Can deduction under section 80IB(10) be claimed by a housing project comprising of residential units as well as commercial establishments?

Section 80-IB of the Income Tax Act provides deduction in respect of Profit and Gains from Industrial Undertakings other than Infrastructure Development Undertakings. According to the said section, the deduction in case of an assessee whose gross total income includes any profits and gains from any business of an industrial undertaking, shall be of the following amount:

• In case of an industrial undertaking located in an industrial Backward State:
  1. For the initial 5 assessment years – 100% of the profit and gains derived from such undertaking and
  2. Thereafter, for the next 5 assessment years – 25% of the profits and gains derived from such industrial undertaking. (30% in case of a company) (25% for 7 assessment years in case of co-operative society)
• In case of an industrial undertaking located in an industrial Backward district:
  1. For the initial 5 assessment years – 100% of the profit and gains derived from such undertaking and
  2. Thereafter, for the next 5 assessment years – 25% of the profits and gains derived from such industrial undertaking. (30% in case of a company) (25% for 7 assessment years in case of co-operative society)

The deduction is available to an Industrial Undertaking, which fulfills all the following conditions:

• It is not formed by splitting up, or the reconstruction of a business in existence. If re-construction takes place in the circumstances and period given in section 33B, then deduction is available.
• It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. [Note: The deduction under section 80IB shall be available if the new undertaking is started in an old building or if old furniture and fittings are used]

The deduction under section 80-IB shall be:

• 100% of the profits for a period of 7 consecutive Assessment Years
• Derived from an undertaking which is engaged in commercial production of natural gas in blocks licensed under the New Exploration Licensing Policy (NELP)
• And which begins commercial production of natural gas
• The deduction shall commence from the AY relevant to the previous year in which the undertaking commences commercial production of natural gas.

Let us refer to the case of CIT v. Veena Developers (2015), where the issue under consideration was whether deduction under section 80IB(10) as in force prior to the amendment by the Finance Act, 2004 could be claimed by a housing project comprising of residential units as well as commercial establishments or not.

Facts of the Case:

• Assessee had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects.
• Assessee claimed deduction under section 80IB(10) of the Income-tax Act, 1961 as per the provisions in force prior to 1st April 2005 which granted deduction of 100% of profits derived by an undertaking developing and building housing projects approved by a local authority if it satisfied the requisite conditions mentioned therein.
• Assessing officer denied the deduction on the ground that the projects were not “housing project” as some commercial activity was also undertaken in those projects.
• The Tribunal allowed the assessee’s claim.
• The High Court (HC) upheld the decision of the Tribunal.

What were the provisions of section 80IB(10) prior to 1st April 2005?

The profits in case of an undertaking developing and building housing projects approved before the 31^st of March, 2005 by a local authority, shall be 100% of the profits derived in any previous year relevant to any assessment year from such housing project if:

• such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998
• the project is on the size of a plot of land which has a minimum area of one acre; and
• 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 kilometres from the municipal limits of these cities and 1500 square feet at any other place.

Observations of Supreme Court (SC)

• HC interpreted the expression “housing project” by giving grammatical meaning thereto as housing project was not defined under the Income Tax Act insofar as the aforesaid provision was concerned.
• Since sub-section (10) of Section 80IB very categorically mentioned that such a project which was undertaken as housing project was approved by a local authority, once the project was approved by the local authority it was to be treated as the housing project.
• SC also pointed out that the HC had made observations in the context of Development Control Regulations (DCRs) under which the local authority sanctioned the housing projects and noted that in these DCRs itself, an element of commercial activity was provided but the total project was still treated as housing project.
• SC was in agreement with the conclusion of the HC which were as follows:
  1. Up to 31/3/2005 (subject to fulfilling other conditions), deduction under Section 80IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under DC Rules/ Regulations framed by the respective local authority.
  2. In such a case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/ Regulation, the deduction under Section 80IB(10) up to 31/3/2005 would be allowable irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’.
  3. In the absence of any provisions under the Income Tax Act, the Tribunal was not justified in holding that up to 31/3/2005 deduction under Section 80IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user up to 10% of the total built-up area of the plot.
  4. Since deductions under Section 80IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting Section 80IB(10) deduction only to a part of the project. However, in the present case, since the assessee has accepted the decision of the Tribunal in allowing Section 80IB(10) deduction to a part of the project, we do not disturb the findings of the Tribunal in that behalf.
  5. Clause (d) inserted to Section 80IB(10) with effect from 1/4/2005 is prospective and not retrospective and hence cannot be applied for the period prior to 1/4/2005.

Supreme Court thus upheld the decision of the High Court which had taken the view that the assessee was eligible for deduction under section 80-IB of the Act.