CIT vs. Sarkar Builders (Supreme Court of India)- Restriction on extent of commercial area in ‘housing project’ imposed w.e.f. 1.4.2005 does not apply to housing projects approved before 1.4.2005 even though completed after 1.4.2005 – Section 80-IB(10).
Brief Facts of the Case and Question of Law
There are various respondents/assessees involved in the assessment. Also the Assessment years are different but the question of law raised by Income Tax Authorities is same. The assessees are engaged in the business of developing and building housing projects. In the said housing projects, commercial establishments were also constructed [exceeding the limits specified in clause (d) to the Section 80IB(10)]with the prior approval of local authorities as per law prevailing in that area.
Section 80IB(10) introduced by the Finance Act, 1999 w.e.f. 01.04.2000 provides for deduction of 100% of profits in the case of an undertaking developing and building housing projects when such profits are derived in the previous year relevant to any assessment year from such housing projects, provided the conditions contained in the said sub-section are satisfied. The Assessees have met all the conditions laid down in u/s 80IB(10) of the Income Tax Act, 1961 (“The Act”) and have accordingly computed and claimed deduction.
Clause (d) was laid down and made effective from 01.04.2005 which stipulated that the built-up area of the shops and other commercial establishments in the housing projects would not exceed 5% of the aggregate built-up area of the housing project or 2000 sq. feet, whichever is less.
In the present case, the housing projects were sanctioned much before the said amendment but have been completed after 01.04.2005 when the amended provision has come into operation.
Question of Law:
Whether deduction under Section 80IB(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” (which is not defined in the Act) within the meaning of this provision.
Whether Section 80IB(10)(d) of the Income Tax Act,1961 applies to a housing project approved before 31.03.2005 but completed on or after 01.04.2005?”
Contention of the Revenue:
The Revenue contended 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(I)(B)(10) of the Act. To constitute as housing/residential project, only commercial use carried out in the residential units and that too, as per DCR is permitted.
Once the project is financed after 01.04.2005 and on the completion of the said project, a particular assessee has earned the income which is shown by the assessee in a particular assessment year, it is that assessment year which would be the determinative factor and the law prevailing on the date relevant to the assessment year will have to be applied. On that basis, it was argued that since the assessment years are post 01.04.2005, clause (d) of sub-section (10) of Section 80IB of the Act gets attracted.
Contention of the Assessee:
The Assessee contented that before 01.04.2005, 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 of 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% deductions, the area covered by shops and commercial establishments was also includible.
The Assessee also argued that that the conditions in clause (d) could not be applied in respect of those projects which had been sanctioned and commenced prior to 01.04.2005. Vested rights had accrued in favour of such persons which could not be taken away by the amendment.
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 1st April, 2005 or that the profits were offered to tax after 1st April,2005 i.e. in A.Y. 2005-06 or thereafter.
Held by the Apex Court:
It was held that on the date on which the legislature introduced 100% deduction in Section 80-IB(10) under the Income Tax Act, 1961 on the profits derived from housing projects approved by a local authority, it was known that the local authorities could approve the projects as housing projects with commercial user to the extent permitted under the DC Rules framed by the respective local authority. In other words, it was known that the local authorities could approve a housing project without or with commercial user to the extent permitted under the Development Control Rules. If the legislature intended to restrict the benefit of deduction only to the projects approved exclusively for residential purposes, then it would have stated so. However, the legislature has provided that Section 80IB(10) deduction is available to all the housing projects approved by a local authority. Since the local authorities could approve a project to be a housing project with or without the commercial user, it is evident that the legislature intended to allow Section 80IB(10) deduction to all the housing projects approved by a local authority without or with commercial user to the extent permitted under the DC Rules.
Where a project fulfills the criteria for being approved as a housing project, then deduction cannot be denied under Section 80IB(10) merely because the project is approved as ‘residential plus commercial’. Hence the first Question of Law stays explained.
Clause (d) to Section 80IB(10) inserted w.e.f. 1.4.2005 provides that even though shops and commercial establishments are included in the housing project, deduction under Section 80IB(10) with effect from 1.4.2005 would be available where such commercial user does not exceed five per cent of the aggregate built-up area of the housing project or two thousand square feet whichever is lower. By Finance Act, 2010, clause (d) is amended to the effect that the commercial user should not exceed three percent of the aggregate built-up area of the housing project or five thousand square feet whichever is higher. The expression ‘included’ in clause (d) makes it amply clear that commercial user is an integral part of housing project. 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.
For example, if under the DC Rules, for shops and commercial activity construction permitted was, say, 10% and the project was also sanctioned allowing a particular assessee to construct 10% of the area for commercial purposes. The said developer started with its project much prior to 01.04.2005 with the aforesaid permissible use and the construction was at a very advanced stage as on 01.04.2005. Can it be argued by that Revenue that he is to demolish the extra coverage meant for commercial purpose and bring the same within the limits prescribed by the new provision if he wanted to avail the benefit of deduction under Section 80IB(10) of the Act, only because of the reason that the project was not complete as on 01.04.2005? As in such a case he filed his return for an assessment year after 01.04.2005 and for the purpose of assessment of the said return, law prevailing as on that date would be applicable?
Answer has to be in the negative on the principle that with the aforesaid planning as per the law prevailing prior to 01.04.2005, these assessees acted and acquired vested right thereby which cannot be taken away.
Therefore, 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. Hence the second Question of Law stays explained.
Hence, it cannot be applied to those projects which were sanctioned and commenced prior to 01.04.2005 and completed by the stipulated date, though such stipulated date is after 01.04.2005.
The Apex Court citing the above points upheld that the assesees were entitled to the benefit of Section 80IB(10) and disposed off the appeal.