Unclarity about exemption a concern in taxing times

Section 80IB(10) of the Income Tax Act confers one of the most important tax incentives available to developers constructing housing projects. The section allows a 100% deduction of profits for a housing project approved before March 2008, subject to certain conditions.

These conditions however remain a bone of contention between the revenue authorities and the developers and have time and again been subjected to the scrutiny of the courts.

Conditions for exemption

The section was introduced in 1999 with the objective of countering shortages in residential units available for low and middle income groups, and has undergone a series of amendments.

Some of the conditions for the exemption, as they stand today, are: (i) project commencement after October 1998 and completion within the prescribed time; (ii) plot area of at least one acre; (iii) residential units should not exceed 1,000 square feet in a built-up area if within 25 kilometres from the municipal limits of Mumbai or Delhi and 1,500 square feet elsewhere; and (iv) the built-up area of the commercial units should not be more than 3% of the aggregate built-up area of the project or 5,000 square feet, whichever is higher. There was no restriction on commercial areas prior to April 2005.

View of the courts

While the revenue authorities have often interpreted these conditions restrictively, courts have been more liberal in their approach. The Income Tax Appellate Tribunal (ITAT) judgments in ACIT v Bengal Ambuja Housing Development Limited, Saroj Sales Organisation v ITO and Vandana Properties v ACIT have given a wide interpretation to the term “housing project”, thereby expanding the scope of the exemption.

In these cases, ITAT held that (i) a housing complex consisting of eligible and non-eligible residential units will be entitled to exemption in respect of the eligible units on a proportionate basis; (ii) a single building can constitute a project and separate blocks on the same plot can be treated as independent projects if separate accounts are maintained; and (iii) an addition to an existing housing project can qualify for exemption and a separate plot area of 1 acre is not required.

In February 2011, Bombay High Court in The Commissioner of Income Tax v Brahma Associates put to rest a controversy with regard to exemption of housing projects with commercial areas beyond the prescribed limits, for periods prior to April 2005. The earlier view taken by ITAT was that the assessee would be entitled to claim the exemption only with respect to residential units and not commercial areas.

In 2009, the special bench of ITAT Pune held that as long as the commercial built-up area did not exceed 10% of the total area, the character of a housing project would not be vitiated and the project would be entitled to an exemption. If the commercial area exceeded 10%, no exemption could be allowed except where profits from the residential units could be worked out separately.

Bombay High Court struck down the restriction of 10% as unjustified and held that for periods prior to April 2005 the exemption would be permissible for the entire project even if it was approved as a residential/commercial project. The judgment came as a relief for several projects seeking similar exemptions.

Further clarity needed

Another issue which has brought some assessees at loggerheads with the revenue authorities in recent times relates to the need to achieve completion within the timelines prescribed post April 2005 for projects sanctioned between 2003 and March 2005. This is because, as the section stood during those years, no time was prescribed for completion of the construction.

The assessees argue that the timelines for completion would not apply to projects approved before April 2005 (when they were introduced) because once a project is approved the rights of the assessee are crystallized and vested and a subsequent change in the section cannot and should not take away or impair an existing right or impose a new obligation. The revenue authorities justify their stand on the principle that the law to be applied is the one in force in the assessment year under consideration and therefore post 2005, the project needs to be completed with the time prescribed.

The developers hope that the courts will continue to be more bountiful in their approach than the revenue authorities.

Even though section 80IB(10) is not applicable to projects sanctioned after March 2008, the exemption under it continues to be relevant to ongoing projects.

While the tussle between the developers and the revenue authorities continues, one only hopes that the section is applied in its true spirit and the benefits percolate down to the millions it was meant to help.

Deepti Mohan is a partner of Vidhii Partners and can be reached at deepti.mohan@vidhiipartners.com.