Deduction u/s. 80-IB(10) cannot be denied for unauthorised excess construction

IN THE ITAT BANGALORE BENCH ‘A’

Income-tax Officer, Ward 4(3), Bangalore

versus

Mahaveer Calyx

IT APPEAL NOs. 153 & 998 (BANG.) OF 2011

[ASSESSMENT YEARS 2007-08 & 2008-09]

AUGUST 31, 2012

ORDER

Jason P. Boaz, Judicial Member

These two appeals by Revenue are directed against the separate orders of the Commissioner of Income Tax (Appeals)-II, Bangalore dt.10.11.2011 for the Assessment Year 2007-08 and dt.8.8.2011 for Assessment Year 2008-09. Since common issues are involved, they are heard together and disposed off by way of this common order.

2. The facts of the case, in brief, are as under :

2.1 The assessee is a partnership firm developing residential flats. The assessee had planned to build 180 flats and it had obtained plan sanction for construction of the said housing project in Survey No. 45, Katha No. 114 in Nayanappanahalli village, Begur Hobli, Bangalore. It had claimed deduction under section 80IB of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) in respect of the sale of flats for both assessment years under consideration at 100% of the profits.

2.2 During the course of assessment proceedings for both assessment years, the Assessing Officer found that the sanctioned plan for construction of the housing project showed that the assessee was to build the following area :

However, the Assessing Officer noticed from the data of sale deeds executed by the assessee, that the built up area sold by the assessee in respect of 180 flats totaled 1,91,346 sq. ft. After adding 18.5% towards common area, the Assessing Officer found that the total built up area comes to 2,26,851.60 sq. ft. In this view of the matter, the Assessing Officer held that as the assessee had got the project approved for construction of 1,83,748.40 sq. ft. as the total built up area (i.e. the total of flats built on the ground, first, second and third floors) whereas, it had constructed 2,26,851.60 sq. ft. this meant that the project as constructed by the assessee did not have the approval of the local authority. According to the Assessing Officer, the assessee had complied with all the conditions mentioned under section 80IB of the Act, except the condition with regard to the built up area as the project as constructed by the assessee did not have the approval of the local authority. The Assessing Officer, therefore, held that the assessee was not entitled to any deduction under section 80IB of the Act and completed the assessment accordingly by an order under section 143(3) of the Act on 29.12.2009 for Assessment Year 2007-08 and by order under section 144 of the Act on 30.12.2010 for Assessment Year 2008-09.

2.3 The assessee went in appeal before the learned CIT(A) against both the orders of assessment for Assessment Year 2007-08 dt. 29.12.2009 and 2008-09 dt.30.12.2010. Before the learned CIT(A), the assessee contended that the conditions of section 80IB(10) of the Act were fulfilled and that each apartment constructed was less than 1500 sq. ft. It was submitted by the assessee that no unauthorized units on floors were constructed by it but that there were certain excess area constructed by it which had not violated the condition relating to the built up area of 1500 sq. ft. In other words, it was contended by the assessee that the approval for a housing project was relevant for only two issues viz. –

(i)  to find out the date of approval and thus the time limit for completion of the housing project and

(ii)  to determine whether the project is approved by the local authority as a housing project.

On the issue of completion of the project, it was submitted before the learned CIT(A) that the assessee had obtained an occupancy certificate but had not made payment of the compounding fee. The Assessing Officer was of the view that the assessee had not obtained a completion certificate and this was a violation of the provisions of section 80IB of the Act. The assessee, however, contended before the learned CIT(A) that the completion of the housing project was a fact and the non-payment of the compounding fee would not result in the denial of exemption and it could not be said that the assessee had constructed a project which was not approved. The learned CIT(A), thereafter disposed off the appeal for Assessment Year 2007-08 holding that the assessee was entitled to deduction under section 80IB of the Act for Assessment Year 2007-08. This view of the learned CIT(A), that the assessee was entitled for deduction under section 80IB of the Act was followed for the Assessment Year 2008-09 wherein the finding of the learned CIT(A) was as under :

“4.10 The same issue came up for consideration in the appeal before my predecessor in the appellant’s own case for the Assessment Year 2007-08 who has, in his order ITA No.160/W-4(3)/CIT(A)II/09-10 dated 10.11.2010, discussed this issue at length. The facts remain the same other than that the compounding fee as claimed to have been paid by the appellant has actually not been paid. My predecessor has examined the issue in depth in order referred to above and held as under :

“3.6 However, according to the Assessing Officer, since the appellant has built the flats in excess of the approved plans, the project of the appellant is held to be not approved one in as much as what has been approved is not built.

3.7 At the time of appeal hearing, the appellant argued that, at the relevant point of time, the bye law of the local authority permitted a certain Floor Area Ratio (in short FAR) that could be constructed by the appellant and based on the then prevailing FAR, the appellant, submitted the plan and obtained the plan approval.

3.8 This aspect of the matter becomes clear from the following clarification given by the CBDT in circular F. No.205/3/2001/IT A-I dated 4.5.2001 being a letter addressed to the Maharashtra Chamber of Housing Industries, which has been referred to by the Hon’ble ITAT in the case of M/s. Brahma Associates (2009) 315 ITR (AT) 268 (Pune) (SB)/122 ‘TOTAL TURNOVER’) 433 (Pune) (SB). The relevant portion of the clarification extracted in order of the Hon’ble ITAT referred to above is as under :

“With regard to your query regarding the definition of housing project it is clarified that any project which has been approved by a local authority as a housing project should be considered adequate for the purpose of s. 10(23G) and 80-IB(10)”

3.9 The appellant further stated that at the time of construction of the project the appellant had put up certain additional construction in such a manner that there were no unauthorized units or floors but only some additional area in each of the apartments that were constructed by the appellant. Even considering the excess area constructed by the appellant in each apartment. The appellant had not violated the condition relating to the built-up area, which is less than 1500 sq ft and this aspect of the matter has been verified by the Assessing Officer and there is no dispute on this issue.

4. I have carefully considered the appellant’s submissions and also perused the records and duly considered the factual matrix of the case as also the legal position.

4.1 Under the existing provisions contained in sub-section (10) of section 80-IB, a deduction equal to one hundred per cent of the profits of an undertaking engaged in developing and building housing projects is allowed if the housing project is approved by a local authority before March, 2007. The deduction is subject to the conditions that the undertaking should have commenced the development of the housing project on or after 1.10.1998. The project should be on the size of a plot of land which has a minimum area of one acre and the residential unit should have maximum built-up area of one thousand square feet where such residential unit is situated in Delhi or Mumbai and one thousand and five hundred square feet at other places.

4.2 Section 80-IB(10), being a beneficial provision of tax incentive, should be interpreted liberally so as to confer the benefit on the so called developer cum builder. Law s fairly settled in this regard by a number of decisions of the apex court referred to by it at (i), (ii), (iii), (iv) of page 291 of 315 ITR of Hon’ble ITAT, Pune Special Bench in the case of Brahma Associates.

“(i)  Petron Engineering Construction (P) Ltd. v. CBDT [1989] 175 ITR 523 (SC) – Liberal interpretation of an incentive provision can be resorted to only when it is possible without imparing the legislative requirement and the spirit of the provision. Where the phraseology of a particular provision takes within its sweep the transactions which are taxable, it is not for the Courts to strain and stress the language so as to enable the tax payer to escape the tax.

(ii)  Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) – Rules of interpretation would come into play only if there is any doubt with regard to the express language used in the provision.

Where the words are unequivocal, there is no scope for importing the rule of liberal interpretation of an incentive provision.

(iii)  CIT v. N.C. Budharaja & Co. & Anr. Etc. Etc. [1993] 204 ITR 412 (SC) – Liberal interpretation of an incentive provision should not do violence to plain language. The object of an enactment should be gathered from a reasonable interpretation of the language used therein.

(iv)  IPCA Laboratory Ltd v. Dy. CIT [2004] 266 ITR 521 (SC) – Any interpretation has to be as per wording of the provision including incentive provision. If the wordings of the provision are clear, then the benefits, which are not available under the provision, cannot be conferred by ignoring or misinterpreting the words in the provision.”

4.3 I am, therefore, of the considered view that the tax incentive byway of deduction under section 80-IB(10) is predominantly for the purpose of augmenting affordable dwelling units and it must be interpreted in that light. When a local authority approves a project as housing project, there is apparently no difficulty. As long as the local authority approves the project as a housing project, it is immaterial as to what is the quantum of use of built up area for building purposes. This is so inter alia for the reason that the CBDT vide letter dated 4.5.2001 (supra) clarified this issue.

4.4 The Hon’ble ITAT, Mumbai Bench ‘A’ in the case of Harshad P. Doshi v. ACIT [2010] 37 SOT 9 (Mum) (URO) held as under :

“Both the Assessing Officer as well as the Commissioner (Appeals) had founded their orders on the premise that the expression ‘house’ means a residential accommodation only. Under the head ‘Chapter IV-C’ ‘Income from house property’ charge of tax is in respect of house property that may be residential house, a shop, an office building, factory premises, godown, warehouse, etc. The CBDT vide its clarification F.No. 205/3/2001/IT A-II dated 4.5.2001 has clarified that any project which has been approved by a local authority as a housing project should be considered adequate for the purpose of sections 10(23G) and 80-IB(10). During the course of assessment proceedings the assessee had furnished certificate of Municipal Corporation to the effect that the projects undertaken had been approved as ‘housing project.’ “

4.5 In view of the above discussions, it was held in the case cited above that there was no justification in reducing the deduction claimed by the assessee by the sum of Rs. 44,43,100/- …”

4.11 I am in agreement with the decision of my predecessor on this issue. Accordingly, in the present case also, the project, which has been approved by the local authority as a ‘housing project,’ should be considered adequate for the purpose of section 80-IB(10) following the CBDT’s circular dated 4.5.2001 and the decision of the ITAT, Mumbai given that all other conditions have been met. The Assessing Officer’s disclosure in his remand report regarding the non-payment of compounding fee for regularisation of the excess area constructed by the appellant for the disallowance of the deduction. 80-IB(10) would not in itself alter the decision in totality as what is relevant is that the conditions laid down in section 80-IB(10) in substance are met as discussed above. Moreover, it is for the BBMP to look into the violation, if any, of the approved plan. In my opinion, merely this discrepancy will not disentitle the appellant of the deduction otherwise allowable under section 80IB(10). I hold that on facts and circumstances of the case, as decided in the immediately preceding assessment year, the appellant is entitled to deduction under section 80IB(10). The Assessing Officer is, therefore, directed to allow deduction of the sum of Rs. 1,83,44,410/- as claimed by the appellant.”

Accordingly, the learned CIT(A) disposed the two appeals for Assessment Years 2007-08 and 2008-09 allowing the assessee the deduction claimed under section 80IB of the Act.

3. Aggrieved by the orders of the learned CIT(A), Revenue is in appeal before us. In identical grounds raised for both years under consideration, Revenue has contended as under :

“1.  The order of the CIT(A) is opposed to the facts of the case.

 2.  The learned CIT(A) has erred in directing the Assessing Officer to allow deduction of Rs.82,61,350 under section 80-IB(10) of the Income Tax Act, 1961.

 3.  The learned CIT(A) has failed to appreciate the fact that the assessee has not obtained the Occupancy Certificate from the local Municipal Authority which is one of the requisite for claiming deduction under section 80IB(10) of the Income Tax Act, 1961.

 4.  The learned CIT(A) has failed to notice that the assessee has deviated from the approved sanctioned plan which initially allowed him to construct built up area of 1,83,748 sq ft as against which the assessee has constructed an area of 2,26,851 sq ft which is in excess than approved sanctioned area.

 5.  The learned CIT(A) has failed to notice that the assessee has not fulfilled the conditions laid down by the CBDT for availing exemption/deduction under section 80IB (10) of the Income Tax Act, 1961.

 6.  For these and such other grounds that may be urged at the time of hearing the appeal, the order of the learned CIT(A) maybe set aside and that the order of the Assessing Officer may be restored.”

4. The grounds of appeal raised at S.Nos.1 and 6 are general in nature and therefore do not warrant any adjudication thereon.

5.1 The grounds of appeal at S. Nos. 2 to 5 all relate to the single issue of deduction under section 80IB of the Act claimed by the assessee and granted to it by the learned CIT(A) for both Assessment Years 2007-08 and 2008-09.

5.2 The learned Departmental Representative submitted that the learned CIT(A) erred in applying the decision of the Special Bench of the ITAT, Pune in the case of Brahma Associates v. Jt. CIT [2009] 30 SOT 155 (Pune) (SB), while granting relief to the assessee. It was contended by the learned Departmental Representative that while the approval of the plan for construction of a project is a primary requisite for commencing a housing project, the occupancy certificate from the local authority after completion is also a necessity. It was argued that when the construction in the housing project is not in accordance with the approved plan, the same becomes illegal and therefore the question of granting deduction under section 80IB of the Act does not arise. The learned Departmental Representative placed reliance on the decision of the Hon’ble High Court of Gujarat in the case of CIT v. Jolly Polymers [2012] 342 ITR 87 for the proposition that deduction cannot be given to an industrial undertaking without a factory licence. It was contended by the learned Departmental Representative that the learned CIT(A) erred in holding that non-payment of compounding fee would not alter the decision and therefore, he pleaded that the orders of the learned CIT(A) require to be set aside and those of the Assessing Officer restored.

5.3 Per contra, the learned counsel for the assessee supported the orders of the learned CIT(A) that the assessee has complied with all the conditions under section 80IB (10) of the Act and the mere fact that the assessee had constructed an area little larger than the sanctioned plan would not mean that the housing project constructed by the assessee is not approved.

5.4.1 We have considered the rival submissions and perused and carefully considered the material on record. From the findings recorded by the authorities below, it is seen that the assessee obtained a sanctioned plan on 31.10.2008 for construction of a basement of 92,565 sq ft and ground, first, second and third floors amounting to 1,83,748.40 sq. ft. It is also seen that the area constructed and sold as per the sale deeds, the Assessing Officer found that the built up area after construction was 1,91,436 sq. ft. and after increasing by the common area at 18.5% the built up area comes to 2,26,851.60 sq. ft. The basic crux of the dispute between the assessee and revenue revolves around this aspect of the matter.

5.4.2 It has been contended by the assessee before the authorities below that the approved plan mentions the built up area being plinth area of the flats and does not cover the balconies of each flat, corridors, lift area room, overhead tank, sump tank, security rooms, stair case and stair case head room, which area is in addition to the area arrived at from the sanctioned plan. What the assessee has conveyed in the sale deeds is the total area constructed including the aforesaid area, which is not reflected in the sanctioned plan. That apart, the contention of the assessee has been that the approval of the local authority for the housing project is secured and that is sufficient for grant of deduction under section 80IB of the Act. In this context, it is relevant to refer to the clarification of the CBDT in a letter vide F.No.205/3/2001/ITA-II dt.4.5.2001 addressed to the Maharashtra Chamber of Housing Industry, which has been reproduced by the learned CIT(A) at para 3.8 of her order for Assessment Year 2008-09 in which it has been stated that approval of any project as a housing project by the local authority would be adequate for the purposes of section 80IB of the Act. Although, the learned Departmental Representative has contended that aforesaid clarifications were given in the context of the commercial areas being constructed along with the housing project, we are of the view that the scope cannot be considered to be restricted to that circumstance alone. This is due to the fact that the definition of a housing project is not given under the Act and therefore the view of the CBDT that a housing project is one which is approved by a local authority requires to be given full effect to. Therefore, it cannot be construed that what the assessee has constructed is not a housing project.

5.4.3 Coming to the crucial question as to whether the housing project constructed by the assessee is an approved housing project or not, we do not find the view of the Assessing Officer that the project should be considered as unapproved because of excess construction put up by the assessee to be on sound footing. This is because the municipal authorities are vested with the power to look into the violations, if any, of the approved/sanctioned plan. The Assessing Officer while examining the issue of granting of deduction under section 80IB of the Act has to satisfy himself with regard to the following conditions mentioned in section 80IB (10) :

(a)  such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998;

(b)  the project is on the size of a plot of land, which has a minimum area of one acre;

(c)  the residential unit has a maximum built up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within 25 kms from the municipal limits of those cities OR one thousand five hundred sq. ft. at any other places.

(d)  the built up area of the shops and other commercial establishments included in the housing project does not exceed 5% of the aggregate built up area of the housing project OR 2000 sq. ft. whichever is less.

5.4.4 From an application of the aforesaid conditions to the facts of the assessee’s case, it becomes clear that the assessee has fulfilled the conditions mentioned in section 80IB of the Act. The judgment of the Hon’ble High Court of Gujarat in the case of Jolly Polymers (supra) relied upon by the learned Departmental Representative was rendered in a case where the assessee claimed deduction under section 80IB of the Act in respect of a factory without even obtaining a factory licence. In that context, the Hon’ble Court held that the commencement of the industrial activity must be lawful and any manufacturing activity which is fundamentally unlawful and is prohibited by law and against public policy would not be covered by the provisions. It has also been held by the Hon’ble High Court that mere breach of some technical provisions OR requirement would not ipso fact disqualify an assessee from claiming deduction under section 80IB of the Act. With due respect, we are of the view that the said judgment would therefore not be applicable to the facts of the assessee’s case as the assessee has obtained approval of the concerned local authorities for construction of a housing project. The fact that the compounding fee has not yet been paid would not mean that the housing project constructed by the assessee is unlawful and thus an violation of the provisions of section 80IB of the Act.

5.4.5 We are of the view that the learned CIT(A) has rightly placed reliance on the decisions of the Hon’ble Apex Court in the cases of Petron Engg. Construction (P.) Ltd. v. CBDT [1989] 175 ITR 523, Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412, IPCA Laboratories Ltd. v. Dy. CIT [2004] 266 ITR 521 to arrive at the view that the tax incentive by way of deduction 80IB of the Act is predominantly for the purpose of augmenting affordable dwelling and ought to be interpreted in that light. In this view of the matter, the incentive provisions must be construed in a manner which advances the object and intention of legislature. The fact that the assessee has obtained approval for the housing project cannot be lost sight of. As for the excess area constructed, as rightly held by the learned CIT(A), it is for the BBMP to look into the violations if any in the construction of the housing project. That however does not authorize the Assessing Officer to hold that the assessee has not got approval for the housing project OR that the conditions laid down in section 80IB (10) stated violated. In view of the facts and circumstances of the case as discussed above, we are of the considered opinion that the orders of the learned CIT(A) for both Assessment Years 2007-08 and 2008-09 granting the assessee deduction under section 80IB of the Act is in accordance with law and on a proper appreciation of the facts of the instant case of the assessee and therefore finding no need for interference therein, confirm the orders of the learned CIT(A).

6. In the result, the Revenue’s appeal are dismissed.