2025 (7) TMI 1060 - HC - Income Tax

Deduction u/s 80IB(10) - calculating the eligible limit of 1000 sq. ft for the purpose of allowing the deduction - CIT(A) directed the Assessing Officer to exclude the service area window area window projections and cupboard projections from the definition of the words built up area for calculating the eligible limit of 1000 sq. ft for the purpose of allowing deduction u/s 80IB(10) and for inclusion of the flower bed area was concerned CIT(A) concurred with the findings of the Assessing Officer that they would have to be included for calculating the eligible limit of 1000 sq. ft - HELD THAT - We are of the view and which also found favour with the ITAT is that the words the inner measurements of the residential units at the floor level cover the carpet area which is the actual habitable area used by the resident of the flat. Such areas are enclosed and surrounded by four walls and are at floor level. The words following these words namely including the projections and balconies are in continuity. If there are any projections or balconies that are habitable/are capable of being effectively used by the flat purchaser the same would be includable in the definition of the words built up area . Thereafter there is a third aspect which needs to be taken into consideration for calculating the built up area i.e. thickness of the walls . The section makes it very clear that common areas shared with other residential units is not to be included in the definition of built up area . When we examine this definition we find that the ITAT was completely justified in excluding the flower bed area from the definition of the words built up area while calculating the eligible limit of 1000 sq.ft. for the purposes of allowing the deduction under Section 80IB(10) of the IT Act. Firstly the flower bed area is admittedly outside the residential units inasmuch as it starts where the balcony ends. Secondly it is open to the sky and is not covered either from the top or from the three sides. Further the flower bed area is not on the same level as that of the residential unit and is in fact a few inches below the floor level. Thirdly and most importantly it is not habitable/ capable of being effectively used by the flat purchaser. We therefore fail to understand how the flower bed area can fall within the definition of the words built up area as appearing in Section 80IB(14)(a). As correctly submitted by the Assessee before the ITAT the flower bed area is merely ornamental and an elevative feature provided on the outer side of the residential unit and is certainly not a habitable area. It is provided mainly for the elevation and design of the building and cannot be included in the definition of built up area . It is also not in the inner measurements of the residential units at the floor level . We therefore find that the ITAT has correctly decided this issue in favour of the Assessee. No Substantial Questions of Law requiring an answer by this Court. Calculation of built up area - Whether the ITAT was justified in upholding the order of the CIT(A) in so far as it directed the AO to delete disallowance of deduction u/s 80IB(10) by holding that the service area window area window projections and cupboard projections are not to be included in the total area for determining the built up area of the flats? - HELD THAT - We are of the opinion that the CIT(A) correctly excluded the cupboard projections from the calculation of built up area . Similarly as far as the service area is concerned it is basically a common area which runs throughout the building for the purpose of laying pipes namely soil pipe waste water pipe water mains etc. This service area cannot be used by the flat purchaser. In fact the CIT(A) has categorically stated that this area being small cannot be used for any other purposes. After perusing the photographs produced by the Assessee the CIT(A) also found that the ducts are open and dangerous which is another factor which led the CIT(A) to believe that the service area is not for the use of flat owners but used for the purpose of repairing the pipes that run through the building. We have no hesitation in holding that the service area would be akin to a common area and which is specifically excluded from the words built up area reproduced by us earlier. Therefore this could have never been included in the calculation of built up area as was done by the AO. Even as far as the window projections are concerned we fail to understand how the AO could include this in built up area as defined in Section 80IB(14)(a). As noted by the CIT(A) these areas are situated at the window-sill level about 3 ft. above the floor level. These projections could not be used for any purposes because the area was highly unsafe and anybody may fall from the said area. It was essentially an elevative feature and has nothing to do with the carpet area of the flat. CIT(A) also noted that in some cases the sill of the window which was allegedly extended may be used for protection from sunlight and rain and it was not the case of the Income Tax Department that the builder has sold this area to the various flat owners. We therefore find that the CIT(A) was fully justified in not including the cupboard projections the service area and window projections for the purpose of calculating the eligible limit of 1000 sq.ft. to allow the deduction under Section 80IB(10). These findings of the CIT(A) have found favour with the ITAT and in our view correctly so. No Substantial Question of Law.

Summary

The core legal questions considered in this judgment arise primarily from the validity of the search warrant issued under the Income Tax Act and the proper interpretation of the term "built-up area" for the purpose of claiming deductions under Section 80IB(10) of the Income Tax Act, 1961. The substantial questions of law presented were:

1. Whether the assessment under Section 143(3) read with Section 153A is valid when the search warrant was issued in the name of a non-existent entity, given that the original entity had merged into another company prior to the search.

2. Whether the merged entity's continuation of business and assumption of assets, liabilities, and tax liabilities validates the issuance of the search warrant in the name of the erstwhile entity.

3. Whether the flower bed area, being below floor level and an external ornamental feature, should be included in the "built-up area" for calculating the eligible limit of 1000 sq.ft. under Section 80IB(10).

4. Whether reliance on precedents concerning courtyards is appropriate when the issue concerns flower beds.

5. Whether Development Control Rules can be read into the meaning of "floor level" for the purpose of interpreting "built-up area" under the Income Tax Act.

6. Whether service areas, window areas, window projections, and cupboard projections should be included in the built-up area for deduction purposes under Section 80IB(10).

7. Whether part-completed projects with completion certificates for parts of the construction qualify for deduction under Section 80IB(10).

The Court did not consider the question relating to part-completed projects (Question 6.8) as it was not relevant for the assessment year in question and was reserved for a separate appeal.

Issue-wise Detailed Analysis:

Validity of Assessment and Search Warrant Issued in the Name of a Non-Existent Entity (Questions 6.1, 6.2, 6.3): The facts reveal that the partnership firm Nahar Enterprises was dissolved and its business was taken over by Nahar Builders Ltd. before the search action. The search warrant was issued in the name of the dissolved firm, which the Assessee contended rendered the assessment null and void. The Assessing Officer and CIT(A) rejected this contention, holding the warrant valid as it mentioned the merged entity.

The ITAT held the assessment under Sections 143(3) and 153A to be bad in law, as the search warrant was issued in the name of a non-existent entity. However, the Court refrained from deciding these questions, considering the submissions that if the Assessee was entitled to the deduction on merits, these questions would become academic. The Court left these questions open to be decided in an appropriate case.

Interpretation of "Built-Up Area" and Inclusion of Flower Bed Area (Questions 6.4, 6.5, 6.6): The definition of "built-up area" under Section 80IB(14)(a) was central to the dispute. The Assessee argued that the flower bed area is below floor level, open to the sky, not enclosed or habitable, and hence should be excluded from the built-up area. The Revenue contended otherwise.

The ITAT examined the statutory definition: "built-up area" means the inner measurements of the residential unit at the floor level, including projections and balconies, increased by thickness of walls, excluding common areas. It found that the flower bed area was outside the residential unit, open to the sky, a few inches below floor level, and not habitable. The flower bed was an ornamental, elevative feature, not intended for habitation or effective use by flat owners.

The ITAT relied on a co-ordinate bench decision which distinguished flower beds from courtyards and held that flower beds cannot be included in the built-up area. The Court agreed with the ITAT's reasoning and factual findings, emphasizing that the flower bed area is not part of the inner measurements at floor level, nor is it habitable or enclosed. It rejected the Revenue's reliance on Development Control Rules to interpret "floor level" for Income Tax purposes, holding that the statutory definition in the Income Tax Act must prevail.

Inclusion of Service Area, Window Area, Window Projections, and Cupboard Projections in Built-Up Area (Question 6.7): The Assessing Officer included these areas in calculating built-up area, which was overturned by the CIT(A) and upheld by the ITAT. The CIT(A) found that:

• Cupboard projections are generally carved out of wall area or projected into other rooms, already accounted for in wall measurements, hence should not be added separately.
• Service area is a small, common duct running vertically through the building for pipes (soil, waste, water mains), not usable by flat owners, open and dangerous, and not sold to owners; thus, it is akin to a common area excluded from built-up area.
• Window projections are ornamental, unsafe ledges at window-sill level, not usable for habitation, and not sold to owners, hence excluded from built-up area.

The ITAT found no reason to include these areas in built-up area, and the Court concurred with the factual findings and legal reasoning. The Court emphasized that common areas and non-habitable ornamental features cannot be included in built-up area for deduction purposes.

Reliance on Precedents and Treatment of Competing Arguments: The ITAT's reliance on the co-ordinate bench decision distinguishing courtyards from flower beds was upheld. The Court rejected the Revenue's argument that Development Control Rules should influence the interpretation of Income Tax provisions, holding that such external regulations are neither warranted nor appropriate for construing the term "built-up area" under the Income Tax Act.

Conclusions: The Court dismissed the Revenue's appeal, holding that:

• The flower bed area does not fall within the definition of "built-up area" under Section 80IB(14)(a) and must be excluded in calculating the eligible limit for deduction under Section 80IB(10).
• The service area, window projections, and cupboard projections are not includable in built-up area for the purpose of Section 80IB(10) deductions.
• The questions relating to the validity of the search warrant issued in the name of the non-existent entity were left undecided, as they were deemed academic given the merits ruling.
• The question relating to part-completed projects was not considered as it did not arise in the assessment year under consideration.

Significant Holdings:

The Court preserved the following crucial legal reasoning verbatim from the judgment:

"The words 'the inner measurements of the residential units at the floor level' cover the carpet area which is the actual habitable area used by the resident of the flat. Such areas are enclosed and surrounded by four walls and are at floor level. The words following these words namely 'including the projections and balconies' are in continuity. In other words, if there are any projections or balconies that are habitable/are capable of being effectively used by the flat purchaser, the same would be includable in the definition of the words 'built up area'."

"The flower bed area is merely ornamental and an elevative feature provided on the outer side of the residential unit and is certainly not a habitable area. It is provided mainly for the elevation and design of the building and cannot be included in the definition of 'built up area'. It is also not in 'the inner measurements of the residential units at the floor level'."

"The service area is basically a common area which runs throughout the building for the purpose of laying pipes namely, soil pipe, waste water pipe, water mains etc. This service area cannot be used by the flat purchaser... The service area would be akin to a common area and which is specifically excluded from the words 'built up area'."

"The window projections are essentially an elevative feature and have nothing to do with the carpet area of the flat... It was essentially an elevative feature and has nothing to do with the carpet area of the flat."

The core principles established include:

• The statutory definition of "built-up area" under Section 80IB(14)(a) must be strictly construed to include only habitable, enclosed areas at floor level, including balconies and projections that are usable by flat purchasers.
• Ornamental, non-habitable, or external features such as flower beds, service ducts, and unsafe window projections are excluded from built-up area calculations.
• Common areas and features not sold to flat owners are excluded from built-up area for deduction purposes.
• External regulatory frameworks such as Development Control Rules cannot be read into the Income Tax Act's definitions unless expressly incorporated.

On the issue of the validity of the search warrant and assessment against a dissolved entity, the Court refrained from deciding, leaving the matter open for future adjudication.