the preceding year and held the payment of ation as unreasonable and excessive. In appeal before CIT (A), assessee Circula d that the MD runs the entire business and cannot be compared with the other FEMA rs tors who hardly worked further the MD is a chartered accountant from Forms nd was earlier working for about ten years with M/s A A Ferguson & Company Servic ther two directors were not even graduates moreover, the remuneration was Master e Case 8% of the profits and since the remuneration was linked to the profits, the Circulars Law reased commensurate with the profits. CIT (A) allowed the appeal of the stating that the reasonableness of the payment should be compared to the Circular MISC for similar services in the open market. AO had not compared the payment to the payment made by other companies to similarly qualified and capable 6th Pay g Directors.

Comm ission ause 3 states that the assessee and EBPL shall develop the said land through Report n of the FSI of approximately 20,00,000 sq. ft. by constructing building on the in different phases according to the revised layout and building plans. It was IGAS( of the assessee to ensure that the revised plans are sanctioned by the BMC 2) the TDR which are to be acquired by the assessee at its costs and made

aring both the parties, the ITAT held that,

for joint development in accordance with the agreement. Clause 4 states that ed layout and the revised building plans are to be prepared by EBPL in ion with the assessee and it is the assessees duty to get them approved by the condition however is that no changes shall be made by the assessee ly without obtaining the prior written approval of EBPL. Clause 5 states that all sits and other charges for obtaining approval for the revised layout plan and the

nd these amounts can be recovered by EBPL from the purchasers of flats, c. at the time of delivery of possession. EBPL shall also be entitled to withdraw sits directly from BMC. Clause 6 provides that all premiums and charges o BMC for obtaining additional FSI shall be borne by the assessee alone. It is provided that initially these amounts may be paid by EBPL to the assessee but nt is subject to recovery later from the assessee. Clause 7 states that the of obtaining additional FSI in the form of compensatory TDR and the cost of n A Taxindiaonline be borne Copyrightby the assessee. The other obligations of of the TDR shall Website. and paid 2010 Taxindiaonline.com Pvt.Ltd. All rights see under the agreement were to obtain plinth commencement certificate from to pay premium for obtaining FSI in respect of staircase, lift and balconies, to he requisite pipeline up to the boundary of the land for supply of potable water ruction purposes and drinking purposes at its own cost in time so that the ion of the buildings is not delayed or impeded, the funds required for the ion of the buildings on the said land shall be expended by EBPL alone and the shall not be required to spend any amount for the same, the assessee is ble for obtaining all statutory permissions including IOD plinth certificates and it s own costs obtain all requisite permissions and orders from ULCRA authorities construction is complete;

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on 80IB(10) confers deduction to an undertaking developing and building projects. What is development of a housing project has not been defined in the on. It cannot be postulated that the assessee, even in 1982, with a view to deduction under section 80-IB undertook certain paper transactions in order to duction at a much later period on the ground that those transactions amounted pment activity preceding the construction of the housing projects. The ns and responsibilities undertaken by the assessee, under the various nts, show that the activities undertaken by the assessee are activities relating pment of the housing project. The assessee has been in the business of rs and builders since many years and has undertaken and completed several projects. Assessing Officer has not raised any objection on the ground that the is not a developer. The fact that the construction activity was financed by EBPL bliterate or take away all the earlier responsibilities undertaken by the assessee and factually prepare the land for putting up the housing projects. The which had the development rights over the land and which had undertaken the bility of obtaining all statutory clearances, permissions, etc. for putting up the project on the land, had collaborated with EBPL which had the necessary knowhow as well as the finance for putting up the construction;

most of the crucial, preliminary and basic developmental activities necessary for ose of making the land ready and prepared for construction activity, both legally ally, were undertaken and put through only by the assessee. It would be unfair or brush aside these activities by calling them not developmental activities ecause the assessee has claimed deduction in respect of the profits under 0- IB(10);

from the day one, the assessee undertook all the developmental activities only ew to putting up housing projects on the land. The very fact that the assessee n development rights by BJPL over the land means that the assessee intended p the land by removing all unauthorized persons and structures and to obtain ssary permissions from all concerned statutory authorities so that the ion of the housing project thereon can be commenced and proceeded with ny hitch;

is no escapement of tax by way of double deduction. the gross sale proceeds divided between the assessee and EBPL on the basis of 43% and 57% ely. Thus the assessee would be getting deduction under section 80-IB(10) in f the profits derived by it from the housing project and EBPL will be similarly deduction in respect of its share of the profits. Both of them combined do not 00% of the profits from the housing project. Thus there is also no double n;

O ought to had compared the payment made to MD with payments made for ervices by other companies. Comparison of the payment with the payments the other two Directors was not justified as the payments are depending upon ication, experience, etc. of each employee. AO had not brought on record to show that the payment was excessive or unreasonable. Hence, disallowance 2) was deleted.