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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 ..... he fact that the same was not based on any adequate reasons recorded by the learned AO, showing any complexities in accounts requiring the special audit in terms of requirements of the section 142(2A) of the Act. Thus, the assessment order in question is based on illegal reference of special audits and thus is liable to be quashed, as no valid assessment can be founded on illegal proceedings. 2. On the facts and circumstances of the case and on law, the assessment order in question is barred by time, as the same was not passed within the stipulated prescribed time expiring on 31.3.2005, as far as the learned AO preferred to illegally gain time by illegally directing the assessee for special audit u/s 142(2A) without mention of any adequate reasons or bringing forth any complexities involved in the accounts, as required under the provision of that section rather same was meant for deciding a legal issue, which is outside the scope of that section. 3. On facts and circumstances of the case and on law, the lower authorities have erred and were not justified in laying down the method of computing the deduction u/s 80HHBA, read with section 80AB, which is calculated after setting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reat such interest income as business income. 8. The above grounds of appeal are independent, without prejudice to each other. 9. The appellant craves to add, modify any new ground of appeal or adduce any new evidence during the course of appeal, as may be necessary, for the disposal of appeal and discharge of due justice to the appellant." 4. The grounds raised in the appeal of the department in ITA No. 1737/Del/2006 are following: "1. Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts and in the circumstances of the case by deleting the addition of Rs. 2,15,99,944/- without appreciating the fact that the direct and immediate source of interest is on account of late payment made by the clients and not from the execution of Housing Project. There is no direct nexus between the execution of housing project and receipt of interest. The interest received may be attributable to the execution of housing project but certainly not derived from the execution of housing project. 2. Ld. Commissioner 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 Rs. 72,67,918/- paid as guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the deductions under Section 80 HHBA are to be allowed first. Deductions u/s 80 HHBA are to allowed before working out the income under the other provisions of the Act. Section 80 HHBA does not use the words "as computed in accordance with the other provisions of the Act". Therefore, deduction under Section 80 HHBA had to be allowed first before allowing unabsorbed business loss and unabsorbed depreciation. b) At this point of time, we would like to explain the provisions of Section 80 AB of the Act which reads as follows: Where any deduction is required to be made or allowed under any Section included in this Chapter under the head "C-deduction in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. Vs Dy. CIT (2004) ISOT 381 (Chennai) Ø DCIT Vs ITC Hotels Ltd. (2004) ISOT 703 (Banglore)" 8. The AO did not find merit in the above submissions of the assessee by stating that the case relied by the assessee were on different facts. He again asked the assessee to show cause as to why provisions of section 80AB of the Act be not invoked. 9. In response the assessee submitted that the quantum of income on which deduction u/s 80HHBA of the Act was to be computed was not governed by section 80AB of the Act and claimed that deduction u/s 80HHBA of the Act was to be allowed before adjusted brought forward losses and unabsorbed depreciation if any. However, the AO did not accept the aforesaid contention of the assessee by observing that constituent of the income from business is apparently the net income after adjustment of brought forward losses and unabsorbed depreciation and this was exactly the amount on which the computation u/s 80HHBA of the Act was required to be made. The 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fixed deposits was incidental to the business activities. It was also state that the assessee had during the financial year 2001-02 relevant to assessment year under consideration had paid interest of Rs. 73.51 million to bank and Rs. 104.29 million to NJPC as interest on various types of advances. Therefore, as a matter of commercial prudence, had the assessee got surplus to earn interest, it could not have taken loan from banks at NJPC at higher rate of interest, therefore, the interest earned by the assessee was purely fulfillment of contractual obligations of the contract awarded by NJPC. The reliance was placed on the following case laws: Ø Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT (1997) 227 ITR 172 (SC) Ø CIT Vs Karnal Co-op Sugar Mills Ltd. (2000) 243 ITR 2 (SC) Ø CIT Vs Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) Ø Addl. CIT Vs Indian Drugs and Pharmaceuticals Ltd. (1983) 141 ITR 134 (Del) Ø Snam Pragati SPA Vs Addl. CIT (1981) 132 ITR 70 (Del) Ø CIT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business is computed with reference to assessment year separately. Therefore, the profits and gains from the execution of eligible for housing project, in relation to assessment year 2002-03 would only mean current year's profit as computed under Chapter-VI alone, however, brought forward losses are to be set off in accordance with provisions of 'Chapter VI-aggregation of income'. It was further stated that the profits and gains of business referred to the income for the current year, which is to be included in the computation of gross total income means an aggregation of various income under the six heads of income as per the Act but the carry forward and set off of business losses is not a part of profits and gains of business or profession for the current year. It was contended that Chapter-VIA lays down general conditions for allowing any deduction under the said Chapter and Section 80A of the Act governs and restricts the quantum of deductions under the Chapter to the amount of gross total income and section 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 Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al deduction shall be restricted by the obligation of sections 80A(2) & 80AB in a manner, so that actual deduction does not exceed the amount of profits & gains actually forming part of the gross total income which shall be computed without setting off of brought forward losses. The reliance was placed on the following case laws: Ø CIT Tarun Udyog (1991) 191 ITR 688 (Orissa) Ø CIT Vs Visakha Industries Ltd. (2001) 251 ITR 471 (AP) Ø CIT Vs Venkateswara Transmission Ltd. (1995) 216 ITR 510 (AP) Ø CIT Canara Workshops P. Ltd. (1986) 161 ITR 320 (SC) Ø CIT Vs HMT Ltd. (1993) 203 ITR 811 (Kar) Ø CIT Vs V. T. Joseph (1997) 225 ITR 731 (Ker) Ø Cambay Electric Supply Industrial Co. Ltd. Vs CIT 113 ITR 84 (SC) Ø CIT Vs South India Flour Mills P. Ltd. (2000) 113 Taxman 239 (Mad) 15. The ld. CIT(A) after considering the submissions of the assessee observed that in the computation of total income, the assessee had claimed deduction of Rs. 25,89,50,000/- u/s 80HHBA of the Act and had adjusted it against the profits of Rs. 86,30,79,327/-. The remaining amount i.e. Rs. 60,41,29,327/- had been set off against the brought forward los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat all the banks required that a suitable margin be kept with them in order to issue the bank guarantees, such margins (say 100% of the guarantee amount in the present case) were kept in the form of bank deposits which yielded interest and such interest income on accrual system of accounting was recognized as income and credited to the profit & loss account. Thus, the bank guarantees are non-fund based credit facilities from banks since the assessee company was always in need of money for ongoing execution of the works which required liquidity to meet contingencies, working capital, heavy equipments etc. Therefore, as part of its business operations, the assessee obtained cash-loans from banks and interest bearing advances from clients, which carry a higher rate of interest than available on bank deposits. Therefore, the interest earned on margin money was lower than interest paid on borrowed money during the relevant year. It was submitted that earning of interest on margin money with banks (in order to obtain bank guarantees to enable the assessee to get release of retention money) was necessarily a business income and that the making of fixed deposits was not the nature of inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when viewed in the context it is used and for the execution of the project, it would thereby entail at the first instance to define, what is the meaning of execution of the project which is primarily governed by a contract between the two parties. It was contended that all covenants of the contract are meant for the execution of the project, which inter alia include the retention of money by the client and the conditions of its release, so there was no reason for not treating the interest income arising out of executing a part of the contract as "income from execution of the project". It was further submitted that for the purpose of section 80HHBA of the Act, the reference has been made to the "profits & gains" and it is further qualified that such "profits & gains" has to be from the execution of eligible housing project. Therefore, the interest earned in the course and for the purpose of execution forms inseparable part of execution of the eligible project and thus was required to be considered for computation of deduction u/s 80HHBA of the Act. Alternatively, it was submitted that the interest income of the assessee was at Rs. 11,76,44,667/- and it had incurred an interest expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product. But the inquiry should stop as soon as the effective source is discovered." The ld. CIT(A) while applying the aforesaid test to the facts of the assessee's case observed that the interest income earned from FDRs, Income Tax Refund and account maintained with Citi Bank, London could not be said to have been derived from execution of housing project, however, the interest received amounting to Rs. 2,15,99,944/- on Dispute Review Board claims was different and was received on the claims settled by DRB during the year in favour of the assessee. Those claims were on account of work done for the client i.e. the claims related to housing project. The ld. CIT(A) held that interest amounting to Rs. 2,15,99,944/- was income derived from execution of housing project and, accordingly, entitled to deduction u/s 80HHBA of the Act and that the remaining amount could not be taken into account for calculating the deduction u/s 80HHBA of the Act as it has not been derived from the execution of the eligible project. The ld. CIT(A) also observed that the Special Audit Report revealed that the assessee had paid Rs. 72,67,918/- as guarantee commission to the Bank in respect of FDRs made for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest amounting to Rs. 2,15,99,944/- was received on the claims settled by Dispute Review Board during the year under consideration. The said claims were on account of work done for the client relating to the housing project, therefore, the immediate source was the execution of housing project. As such it was eligible for deduction u/s 80HHBA of the Act and the ld. CIT(A) was fully justified in directing the AO to allow the deduction u/s 80HHBA of the Act on the said amount. 24. We have considered the submissions of the both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the AO while disallowing the claim of the assessee categorically stated at para 21 of the assessment order dated 29.10.2005 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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