Finance Act 2004 Amendment Held Prospective; Pro Rata Deduction for Residential Units Directed u/s 80-IB(10.

The ITAT concluded that the amendment by the Finance (No. 2) Act, 2004, was prospective, not affecting the assessment years 2003-04 and 2004-05. It directed the AO to grant a pro rata deduction under Section 80-IB(10) for residential units, excluding the commercial area. The assessee's appeals were partly allowed.

---

---

Issues Involved:
1. Eligibility for deduction under Section 80-IB(10) of the Income Tax Act, 1961.
2. Applicability of the amendment brought by the Finance (No. 2) Act, 2004, w.e.f. 1st April 2005, prospectively or retrospectively.
3. Pro rata allowance of deduction under Section 80-IB(10) for residential units.

Detailed Analysis:

1. Eligibility for Deduction under Section 80-IB(10):
The primary issue in these appeals was whether the assessee was eligible for deduction under Section 80-IB(10) of the Income Tax Act, 1961. The assessee had claimed this deduction for two projects, "Raagamalika Phase-I" and "Raagamalika Phase-II." A survey under Section 133A revealed that the assessee had developed three projects, including Raagamalika-I, Raagamalika-II, and Raagamalika-III. The Assessing Officer (AO) found that the commercial area constructed in Raagamalika-I was 9,790 sq. ft., which exceeded the permissible limit as per the amended provisions of Section 80-IB(10). The AO disallowed the deduction, stating that the commercial area exceeded the permitted limit and was sold to persons related to the managing director of the assessee company.

2. Applicability of the Amendment by Finance (No. 2) Act, 2004:
The assessee argued that the amendment brought by the Finance (No. 2) Act, 2004, which imposed restrictions on the commercial area in housing projects, was applicable only from 1st April 2005 and should not apply retrospectively to the assessment years 2003-04 and 2004-05. The Tribunal agreed with the assessee, stating that the amendment was clearly intended to be prospective, as indicated by the Notes on Clauses and the memorandum explaining the provisions. The Tribunal cited the Supreme Court's decision in R. Rajagopal Reddy vs. Padmini Chandrasekharan, which held that amendments creating new rights or obligations are not retrospective unless explicitly stated.

3. Pro Rata Allowance of Deduction:
The Tribunal considered the assessee's alternative plea for a pro rata allowance of deduction under Section 80-IB(10) for the residential units. The Tribunal noted that the assessee had complied with the three conditions laid down in Section 80-IB(10) for residential units, and the only dispute was the extent of the commercial area. The Tribunal directed the AO to allow the deduction on a pro rata basis for the residential units, excluding the commercial area, which constituted 9.31% of the total constructed area.

Conclusion:
The Tribunal concluded that the amendment brought by the Finance (No. 2) Act, 2004, was prospective and not applicable to the assessment years 2003-04 and 2004-05. The Tribunal directed the AO to allow the deduction under Section 80-IB(10) on a pro rata basis for the residential units, excluding the commercial area. The appeals filed by the assessee were partly allowed.

---