CIT vs. Moon Star Developers (Gujarat High Court)

S. 80-IB(10): If developer does not (without just cause) develop to full extent of FSI, a part of the sale proceeds has to treated as being for sale of FSI and denied s. 80-IB(10) deduction

The assessee, engaged in development of housing projects, constructed a residential project. Though total FSI of 15312 sq. meters was available for construction, the assessee utilized only 3573 sq. meters. The residential units were constructed only on the ground floor. The said residential units were sold and the entire surplus was claimed u/s 80-IB(10) as profits derived from activity of developing housing project. The AO and CIT(A) held that a part of the consideration received by the developer was relatable to the unutilized FSI and had to be excluded from the profits eligible for s. 80-IB(10) deduction. However, the Tribunal upheld the assessee’s claim on the basis that the assessee was not compelled to construct upto the maximum FSI and that it had satisfied all the other conditions of s. 80-IB(10). On appeal by the department to the High Court HELD reversing the Tribunal:

(i) For any commercial activity of construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remaining same, non-utilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the AO;

(ii) It is true that s. 80IB(10) does not provide that for deduction, the undertaking must utilize 100% of the FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction u/s 80IB(10) on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale u/s 80IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction u/s 80IB(10);

(iii) This is not to suggest that for claiming deduction u/s 80IB (10), invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim u/s 80IB(10), being rejected. The issue has to be seen from case to case basis. Marginal under-utilization of FSI certainly cannot be a ground for rejecting the claim u/s 80IB(10). Even if there has been considerable under-utilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of s. 80IB(10) and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. On facts, none of the assessees have made any special ground for non-utilization of the FSI.