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TMI Blog2015 (7) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own the method of computing the deduction u/s 80HHBA, read with section 80AB, which is calculated after setting off the brought forward business losses and unabsorbed depreciation allowance, opposed to the provisions of the Act and intent of the legislature, particularly when all other relevant conditions were duly complied with, as provided in that section, instead of ₹ 25,89,50,000/- claimed by the assessee in its return of income. 4. The lower authorities have erred and failed to notice the relevancy of distinction in the sections 80HHBA and 80AB, as the former refers to the conditions method of computing the eligible deduction in respect of certain specified income, whereas the section 80AB refers to nature of income for the purpose of actual deduction seeking restriction on such eligible deduction which is included in the Gross Total Income. 5. The lower authorities have erred and were not justified in relying on the opinion of the Special Auditors which is against the provisions of the Act and thereby drawing unwarranted conclusions by mis-interpreting the various judicial pronouncements, mentioned in the body of the assessment order, without any refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax (Appeals) has erred in law and on the facts and in the circumstances of the case by allowing the assessee relief of ₹ 72,67,918/- paid as guarantee commission without considering that there is no nexus of payment of guarantee commission with the interest received on FDRs. The Fixed Deposits are kept with the banks as margin money against the guarantee issued to release of retention money kept by the client. Bank guarantee is not given for taking the FD. The bank guarantee commission may be business expenses but certainly not incurred for earning interest income on FDRs but for getting released the retention money. Hence, nexus between the interest received and expense on the guarantee commission cannot be established. 5. Ground Nos. 1 2 of the assessee s appeal were not pressed so these are dismissed as not pressed. From the remaining grounds of the assessee s appeal and the grounds of the departmental appeal, it is gathered that the issues revolves around the deduction u/s 80HHBA of the Income Tax Act, 1961 (hereinafter referred to as the Act). 6. Facts of the case in brief are that the assessee filed the return of income on 31.10.2002 declaring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in gross total income . Section 80 AB deals only with the eligibility criterion for availing deduction under heading Cdeduction in respect of certain incomes of Chapter VIA of the Act. It says that deduction of profits derived from the priority sector is available as if such income is only the income of the assessee, i.e., it makes it clear that on the profits and gains arising from the non-priority business. Further, to avail such deduction under heading C , the profits and gains from such priority business should be included in Gross Total income, i.e., if there is loss computed from the priority Section, no deduction under heading C can be claimed. Therefore, Section 80 AB only governs the eligibility criterion for availing deduction on the specified profits. However, the quantum of deduction depends only on the provisions of Section under which the deduction is being claimed. Thus, the scheme of Section 80 HHBA itself is very clear and is confined to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO accordingly rejected the contention of the assessee that the computation be made on the gross income before adjustment of brought forward losses. The reliance was placed on the following case laws: CIT Vs Yen Peyes Rubber Pvt. Ltd. (1999) 239 ITR 734 (Mad.) CIT Vs South India Flour Mills Ltd. (2000) 243 ITR 458 (Mad.) CIT Vs Chemical and Metallurgical Design Co. Ltd. (2001) 247 ITR 749 (Del) (FB) Distributors (Baroda) Pvt. Ltd. Vs Union of India (1985) 155 ITR 120 (SC) 10. The AO also observed that as per section 80B(5) of the Act, gross total income means the total income computed in accordance with the provision of this Act before making any deduction under Chapter-VIA and that the depreciation as per section 72 of the Act comes under Chapter-VI dealing with aggregation of income, therefore, section 72 of the Act is to be applied before the total income of an assessee was determined. He also pointed out that section 80AB of the Act has the overriding effect for the computation of deduction u/s 80HHBA of the Act. He also pointed out that the assessee itself had computed deduction u/s 80HHBA of the Act on net income in the subsequent year which indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Vs Tamilnadu Dairy Dev. Corpn. (1995) 216 ITR 535 12. The AO however, did not find merit in the above submissions of the assessee by observing that no evidence had been brought on record to prove that in execution of contract, the assessee was to provide guarantees to the Principal contractor. He also observed that the assessee had not furnished the details of FDR as on 01.04.2001, FDRs made and encashed during the year and that even the assessee had not reconciled against which FDR, the bank guarantee was provided to the Principal Contractee. The AO in para 23 observed as under: 23. Assuming but not admitting the assessee s contention that interest on FDRs is business income, even then assessee is not entitled for deduction u/s 80 HHBA as per provisions of Section 80 HHBA. Section 80 HHBA stipulates that where the gross total income of an assessee being an Indian company or a person (other than a company) who is resident of India includes any profits and gains derived from execution of housing project awarded to the assessee on the basis of global tender and such projects is aided by the World Bank, there shall, in accordance with and subject to the provisions of this S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80B of the Act defines gross total income as a total income computed in accordance with the provisions of the Income Tax Act, before making any deduction under the Chapter. It was also stated that section 80AB of the Act specifies the nature of income with respect to which the deduction is allowable but there is nothing in it to suggest that it could be applied to determine the eligible quantum of deduction. It was submitted that primarily it is the relevant section which governs the computation of the eligible deduction and section 80AB of the Act becomes operative, only when the question of actual deduction comes. Therefore, it could not be said that section 80AB of the Act refers to the deduction with reference to gross total income, which if so considered would give absurd results. It was further stated that section 80AB of the Act stipulates only the nature of income with respect to which the actual deduction is allowable but not the determination of eligible quantum of deduction itself. It was contended that section 80A(2) of the Act restricts the amount of deduction under Chapter VI to the gross total income so that aggregate deductions under the said Chapter do not result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the profits of ₹ 86,30,79,327/-. The remaining amount i.e. ₹ 60,41,29,327/- had been set off against the brought forward losses and depreciation, resulting in Nil income. According to the ld. CIT(A), the aforesaid method of computation was itself against the submissions of the assessee as the deduction had been claimed against business income of the current year without first adjusting the brought forward losses and depreciation against this income. The ld. CIT(A) referred to the provisions contained in section 80HHBA of the Act and came to the conclusion that sub-section (1) of section 80HHBA of the Act would show that the deduction at the prescribed percentage of such profits gains as included in the gross total income, shall be allowed to the assessee and the gross total income can be determined after effect has been given to all the provisions of the Act, excluding the provision contained in Chapter-VIA, therefore, brought forward losses and depreciation have to be adjusted before one can arrive at gross total income. The ld. CIT(A) further observed that after the decision of the Hon ble Apex Court in IPCA Laboratories (266 ITR 521), there is no doubt that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to get release of retention money) was necessarily a business income and that the making of fixed deposits was not the nature of investment of surplus funds/idle funds nor the same was earned as short term deposits of surplus funds. It was further submitted that as per the provisions of section 56(1) and (2) of the Act, it was not necessary that all interest income has to be assessed as income from other sources. It was stated that interest income was inextricably linked with the business of the joint venture engaged in the execution of the eligible housing project and, thus shall necessarily be forming part of the business income and when such interest income is considered as business income, the same shall also obviously form part of the profits gains of business/gains from the execution of the eligible housing project. It was submitted that interest income shall be considered as income from other sources, if and only if the same could not be classified under any other head of income. It was further submitted that in the present case, when the interest income was inextricably linked with the execution of the project, the same shall be business income. The reliance was pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the interest income of the assessee was at ₹ 11,76,44,667/- and it had incurred an interest expense of ₹ 17,78,07,489/-. Therefore, for the purpose of computing the quantum of deduction u/s 80HHBA of the Act, it was the net of interest earned and paid, which should have been taken into account. The reliance was placed on the decision of the ITAT Delhi Special Bench in the case of Lalsons Enterprises in ITA No. 3395/Del/1997. 18. The ld. CIT(A) after considering the submissions of the assessee observed that in the computation of income, the profit before appropriation as per profit loss account had been shown at ₹ 89,05,87,488/- which included income from interest amounting to ₹ 11,76,44,667/-. The ld. CIT(A) further observed that in the assessment order although the discussion was only about interest income from FDRs, but in fact the interest income had been received from various sources as per following details: i) ₹ 9,28,70,416/- on FDRs with Banks ii) ₹ 27,12,100/- on I.T. Refund iii) ₹ 4,62,207/- on A/c with Citi Bank in London iv) ₹ 2,15,99,944/- on DRB (Dispute Review Board) claims Total ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The ld. CIT(A) also observed that the Special Audit Report revealed that the assessee had paid ₹ 72,67,918/- as guarantee commission to the Bank in respect of FDRs made for giving guarantee on which interest of ₹ 9,28,70,460/- had been earned and since these expenses were directly related to the interest earned from FDRs, it was to be deducted from the interest income for calculating deduction u/s 80HHBA of the act. 21. Now the department is in appeal against the direction of the ld. CIT(A) in treating the interest amount of ₹ 2,15,99,944/- entitled to deduction u/s 80HHBA of the Act and reducing the guarantee commission of ₹ 72,99,980/- from the bank interest and the assessee is in appeal in not allowing the benefit of netting of interest and not allowing the interest earned on FDRs for deduction u/s 80HHBA of the Act. 22. The ld. DR strongly supported the order of the AO and further submitted that the income earned by the assessee as an interest was not derived from the housing project, so it was not allowable for deduction u/s 80HHBA of the Act. It was further submitted that the interest earned by the assessee on Dispute Review Board claims was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 amounting to ₹ 9,28,70,460/- 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 observ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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