Background:-
Section 80-IB (10) of the Act is aimed at promoting construction of housing projects, so as to address the problem of shortage of dwelling units. The predominant objective of this incentive provision, therefore, is to encourage better availability of the dwelling units for low and middle class segment of the society. Section 80-IB(10) of the Act provides that the assessee engaged in developing and building housing projects shall be entitled to claim hundred per cent (100%) deduction of the profit derived in the previous year from such housing projects if the under mentioned conditions are satisfied:
(i) The project should be approved by a local authority before 31-3-2008;
(ii) The undertaking should have commenced development and construction of the project after 1-10-1998 and should complete construction:
(a) in case of projects approved before 1-4-2004 on or before 31-3-2008; and
(b) in case of project approved after 1-4-2004 within four (4) years from the end of the financial year in which the project was approved by local authority;
(iii) The size of the plot of land should be minimum one (1) acre;
(iv) The build up area of the shops or other commercial establishments shall not exceed five (5) percent of the aggregate build up area of the project or two thousand (2000)square feet whichever is less;
(v) The maximum build up area of the residential unit should be one thousand (1000) square feet for the projects within the cities of Delhi and Mumbai and twenty five (25) kilometres from the local limits of the above mentioned cities and at any other place one thousand five hundred (1500) square feet.
(vi) Not more than one residential unit should be allotted to the same person who is not an individual assessee and where the person is an individual no other residential units in such project should be allowed to spouse or minor children of the individual;
(vii) The assessee should file the return of income before the due date of filling return under section 139(1) of the Act and deduction under section 80-IB of the Act should be claimed by the assessee in the return of income by him.
Amendment Made
In order to provide some relief to the housing and real estate sector which, is presently reeling under global recession, it is provided in Finance Bill, 2010 to increase the period allowed for completion of a housing projects in order to qualify for availing the tax benefit under section 80-IB(10) of the Act, from the existing four (4) years to five (5) years from the end of the financial year in which the housing project is approved by the local authority. This extension will be available for housing projects approved on or after 31-3-2005. Thus, now deduction under section 80-IB (10) of the Act will be available in respect of the income relating the project for A.Y. 2010-11 and subsequent year which are approved by the local authority after 31-3-2005 and are pending for completion.
It is further amended to enhance the current norms for built-up area of shops and other commercial establishments in housing projects in order to enable basic facilities for the residents. The Finance Bill, 2010 also proposes to amend clause (d) of sub-section 10 of section 80-IB to provide that in case of housing projects approved by the local authority on or after 1-4-2005 the built-up area of the shops and other commercial establishments included in such housing project could be either three per cent (3%) of the aggregate built-up area of the housing project or 5000 square feet, whichever is higher.
Comment
Due to global recession most of the housing projects were not completed within the period of four years as provided in section 80-IB of the Act and would be denied benefit of section 80-IB (10) of the Act. As such, now the Finance Bill, 2010 proposes to allow the pending housing projects to be completed within a period of five (5) years instate of four (4) years for claiming deduction on their profits under section 80-IB(10) of the Act.
The proposal to enhance the current norms for built-up area of shops and commercial establishments is also in lines with the observations of the decision of the Special Bench in the case of, Brahma Associates vs. Jt. CIT [(2009) 119 ITD 255 (Pune) (SB)], wherein the Hon’ble Special Bench of the Tribunal while interpreting the provisions of section 80-IB(10) prior to introduction of sub clause (d) which restricted the area of commercial area in a housing project to five (5) per cent of the built up area observed at paragraph 81 that, “commercial use of area generally leads to a more convenient and complete housing project. Many a times, these housing projects are away from the commercial centres in the city, and, therefore, it is necessary that the residents of the dwelling units built in these housing projects have the benefit of commercial establishment in the near vicinity”
CBDT Circular F. No. 205/3/2000/ITA II dt. 4-5-2001. CBDT has clarified that “any project which has been approved by a local authority as housing project should be considered as adequate for purpose of Section 80IB(10)”.
Now let us discuss few latest case laws to have better understanding of the deduction.
• Assessee entered into a JV for developing a property. Assessee’s claim for deduction u/s. 80IB(10) could not be disallowed on the ground that the assessee has not honoured the conditions of the JV agreement or that it could not substantiate its claim that the profit has been shared equally with the JV partner as these are not the conditions under s.80IB(10).On identical facts and for the same project the revenue has accepted the claim in the hands of one party to the joint venture agreement. Claim of assessee was allowed. Refer, Rajkotia Securities Ltd. .v. Dy. CIT, 98 DTR 275.
• 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. Refer, CIT .v. Moon Star Developers (Gujrat High Court).
• Lay out approval of the assessees project to be considered and not the earlier approval which was not implemented. Refer, ITO .v. AV. Bhat Developers, 145 ITD 305.
• Tribunal held that deduction under section 80-IB(10) is specifically provided in respect of profit earned from development and construction of housing projects on or after 1-10-1998.therefore, since construction and development of housing projects is sine qua non for claim of deduction under section 80-IB(10), deduction was not available to assessee company as it had just undertaken development of plots and their sales, and no construction activity was undertaken in respect of residential units proposed on such plots during relevant assessment year. Refer, Navratan Techbuild (P.) Ltd. .v. ACIT, 60 SOT 81.
• Provisions of section 80-IB(10) nowhere require that only those developers who themselves own land can deduction. Hence, assessee’s claim was to be allowed. [Followed CIT .v. Radhe Developers (2012) 341 ITR 403 (Guj)(HC)]. Refer, CIT .v. Shreeji Developers, 218 Taxman 100.
• Deduction u/s 80-IB is not to be allowed unless return is furnished. Where the assessee-company filed delayed return of income, involving refund claims arising due to deduction claimed under section 80IB, CBDT alone could consider claim of assessee to condone delay. Matter remanded. Refer, Unique Shelters (P.) Ltd. .v. UOI, 218 Taxman 99.
• Amendment to section 80-IB(10) with effect from April 1, 2005 restricting built up area of shops and commercial establishments included in housing project since it is Prospective and hence not applicable to projects approved prior to April 1, 2005. Refer, ITO v. Velentine Developers, VOL 31 PG 452.
• Amendment with effect from 1-4-2005 requiring certificate of completion of project within four years of approval since it is prospective and hence not applicable to project approved prior to that date and Assessee entitled to deduction. Refer, CIT v. CHD Developers Ltd, 362 ITR 177.
• Construction completed but building permission rejected for technical grounds, in this case also assessee get deduction. Refer, CIT v. Tarnetar Corporation, 362 ITR 174.
• The assessee-firm was engaged in business of development of land and construction of residential building. The Assessing Officer denied deduction under section 80-IB to assessee on ground that land was not in name of firm, and assessee acted merely as an agent for collection of land consideration on behalf of land owner. Benefit of section 80-IB(10) would be available if developer had dominance control over project and had developed land at its own cost and risk. Where transport expenses were disallowed for want of deduction of TDS, deduction under section 80- IB to be allowed on such disallowance. Refer, ITO .v. Keval Construction, 59 SOT 13.
• Deduction allowable on construction projects approved after 1-10-1998 wherein area of flats was less than 1500 sq. ft. Refer, CIT .v. Ashray Premises (P.)Ltd, 34 taxmann.com 165.
• Approval for construction of flats on 28-3-2005 and communicated same to assessee on 4-4-2005, as date of approval was 28-3-2005, assessee would be entitled to exemption under section 80-IB(10) on profit earned from assessment year 2005-06 onwards. Refer, CIT .v. Akshay Eminence Developers (P) Ltd, 259 CTR 266.
• Assessee is not eligible for deduction under section 80-IB in respect of interest received from security deposit with Electricity Board. Refer, Midas Polymer Compounds (P.) Ltd. .v. ACIT, 59 SOT 87.
• Entitled for benefit under section 80-IB(10) in respect of flats completed before prescribed limit even though the housing project was not completed in time due to reasons beyond control. Refer, Ramsukh Properties v. DCIT, 138 ITD 278.
• Submissions of completion certificate from local authority is mandatory. For Non submission of certificate the assessee is not entitled to deduction. Refer, Sainath Estates (P) Ltd. v. DCIT, 88 DTR 11.
• The AO disallowed the assessee’s claim of deduction under Section 80-IB on the ground that the assessee is having commercial area exceeding 5% as well as 2000 sq.ft. The CIT(A) confirmed the disallowance. The Tribunal observed that the amendment by inserting clause (d) in Section 80IB(10) is not applicable for the assessment years in question i.e. 2003-04 & 2004-05, and thus relying on the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Brahma Associates 333 ITR 289, held that no disallowance can be made on account of commercial establishment in the project. The High Court following the aforesaid decision as also the fact that the issue had been decided in favour of assessee in its own case in the earlier years dismissed the departmental appeal. Refer, CIT v. Jogani Construction Ltd, 217 Taxman 95 (Bom.)(HC).
• The AO disallowed the assessee claim for deduction u/s. 80-IB(10) since assessee did not own the land and name of the assessee did not appear in the permission for development granted by local authority. The CIT(A) and the Tribunal allowed the deduction to the assessee. On appeal by the department, the High Court following its own decision in case of CIT v. Radhe Developers (2012) 204 Taxman 543(against which the SLP was dismissed by the Supreme Court), held that the assessee cannot be denied deduction u/s. 80-IB(10). Refer, CIT v. Vishal Construction Co, 217 Taxman 96 (Guj.)(HC).
• Interest received from buyers for delayed payment is entitled for deduction. Refer, CIT v. Pratham Developers, 355 ITR 507.
• Specification of area of residential unit - Meaning of built-up areaÂ-Inner measurement of residential unit at floor level to be taken into consideration . Common areas like balconies even if shared with one other person to be excluded refer Circular No. 5 of 2010, dated 3-6-2010. Refer, CIT v . Raghavendra Construction, 354 ITR 194.
• Assessee company is engaged in the business of civil construction. It entered into contract with land owners for development of residential cum commercial complex on land. The assessee claimed deduction u/s 80IB(10). It was noted from the records that neither aggregate amount of sale agreement entered into nor advance received there against had been mentioned. It was held that reasonable certainty as to the realization of sale proceeds were crucial to income recognition, and both sale agreement as well as advance received in pursuance thereof were vital thereto. Matter was thus, remanded back to AO. Refer, Dy. CIT v. Vertex Homes P. Ltd, 140 ITD 300 (Hyd.)(Trib.).
• Assessee has undertaken the development and construction of housing project hence eligible deduction. Assessee completed the construction on 6th march 2006, corporation certified the completion on 28th Dec. 2007, one of the authorities namely CMDA had issued a letter on 13th June, 2008 cannot be ground to reject the claim of assessee. The Court also held that open terrace could not be the subject – matter of inclusion as a built up area to deny the benefit under section 80IB (10). Appeal of revenue was dismissed. Refer, CIT v. Sanghvi & Doshi Enterprises, 81 DTR 75.
• Where a developer follows percentage completion method, and profit attributable to completed project is taxed in respective year, deduction under section 80-IB(10) is also to be granted simultaneously in that year. Refer, Kura Homes P. Ltd. v. ITO , 139 ITD 445 .
• Whether, for purpose of benefits u/s 80IB(10), area of rear courtyard enclosed by walls of a residential unit is to be taken into account to compute built up area - NO: Bombay HC
• In the assessee’s own case for the same project relating to AYs 2005-06 and 2006-07, which falls after the insertion of clause (d) to s. 80IB(10), the Tribunal held that the assessee is eligible for deduction u/s 80IB(10) in respect of the housing project. Not only this, in Manan Corporation 214 Taxmann 373 (Guj) it was held that the condition of limiting commercialestablishment/shops to 2000 sq.ft, which has come into force w.e.f. 1.4.2005 would be applicable for projects approved on or after 1.4.2005 and where the approval of the project was prior to 31.3.2005, the amended provision would have no application for those projects. The Gujarat High Court placed heavily reliance on the decision of the Bombay High Court in Brahma& Associates 333 ITR 289 (Bom). Refer, ITO vs. M/s Yash Developers (ITAT Mumbai).
• The High Court had to consider the following questions on interpretation of s. 80-IB(10): (i) what is a “housing project” u/s 80-IB(10)?, (ii) whether if approval for construction of ‘E’ building was granted by the local authority subject to the conditions set out in the first approval granted on 12.5.1993 for construction of A and B building, construction of ‘E’ building is an “extension” of the earlier housing project for which approval was granted prior to 1.10.1998 and, therefore, benefit of s. 80IB (10) cannot be granted?, (iii) whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate area for each building is less than one acre, s. 80-IB(10) can be denied?, whether the merger of two flats into one so as to exceed the maximum size of 1000 sq feet violates the condition set out in s. 80IB (10)? HELD by the High Court. Refer, CIT vs. M/s.Vandana Properties (Bombay High Court)
• Whether profits from mere sale of open land or unused FSI as part of housing project where FSI utilization is way short of permissible limits can be said to have been derived from such project u/s 80IB(10) - NO: High Court
• Though the assessee’s project, when it was commenced in the year 2003, was in compliance with s. 80-IB(10) as it then stood, the law prevailing in the year of completion of the project has to be seen. As the Project breached the ceiling of maximum commercial area imposed by s. 80-IB(10)(d) inserted w.e.f. 1.4.2005 (lesser of 2000 sq. ft or 5% of aggregate BU area), the assessee is not eligible for s. 80-IB(10) relief (Saroj Sales Corp vs. ITO 115 TTJ Mum 485 not followed; Brahma Associates 333 ITR 289 (Bom) & Reliance Jute 120 ITR 921 (SC) referred). Refer, ITO vs. Everest Home Construction (ITAT Mumbai)
• The assessee entered into a ‘development agreement’ with the owner of the land pursuant to which it agreed to develop the land. Deduction u/s 80-IB(10) in respect of the profits arising from the said activity was claimed on the ground that it was “derived from the business of undertaking developing and building housing project approved by the local authority”. The AO & CIT (A) rejected the claim on the ground that the assessee was not the “owner” of the land and that the approval of the local authority to, and the completion certificate of, the “housing project” was given to the owner and not to the assessee. However, the Tribunal allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal. Refer, CIT vs. Radhe Developers (Gujarat High Court)
• Whether assessee is entitled to claim deduction 80IB(10) proportionately in respect of residential units where there is also commercial area constructed if all other conditions are satisfied - YES: Madras HC
• CIT vs. Brahma Associates (2011) 333 ITR 289 (Bom.). Section 80IB(10) allows deduction to the entire project approved by the local authority and not to a part of the project, if the conditions set out in section 80IB(10) are satisfied, then deduction is allowable on the entire project approved by the local authority and there is no question of allowing deduction to a part of the project .
Hope the above small summary on section 80-IB(10) will help you in getting some relief from the hardship from the ITD. In case you have any further clarification please mail me at taxbymanish@yahoo.com.
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