CHENNAI, DEC 14, 2012: THE issue before the Bench is - Whether the assessee is entitled to claim deduction 80IB(10) proportionately in respect of the residential units where there is also commercial area constructed if all the other conditions are satisfied. And the answer goes in favour of the assessee.

Facts of the case

Assessee is engaged in the business of developing and constructing housing projects. A survey operation was carried out u/s 133A of the Act to verify the claim of deduction u/s 80-IB(10) claimed by the assessee. AO observed that the extent of commercial area in both the projects as per sanctioned the plan were at 974 sq.ft. and 1075 sq.ft. respectively. It was further observed that directors of the assessee company also purchased flats which were merged to one flat with a total area of 1850 sq. ft. AO pointed out that after purchase, the purchasers had converted the flats into commercial establishments. In one building, there were no residential units, but three commercial units were built. AO viewed that the provisions u/s 80IB (10) had not been satisfied, thus, was not entitled for deduction.

Before CIT (A) it was contended that Section 80-IB as it stood during the relevant time made no reference as regards the commercial area to be restricted for the purpose of grant of relief. The definition of 'housing project' under the Act not having been defined u/s 80-IB, the same has to be understood as per common parlance and has to be liberally construed. The flats constructed therein were principally residential units only, which satisfied sub clause (c) of Section 80-IB (10) of the Act. Assessee contended that it had satisfied the conditions stipulated in Section 80-IB(10), the relief be granted on pro-rata basis to the extent of compliance of 80IB(10)(c).

CIT (A) stated that deduction u/s 80-IB did not contemplate any flexibility till 2004-2005 for grant of relief to projects, which are partly residential and partly commercial. Thus, there could be no liberal construction of deduction provision even on pro-rata basis and the appeal of the assessee was rejected.

ITAT observed that out of total constructed area, the commercial area constructed accounted for 9.31%. AO observed in the order that the commercial area was only residential units which were converted for commercial purpose by the MD of assessee-company and his relatives. ITAT held that Section 80IB(10), as it stood during the relevant AY 2003-04 and the subsequent amendment to Section by insertion of Explanation and Clause (d), effective from 01.04.2005 had no relevance to the case on hand, as the amendment is not retrospective in nature. The assessee had complied with all the three conditions and the total extent used for the purpose of commercial construction was 9.31%. ITAT held that the deduction would be allowed on the residential units constructed on pro-rata basis. The assesse was not entitled for deduction for commercial area to the extent of 9.31%.

Revenue contended that when the law provided that the deduction is in respect of the housing project and the deduction is available subject to certain conditions, the meaning of the expression 'housing project', though not defined specifically under the above Section, is evident, that the same has to be drawn only from the policy of the Government; as such, the construction of project undertaken by the assessee must necessarily fit in with what is contemplated under the relevant provisions, namely, construction of house and it is not for the assessee to read the expression 'housing project' in an extended manner to include commercial project too. If the law contemplated proportionate relief to be granted on a partial compliance, the Section itself would have provided for such a situation. However, in the absence of any such contemplation, it is not open to the Tribunal to dilute the said Section to grant pro-rata relief. Revenue contended that under the Section 'housing project' means the project of residential unit alone and not for anything else. Hence, the question of granting even proportionate relief does not arise in this case.

Assessee contended that u/s 80IB there is no definition on the expression 'housing project'. In the absence of any definition in Section 80IB of the Act, on the availability of a definition in a related provision concerning deduction, the definition of 'housing project' u/s 80HHBA of the Act would govern the meaning of the expression 'Housing Project' in Section 80-IB. The assessee's project was for construction of residential units and they satisfied the conditions, as had been given under Section 80IB(10)(c). Assessee contended that even going by the amended provisions from the year 2005, it is clear that 'housing project', read in the context of Explanation to Section 80HHBA, does not contemplate any restriction as to its character of the project to be of pure and simple a residential housing project alone and not of a mixed one for the purpose of claiming deduction.

Wherever the project is a residential unit, which need not necessarily be so, or a mixed one, such residential unit must comply with clause (c) of Section 80-IB(10) of the Act. Where housing project does not have any residential unit, it being a pure commercial project, per se, Section 80IB(10)(c) would not defeat the claim of the assessee. Further, the expression 'housing project' cannot be viewed in a restricted manner to refer to the residential units alone., wherein the Apex Court had given wide meaning to the expression of 'housing' to include non-residential project too. Thus, in the context of Explanation to Section 80HHBA of the Act, he submitted that the assessee would be entitled to the deduction as sought for. He further submitted that the assessee's case herein is 100% compliance and hence, there could be no rejection of the claim made by the assessee. It was further stated that what was sold was only residential unit and what the purchaser did after the purchase is not the concern of the assessee or the statute. Post project completion factors are totally alien to the consideration of the assessee's claim for deduction, since the assessee has no control over the manner in which and the usage to which the purchaser puts his residential units purchased.

After hearing both the parties, the Hon’ble High Court held that,

++ as per explanation to Section 80HHBA, the expression "housing project" is defined in a wide term to mean construction of any building, road, bridge or other structure in any part of India. Admittedly, road, bridge or other structure are taken in as infrastructure facility under Section 80IA. There is no definition of 'housing project' under Section 80IB(10) of the Act. For reading Section 80HHBA and Section 80IA, it is clear that Section 80IB is concerned about housing project namely, construction of any building other than what is contemplated as an infrastructure facility u/s 80IA. Thus when under the very same Chapter dealing with deduction, the expression "housing project" has already been defined in a related provision, the absence of the same u/s 80IB should not pose a problem in understanding the meaning of the said expression. It is appropriate to go by the definition of the expression 'housing project', as available under Section 80HHBA for the purpose of understanding the said expression of 'housing project' under Section 80-IB of the Act. 'Housing Project' defined u/s 80HHBA refers not only building, but also road, bridge or other structure in any part of India. The housing project contemplated under Section 80-IB(10) refers construction of "any building" and widest possible meaning has to be given to the word "building" and cannot be restricted to and as referable to a housing project covering residential units only. The benefit of deduction u/s 80-IB(10) of the Act, with reference to housing project has to go in tune with the Explanation given in 80HHBA;

++ Revenue does not deny the fact that the assessee had complied with clauses (a) and (b) and that it had commenced the development of construction of the project on 1st October 1998 and that the area of the land satisfies the minimum required area of one acre. The one and only dispute herein is as to the built-up area, as regards the residential unit, later on converted as commercial unit. The built-up area of 8.33%, as relatable to commercial area, has nothing to do with the dispute raised, since the assessee has not made any claim for deduction on this. Such occupation of commercial area in a housing project would not negate the claim of the assessee for 100% deduction of the profits and gains from the business of undertaking, development and construction of housing project subject to the assessee complying with the other conditions under Clauses (a), (b) and (c) of Section 80IB(10) of the Act;

++ given the object of the provisions u/s 80-IB(10), when the deduction to be granted is on the profits and gains of undertaking developing and constructing approved housing projects, in the absence of restrictive covenant under sub- Section (10) of Section 80-IB, it is not justifiable to hold that on the mere fact of some of the units having the built-up area exceeding the condition specified under clause (c), the claim for deduction would stand rejected on the entire project. Once the local authorities approved the project with or without the commercial use as permitted under the Rules, the project approved is eligible for deduction u/s 80IB(10). The fact that the housing project has residential flats and commercial user, by itself, cannot, in any way, stand in the way of granting deduction. The restriction under Section 80IB(10)(c) cannot be construed as a negative condition to deny the benefit to an assessee, when the approved project has residential units of more than 1500 s.q.ft. The idea of prescribing such restriction is to encourage construction of affordable houses to common man and the restriction is not by way of negative condition to reject a claim where the housing projects have units with the built-up area exceeding the prescribed limit as well as within the limits. So too, in a case where the project contains commercial as well as residential area;

++ it is no doubt true that the Section does not provide any such working of allowing deduction on pro rata basis. Yet, this being a deduction provision and there being no such indication that the conditions have to be cumulatively satisfied in the context of the meaning of a 'housing project' to include residential-cum-commercial complex, it is fair that the proportionate relief has to be read into the provisions, so that deduction provisions are sustained.

(See 2012-TIOL-1005-HC-MAD-IT)