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Provisions of Section 80IB(10) do not mandate that eligibility for deduction is conditional upon obtaining completion certificate for residential project within four years from date of approval granted by Development Authority: HC

2019-TIOL-1944-HC-ALL-IT

IN THE HIGH COURT OF ALLAHABAD

Income Tax Appeal Nos. – 113 Of 2016
Income Tax Appeal Nos. – 114 Of 2016

PRINCIPAL COMMISSIONER OF INCOME TAX

Vs

SAHARA STATES GORAKHPUR

Bharati Sapru & Piyush Agrawal, JJ

Dated: August 19, 2019

Appellant Rep by: Manu Ghildyal, Manu Ghildyal
Respondent Rep by: 
Archi Agarwal, Abhinav Mehrotra

Income Tax – Section 80 IB(10)(a)(i)

Keywords – Change of opinion – Completion certificate – Eligibility for claiming deduction

The assessee, a real estate developer, filed its return for the relevant AY 2005-06 and claimed deduction u/s 80IB(10) regarding expenditures incurred for residential project development. The project was approved by the Development Authority on April 2003. The return was accepted after issuance of scrutiny assessment order. During the Ay 2006-07, the AO received information that the assessee had not obtained completion certificate within 4 years from the date of approval of the project by the appropriate authority. Based on this information, the re-assessment was done and expenditure as claimed were disallowed for violation of section 80IB(10)(a)(i). The CIT(A) confirmed the disallowance finding logic in the AO’s reasoning that since the assessee has lost the eligibility for claiming deduction u/s 80IB(10), the claim cannot be legally permitted. The ITAT, however, set aside the re-assessment order and directed the AO to restore the original assessment order with respect to deduction u/s 80IB(10).

Having heard the parties, the High Court held that,

Whether there is any condition u/s 80IB(10) that to become eligible for deduction, the completion certificate for the residential project must be availed within four years from the date of approval granted by the Development Authority – NO: HC

Whether re-assessment order passed by the lower Assessing Authorities based on an interpretation of section 80IB(10) which goes against the settled interpretation accepted by the Appellate Tribunal, is invalid – YES: HC

++ there are only three conditions for the eligibility of the deduction u/s 80- IB(10) and in the said provision there is no such condition that the project in question should be completed and obtained completion certificate with the period of four years. The Tribunal has recorded a finding of fact that there was no such requirement under the Act for completing the project before a particular date and would have obtained the completion certificate from the Local Authority who have approved the project. The projects which were approved prior to April 01, 2005, the applicability of Section 80IB(10)(d) is not permitted. In other words, Section 80(IB)(10)(d) will be applicable prospectively and not retrospectively. Once it has come on record by fact finding Authority also that there is no such condition to have completion certificate within four years from the local authority granting approval of the projects in question, the reassessment proceedings taken against the assessee are bad and against the settled principle of law. Therefore, the Tribunal has rightly set aside the re-assessment proceeding.

Revenue’s appeals dismissed

Case followed:

CIT vs. Sarkar Builders – 2015-TIOL-123-SC-IT

JUDGEMENT

Per: Piyush Agrawal:

The present appeals have been filed against the common order dated 7.12.2015 passed in ITA No. 04 & C15/Alld 2012 for the Assessment Year 2005-06 & 2007-08 passed by the Income Tax Appellate Tribunal, Allahabad, Bench Allahabad.

The aforesaid appeals on 3.5.2016 was firstly admitted on question No. B, which reads as under:

“(B) Whether on the facts and the circumstances of the case, the order of the Income Tax Appellate Tribunal was correct in Law holding that Section 80- IB(10) which is substituted w.e.f. 1.4.2005 is not applicable to the project approved before 01.04.2004. The provision of Section 80(IB)(10)(a)(i) is as such applicable for the all projects which has been approved by the local authority before 1.4.2004.”

Thereafter, on 11.1.2017 this Hon’ble Court accepted and admitted one more question of law mentioned as ‘C’ in memo of appeals, which reads as under:

“Whether on the facts and in the circumstances of the case, the order of the Income Tax Appellate Tribunal was correct in law holding that there is change of opinion by the Assessing Officer. As such, there is no change of opinion as information regarding completion of project has been collected by the Assessing Officer is a new information and Assessing Officer had correctly applied the provision of Section 147/148 for reopening the assessment of A.Y. 2007- 08.”

In both the appeals common facts and question of law are involved, as well as both the parties are agreed for disposal of the appeals by a common order.

The facts of the case are that the respondent-assessee (hereinafter referred to as ‘assessee’) is engaged in the business of development of land, construction of house and its sales thereof. For the purpose of factual background the facts of the assessment year 2005-06 has been taken up.

The assessee filed its return showing income of Rs. 59,37,200/- and claimed the deduction under Section 80IB(10) of the Income Tax Act (hereinafter referred to as ‘the Act’).

The case of the assessee was selected under the scrutiny and subsequently on 24.12.2007, assessment order was passed on the total income of Rs. 61,91,134/-, then exemption as claimed by the assessee under Section 80-IB(10) of the Act was allowed.

Thereafter, the reassessment proceeding were initiated on the basis of some information received during the assessment proceeding for the year 2006-07 that the assessee has not obtained completion certificate within four year from Local Authority who have approved the project and therefore, there was a violation of the provision of Section 80-IB(10)(a)(i) of the Act.

The assessing authority was of the opinion that since the assessee has lost the eligibility for claiming the deduction under Section 80IB(10) of the Act. Therefore, the claim cannot be legally permitted, the proceeding for reassessment were initiated for both assessment years.

The notice dated 5.6.2009 was issued under Section 148 of the Act which was served upon the assessee on 8.6.2009. The assessee submitted his return under protest on 8.7.2007 and further made a request for supply the copy of reasons recorded for reopen the completed assessment. The assessee has filed his objection on 27.10.2010 pointing out that the reassessment proceedings have been initiated on the basis of change of opinion and the assumption of jurisdiction has been made without any tangible fresh material /information on record which is permissible under the provision of Section 147 of the Act. Notice under Section 143(2) of the Act was issued on 10.6.2010 and thereafter notice under Section 142 (1) along with questionnaire were issued on 18.6.2010 and the same was served upon the assessee on 24.6.2010.

Assessing authority by its re-assessment order dated 27.10.2010 has rejected the claim of exemption under Section 80IB(10) of the Act to the Tune of Rs. 58,44,230/-.

Again the aforesaid order, the assessee preferred an appeal before Commissioner of Income Tax (appeals), Lucknow who vide its order dated 23rd September, 2011 partly allowed the appeal but has confirmed the rejection of claim under Section 80IB(10) of the Act.

Feeling aggrieved by the said order the assessee preferred an appeal before Income Tax appellate Tribunal who by its impugned order has allowed the appeal and has set aside the re-assessment proceeding and directed the assessing authority to allow the claim of deduction to the assessee under Section 80IB(10) of the Act.

Feeling aggrieved by the impugned order the revenue has preferred the present appeals.

Heard Mr. Manu Ghildyal, learned counsel for the Revenue and Mr. Archit Mehrotra, learned counsel for the assessee.

It has been argued on behalf of the Revenue that Section 80IB(10) of the Act has been substituted by Finance Act, 2004 and a subsection (d) in Section 80IB(10) of the Act has been inserted which operates retrospectively and therefore the said amendment is applicable in the case of the respondent even though whose projects have been approved before 1.4.2004 and therefore the impugned order passed by the Tribunal are not justifiable which deserves to be set aside.

It was further argued that since there is no change of opinion, Tribunal was not justified in allowing the appeal of the assessee and directing the assessing authority to grant the benefit of Section 80IB(10) of the Act to the assessee. The reassessment proceeding was rightly initiated.

The counsel for the assessee has vehemently opposed the contention of the Revenue and has argued that the Tribunal has rightly passed the impugned order and has further submitted that the Tribunal was justified in relying upon the judgment of the Bombay High Court in the case of CIT vs. Brahma Associates reported in 333 ITR 289 (Bombay) = 2011-TIOL-125-HC-MUM-IT wherein the Bombay High Court has specifically held that the amendment made in Section 80IB(10)(d) of the Act is prospectively and not retrospectively.

It was further argued that the Apex Court in the case of CIT vs. Sarkar Builders reported in [2015] 375 ITR 392(SC) = 2015-TIOL-123-SC-IT has also approved the judgment of the Bombay High Court.

We have perused the record of the case and finds that the assessee projects were approved by the respective Development Authority on April 2003 for construction of 7 types of residential units comprising all 429 units out of which 120 units were sold against Income of Rs. 83,74,72028/- and net profit of Rs. 1,17,81,384/- has been declared after debating expenditure of Rs. 82,56,90,664/- on account of land and development, construction & Development, personnel & site running expenses and selling and distribution expenses etc.

The assessee has claimed deduction under Section 80-IB(10) of the Act of Rs. 58,44,230/- on the net profit of Rs. 1,17,81,384/-.

The record reveals that reassessment proceedings have been initiated on the basis of observation made by the assessing officer during the assessment proceeding for the assessment year 2006-07 that the respondent has not obtained completion certificate within four years from the local authority and has not fulfilling the condition as stipulated under Section 80IB(10)(d) of the Act and therefore the assessee has lost eligibility of claim deduction under Section 80-IB(10) of the Act in the disputed assessment years.

The Section 80-IB(10) of the Act for the relevant assessment year is quoted below:

“Section 80-IB(10) prior to the amendment of 1.4.2005:

“(10) amount of profits in case of an undertaking developing and building housing projects approved before the 3 I” day of March, 2005, by a local authority, shall be hundred percent, of the profits derived in any previous year relevant to any assessment year from such housing project if,-

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

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

(c) the residential unit has a minimum built up area of one thousand square feet where such residential unit is situated within the cites of Delhi or Mumbai or within twenty-five kilometers from the municipal limits of these cities and one thousand and five hundred square feet at any other place.”

From perusal of the said section which provides that only three conditions for the eligibility of the deduction under Section 80- IB(10) of the Act and in the said provision there is no such condition that the project in question should be completed and obtained completion certificate with the period of four years.

In the impugned order the Tribunal has recorded a finding of fact that there was no such requirement under the Act for completing the project before a particular date and would have obtained the completion certificate from the Local Authority who have approved the project.

The Bombay High Court in the case of CIT vs. Brahma Associates (Supra) has observed (see page 399) as under:

” Held that clause (d) inserted to Section 80-IB(10) with effect from April 1, 2005, is prospective and not retrospective and hence could not be applied were on the profits derived from the housing projects under Section 80-IB(10) were on the profits derived from the housing project approved by the local authority as a whole, the Tribunal not justified in restricting the Section 80-IB (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 80-IB (10) deduction to a part of the project, the findings of the Tribunal in that behalf could not be disturbed.”

Subsequently, against the judgement of the Bombay High Court the revenue preferred the SLP before the Hon’ble Supreme Court being SLP (C)-No. 24330 of 2011 and others) the Hon’ble Supreme Court by its judgement and order dated 15th May, 2015 has dismissed the appeal of the Revenue and has confirmed the order and judgement passed by the Bombay High Court.

Hon’ble Supreme Court in the case of CIT vs. Sarkar Builders (supra) while considering the bunch of cases has observed as under (see page 399):

“We would also like to point out that following this judgment of the Bombay High Court, or independently, other High Courts had also taken similar view. Against the aforesaid judgments, special leave petitions were filed by the Revenue in this Court. All these SLPs have been disposed of by this Court vide order dated 29.04.2015, we would like to reproduce the said order in entirety hereunder:

“All these special leave petitions are filed by the Revenue/ Department of Income tax against the judgments rendered by various High Courts deciding identical issue which pertains to the deduction under Section 80IB(10) of the Income Tax Act, as applicable prior to 01.04.2005. We may mention at the outset that all the High Courts have taken identical view in all these cases holding that the deduction under the aforesaid provision would be admissible to a “housing project”.

All the assessees had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects. On that basis, they claimed deduction under Section 80IB(10) of the Act. This provision as it stood at that time, i.e., prior to 01.04.2005 reads as under: –

Section 80IB(10) [as it stood prior to 01.04.2005] “(10) The amount of profits in case of an undertaking developing and building housing projects approved before the 31st day of March, 2005 by a local authority, shall be hundred per cent of the profits derived in any previous year relevant to any assessment year from such housing project if,

(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 crore; and

(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 twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place.” However, the income tax authorities rejected the claim of deduction on the ground that the projects were not “housing project” inasmuch as some commercial activity was also undertaken in those projects. This contention of the Revenue is not accepted by the income tax Appellate Tribunal as well as the High Court in the impugned judgment. The High Court interpreted the expression “housing project” by giving grammatical meaning thereto as housing project is not defined under the Income Tax Act insofar as the aforesaid provision is concerned. Since sub-section (10) of Section 80IB very categorically mentioned that such a project which is undertaken as housing project is approved by a local authority, once the project is approved by the local authority it is to be treated as the housing project. We may also point out that the High Court had made observations in the context of Development Control Regulations (hereinafter referred to as ‘DCRs’ in short) under which the local authority sanctions the housing projects and noted that in these DCRs itself, an element of commercial activity is provided but the total project is still treated as housing project. On the basis of this discussion, after modifying some of the directions given by the ITAT, the conclusions which are arrived at by the High Court are as follows: –

“30. In the result, the questions raised in the appeal are answered thus:-

a) Upto 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

b) ……

c) …..

d) ……

(See page 401)

e) Clasue (d) inserted to section 80-IB(10) with effect from April 1, 2005, is prospective and not retrospective and, hence, cannot be applied for the period prior to 2005.

We are in agreement with the aforesaid answer given by the High Court to the various issues.”

(See page 402)

“……………….In the aforesaid scenario, we revert back to the question that is to be answered. We have already pointed out that the parties are ad idem that the amendment is prospective in nature and, therefore, it operates from 01.04.2005. We have also mentioned that in the instant appeals, all these assessees had got the housing projects sanctioned prior to 01.04.2005 and the construction of the said housing project also started before 01.04.2005. All other conditions mentioned namely the date by which approval was to be given and the dates by which the projects were to be completed as on the date when the project was sanctioned, are also met by the assessees…….”

(See page 404)

“…… The Revenue had argued that clause (d) inserted with effect from 01.04.2005 should be applied retrospectively, which argument was repelled by the High Court. Therefore, for better understanding, we would like to begin our discussion with the meaning given to ‘housing project’ along with the issue of retrospectivity of clause (d), as raised by the Revenue, which was dealt with by the High Court and repelled. That portion of the discussion contained in the High Court judgment, which has some bearing on the issue at hand, runs as under: “21. Thus, on the date on which the legislature introduced 100% deduction 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 houding 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.

22. It is not in dispute that where a project is approved as a housing project without or with commercial user to the extent permitted under the Rules/Regulations, then, deduction under Section 80IB(10) would be allowable. In other words, if a project could be approved as a housing project having residential units with permissible commercial user, then it is not open to the income tax authorities to contend that the expression ‘housing project’ in Section 80IB(10) is applicable to projects having only residential units.

23. Once it is held that the local authorities could approve a project to be housing project without or with the commercial user to the extent permitted under the DC Rules, then the project approved with the permissible commercial user would be eligible for Section 80IB(10) deduction irrespective of the fact that the project is approved as ‘housing project’ or approved as ‘residential plus commercial’. In other words, 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’.

24. The fact that the deduction under Section 80IB(10) prior to 1.4.2005 was allowable on the profits derived from the housing projects constructed during the specified period, on a specified size of the plot with residential units of the specified size, it cannot be inferred that the deduction under Section 80IB(10) was allowable to housing projects having residential units only, because, restriction on the size of the residential unit is with a view to make available large number of affordable houses to the common man and not with a view to deny commercial user in residential buildings. In other words, the restriction under Section 80IB(10) regarding the size of the residential unit would in no way curtail the powers of the local authority to approve a project with commercial user to the extent permitted under the DC Rules/Regulations. Therefore, the argument of the Revenue that the restriction on the size of the residential unit in Section 80IB(10) as it stood prior to 1.4.2005 is suggestive of the fact that the deduction is restricted to housing projects approved for residential units only cannot be accepted.

25. The above conclusion is further fortified by Clause (d) to Section 80IB(10) inserted with effect from 1.4.2005. 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. Thus, by inserting clause (d) to Section 80IB(10) the legislature has made it clear that though the housing projects approved by the local authorities with commercial user to the extent permissible under the DC Rules/Regulation were entitled to Section 80IB(10) deduction, with effect from 1.4.2005 such deduction would be subject to the restriction set out in clause (d) of Section 80IB(10). Therefore, the argument of the revenue that with effect from 1.4.2005 the legislature for the first time allowed Section 80IB(10) deduction to housing projects having commercial user cannot be accepted.

29. Lastly, the argument of the revenue that Section 80IB(10) as amended by inserting clause (d) with effect from 1.4.2005 should be applied retrospectively is also without any merit, because, firstly, clause (d) specifically inserted with effect from 1.4.2005, and therefore, that clause cannot be applied for the period prior to 1.4.2005. Secondly, clause (d) seeks to deny Section 80IB(10) deduction to projects having commercial user beyond the limit prescribed under clause (d), even though such commercial user is approved by the local authority. Therefore, the restriction imposed under the Act for the first time with effect from 1.4.2005 cannot be applied retrospectively. Thirdly, it is not open to the revenue to contend on the one hand that Section 80IB(10) as stood prior to 1.4.2005 did not permit commercial user in housing projects and on the other hand contend that the restriction on commercial user introduced with effect from 1.4.2005 should be applied retrospectively. The argument of the revenue is mutually contradictory and hence liable to be rejected. Thus, in our opinion, the Tribunal was justified in holding that clause (d) inserted to Section 80IB(10) with effect from 1.4.2005 is prospective and not retrospective and hence cannot be applied to the period prior to 1.4.2005.”

The issues dealt with from paras 21 to 25 by the High Court already stands approved by this Court. In para 29, the High Court has held that clause. (d) has prospective operation, viz., with effect from 01.04.2005, and this legal position is not disputed by the Revenue before us. What follows from the above is that prior to 01.04.2005, these developers/assessees who had got their projects sanctioned from the local authorities as ‘housing projects’, even with commercial user, though limited to the extent permitted under the DC Rules, were convinced that they would be getting the benefit of 100% deduction of their income from such projects under Section 80IB of the Act…”

In view of the observation of the Hon’ble Apex Court, we are of the opinion that the projects which were approved prior to 1.4.2005 the applicability of Section 80IB(10) (d), of the Act is not permitted. In other words, Section 80(IB)(10)(d) of the Act will be applicable prospectively and not retrospectively.

Once it has come on record by fact finding Authority also that there is no such condition to have completion certificate within four years from the local authority granting approval of the projects in question, the reassessment proceedings taken against the assessee are bad and against the settled principle of law.

Therefore, the Tribunal has rightly set aside the re-assessment proceeding and directed the assessing authority to grant benefit of Section 80IB(10) of the Act to the assessee.

In view of the above facts and circumstances of the case the question of law are answered in favour of assessee and against the Revenue.

The appeals are, accordingly, answered. Both the appeals fail and are therefore dismissed.

Copy of this order be placed in the connected Income Tax Appeal No. 114 of 2016.

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