Transitional Tax Incentives for Affordable Housing : Clause 142 of Income Tax Bill, 2025 Vs. Section 80IBA of Income-tax Act, 1961

 

Clause 142 Deductions in respect of profits and gains from housing projects.

Income Tax Bill, 2025

Introduction

Clause 142 of the Income Tax Bill, 2025, proposes a framework for deductions in respect of profits and gains derived from the business of developing and building housing projects, including rental housing projects. This provision is a crucial transitional mechanism, referencing and preserving the essential features of the now-repealed Section 80IBA of the Income-tax Act, 1961. The legislative intent behind Clause 142 is to ensure continuity of tax benefits for eligible housing projects that were entitled to such deductions under the previous regime, thus avoiding abrupt disruption to ongoing projects and the broader real estate sector. Section 80IBA, introduced by the Finance Act, 2016 and subsequently amended, was a pivotal provision in the Income-tax Act, 1961, designed to incentivize the development of affordable housing and, later, rental housing projects. It provided for a 100% deduction of profits and gains derived from eligible housing projects, subject to a series of stringent conditions relating to project approval, completion, size, utilization of floor area ratio, and other regulatory parameters. This commentary will provide a detailed analysis of Clause 142, its objectives, operative mechanism, and practical implications. Subsequently, an exhaustive comparative analysis with Section 80IBA will be presented, highlighting similarities, differences, and the legal and practical consequences of the transition from Section 80IBA to Clause 142.

Objective and Purpose

The primary objective of Clause 142 is to provide a seamless transition for taxpayers who were eligible for deductions u/s 80IBA prior to the repeal of the Income-tax Act, 1961. The intent is to prevent any unintended hardship or loss of tax benefits for ongoing housing and rental housing projects that commenced under the old regime but are now subject to the provisions of the new Income Tax Bill, 2025. Section 80IBA was originally enacted to address the acute shortage of affordable housing in India and to stimulate private sector participation in this sector. By offering a substantial tax incentive-full deduction of profits from eligible projects-Section 80IBA sought to make affordable housing projects financially viable and attractive to developers. The provision was later expanded to include rental housing projects, further broadening its social and economic impact. Clause 142, therefore, serves a dual purpose:

• It preserves the legislative intent and policy thrust of Section 80IBA for ongoing projects, ensuring that the repeal of the old Act does not retroactively penalize or disadvantage eligible assessees.
• It provides legal certainty and predictability for developers, investors, and other stakeholders in the real estate sector, thereby supporting the broader policy objective of promoting affordable and rental housing.

Detailed Analysis of Clause 142

Clause 142 is structured as a transitional provision, and its operative mechanism is as follows:

1. Eligibility:
   • Applies to any assessee whose gross total income for a tax year includes profits and gains derived from the business of developing and building housing or rental housing projects referred to in Section 80IBA of the Income-tax Act, 1961.
   • The assessee must be eligible to claim a deduction u/s 80IBA, had the Act not been repealed.
2. Quantum and Computation of Deduction:
   • The deduction allowed is to be calculated as per the provisions of Section 80IBA.
3. Temporal Limitation:
   • The deduction is available only for such tax years as would have been allowed u/s 80IBA, if the Act had not been repealed.

Thus, Clause 142 does not create a new regime but incorporates Section 80IBA by reference for the limited purpose of ensuring continuity of deductions for ongoing projects.

Interpretative Issues and Ambiguities

Several interpretative issues may arise under Clause 142:

• Reference to Repealed Law: Clause 142 relies entirely on the provisions of Section 80IBA, which will no longer be in force. This "incorporation by reference" approach requires careful interpretation to avoid ambiguity, especially if disputes arise regarding the meaning or application of specific conditions u/s 80IBA.
• Eligibility Cut-off: The clause is silent on whether new projects commenced after the repeal of the old Act would be eligible, or only those already in progress. However, the reference to eligibility "if the said Act had not been repealed" suggests that only ongoing projects approved under the old law are covered.
• Procedural Requirements: The clause does not specify procedural aspects such as documentation, application, or compliance mechanisms, instead relying on the procedures that would have applied u/s 80IBA.
• Potential for Litigation: Any ambiguity in the interpretation of the "conditions" or "tax years" referenced may give rise to disputes, especially in cases where project timelines, approvals, or other factors are in question.

Key Features and Conditions (by reference to Section 80IBA)

Since Clause 142 adopts the provisions of Section 80IBA, the following key features are incorporated:

• 100% Deduction: The entire profits and gains derived from eligible housing or rental housing projects are deductible.
• Project Approval and Completion: The project must be approved by the competent authority within the specified dates and completed within five years of approval.
• Size and Area Restrictions: Stringent limits on plot size, carpet area of residential units, and commercial area within the project.
• Utilization of Floor Area Ratio (FAR): Minimum utilization thresholds for FAR, varying by location.
• Allotment Restrictions: No individual, their spouse, or minor children can be allotted more than one unit in the project.
• Separate Books of Account: Assessee must maintain separate books for the project.
• Exclusion of Works Contracts: Projects executed as works contracts are ineligible.
• Clawback Provision: If the project is not completed within the specified period, the deduction is reversed and taxed as income in the year of default.

Practical Implications

1. Impact on Developers and Real Estate Sector

The preservation of the deduction through Clause 142 is crucial for developers who have structured their projects and financing based on the availability of Section 80-IBA benefits. Abrupt withdrawal could have resulted in significant tax liabilities, disruption of business models, and potential litigation. By maintaining continuity, the provision supports ongoing investment in affordable and rental housing, which remains a policy priority for the government.

2. Compliance and Procedural Aspects

Assessees must continue to comply with all the substantive and procedural requirements of Section 80-IBA, including maintaining separate books of account, obtaining timely project approvals and completion certificates, and ensuring adherence to unit size and value restrictions. Given the clawback provision, there is a strong incentive for developers to ensure project completion within the stipulated time to avoid retrospective taxation of deductions already claimed.

3. Regulatory and Administrative Considerations

Tax authorities will need to apply the old Section 80-IBA standards in respect of claims under Clause 142, even after the repeal of the Income-tax Act, 1961. This may require continued reference to repealed law and associated jurisprudence, potentially complicating administration and dispute resolution.

Comparative Analysis: Clause 142 vs. Section 80IBA

1. Structural Approach

• Section 80IBA: Operated as a substantive provision, directly conferring the deduction subject to compliance with detailed conditions.
• Clause 142: Functions as a transitional or savings provision, referencing Section 80IBA for its operative content, rather than setting out independent conditions.

2. Scope and Applicability

• Section 80IBA: Applied to projects approved after 1st June 2016 and on or before 31st March 2022 (with amendments extending dates for certain projects), and to rental housing projects notified up to 31st March 2022.
• Clause 142: Applies only to assessees who would have been eligible u/s 80IBA "if the said Act had not been repealed." It does not extend the benefit to new projects approved after the repeal.

3. Quantum of Deduction

• Section 80IBA: 100% of profits and gains derived from eligible business.
• Clause 142: Deduction quantum is identical, as it is calculated "as per the provisions of Section 80IBA."

4. Conditions and Compliance

• Section 80IBA: Specifies detailed conditions relating to project approval, completion, size, FAR utilization, allotment restrictions, separate books, and others.
• Clause 142: Incorporates all such conditions by reference. The compliance burden and standards remain unchanged for transitional cases.

5. Time Limitation

• Section 80IBA: Benefits are available for the duration specified in the section, i.e., for projects completed within five years of approval, and for profits earned during such period.
• Clause 142: The deduction is allowed "only for such tax years, as would have been allowed u/s 80IBA," ensuring no extension of benefit beyond the original scope.

6. Definitions and Interpretations

• Section 80IBA: Contains detailed definitions for "carpet area," "competent authority," "floor area ratio," "housing project," "rental housing project," "residential unit," and "stamp duty value."
• Clause 142: Relies on all such definitions as incorporated from Section 80IBA, maintaining interpretative continuity.

7. Clawback and Anti-abuse Provisions

• Section 80IBA: Contains a clawback mechanism: if the project is not completed within the specified period, deductions allowed are taxed as business income in the year of default.
• Clause 142: By incorporating Section 80IBA, the clawback and anti-abuse provisions remain fully applicable to transitional cases.

8. Exclusion of Works Contracts

• Section 80IBA: Explicitly excludes assessees executing projects as works contracts.
• Clause 142: Maintains this exclusion by reference.

9. Policy and Legislative Intent

• Section 80IBA: Reflected an active policy to incentivize affordable and rental housing.
• Clause 142: Reflects a policy of non-disruption and protection of vested rights for ongoing projects, rather than creating new incentives.

10. Administrative and Procedural Aspects

• Section 80IBA: Procedures were governed by the Income-tax Act, 1961 and associated rules.
• Clause 142: Leaves procedural aspects to be governed as per the repealed law, which may require clarificatory guidance from the tax authorities for smooth administration.

Potential Issues and Areas for Further Clarification

• Interpretation of "Eligibility": Whether projects that received partial approvals or underwent modifications post-repeal are eligible may require clarification.
• Procedural Guidance: The absence of explicit procedural rules under the new law may create practical difficulties for both assessees and tax authorities.
• Dispute Resolution: Transitional provisions often give rise to litigation regarding the scope and application of the savings clause, especially where facts are complex or documentation is incomplete.
• Future Policy Direction: The absence of a similar incentive under the new law may impact the pace of affordable and rental housing development going forward.

Conclusion

Clause 142 of the Income Tax Bill, 2025, is a carefully crafted transitional provision designed to safeguard the interests of assessees with ongoing housing and rental housing projects that were eligible for deduction under Section 80IBA of the Income-tax Act, 1961, 1961. By incorporating the operative content of Section 80IBA by reference, Clause 142 ensures legal continuity, protects vested rights, and upholds the policy objectives underlying the original provision. However, the reliance on a repealed law for the operative mechanism introduces interpretative and administrative challenges, particularly regarding eligibility, compliance, and procedural aspects. Tax authorities may need to issue clarificatory guidance to ensure smooth implementation and prevent disputes.

The comparative analysis reveals that Clause 142 is not a substantive re-enactment but a transitional savings provision, preserving the benefit only for those who had a legitimate expectation under the old regime. It does not extend or expand the benefit to new projects commenced after the repeal, signaling a shift in policy focus under the new tax regime. The future of tax incentives for affordable and rental housing will depend on the policy choices reflected in the new Income Tax Bill, 2025, and subsequent legislative or administrative actions. Stakeholders must closely monitor developments and ensure robust compliance with the transitional framework to avoid adverse tax consequences.

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Full Text:

Clause 142 Deductions in respect of profits and gains from housing projects.

 

 

Dated: 18-4-2025