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Continental Foundation Joint Venture and others Versus Assistant Commissioner of Income tax and others

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 C .....

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der 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 acco .....

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or 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. - Decide .....

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t years 2002-03 & 2003-04 respectively. 2. Since the issues involved are common and the appeals were heard together so these are being disposed off by this common order for the sake of convenience and brevity. 3. First we will deal with the cross appeal for the assessment year 2002-03. In the assessee s appeal in ITA No. 1168/Del/2006 following grounds have been raised: 1. On the facts and circumstances of the case, lower authorities were not justified in holding that the reference for speci .....

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he 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 sec .....

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#8377; 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. .....

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y unbiased & judicial application of mind and appreciation of facts & law. 6. The lower authorities have erred and were not justified on facts and in law, in concluding that interest income, amounting to ₹ 9,28,70,416/- from bank s fixed deposit, kept as margin money for guarantees issued for the purpose of the business of execution of eligible project by the assessee, is taxable as Business income but the same is not eligible for deduction u/s 80HHBA of the Act, without identifyin .....

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uch interest income, when the assessee itself has incurred a sum of ₹ 17,78,07,489/- towards payment of interest to banks/clients etc. and thus treat 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 .....

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ceipt 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 ₹ 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 ke .....

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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 total income at Nil. Later on, the case was selected for scrutiny. During the course of assessment proceedings the AO noticed t .....

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to why provisions of section 80AB of the Act be not invoked and deduction u/s 80HHBA of the Act be recomputed accordingly. 7. In response the assessee submitted as under: a) Section 80 HHBA of the Income-tax Act, 1961, 1961, says that in computing the total income of the assessee, deductions of such profits and gains are to be allowed in accordance with and subject to the provisions of this section. The expression used is this section , that means section 80 HHBA. It does not say that the deduct .....

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r 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 .....

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nly 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 Tot .....

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r only in respect of which the deduction is being claimed subject to maintaining separate accounts of such project and creation of a Housing Projects Reserve Account. Whereas, Section 80 AB allows the deduction only in respect of such nature of income which form part of gross total income as has been held consistently by several High Courts in landmark judgments enumerated above. The quantum of income on which deduction u/s 80 HHBA is to be computed is not governed by Section 80 AB. Thus, in vie .....

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) 171 CTR (AP) 300 Ø M. N. Dasatur & Co. Ltd. Vs Dy. CIT (1992) 42 TTJ (Cal) Ø CIT Vs Canaras Work Shop (P) Ltd. (1986) 58 CTR (SC) 108 Ø CIT VS Venktachalam (1993) 113 CTR (SC) 55 Ø CIT Vs L. M. Van Moppes Diamond Tools (India) Ltd. (1977) 107 ITR 386 (Mad.) Ø M/s Sharon Veneers (P) 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 s .....

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O 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 .....

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ore 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 .....

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interest on FDR amounting to ₹ 11,49,32,567/- and Income Tax Refund amounting to ₹ 27,12,100/-. The AO asked the assessee to show cause as to why interest on FDR s be not assessed to tax under the head income from other sources. In response the assessee submitted that it was required to furnish bank guarantee in favour of NJPC (the principal contactor) as a part of the terms and conditions of the contract awarded and in order to enable the banks for issuing bank guarantees, certain a .....

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e that the assessee had during the financial year 2001-02 relevant to assessment year under consideration had paid interest of ₹ 73.51 million to bank and ₹ 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 .....

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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 .....

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ssee 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 Section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains. 13. According to the AO there was no business compulsion or business necessity to maintain FDRs and hence the interest income could not be said to be derived from the execution of housing project though it could be debatable to that in some .....

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rieved the assessee carried the matter to the ld. CIT(A) and submitted that the deduction 80HHBA of the Act is not with reference to the amount of gross total income, but with reference to the profit and gains of an eligible housing project and that the Income Tax Act, itself had laid out the definition between the profit and gains of business or profession and income from profit and gains of business or profession . It was stated that each assessment year is independent for tax purposes and the .....

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nt 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 .....

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e 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 .....

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ome, which in the absence of such provision may result in allowance of such total deduction against any other income. It was accordingly submitted that the nature of income with respect to which the deduction u/s 80HHBA of the Act is claimed, is not included and considered in gross total income. The reliane was placed on the judgment of the Hon ble Andhra Pradesh High Court in the case of CIT Vs Visakha Industries Ltd. (2001) 251 ITR 471. It was further submitted that the AO s reliance on the ca .....

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has to be with reference to the profits & gains of eligible project for the relevant previous year. However, the actual 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 IT .....

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ing the submissions of the assessee observed that in the computation of total income, the assessee had claimed deduction of ₹ 25,89,50,000/- u/s 80HHBA of the Act and had adjusted it against 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 t .....

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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 provisions of section 80AB of the Act control all the deduction provided under the heading C-deduction .....

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essment as income from other sources , the assessee contended before the ld. CIT(A) that in order to fetch the award of contract it was required to submit quotations in response to the tenders and normally there was a requirement to submit alongwith tenders, bid bond or earnest money or guarantee for the specified amounts. It was also contended that on and after the award of contract and during execution of project, the assessee was required to furnish various types of guarantees from time to ti .....

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ccrual 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 .....

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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 .....

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placed on the following case laws: Ø Snam Progetti Spa 132 ITR 70 (Del) Ø Suhag Traders 133 Taxation 22 (Delhi ITAT) Ø Karnal Coop Sugar Mills 243 ITR 2 (SC) Ø Govindha Chaudhury & Sons 203 ITR 881 (SC) Ø CIT VS Bokaro Steel Ltd. 236 ITR 315 (SC) Ø Lalsons Enterprises Vs CIT 136 Taxman 97 (Special Bench, Delhi ITAT) 17. It was further stated that the AO s argument that even if the impugned interest income is considered as business income, the same wo .....

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if business income, does not represent profit & gains derived from execution of housing project and when particular interest was inseparable from the housing project, the same could not be treated as a separate business income, which was not eligible for deduction. It was further stated that the word derived from can only be extracted 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 ex .....

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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 ₹ 11, .....

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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 .....

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e Hon ble Madras High Court in the case of Pandian Chemicals reported at 233 ITR 497. 20. The ld. CIT(A) held that interest on I. T. refund shall be assessed as income from other sources and not as business income. The ld. CIT(A) categorically stated that there was no dispute that the deduction u/s 80HHBA of the Act was available only on the income derived from execution of housing project and in the present case the only issue was to be decided as to whether the interest income earned by the as .....

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y 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 ₹ 2,15,99,944/- on Dispute Review Board claims was different and was received on the claims settled by DRB during .....

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ject. 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 t .....

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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 also not derived from the housing project, so it was not eligible for deduction u/s 80HHBA of the Act. It was further submitted that the ld. CIT(A) was not justified in directing the AO to reduce the guarantee commission from the interest earned on the FDRs. 23. In his rival submissions the ld. Counsel .....

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come and the said finding has not been challenged by the department. Therefore, the assessee was eligible to claim the deduction u/s 80HHBA of the Act on the said interest incomes which were considered by the ld. CIT(A) as business income. It was further submitted that guarantee commission had been paid to the bank in respect of FDRs made for giving guarantee. Therefore, the guarantee commission was directly linked with earning of interest on FDRs and the ld. CIT(A) was justified in directing th .....

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ied 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 y .....

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siness 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 de .....

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