Principal Commissioner of Income Tax, Central-2, Mumbai v. Nahar Enterprises

1. The above Income Tax Appeal is filed by the Appellant-Revenue being aggrieved by the judgment and order dated 7th April 2017 passed by the Income Tax Appellate Tribunal, “G” Bench, Mumbai (for short “ITAT”) in ITA No. 2853/Mum/2015. The assessment year in question is AY 2010-11. According to the Revenue, the impugned order gives rise to the following Substantial Questions of Law:- “6.[1] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in holding that JULY 10, 2025 Uday S. Jagtap assessment made u/s 143(3) r.w.s. 153A is bad in law being nullity in eyes of law as the search warrant was issued in the name of non-existing entity when the search warrant specifically mentioned the name of the merged entity and the existing entity as Nahar Enterprises (now known as Nahar Builders Limited)? 6.[2] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in holding that search warrant was issued in the name of non-existing entity, when, the said entity had only merged with other entity and there was no stoppage or discontinuation of business operations? 6.[3] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in holding that search warrant was issued in the name of non-existing entity, when, the such merged entities take over all the assets, liabilities and business operations of the merging entity including assessment proceedings and tax liabilities? 6.[4] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in directing the AO to delete the disallowance of deduction u/s 80IB(10) of the Income Tax Act, 1961 by holding that flower beds are below the floor level and so not covered in BUA in terms of provisions of section 80IB(14)(a), when, the ‘Floor Level’ mentioned in section 80IB(14)(a), refers to the bottom area of the unit and does not imply to exclude any area which is lower than floor level of rooms? 6.[5] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in placing reliance on the decision in case of commonwealth Developers 44 Taxmann.com 303 when the same is distinguishable as it is with reference to courtyard appurtenant to residential unit whereas, in this case it is the Flower Bed? 6.[6] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in placing reliance on the decision of Co-ordinate Bench of the Tribunal dated 12.03.2014 when the same was misplaced as it has tried to read into the meaning of Floor Level with the Development Control Rules which is neither warranted nor appropriate. The BUA has to be understood for the purpose of income tax and what customer gets actually and not what is put in the agreement or satisfies some structural issues? 6.[7] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in directing the AO to delete disallowance of deduction u/s 80IB(10) by holding that service area, window area, window projection and cupboard projection are not to be included in the total area for determining the built up area of the flats, when in terms of provisions of section 80(IB)(14)(a) the projections are includable and all these are nothing but projections only? 6.[8] Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in directing the AO to hold that even the part complete project which has received completion certificate in respect of part completed constructions is entitled for deduction u/s 80(IB)(10) in respect of profits from such part completion, when the entitlement for deduction in terms of para (ii) of 1st explanation to section 80(IB)(10) is only for ‘such housing project’ where such refers to Approved housing projects mentioned in 80(IB)(10) and such approved housing project, is still incomplete?”

2. At the outset, we must state that Question 6.[8] does not arise for consideration at all in the current assessment year and arises only for consideration in AY 2011-12. For AY 2011-12 the Appellant-Revenue has already filed a separate Appeal and hence, Question No.6.[8] will be considered therein.

3. Before we decide whether the Questions as projected by the Revenue give rise to any Substantial Question of Law, it would be apposite to set out some brief facts. Nahar Enterprises, a partnership firm, (the Assessee) was formed in the year 1978 and was engaged in the business of construction of buildings and development of properties. On 9th September 2011 a new company was incorporated under the Companies Act, 1956 in the name and style of “M/s. Nahar Builders Limited”. The partnership firm – Nahar Enterprises (the Assessee) was dissolved on 20th November 2011 and the business of the said firm was taken over by the company-Nahar Builders Ltd. It is not in dispute that the Income Tax Department was informed qua the said change in the status, namely, that Nahar Enterprises was dissolved and its business was taken over by M/s. Nahar Builders Ltd. This was informed to the Income Tax Department vide a letter dated 1st December

2011.

4. The firm M/s. Nahar Enterprises, before its dissolution, was engaged in the business of developing a residential complex with the name “Amrut Shakti”, Chandivali, Andheri (E), Mumbai wherein it had completed as many as 19 different residential complexes. The said firm claimed a deduction u/s 80IB(10) of the IT Act in respect of the residential buildings from assessment years 2006-07.

5. On 2nd February 2012, a search action under Section 132(1) and also a survey action under Section 133A were carried out on the Nahar Group and its associate concerns. According to the Assessee, the search was concluded on 28th March 2012 after the last date on which the authorization was executed. The search warrant issued was in the name of the erstwhile firm M/s. Nahar Enterprises, which was dissolved on 20th November 2011, and which was also brought to the notice of the Income Tax Department vide letter dated 1st December 2011. In other words, the search warrant was issued in the name of a non-existent entity as the said firm was not in existence on the date when the warrant was served on 2nd February 2012.

6. This being the case, the Assessee contended before the Assessing Officer that since the search warrant was issued in the name of M/s. Nahar Enterprises and the assessment was also completed in the name of M/s. Nahar Enterprises, a firm which was not in existence when the warrant was issued, the assessment also could not be made on the dissolved Assessee firm. The Assessing Officer did not agree with the legal and technical issue raised by the Assessee and he concluded that the warrant issued in the name of “M/s. Nahar Enterprises (now known as ‘Nahar Builders Ltd.’)” is legally valid and the assessment order was not bad in law. He therefore proceeded to deny the deductions under Section 80IB(10) of the IT Act.

7. Being aggrieved by the order of the Assessing Officer, the Assessee preferred Appeals before the Commissioner of Income Tax (Appeals) [for short “CIT(A)”], who dismissed the Appeals of the Assessee confirming the stand of the Assessing Officer on the issue that the assessment could proceed against the Assessee. As far as the deduction under Section 80IB(10) of the IT Act is concerned, the CIT(A), directed the Assessing Officer to exclude the service area, window area, window projections and cupboard projections from the definition of the words “built up area” for calculating the eligible limit of 1000 sq. ft for the purpose of allowing deduction under Section 80IB(10) of the IT Act. As far as inclusion of the flower bed area was concerned, the CIT(A) concurred with the findings of the Assessing Officer that they would have to be included for calculating the eligible limit of 1000 sq. ft for the purpose of allowing the deduction under

8. Being aggrieved by the order of the CIT(A), the Assessee preferred an Appeal before the Income Tax Appellate Tribunal (for short “ITAT”). The Assessee argued that the firstly the search warrant itself was issued to a non-existent entity and, therefore, any proceedings taken pursuant thereto were non-est law. This apart, the Assessee also argued that on merits, namely, that the flower bed area could never have been included in the definition of “built up area” to calculate the eligible area of 1000 sq.ft as stipulated in Section 80IB(10) of the IT Act. The Revenue also challenged the order of the CIT(A) insofar as it set aside the order of the Assessing Officer to include cupboard projections; service area; and window projections for the purposes of calculation of the “built up area” of the eligible 1000 sq.ft.

9. The Tribunal, after hearing the parties, by a detailed order held in favour of the Assessee on all counts. In other words, the Tribunal firstly held that the assessment made under Section 143(3) r/w Section 153A are bad in law, being a nullity in the eyes of law, as the search warrant was issued in the name of the non-existent entity. Even as far as the merits are concerned, the Tribunal held that the flower bed area could not be included in the definition of the words “built up area” while calculating the eligible limit of 1000 sq. ft. for the purpose of allowing the deduction under Section 80IB(1o) of the IT Act. As far as the inclusion of cupboard projections, service area and window projections were concerned, the ITAT confirmed the order of the CIT(A) and dismissed the Appeals filed by the Revenue.

10. It is in these facts that Mr. Suresh Kumar, the learned Counsel appearing on behalf of the Revenue, submitted that the Questions of Law referred to by us above give rise to Substantial Questions of Law, which require an answer from this Court.

11. Mr. Mistri, the learned Senior Counsel appearing on behalf of the Respondent, submitted that Question Nos. 6.1, 6.[2] and 6.[3] are relating to whether the assessment was non-est in the eyes of law because the search warrant was issued in the name of a non-existent entity. He submitted that if on the merits of the matter the Court is satisfied that the Assessee was entitled to the deduction under Section 80IB(10), then these Questions would become academic and need not be gone into in the present Appeal, and can be left open to be decided in an appropriate case. Considering the submission of Mr. Mistri, we have, therefore, proceeded to examine whether the order of the ITAT, in allowing the claim of the Assessee on merits [for a deduction under Section 80IB(10) of the IT Act], gives rise to any Substantial Question of Law that requires an answer by this Court.

12. The first Question in that regard is Question No.6.4. Questions 6.[5] and 6.[6] are incidental to Question 6.4. Hence we first have to see whether Question 6.[4] gives rise to any substantial Question of Law. Question No. 6.[4] is whether the ITAT was justified in directing the Assessing Officer to delete the disallowance of deduction under Section 80IB(10) by holding that flower bed areas are below the floor level and so not covered in the definition of “built up area” as set out in Section 80IB(14)(a) of the IT Act. On this issue, the discussion of the ITAT can be found from paragraph 23 onwards. The ITAT has reproduced in detail the submissions of the Assessee, where the Assessee has placed reliance on the words “built up area” as defined in Section 80IB(14)(a) of the IT Act and submitted that the crux of the definition and intention behind definition of the words “built up area” was to include only the habitable area which is exclusively built for a particular residential unit at the floor level. Since the flower bed area is not a habitable area at all and further, not on the floor level, the flower bed area could never be included in the “built up area” for determining the eligible 1000 sq.ft. to claim a deduction under Section 80IB(10). After noting the submissions of the Assessee, the Tribunal came to the conclusion that there was considerable force in the submission of the Assessee that the flower bed area could not be included in the definition of “built up area” while calculating the eligible limit of 1000 sq.ft. for the purposes of allowing the deduction under Section 80IB(10) of the IT Act. The Tribunal came to a factual finding that the flower bed area is open to the sky and not covered on any sides whereas the balcony is covered by three sides. Further the flower bed area is a few inches below the floor level and it is outside the balcony area. In other words, the starting point for the flower bed area is a point where the balcony area ends. Once this was the factual situation, the learned ITAT, after relying upon the decision of a co-ordinate bench in the case of Income Tax Officer v. Poddar Ashish Developers, ITA No. 3408/M/2010, dated 12th March 2014, came to the conclusion that the flower bed area could not be included in the definition of the words “built up area” to calculate the eligible limit of 1000 sq.ft. for the purposes of allowing the deduction under Section 80IB(10) of the IT Act. The ITAT also took note of the argument of the Assessee that the flower bed area is ornamental and an elevative feature provided on the outer side of the residential unit, which is not a habitable area and is provided only for elevation and design of the building. The said area is not covered by a wall on either side and hence did not constitute the inner part of the residential unit which makes it a non-habitable area. In these facts, the ITAT held in favour of the Assessee and against the Revenue.

13. After going through the order of the ITAT on this aspect, we are in full agreement with the findings given by the ITAT. It is not in dispute that the flower bed area is not covered, it is below the floor level of the residential unit, for FSI calculations as per the Development Control Regulations it is excluded, and most importantly it is outside the residential unit. In other words, it starts where the balcony ends. The definition of the words “built up area” found in Section 80IB(14)(a) of the IT Act means the inner measurements of the residential unit at the floor level including projections and balconies, as increased by the thickness of the walls, but does not include the common areas shared with other residential units. For the sake of convenience, Section 80IB(14)(a) is reproduced hereunder:- “80IB (14)(a) - "built-up area" means the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but does not include the common areas shared with other residential units.”

14. We are of the view and which also found favour with the ITAT, is that the words “the inner measurements of the residential units at the floor level” cover the carpet area which is the actual habitable area used by the resident of the flat. Such areas are enclosed and surrounded by four walls and are at floor level. The words following these words namely “including the projections and balconies” are in continuity. In other words, if there are any projections or balconies that are habitable/are capable of being effectively used by the flat purchaser, the same would be includable in the definition of the words “built up area”. Thereafter, there is a third aspect which needs to be taken into consideration for calculating the built up area i.e. “thickness of the walls”. The section makes it very clear that common areas shared with other residential units is not to be included in the definition of “built up area”. When we examine this definition, we find that the ITAT was completely justified in excluding the flower bed area from the definition of the words “built up area” while calculating the eligible limit of 1000 sq.ft. for the purposes of allowing the deduction under Section 80IB(10) of the IT Act. Firstly, the flower bed area is admittedly outside the residential units inasmuch as it starts where the balcony ends. Secondly, it is open to the sky and is not covered either from the top or from the three sides. Further, the flower bed area is not on the same level as that of the residential unit and is in fact a few inches below the floor level. Thirdly, and most importantly, it is not habitable/ capable of being effectively used by the flat purchaser. We, therefore, fail to understand how the flower bed area can fall within the definition of the words “built up area” as appearing in Section 80IB(14)(a) of the IT Act. As correctly submitted by the Assessee before the ITAT, the flower bed area is merely ornamental and an elevative feature provided on the outer side of the residential unit and is certainly not a habitable area. It is provided mainly for the elevation and design of the building and cannot be included in the definition of “built up area”. It is also not in “the inner measurements of the residential units at the floor level”. We, therefore, find that the ITAT has correctly decided this issue in favour of the Assessee. We, accordingly hold that Question Nos. 6.4, 6.[5] and 6.[6] as projected by the Revenue do not give rise to any Substantial Questions of Law requiring an answer by this Court.