The Hindu Business Line : Housing needs more tax props

Incentives for development of housing projects were introduced in the Income-Tax Act, 1961 through Section 80-IB by Finance Act, 1999 w.e.f. April 1, 2000. Section 80-IB (10) is a beneficial provision giving deduction at 100 per cent of the profits derived in any previous year from a housing project, subject to the fulfilment of the prescribed conditions.

The construction should have commenced on or after October 1, 1998. It should be on a plot of land which has a minimum area of one acre. The residential unit should have a maximum built-up area of 1,000 sq.ft for Delhi or Mumbai and 1,500 sq.ft for other places.

Laukik Developers undertook a housing project in 2001-02 within the municipal limits of Kalyan near Mumbai. For the assessment 2002-03, the firm filed a nil return claiming deduction of Rs 8,74,331 under Section 80-IB (10).

The assessing officer (AO) rejected the claim. He pointed out that the project contained some commercial area of 3,143 sq.ft and consisted of six residential units with built-up area of more than 1,000 sq.ft each.

The firm pleaded that the housing project had to provide in a planned manner facilities needed in a modern developing society for the convenience of its residents, and shops were integral to the housing project.

The total commercial area in the housing project was only 3,143 sq.ft and this was necessitated for proper provision of basic amenities within the housing project.

Housing project definition

The CBDT (Central Board of Direct Taxes) had written to the Maharashtra Chamber of Housing Industry in May 2001 clarifying that any project which is approved by a local authority as a housing project should be considered adequate for the purpose of Section 80-IB (10).

There is no definition of the term ‘housing project’ in Section 80-IB(10). This particular project was approved by the Kalyan Municipal Corporation. The provision in the statute was meant to provide incentive for housing and called for liberal interpretation.

These arguments were of no avail. The Mumbai Bench of the Appellate Tribunal pointed out that to get tax exemption, all the conditions listed out under Section 80-IB(10) must be scrupulously observed. “The construction of shops or commercial place cannot be considered a ‘housing project’ for the purposes of application of Section 80-IB(10) of the Act. It was not established by the assessee that the building project is primarily a housing project in the facts of the case”.

The Municipal Corporation approved the project as a residential as well as commercial project. Clarification given by the CBDT would be of no avail.

Municipal approval was both for residential and commercial project. Liberal interpretation of incentive provision cannot defeat the very purpose of enacting a particular incentive provision of law.

The Tribunal also rejected the plea for propionate deduction in respect of the housing project after eliminating the commercial space. It held that the conditions prescribed were not fulfilled.

Even the non-fulfilment of a single precondition would disentitle the assessee from claiming exemption of any part of his income which may accrue from the building project during the year.

The fact that the site fell under the residential zone was not decisive of the issue. The building project was not a housing project and was not eligible for relief (303 ITR AT 356).

The Benches of the Tribunal have to take a common view on the subject of proportionate deduction under Section 80-IB(10) in cases of mixed use. The Madras Bench has allowed proportionate relief [108TTJ]. If the housing project fell short of the one acre limit, no relief can be granted by applying an arithmetical exercise on a notional basis. It should be shown that the assessee was the absolute owner of the land of one acre. This was also decided in the case of own engineers and builders (ITA No 160/PN/2005).

(The author is a former Chief Commissioner of Income-Tax.)

Commercial establishment

Government appreciated the arguments about the need for providing amenities in the housing project. Finance (No.2) Act of 2004 amended the section to provide for inclusion of commercial establishments in the housing project. Such commercial establishment should not exceed 5 per cent of the aggregate built-up area of the project or 2,000 sq.ft, whichever is less.

This amendment took effect from the assessment year 2005-06. This amendment has been considered prospective and not applicable to the earlier years. Prior to this amendment, no mention was made about use for commercial purposes also in the housing project. A mere housing project without provision for amenities by way of shops and establishments, hospitals and schools will be of no avail.

The tolerance limit of 5 per cent of the total area for commercial establishments is too low. Section 80-IB(10) is of recent origin, therefore no case has been decided at the High Court level so far. It is necessary that both the Government and the judiciary have a fresh look at this incentive provision for promoting housing.

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