2025 (6) TMI 241 - HC - Income Tax

Eligibility for deduction u/s 80IB - inclusion/exclusion of terrace / balcony in the form of open to sky or portico / porch area without walls while computing the built-up area for the purpose of determining the eligibility for deduction - HELD THAT - If we take the literal meaning of built-up area as is defined Clause (14) (a) of Section 80-IB a built-up area includes balcony and projection. If on the inclusion of balcony and projections if any and if the total built-up area exceeds 1, 500 sq.ft. the assessee would not be entitled for deduction Section 80-IB of the Act. Admittedly in the case of the assessee if it is only a projection or a balcony there can be no doubt that under the definition of built-up area projections and balconies are also included and by no stretch of imagination those can be excluded from computation of built-up area. Nonetheless from the drawing of the construction which is available along with the Assessment Order which is marked as Annexure-I the portion which is being sought to be excluded is an open terrace and a portico. Both open terrace and an open portico has nowhere been mentioned to be a part of the built-up area. In the said circumstances relying upon the decision of Amaltas Associates 2016 (10) TMI 359 - GUJARAT HIGH COURT a balcony certainly would not be excluded treating it as open terrace . So also an open terrace can never be termed to be a balcony or a projection. Likewise an open portico in front of the residential unit which is otherwise on the outside part of the residential unit also cannot be brought within the purview of an inner measurement of a residential unit. Whether excluding the open terrace and the area of the portico and whether the built-up is exceeding 1, 500 sq.ft. or not (if it still exceeds 1, 500 sq.ft.) the assessee would not be entitled for the benefit as is otherwise enshrined u/s 80-IB ? - If the built-up area falls within the 1, 500 sq.ft. excluding the open space in the portico area the appellants are entitled for the benefit u/s 80-IB of the Act. From the Annexure-I attached to the assessment order which is a drawing of the construction area and which is sought to be excluded is an open terrace and a portico and for the reasons stated above an open terrace and a portico cannot be brought within the ambit of the definition of an built-up area as is defined under Section 80-IB (14) (a) of the Act the definition that was inserted vide amendment that took place w.e.f. 01.04.2005. Moreover from the drawing itself it is evidently clear that the two spaces i.e. the open terrace and also the portico is an area which is otherwise totally open and exposed. It could not be under any stretch of imagination be brought or considered to be an area within the inner measurement of a residential unit. Since it is an open space which cannot be brought within the purview of inner measurement of the residential unit the said two areas i.e. the open terrace and the portico has to be excluded from computation of the built-up area entitling the appellant the benefit that which is enshrined under Section 80-IB of the Act. Assessee appeal allowed.

Summary

The core legal question considered in these appeals is whether an open terrace or a portico, which is open to the sky and not enclosed by walls, can be included in the computation of the "built-up area" of a residential unit for the purpose of determining eligibility for deduction under Section 80-IB of the Income Tax Act, 1961.

Section 80-IB provides deductions for profits and gains from certain industrial and infrastructural undertakings, including housing projects, subject to conditions. One such condition excludes residential units with a built-up area less than 1,500 square feet (outside metropolitan cities like Delhi and Bombay) from the deduction. Therefore, the precise measurement of "built-up area" is critical to eligibility.

The definition of "built-up area" under Clause (14)(a) of Section 80-IB was central to the analysis. It defines "built-up area" as the inner measurements of the residential unit at the floor level, including projections and balconies, increased by the thickness of the walls, but excluding common areas shared with other residential units. This definition implies that only areas within the inner measurements of the residential unit, including projections and balconies, qualify as built-up area. Common areas and open terraces are expressly excluded.

The appellant, a real estate developer, claimed deduction under Section 80-IB(10) for residential units comprising duplexes with porticos and open terraces. The Assessing Officer disallowed the deduction on the ground that the terrace and portico areas should be included in the built-up area, which exceeded 1,500 sq.ft., thus disqualifying the deduction. The Income Tax Appellate Tribunal upheld this disallowance.

The appellant challenged this on the basis that the open terrace and portico are not enclosed areas and do not form part of the inner measurements of the residential unit. The Court examined the statutory language and relevant precedents to resolve this issue.

A key precedent relied upon was the Division Bench judgment of the Gujarat High Court in Commissioner of Income Tax vs. Amaltas Associates. The Gujarat High Court interpreted the term "built-up area" in the context of Section 80-IB(14)(a) and held that open terraces do not qualify as balconies or projections and thus cannot be included in the built-up area. The Court emphasized that a "balcony" is generally a projection from a building enclosed by a parapet or railing and may be covered, whereas an open terrace is an exposed area and not a projection.

The Court reasoned that the statutory definition's inclusion of projections and balconies but exclusion of common areas implies a deliberate legislative choice to exclude open terraces and porticos, which are open to the sky and not enclosed within the inner measurements of the residential unit. The Court distinguished between balconies and projections, which are part of the inner measurement, and open terraces or porticos, which are external and open spaces.

Applying this interpretation to the facts, the Court found that the portico for parking cars and the open terrace were open spaces not enclosed by walls and thus fell outside the built-up area as defined. The Court noted that the Assessing Officer and Tribunal had not adequately examined whether the disputed areas fell within the inner measurements of the residential unit. The Court held that since the open terrace and portico are excluded, the built-up area should be computed without including these spaces.

The Court further observed that if, after excluding the open terrace and portico, the built-up area remains above 1,500 sq.ft., the deduction under Section 80-IB would be disallowed. However, if the built-up area falls within 1,500 sq.ft. excluding these areas, the appellant is entitled to the deduction.

In conclusion, the Court set aside the impugned orders of the Tribunal and the Assessing Officer, allowing the appeals to the extent that open terraces and porticos are excluded from the built-up area calculation for Section 80-IB deduction eligibility.

Significant holdings and principles include:

"A plain reading of Clause (14)(a) of Section 80-IB clearly indicates that the built-up area includes the inner measurements of the residential unit at floor level including projections and balconies as increased by the thickness of the walls but does not include common areas shared with other residential units."

"An open terrace and an open portico, which are not enclosed by walls and are open to the sky, cannot be included in the built-up area as they do not form part of the inner measurements of the residential unit."

"The term 'balcony' denotes a projection from a building enclosed by parapet or railing and may be covered; an open terrace is not a balcony or projection within the meaning of Section 80-IB."

"Excluding the open terrace and portico from the built-up area computation, if the built-up area falls within 1,500 sq.ft., the assessee is entitled to deduction under Section 80-IB."

These principles clarify the scope of "built-up area" for housing projects under Section 80-IB and delineate the exclusion of open terraces and porticos from its ambit, impacting the eligibility for tax deductions.