Introduction

1. To give impetus to the housing sector, the Legislature has introduced the provisions of section 80IBA with effect from 01/04/2017 providing 100% deduction of the profits and gains arising from "developing and constructing a housing project". The said provision is the new avatar of erstwhile section 80IB(10).

The provisions of section 80IB(10) have had a chequered history and was riddled with litigation which finally saw the doors of apex court. The new provision of section 80IBA is offspring of the erstwhile section 80IB(10) clothed with the principles enunciated by the apex court. It has been further amended in the very next year of its introduction when certain conditions for deduction were relaxed and brought in conformity with new laws enacted to govern the real estate development like Real Estate(Regulation and Development) Act 2016.

In this article we shall discuss on whether the amended provisions of Section 80IBA vis-a-vis the earlier section 80IB(10) are effective enough to clear the air on the controversies which marred the earlier section 80IB(10). The legislature has made an attempt to capture the essence of various judicial pronouncements of The High Courts and the apex court rendered in the context of section 80IB(10) while enacting the new section 80IBA. We shall analyse whether these changes are settling the past issues or whether uncertainty and confusion prevail.

Commercial Area in a "Housing Project"

2. One of the raging controversies in the earlier s.80IB(10) was regarding the construction of commercial area in a residential project. The revenue refused benefit of deduction where the commercial units were constructed as a part of residential project. Since the definition of "housing project" was not provided under the then provision, the assessee was unsure whether the department would accept the project as a "housing project" which included commercial area in the sanctioned plan. If allowable, how much commercial area could be constructed to qualify for deduction?

"Housing Project"

2.1 To determine the eligibility for the deduction under section 80IBA, the first step is to consider whether the project is a "housing project" or not? For that purpose one has to look at the definition of "housing project" as provided under sub-section (6)(d). The said definition reads as under:

The above definition has been introduced because sub-section (1) exempts the income of a "housing project". The earlier section 80IB(10) did not define the said term and, hence, in the case of CIT v. Veena Developers [2016] 66 taxmann.com 353 (SC) the apex court gave a meaning as provided in common parlance. The apex court in paragraphs 4, 5 and 6 of its order held as under:

"4. We are in agreement with the aforesaid answers given by the High Court to the various issues. We may only clarify 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.

5. There was much debate on the answer given in para (b) above. It was argued by Mr. Gurukrishna Kumar, learned senior counsel, that a project which is cleared as "residential plus commercial" project cannot be treated as housing project and therefore, this direction is contrary to the provisions of Section 80-IB(10) of the Act. However, reading the direction in its entirety and particularly the first sentence thereof, we find that commercial user which is permitted is in the residential units and that too, as per DCR. Examples given before us by the learned counsel for the assessee was that such commercial user to some extent is permitted to the professionals like Doctors, Chartered Accountants, Advocates, etc., in the DCR itself.

6. Therefore, we clarify that 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. With the aforesaid clarification, we dispose of all these special leave petitions."

Now if we compare the statutory definition of "housing project" with that provided by the apex court as above, the findings are intriguing. The legislature has accepted the meaning as provided by the apex court by including the use of word "predominantly" so as to clarify that the housing project need not be 100% residential. A comparison of the language used by the apex court and the language used by statute in sub-section (6)(d) is given in tabular form for better understanding:

A perusal of the above comparison reveals that while defining the term "housing project" legislature has followed the judicial view and codified it by including the commercial element in a "housing project". The legislature has also clarified that the approval of competent authority to such a project would be conclusive evidence of a "housing project".

Primacy of Definition:

3. The use of the phrase "subject to the provisions of this section" at the end of the definition creates certain doubts. The question is where the commercial area is more than 3% of area approved by the competent authority whether such project will stand disqualified and will cease to be a "housing project" for the purpose of the deduction under section 80IBA, since the approval of the competent authority will not be in conformity with the provisions of sub-section 2(c).

Once the basic requirement as provided in sub-section 6(d) is fulfilled, one has to look at the conditions for deduction as provided in sub-section (2). One of the conditions is provided in sub-clause (c) which reads as under:

The above condition is not the essential condition for the purpose of eligibility of a project being defined as a "housing project". Even where the commercial area sanctioned in a housing project by the competent authority is more than 3% of the aggregate carpet area, the basic nature of the project will remain a "housing project". The sanction by the competent authority of a project which is predominantly residential will make it a housing project. This is what the definition contemplates and is in tandem with the ratio laid down by the apex court as stated earlier. The said sanction of competent authority is enough to make the project a "housing project".

After considering the definition and the judicial history leading to such definition, let us consider the sub-section (1) which provides for deduction to such housing projects. The said sub-section (1) states as under:

(1) Where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall, subject to the provisions of this section, be allowed, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business.

Eligibility v. Quantum

4. What the above section contemplates is that once the project qualifies as a housing project, the deduction of 100% would be subject to the provisions of section which includes sub-section (2) clause (c) and would be restricted to "such business". The said sub-section qualifies the quantum of deduction and not the eligibility of deduction. The quantum of deduction in that case would be restricted to profits and gains of upto 3% of the commercial area. Any profit of excess commercial area will be taxable. This is because if the intent of legislature was to restrict the benefit only to the projects which have commercial area of 3% there was no need to mention "as the competent authority may approve" in the definition of "Housing Project". By adding the requirement of approval of competent authority the eligibility condition of 3% commercial area has been made subservient to such approval.

The enactment of definition of "housing project" in section 80IBA(6)(d) is also totally in sync with the dictum of the Supreme Court in the case of Veena Developers (supra). The apex court has given a purposive interpretation to the benevolent provision The new enactment does not take it away, rather it supports the apex courts view.

The above view is further fortified by the fact that the legislature has chosen not to include the requirement of approval by competent authority in sub-section (2) as a condition for deduction. The legislature has made such approval a part of the definition of "Housing Project" under sub-section 6(d). This means that once approval is obtained from competent authority, the said project becomes a "housing project" and benefit is allowable subject to the fulfilling of conditions as provided in sub-section (2). If the legislature desired to treat the approval of competent authority restricted to commercial area, being upto 3% as a condition for qualifying for deduction, the requirement of approval would have been incorporated in sub-section (2) along with clause (c) instead of in definition of "housing project".

In many satellite cities like Navi Mumbai and elsewhere the competent authorities (especially, new town development authorities) provide that the housing project must have a certain minimum percentage of commercial area. Usually these minimum limits are more than 3% carpet area as provided in sub-section (2)(c). Such projects would qualify as a "housing project" for the purpose of section 80IBA., although for the purpose of 100% deduction the profit of "housing project" as provided in section 80IBA is to be restricted to 3% commercial carpet area only apart from residential area. For instance, CIDCO in Maharashtra provides for minimum 10% of FSI to be used for commercial purposes even in a residential project. Hence any attempt to restrict the deduction only to housing projects having 3% commercial area would create an undesired and irrational discrimination which would tether on unconstitutionality under Article 14 of The Constitution of India.

The legislature has qualified the definition of housing project to 3% carpet area for commercial area in aggregate to take care of the observation of the Bombay High Court in the case of CIT v. Brahma Associates [2011] 197 Taxman 459 / 9 taxmann.com 289. In the said decision the Mumbai High Court held that once the competent authority / local authority sanctions a project which is residential-cum-commercial then, irrespective of the percentage of commercial area, the deduction is available from the income of both residential as well as commercial units. The High Court held as under:

31. In the present case, though the commercial user is more than 10 per cent of the plot area, the Tribunal has allowed section 80-IB(10) deduction in respect of 15 residential buildings on the ground that the profits from these exclusively residential buildings could be determined on stand alone basis. In our opinion that would not be proper, because, section 80-IB(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 80-IB(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. In the present case, the commercial user is allowed in accordance with the Development Control Rules and hence the assessee was entitled to section 80-IB(10) deduction on the entire project approved by the local authority. However, the assessee has not challenged the decision of the Tribunal in restricting the deduction to a part of the project. Therefore, while holding that in law, the assessee was entitled to section 80-IB(10) deduction on the profits of the entire project, in the facts of the present case, since the assessee has not challenged the decision of the Tribunal, we are not inclined to disturb the decision of the Tribunal in restricting the section 80-IB(10) deduction only in respect of the profits derived from 15 residential buildings."

Therefore, to overcome the above part of the decision of the Mumbai High Court the legislature has added the words "subject to the provisions of this section" to the definition of "housing project". This phrase restricts the benefit of deduction of income only to residential units and upto a maximum of 3% commercial area as provided in conditions of sub-section (2)(c). The said qualifying phrase cannot be interpreted to mean that where the commercial area exceeds 3% in aggregate the entire project ceases to be a "housing project". To interpret in the said manner would be violating the basic jurisprudence of benevolent provision which state that such beneficial provisions have to be liberally construed so as to advance the objective of the provision and not to defeat the same.

Recently, the Bombay High Court in the case of CIT v. Makwana Brothers & Co. (HWP) [2017] 86 taxmann.com 278 has held as under:

54. We are not in agreement with Mr. Gupta that when the Hon'ble Supreme Court gave illustrations of the commercial user in residential projects that user must be restricted to professional activities, particularly of Doctors, Chartered Accountants, Advocates, etc. The clarification by the Hon'ble Supreme Court also does not lead to an acceptance of his argument and where the project is predominantly housing/residential, but commercial activity in the residential units is permitted. We do not think that the Hon'ble Supreme Court restricted the commercial activities in the residential units to its own illustrations. It clearly referred to the Development Control Regulations in the preceding paragraphs and thus, upheld the conclusions of the High Courts that an element of the commercial activity is provided but the project as a whole is still treated as a housing project. What could be the permissible limit on commercial activity would depend upon the Development Control Regulations and which can be considered on fact to fact basis. In other words, the Development Control Regulations, which prevail for cities and planning authorities in each case, would have to be noted for the interpretation of this expression as also the nature of the users envisaged and permitted therein (residential and commercial) in a housing project.

Though the above ratio was laid down in the pre-amended provision of section 80IB(10) when there was no limit provided for the commercial units in the housing project, yet the basic jurisprudence remains unfettered even under the new section 80IBA.

A word of caution here. Sub-section (2)(i) provides that for claiming the benefit of deduction from the "housing project" the assessee has to maintain separate books of account. It would be prudent that developer maintains separate books for the project upto 3% Commercial area and for balance commercial area separate books are maintained so as to be able to drive home his view point.

Conclusion

5. A perusal of the above analysis reveals that the litigation is going to ensue in the current avatar of section 80IBA also. The amendments are not clear enough for the taxman to be benevolent enough to grant the deduction, even though the purpose of such provision has been dictated by the apex court while administering decision in the case of Veena Developers (supra).