The Section enables 100 per cent tax exemption on profits made by developers of residential complexes with dwelling units of up to 1,000 sq ft in metros and 1,500 sq ft in other cities.

The construction must have started after March 1998 and needs to be completed by March 31, 2008, to avail of the tax relief.

According to official sources, the recent surveys and searches by the Income Tax department found widespread misuse of the Section to claim exemptions. Builders usually construct blocks of 4,000-5,000 sq ft but enroll for split registration with authorities by breaking it into 1,000 sq ft blocks.

Further, a block of 4,000-5,000 sq ft allotted to a single person is usually registered as 1,000 sq ft under different names of the family members.

As per a rough estimates, department claims to have lost at least Rs 300-400 crore (Rs 3 to 4 billion) of tax revenues in the current fiscal on account of manipulations by real estate developers. 

Real estate developers, however, say if this exemption is removed, the prices of residential properties may further go up. They said an increase in home loan rates had already affected the housing industry.

The tax holiday was granted on the ground that builders and contractors help in infrastructure development in urban and semi-urban areas.

Infrastructure development, on the other hand, boosts ancillary industries such as cement, brick and mortar and steel.

Irregularities in construction sector has been under the lens of the IT department in the current financial year. After a tribunal special bench order in September ruling that builders and contractors will no longer be allowed to capitalise their interest expenses, the income tax has launched intense searches and surveys for collection.

As per the order, builders and contractors would not be allowed to deduct interest on loans taken for projects from expenses every year during the entire gestation period of any project. The deduction of interest from taxable income will be permitted only after a project is completed.