DCIT,CIRCLE-8, KOLKATA, KOLKATA vs. M/S. R.D. ESTATES & RESOURCES LTD, KOLKATA

SHRI M.BALAGANESH, AM

These appeals of the revenue and cross objections of the assessee arise out of the separate orders of the Learned CIT(A), VIII, Kolkata in Appeal No. 287/CIT(A)- VIII/Kol/11-12 dated 20.6.2012 for Asst Year 2004-05 and Appeal No. 286/CIT(A)- VIII/Kol/11-12 dated 20.6.2012 for Asst Year 2005-06 against the orders of assessment framed u/s 147 / 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). As the issues involved are identical in nature in both the asst years, the same are taken up together and disposed off by this common order for the sake of convenience.

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assessed in the assessment order u/s. 143(3) wherein the company's method of revenue recognition was accepted.

3.1. It was stated that for claiming the deduction u/s 80IB(10) in AY 2004-05, assessee was required to fulfill only following conditions:

a. The undertaking commenced development and construction of the housing project on or after 01-10-1998. b. The project was on size of plot having minimum area on Acre c. The residential unit had maximum built up area of 1500 sq. ft.

The assessee stated that it had fulfilled all the three conditions as prescribed in section 80IB(10) as applicable for AY 2004-05. The assessee brought the attention of the Learned AO the amendment brought in by the Finance (No.2) Act 2004 in section 80IB(l0) which was effective from AY 2005-06. As per the amended provisions of the Act, the housing project could not include commercial-area exceeding 2000 sq. ft. It was argued that the company's housing project in which commercial area was included was completed in FY 2003-04 relevant to AY 2004-05. It was also stated that in respect of profit derived from sale of commercial area, the assessee did not claim any deduction u/s 80IB(10) of the Act. The assessee’s claim of deduction was restricted only to the sale of residential area comprised in the first housing project completed in FY 2003-04 relevant to AY 2004-05.

3.2 The Ld. AO disallowed the deduction u/s 80IB(10) by observing as follows: The submission of the A/R is considered but found not tenable. The primary contention of the assessee that the amendment in section 80IB( 10) has been bought about by the Finance (No.2) Act 2004 and is therefore not applicable to the relevant FY 2004-05. The assessee has further stated that only the profits derived from residential flats was claimed as deduction whereas profit of the commercial area was not deducted u/s 80IB(I0) of the Act. However, such contention of the assessee has no merits. Section 80(IB)( I0) which was amended by the Finance (No.2) Act 2004 provided that

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the housing project has to be primarily a residential complex and not a commercial one and in any case, it could not include commercial area exceeding 2000 sq. ft. The said amendment brought into the section adequately clarifies this aspect. In the present case, the commercial area comprises of 14088 sq. ft which is far excess that the limit prescribed by the aforesaid amendment. Further, there is no provision in section 80IB( 10) to allow pro-rata deduction. Thus the deduction claimed by the assessee amounting to Rs 3,51,86,897/- is disallowed and added back to the computation.

4.1 The Assessing Officer has not disputed the above facts which is also evident from reasons for issue of notice u/s 148, which is reproduced below: "The assessment of M/s RD Estate & Resources Ltd for the AY 2004-05 was completed after scrutiny in December 2006 after allowing a deductions of Rs. 3.50 crore u/s 80IB(10) of the Act. It is seen that the project on which deduction u/s 80IB was claimed was commercial cum residential in nature and had commercial units measuring 14088 square feet which is more than the maximum permissible limit of 2000 square feet. Thus the housing project was ineligible for deduction and the

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allowance of deduction was wrongly claimed by the assessee and allowed by the AO.

Thus, I have reason to believe that income chargeable to tax has escaped assessment. Notice u/s 148 of Income Tax Act, 1961 is issued"

4.2. The Learned CITA observed that from the above, it is clear that the only reason for disallowance of deduction u/s 80IB(l0) was because of changes bought into section 80IB(l0) w.e.f 01-04-2005 which required that the built-up area of the shops and other commercial establishments included in the housing project does not exceed five per cent of the aggregate built-up area of the housing project or two thousand square feet, whichever is less. However, prior to AY 2005-06 there was no such statutory restriction with respect to commercial establishments. Hence the only question is whether the amendments in section 80IB(l0) bought w.e.f. 01-04-2005 has retrospective applicability. The Learned CITA placed reliance on the Special Bench of Pune ITAT in the case of Brahma Associates Vs. JCIT (119 ITD 255) wherein it was held that the amendment made by the Finance (No.2) Act 2004 enacting clause (d) in section 80(IB)(10) was not retrospective in operation and would be applicable only from AY 2005-06. He also found that the above decision was also upheld by Hon'ble Mumbai High Court. The Hon'ble High Court in its decision reported in 197 Taxman 459 in the case of CIT-II vs Brahma Associates affirmed the view of the Tribunal and held that the amendment brought by the Finance (No.2) Act 2004 imposing restriction on commercial area within the housing project was applicable w.e.f. 01-04-2005. The High Court further held that prior to 01-04-2005, deduction u/s 80lB(l0) would be available to any housing project which is approved by local authority without or with commercial user and irrespective of the fact that project is approved as 'housing project' or as 'residential plus commercial project '.

4.3 The Learned CITA also observed that the Kolkata ITAT in the case of Bengal Ambuja Housing Development Limited vs DCIT [ITA no. 1595/Kol/2005, AY 2002-

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03], Bench C Order dated 24-03- 2006 [(2007 39 BCAJ 546], wherein it was held that even if the units constructed are both smaller and larger units with reference to the stipulated area of 1000 square feet built up area, the deduction U/S 80IB(10) ought to have been allowed. The above decision has been approved by Hon'ble Calcutta High Court. Hence the Learned CITA observed that the jurisdictional Tribunal and High Court has held that even if an assessee is not fulfilling all the conditions laid down in Section 80IB(10) of Income Tax Act, 1961, the disallowance, if any, should not be in entirety but proportionate disallowance should only be done. In other words, the disallowance should be to the extent of commercial portion of housing project. However, he found that, in the present case, the assessee had not claimed any deduction u/s.80IB( 10) of the Act on the income from commercial portion of the housing project.

4.4. With regard to Asst Year 2005-06, the learned CITA observed that the assessee had obtained the approval of the housing project from Kolkata Municipal Corportion on 17.7.2000. The said project consisted of 5 multistoried buildings namely Block A, Block B, Block C, Block D and Block E. The entire project was completed in two phases and the first stage consisted of Block A, Block B and Block C which was completed in Asst Year 2004-05 , whereas the second phase consisted of Block D and Block E was completed in Asst year 2005-06. In Asst Year 2005-06, the construction of Block D and Block E wsa completed on 31.3.2005. These two blocks consisted of 176 flats and individual flat size was less than 1500 square feet of built up area. The total constructed area of these two buildings were 217850 square feet on land measuring 158.54 cottahs equivalent to 2.62 acres.

4.5. The Learned CITA in view of the aforesaid findings and observations and placing reliance on various judicial pronouncements held that that the assessee is eligible for deduction u/s. 80lB( 10) in the instant year. Aggrieved, the revenue is in appeal before us by raising the following ground:-

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built-up area to be used for commercial purpose in the said housing project. As would be noticed later, the extent to which such commercial area could be constructed was as per the local laws under which local authority gave the sanction to the housing project. However, vide clause (d), which was inserted by the aforesaid amendment and made effective from 1-4-2005, it was stipulated that the built-up area of the shops and other commercial establishments in the housing projects would not exceed 5 per cent of the aggregate built-up area of the housing project or 2000 sq. feet, whichever is less.

• Certain other disputes which had arisen between the revenue and the assessees/developers of the housing projects concerning interpretation of sub-section (10) of section 80-IB primarily related to the meaning that is to be assigned to 'housing projects' prior to 1-4-2005 because of the reason that there was no clause (d) earlier and there is no express provision in this sub-section dealing with the consequence of having a commercial establishment within a housing project. One of the requirements contained in sub-section (10) is that in order to be entitled to have the deduction under this provision, housing project is to be approved by a local authority. It is a matter of common knowledge that there are Municipal Acts of specific Local Acts governing the construction of buildings, commercial as well as residential, in every State. For undertaking any such construction authority, it is necessary to have the building plans sanctioned from the local authorities in accordance with the provisions of such local acts. There are local laws relating to the development and building of 'housing projects' by the developers/builders which also need a sanction from the local authorities as per the law prevailing in that particular area where the housing project is developed. Such local laws, while sanctioning the housing projects, also permit use of certain area in the housing projects in a specified manner for shopping and commercial purposes as well. The question that had arisen was - whether deduction under section 80-IB(10) would be admissible when commercial establishment is constructed in a housing project? That is, whether it would still retain the character of housing project within the meaning of this provision. The Bombay High Court in the case of CIT v. Brahma Associates [2011] 333 ITR 289/197 Taxman 459/9 taxmann.com 289 held that since the expression 'housing project' is not defined under the Act, the intention of Parliament was that whatever is approved by the local authority under the extent rules as a housing project would be treated as 'housing project' for the purpose of this section, inasmuch as sub-section (10) itself mandates that housing project is to be approved by a local authority as such an approval is a necessary condition for claiming the deduction under this provision. When the local authority has

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approved a housing project, whether 'residential' or 'residential cum commercial' the assessee is entitled to a deduction on the entire profit including the commercial establishments portion. [Para 5]

• Before 1-4-2005, the legal position was that once the project is sanctioned by the local authority as 'housing project', the extent of area sanctioned for shops and commercial establishments in the said housing project was immaterial and had no bearing. Thus, irrespective of the said area where shops and commercial establishments were permitted by the local authority in a housing project, it was still treated as housing project and further that while granting 100 per cent deductions, the area covered by shops and commercial establishments was also includible. This position has changed with the insertion of clause (d) to sub-section (10). As per the amendment carried out and made effective from 1-4-2005, even if the local authority had sanctioned larger area for shops and commercial establishment, the benefit of section 80-IB(10) would not be admissible to these asses sees/developers in case the area utilised for shops and commercial establishment exceeded 5 per cent of the aggregate built-up area of the housing project or 2000 sq. feet, whichever is less. [Para 6]

• As already pointed out, the parties are ad idem that the amendment is prospective in nature and, therefore, it operates from 1-4-2005. It has also been mentioned that in the instant appeals, all these assessees had got the housing projects sanctioned prior to 1-4-2005 and the construction of the said housing project also started before 1-4-2005. All other conditions mentioned namely the date by which approval was to be given and the dates by which the projects were to be completed as on the date when the project was sanctioned, are also met by the assessees.

• Prior to 1-4-2005, the developers/assessees who had got their projects sanctioned from the local authorities as 'housing projects', even with commercial user, though limited to the extent permitted under the DC Rules, were convinced that they would be getting the benefit of 100 per cent deduction of their income from such projects under section 80-1B. Their projects were sanctioned much before 1-4-2005. As per the permissible commercial user on which the project was sanctioned, they started the projects and the date of commencing such projects is also before 1-4- 2005. All these assessees were made known of the provision by which these projects are to be completed as those dates have been specified from time to time by successive Finance Acts in the same provision under section 80-1B. In instant cases, completion dates were after 1-4-2005. Once they arrange their affairs in this manner, the revenue

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cannot deny the benefit of this section applying the principle of retroactivity even when the provision has no retrospectivity. With the aforesaid planning as per the law prevailing prior to 1-4-2005, these assessees acted and acquired vested right thereby which cannot be taken away. It is ludicrous on the part of the revenue authorities to expect the asses sees to do something which is almost impossible. [Para 12]

• A right claimed by an assessee under the law in force in a particular assessment year is ordinarily available only in relation to a proceeding pertaining to that year. Thus, it clearly follows that though normally the law which is in force in the assessment year would prevail, but this is not an absolute principle as the Court itself carved out exceptions thereto by making it clear that such exception can be either express or implied by necessary implication. Even the principle which is mentioned is qualified with the words 'ordinarily available'. [para 14]

• On examining the scheme of sub-section (10) of section 80-IB, its historical turn around by amendments from time to time and keeping in view of the real purpose behind such a provision, in the peculiar scenario as projected in this provision, the aforesaid cardinal principle of tax law is not to be applied as, by necessary implication, application thereof stands excluded. With effect from 1-4-2001, section 80-IB(10) stipulated that any housing project approved by the local authority before 31-3-2001 was entitled to a deduction of 100 per cent of the profits derived in any previous year relevant to any assessment year from such housing project, provided - (i) the construction/development of the said housing project commenced on or after 1-10-1998 and was completed before 31-3-2003; (ii) the housing project was on a size of a plot of land which had a minimum area of one acre; and (iii) each individual residential unit had a maximum built-up area of 1000 sq.ft., where such housing project was situated within the cities of Delhi or Mumbai or within 25 kms. from the municipal limits of these cities, and a maximum built-up area of 1500 sq.ft. at any other place. Therefore, for the first time, a stipulation was added with reference to the date of approval, namely, that approval had to be accorded to the housing project by the local authority before 31-3- 2001. Before this amendment there was no date prescribed for the approval being granted by the local authority to the housing project. Prior to this amendment, as long as the development/construction commenced on or after 1-10-1998 and was completed before 31-3- 2001, the assessee was entitled to the deduction. Also by this amendment, the date of completion was changed from 31-3-2001 to 31-3-2003. Everything else remained untouched. Thereafter, by Finance Act, 2003, further amendments were made to section 80-IB(10). [Para 15]

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• Now the only changes that were brought about were that with effect from 1-4-2002: (i) the housing project had to be approved before 31-3-2005; and (ii) there was no time limit prescribed for completion of the said project. Though these changes were brought about by the Finance Act, 2003, the Legislature thought it fit that these changes be deemed to have been brought into effect from 1-4-2002. All the remaining provisions of section 80- IB( 1 0) remained unchanged. [Para 16]

• Thereafter, significant amendment, was carried out by Finance (No. 2) Act, 2004 with effect from 1-4-2005 with which the Legislature made substantial changes in sub-section (10). Several new conditions were incorporated for the first time, including the condition mentioned in clause( d). This condition/restriction was not on the statute book earlier when all these projects were sanctioned. Another important amendment was made by this Act to sub-section (14) of section 80- IB with effect from 1-4-2005 and clause (a) was inserted in section 80-IB(14) defining the words 'built-up area' to mean the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls, but did not include the common areas shared with other residential units. [Paras 17&18]

• Holding that in order to avail the benefit in the assessment years after 1- 4-2005, balconies should be removed though these were permitted earlier would lead to absurd results as one cannot expect an assessee to comply with a condition that was not a part of the statute when the housing project was approved. Thus, the only way to resolve the issue would be to hold that clause (d) is to be treated as inextricably linked with the approval and construction of the housing project and an assessee cannot be called upon to comply with the said condition when it was not in contemplation either of the assessee or even the Legislature, when the housing project was accorded approval by the local authorities. [Para 19]

• From this provisions of section 80-IB(10), it is clear that the housing project contemplated under sub-section (10) of section 80-IB includes commercial establishments or shops also. Now, by way of an amendment in the form of clause (d), an attempt is made to restrict the size of the said shops and/or commercial establishments. Therefore, by necessary implication, the said provision has to be read prospectively and not retrospectively. As is clear from the amendment, this provision came into effect only from the day the provision was substituted. Therefore, it cannot be applied to those projects which were sanctioned and commenced prior

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to 1-4-2005 and completed by the stipulated date, though such stipulated date is after 1-4-2005. [Para 20]

• These aspects are dealt with by various High Courts elaborately and convincingly in their judgments. This very aspect is answered in the judgment dated 25-7-2014 of the Bombay High Court in IT Appeal Nos. 201 and 308 of2012, wherein, it has been held that section 80-IB(10) is prospective in nature and can have no application to a housing project that is approved before 31-3-2005. As the deduction sought to be claimed under section 80-IB(10) is inseparably linked with the date of approval of the housing project, it would make no difference if the construction of the said project was completed on or after 1-4-2005 or that the profits were offered to tax after 1-4-2005 i.e. in assessment year 2005-06 or thereafter. The condition/restriction laid down in clause (d) of section 80-IB(10) has to be revisited and/or looked at and complied with in the assessment year in which the profits are offered to tax by the assessee. When the assessee claims a deduction under section 80-IB(10), the assessee is required to comply with such a condition only if it is on the statute-book on the date of the approval of the housing project and it has nothing to do with the year in which the profits are brought to tax by the assessee. [Para 21]

• Thus, in view of the aforesaid discussion it is to be concluded that the judgments of the High Courts, which are impugned in these appeals have taken correct view that the assessees were entitled to the benefit of section 80-IB(10). [Para 23].

We also find that the issue is also settled by another decision of the Hon’ble Supreme Court in the case of CIT vs Veena Developers reported in (2015) 66 taxmann.com 353 (SC), wherein it was held that :-. The assessee had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects. On that basis, the assessee claimed deduction under section 80-IB(10). However, the income-tax authorities rejected the claim of deduction on the ground that the projects were not 'housing project' inasmuch as some commercial activity was also undertaken in those projects. This contention of the revenue was not accepted by the Tribunal as well as the High Court. The High Court held that, (a) Upto 31-3-2005 (subject to fulfilling other conditions), deduction under section 80-IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under Development Control (DC) Rules/ Regulations framed by the respective local authority. (b) In such a

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case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/Regulation, the deduction under section 80- IB(1 0) up to 31-3-2005 would be allowable irrespective of the fact that the project is approved as 'housing project' or 'residential plus commercial'. (c) In the absence of any provisions under the Income-tax Act, the Tribunal was not justified in holding that upto 31-3-2005 deduction under section 80-IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user up to 10 per cent of the total built-up area of the plot. (d) Since deduction under section 80-IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting section 80- IB(10) deduction only to a part of the project. However, in the present case, since the assessee had accepted the decision of the Tribunal in allowing section 80-IB(10) deduction to a part of the project, the Court would not disturb the findings of the Tribunal in that behalf. (e) Clause (d) inserted to section 80-IB(10) with effect from 1-4-2005 is prospective and not retrospective and hence cannot be applied for the period prior to 1-4-2005.

Held that the Court is in agreement with the aforesaid answers given by the High Court to the various issues. It is only clarified that insofar as answer at para (a) is concerned, it would mean those projects which are approved by the local authorities as housing projects with commercial element therein.

There was much debate on the answer given in para (b) above. However, on reading the direction in its entirety and particularly the first sentence thereof, it is found that commercial user which is permitted in the residential units and that too, as per DCR. Examples given by the assessee was that such commercial user to some extent is permitted to the professionals like Doctors, Chartered Accountants, Advocates, etc., in the DCRs itself. Therefore, direction (b) is to be read in that context where the project is predominantly housing/residential project but the commercial activity in the residential units is permitted.

Respectfully following the aforesaid judgements of the Hon’ble Supreme Court, we find no infirmity in the order of the Learned CIT(A). Accordingly, the grounds raised by the revenue are dismissed for both the asst years.

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Sd/- Sd/- ( N.V.Vasudevan, Judicial Member ) (M. Balaganesh, Accountant Member) Date:

Date 11-5 -2016

Copy of the order forwarded to:-

The Appellant/department: The DCIT, Cir-8, Aaykar Bhavan, 5th Fl, Room No. 8 1.. P-7 Chowringhee Sq, Kol-69. 2 The Respondent/Assessee: M/s. R.D Estates & Resources limited 4 Middleton Street, Kol-71. 3 /The CIT, 4.The CIT(A)

**PRADIP SPS

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