2015 (7) TMI 40 - AT - Income Tax

Deduction u/s 80HHBA - interest income from bank s fixed deposit, kept as margin money for guarantees - Held that - In the present case, it is noticed that the AO while disallowing the claim of the assessee categorically stated that the assessee had not furnished the details of FDR at the opening of the year i.e. on 01.04.2001, made during the year and encahsed during the year. He also stated that the assessee had not reconciled against which FDRs, the guarantees were provided to the Principal Contractee. At the same time, it is nowhere stated that the assessee had not made the FDRs for issuing bank guarantee in favour of principal client viz., NJPC, for the award and execution of the contract. The ld. CIT(A) also held in para 7.1 of the impugned order that the interest income earned on FDR was the business income and once it is held that it was the business income, the assessee becomes eligible for deduction u/s 80HHBA of the Act. However, the ld. CIT(A) in para 7.4 of the impugned order has given a contradictory finding by stating that the aforesaid interest income cannot be said to be derived from execution of housing project. Therefore, the facts are not clearly brought on the record by the AO and contradictory findings have been given by the ld. CIT(A). In that view of the matter, we deem it appropriate to remand this matter relating to the deduction u/s 80HHBA of the Act, on account of the interest, back to the file of the AO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. As regards to the observations of the ld. CIT(A) that the interest earned on claims settled by Dispute Review Board, was related to the claims on account of work done by the assessee for the housing project is concerned, nothing contrary was brought on record to rebut the same. We, therefore, do not see any infirmity on this issue in the order of the ld. CIT(A). Accordingly, the direction for allowing the deduction u/s 80HHBA of the Act on the interest received by the assessee on the claims settled by the DRB during the year under consideration, is upheld. As regards to the issue relating to the bank guarantee commission paid to the bank, we are of the view that it was directly related with the FDRs made for giving guarantee for getting contract, therefore, the ld. CIT(A) rightly directed the AO to allow the deduction of these expenses from the interest earned on the FDR. - Decided in favour of assessee for statistical purposes

Issues Involved:
1. Legality of the reference for special audit under Section 142(2A) of the Income Tax Act.
2. Timeliness of the assessment order.
3. Method of computing deduction under Section 80HHBA, read with Section 80AB.
4. Eligibility of interest income for deduction under Section 80HHBA.
5. Application of the principle of 'Netting off' for interest income.

Issue-wise Detailed Analysis:

1. Legality of the Reference for Special Audit:
The assessee contended that the reference for special audit under Section 142(2A) was not based on adequate reasons showing complexities in accounts, making the assessment order illegal. However, this ground was not pressed and thus dismissed.

2. Timeliness of the Assessment Order:
The assessee argued that the assessment order was barred by time as it was not passed within the stipulated period, and the special audit was directed without adequate reasons. This ground was also not pressed and dismissed.

3. Method of Computing Deduction under Section 80HHBA, Read with Section 80AB:
The primary contention was whether the deduction under Section 80HHBA should be computed before or after adjusting brought forward losses and unabsorbed depreciation. The assessee argued that Section 80HHBA does not require deduction from gross total income and should be allowed before adjusting losses. The AO disagreed, stating that Section 80AB, which has an overriding effect, requires the deduction to be computed on net income after adjustments. The CIT(A) upheld the AO's view, stating that the deduction under Section 80HHBA must be calculated on profits included in the gross total income after setting off brought forward losses and depreciation.

4. Eligibility of Interest Income for Deduction under Section 80HHBA:
The AO assessed the interest income from FDRs, IT refund, and other sources as "Income from Other Sources" rather than "Business Income," thus disallowing the deduction under Section 80HHBA. The CIT(A) partially agreed, treating interest from FDRs, Citi Bank account, and DRB claims as business income but excluded interest on IT refund. The CIT(A) held that interest from DRB claims was derived from the housing project and eligible for deduction under Section 80HHBA, while interest from FDRs and other sources was not. The Tribunal remanded the matter to the AO for fresh adjudication regarding the interest from FDRs, while upholding the CIT(A)'s decision on DRB claims.

5. Application of the Principle of 'Netting off' for Interest Income:
The assessee argued for netting off interest income against interest expenses incurred. The CIT(A) directed the AO to reduce guarantee commission from the interest earned on FDRs, recognizing the direct link between the expenses and the interest income. The Tribunal upheld this direction, agreeing that the guarantee commission was directly related to the FDRs made for obtaining bank guarantees.

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, with the Tribunal remanding the issue of interest from FDRs back to the AO for fresh adjudication. The appeals of the department were dismissed, upholding the CIT(A)'s decisions on DRB claims and the deduction of guarantee commission from interest income.

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