The Hindu Business Line : De-constructing good intentions

Property transactions and taxes make strange bedfellows. In spite of the fact that the deduction for interest and principal on housing loans continues to be a much-availed deduction, commercial properties are never far away from the taxman's eye.

There could be a reason for this also in that in the days when acquisition of properties by the Central Government became law, innovative real-estate agents in Mumbai sold individual rooms in a flat to the same buyer just to avoid the threshold limit. The anomaly in the law was prevented through an amendment which stated that even such sales would enter the purview of the Government for the purposes of compulsory acquisition.

A more recent episode from the same city exposes another Section of the Income-Tax Act — 80(1B)(10) — that was introduced to give a fillip to low-cost housing in certain cities. It provides a deduction of 100 per cent of profits to an undertaking developing and building housing projects approved before March 31, 2007, if:

(i) such undertaking has commenced or commences development and construction of the housing project on or after October 1, 1998 and completes such construction;

(ii) in a case where a housing project has been approved by the local authority before April 1, 2004, on or before March 31, 2008;

(iii) in a case where a housing project has been, or, is approved by the local authority on or after April, 2004 1, within four years from the end of the financial year in which the housing project is approved by the local authority. One of the conditions to get this deduction is that the residential unit has a maximum built-up area of one thousand square feet where such residential unit is located within the cities of Delhi or Mumbai or within 25 km of the municipal limits of these cities and 1500 square feet at any other place. The Income-Tax Department has unearthedtax-evasion scams worth over Rs 100 crore in Mumbai. Investigations over three years reveal how developers in Mumbai have blatantly misused the loophole in this Section to evade taxes.

The I-T Department found builders combining two flats — each less than the prescribed area, and selling them as one massive flat by making two separate agreements. The practice is apparently rampant in Mumbai. About 30 projects in Mumbai surveyed by the IT Department were found in abuse of this tax law. Mumbai is seeing a major growth in residential complexes. More than 400 builders are constructing 1200 residential projects. Sources say 30-40 per cent of those projects have exploited the loophole.

History shows that such innovative devices spread to other cities quite quickly. This is another example of the problems that a well-intentioned specific deduction can cause. When the Government does its next review of the Income-Tax Act, it would do well to look into such Sections.

(The author is Hyderabad-based Chartered Accountant.)

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