2012 (12) TMI 84 - HC - Income Tax

Developers Can Claim Section 80IB(10) Deductions Without Land Ownership, Flats Over 1500 Sq.Ft. Excluded

The HC held that an assessee need not be the landowner to claim deduction under Section 80IB(10) of the Income Tax Act, affirming that developers without ... Eligibility of developer Or builder, for claiming deduction u/s 80IB - Ownership vs Builder - developing and building housing projects - Compliance with Completion Certificate Requirement u/s 80IB(10)(a) - prescribed time limit as per Section 80IB(10)(a) - Held that:- Fact that Assessee was not the owner would not disentitle assessee from claiming relief u/s 80IB(10) of the Income Tax Act. As decided in Commissioner of Income-Tax V. Radhe Developers [2011 (12) TMI 248 - GUJARAT HIGH COURT], Gujarat High Court considered the question on ownership as a condition for grant of deduction under Section 80IB(10) in depth and accepted the case of an assessee similarly placed. It held that the provisions nowhere require that developers who are the owner of the land alone would be entitled for grant of deduction under Section 80IB(10). Therefore, assessees were entitled to the benefit u/s 80IB(10) even where the title of the lands had not passed on to the assessees and in some cases, the development permissions may also have been obtained in the name of the original land owners – Decided against the Revenue. Whether Tribunal was right in holding that the provisions of Sec 80IB(10) provide for partial deduction to housing project with respect to residential flats with built up area of less than 1500 sq.ft. where the same project contains flats with built up area exceeding 1500 sq.ft - held that:- Assessee was not entitled to relief in respect of those flats, which exceeded 1500 sq.ft. it is evident that what the assessee had undertaken is not a mere construction, but developing and constructing of a project, which qualifies for deduction u/s 80IB of the Income Tax Act. Deduction contemplated therein is oriented towards the project and not with reference to an assessee. It is no doubt true that the project has to be done by the assessee, but then, when the deduction is specific enough as regards the particular activity, administrative process, is purely at the hands of the Statutory Authority concerned, over which, the assessee could not have any control, the Explanation cannot, in any manner, have a negative effect on a factual aspect of the matter, namely, completion of the construction. Thus, in a case like this, where, the local authority, being the Corporation, had already certified about the completion of the project as per the approved plan, the fact that one of the Authorities, namely, Chennai Metropolitan Development Authority had issued a letter only on 13.6.2008, per se, cannot negative the assessee's claim for deduction. In the light of the above-said facts, Revenue's appeal is rejected. Though the assessee had complied with the extent of built-up area as per clause (c) and the assessee is entitled to have the benefit of deduction under Section 80IB of the Income Tax Act, since the Tribunal had remanded the portion of the built-up area for verification before the Assessing Officer and a factual enquiry has to be made thereon as to whether the built-up area is in fact 1500 sq.ft. or more than that In the circumstances, we confirm the order of the Tribunal on the remand portion. when the local authority, being part of Chennai Metropolitan Development Authority and also the approving authority, thus having certified about the completion, we do not find any justifiable ground to invoke Explanation (2) to sub-section (10) of Section 80IB of the Income Tax Act for the purpose of negativing the claim. In any event, going by the fact that the Explanation cannot have a control on the substantive provision, as a matter of construction, we agree with the assessee's contention and we have no hesitation in confirming the order of the Tribunal. 1. ISSUES PRESENTED and CONSIDERED 1. Whether a developer or builder, who is not the owner of the land or property, is eligible to claim deduction under Section 80IB(10) of the Income Tax Act for developing and building housing projects. 2. Whether the assessee complied with the condition of submission of the completion certificate from the local authority within the prescribed time limit as per Section 80IB(10)(a) of the Income Tax Act. 3. Whether the deduction under Section 80IB(10) is available for residential flats with built-up area not exceeding 1500 sq.ft. in a housing project that also contains flats exceeding 1500 sq.ft. 4. Whether the provisions of Section 80IB(10) allow for partial or proportionate deduction in a housing project containing some flats exceeding the specified built-up area limit. 5. Whether the open terrace area attached to flats should be included in the built-up area for the purpose of Section 80IB(10)(c) of the Income Tax Act. 6. Whether the Tribunal erred in remanding the issue of violation of built-up area limits to the Assessing Officer for factual verification. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Eligibility of Non-Owner Developer/Builder to Claim Deduction under Section 80IB(10) - Relevant Legal Framework and Precedents: Section 80IB(10) provides deduction for an undertaking developing and building housing projects approved by local authorities. The provision does not explicitly require the claimant to be the owner of the land. The Explanation introduced by Finance (No.2) Act, 2009, effective from 01.04.2010, excludes mere contractors without risk from claiming deduction. - Court's Interpretation and Reasoning: The Court and Tribunal emphasized that ownership of land is not a condition precedent for claiming deduction under Section 80IB(10). The risk element in development and construction is determinative. The assessee, though not the owner, undertook substantial risk and responsibility, including investment in materials and labour, collection of sale consideration from purchasers, and payment to the owner for the undivided share of land. The agreement terms showed that the owner was entitled only to the value of the undivided share of land, while the builder bore construction risk and uncertainty of realization. - Key Evidence and Findings: The agreement between the assessee and the owner established the assessee's role as developer/builder with risk and control over construction and sale. The assessee entered into builder agreements with purchasers and bore risk of unsold flats. The Memorandum explaining Finance Bill, 2009, and judicial precedents supported the view that risk and business activity, not ownership, determine eligibility. - Application of Law to Facts: The assessee's role went beyond mere contracting, qualifying as developer/builder entitled to deduction. The Revenue's contention that the assessee was merely a contractor was rejected based on factual findings and statutory interpretation. - Treatment of Competing Arguments: The Revenue argued that deduction is only available to owners or those with ownership interest. The Court rejected this, holding that the statute's language and legislative intent focus on the business activity and risk, not ownership. - Conclusion: The Tribunal and Court held that a developer or builder not owning the land is eligible to claim deduction under Section 80IB(10) if the conditions of risk and business activity are met. Issue 2: Compliance with Completion Certificate Requirement under Section 80IB(10)(a) - Relevant Legal Framework: Section 80IB(10)(a) requires completion of construction within prescribed timelines and submission of completion certificate issued by the local authority. Explanation (2) to sub-section (10) clarifies the date of completion as the date of issuance of such certificate. - Court's Interpretation and Reasoning: The Court found that the local authority competent to issue completion certificates was the Chennai Corporation, a constituent local authority under the Tamil Nadu Town and Country Planning Act. The Chennai Corporation issued the completion certificate on 28.12.2007, before the prescribed deadline of 31.3.2008. The Chennai Metropolitan Development Authority's later issuance of completion certificate on 13.6.2008 did not negate the earlier certificate by the local authority. - Key Evidence and Findings: The Chennai Metropolitan Development Authority's sanction letter explicitly required approval by the local authority (Chennai Corporation). The Corporation's certificate was undisputed and based on inspection confirming compliance with sanctioned plans and building by-laws. - Application of Law to Facts: The Court held that the completion certificate from the local authority satisfied the statutory requirement. The Explanation cannot override substantive facts and the statutory role of the local authority. - Treatment of Competing Arguments: The Revenue relied on the later completion certificate issued by the Chennai Metropolitan Development Authority and Explanation (2) to deny deduction. The Court rejected this, emphasizing the primacy of the local authority's certificate and the practical realities of administrative delays beyond the assessee's control. - Conclusion: The assessee complied with the completion certificate condition within the prescribed time, entitling it to claim deduction under Section 80IB(10)(a). Issue 3 and 4: Deduction for Flats with Built-up Area Exceeding 1500 sq.ft. and Proportionate Relief - Relevant Legal Framework: Section 80IB(10)(c) limits residential units' built-up area to 1500 sq.ft. for eligibility. The provision does not explicitly prescribe a percentage or cap for flats exceeding this limit within a project. - Court's Interpretation and Reasoning: The Tribunal majority and the third Member held that deduction is available on a proportionate basis for flats complying with the built-up area limit. Flats exceeding 1500 sq.ft. are excluded from deduction, but their presence does not automatically disqualify the entire project. The Accountant Member suggested a 10% ceiling for flats exceeding 1500 sq.ft., but the Judicial Member dissented, holding that any violation disqualifies the entire project. The third Member rejected the 10% ceiling as not prescribed by law and favored proportionate relief. - Key Evidence and Findings: The Tribunal relied on precedents including decisions from Calcutta High Court and Bombay Tribunal/Special Bench, which supported proportionate relief and rejected arbitrary ceilings. The factual data showed some flats exceeded 1500 sq.ft., but the majority view allowed deduction on flats within the limit. - Application of Law to Facts: The Court upheld the Tribunal's majority view granting proportionate deduction for flats within the prescribed built-up area, rejecting the Revenue's contention for total disqualification. - Treatment of Competing Arguments: The Revenue argued for denial of deduction for the entire project if any flat violated the built-up area limit. The Court found no statutory basis for such total denial and favored a reading consistent with legislative intent and precedent. - Conclusion: Deduction under Section 80IB(10) is available proportionately for flats complying with built-up area limits, and flats exceeding 1500 sq.ft. are excluded from deduction without disqualifying the entire project. Issue 5: Inclusion of Open Terrace Area in Built-up Area - Relevant Legal Framework: Section 80IB(10)(c) defines built-up area limits but does not explicitly address open terrace areas. The question is whether private open terraces attached to flats constitute built-up area. - Court's Interpretation and Reasoning: The Tribunal and the Court held that open terrace areas adjoining the dwelling unit and used as private terraces should be considered part of the built-up area for the purposes of Section 80IB(10). This interpretation aligns with the purpose of the provision and prevents manipulation of area calculations. - Key Evidence and Findings: The facts showed terraces were private and directly accessible from flats. The Court referred to its earlier decisions supporting inclusion of such terraces in built-up area. - Application of Law to Facts: Inclusion of terrace area was upheld, affecting calculation of compliance with built-up area limits. - Treatment of Competing Arguments: The assessee challenged the inclusion, but the Court held that the statutory purpose and prior rulings support inclusion. - Conclusion: Private open terrace areas adjoining flats are to be included in the built-up area for Section 80IB(10) compliance. Issue 6: Remand of Built-up Area Verification to Assessing Officer - Relevant Legal Framework: Factual verification of compliance with built-up area limits is within the Assessing Officer's jurisdiction. - Court's Interpretation and Reasoning: The Court found no error in the Tribunal remanding the issue of whether flats exceeded the 1500 sq.ft. limit to the Assessing Officer for factual determination. This is consistent with procedural fairness and fact-finding norms. - Key Evidence and Findings: The Tribunal's remand was to verify measurements and compliance with Section 80IB(10)(c). - Application of Law to Facts: The Court confirmed the remand order and directed Assessing Officer to consider the Court's rulings on terrace inclusion and proportionate relief while making findings. - Treatment of Competing Arguments: The Revenue initially objected but did not press the argument after Court's observations. - Conclusion: The remand for factual verification was proper and consistent with statutory and procedural requirements.