Continental Foundation Joint Ventur,, vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'E', NEW DELHI Before Sh. N. K. Saini, AM And Sh. H. S. Sidhu, JM ITA No. 3736/Del/2006 : Asstt. Year : 2003-04 Continental Foundation Joint Vs Assistant Commissioner of Venture, Continental House, Income tax, Circle-38(1), 28, Nehru Place, 3rd Floor, C. R. Building, New Delhi-110019 New Delhi (APPELLANT) (RESPONDENT) ITA No. 4204/Del/2006 : Asstt. Year : 2003-04 Assistant Commissioner of Vs Continental Foundation Joint Income tax, Circle-38(1), Venture, Continental House, 28, 3rd Floor, C. R. Building, Nehru Place, New Delhi New Delhi-110019 (APPELLANT) (RESPONDENT) ITA No. 1168/Del/2006 : Asstt. Year : 2002-03 Continental Foundation Joint Vs Assistant Commissioner of Venture, Continental House, Income tax, Circle-38(1), 28, Nehru Place, 3rd Floor, C. R. Building, New Delhi-110019 New Delhi (APPELLANT) (RESPONDENT) ITA No. 1737/Del/2006 : Asstt. Year : 2002-03 Assistant Commissioner of Vs Continental Foundation Joint Income tax, Circle-38(1), Venture, Continental House, 28, 3rd Floor, C. R. Building, Nehru Place, New Delhi New Delhi-110019 (APPELLANT) (RESPONDENT) PAN No. AAAAC0084D Assessee by : Sh. Y. K. Kapoor, Adv. Revenue by : Sh. Gunjan Prashad, CIT DR

Date of Hearing : 26.03.2015 Date of Pronouncement : 24.06.2015 2 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

ORDER Per N. K. Saini, AM:

These cross appeals by the assessee and the department are directed against the separate orders of ld. CIT(A)-XXVIII, New Delhi dated 14.02.2006 & 27.09.2006 for the assessment 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 special audit was proper & legal in spite of the 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 3 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 Rs. 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.

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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 reference to the facts of the relevant case and the context in which such pronouncements were made. Thus the action of the learned AO was directed towards the pre-thought decision without any 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 Rs. 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 identifying any other 'Business' distinct & separate from the sole business of 'Housing Project' of the assessee and which is the germane of the joint venture by its members and the award of the contract by NJPC, a world bank financed project.

7. On facts and circumstances of the case and on law, the lower authorities have erred and were not justified in rejecting the plea of the assessee, without prejudice to the merits of the case, to apply the principle of 'Netting off' in arriving at the taxability of such interest income, when the assessee itself has incurred a sum of Rs. 17,78,07,489/-

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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 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 guarantee commission without considering that there is no nexus of payment of guarantee commission with the interest received on FDRs. The Fixed Deposits are 6 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 total income at Nil. Later on, the case was selected for scrutiny. During the course of assessment proceedings the AO noticed that the assessee derived income from civil contracts. The AO did not disturb the trading result by observing that the purchases were verifiable and net profit rate declared by the assessee had shown improvement as compared to the last year. He further observed that the assessee earned profit of Rs. 86,30,70,327/- and claimed deduction u/s 80HHBA of 7 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

the Act amounting to Rs. 25,89,50,000/- before adjusting brought forward losses of earlier years. The AO asked the assessee to show cause as 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 deduction is to be allowed from the gross total income.

In computing the total income of the assessee, the deduction of profits shall be in accordance with and subject to the provisions of Section 80 HHBA meaning thereby that from out of the income declared, 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.

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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 is included in gross total income'.

Section 80 AB deals only with the eligibility criterion for availing deduction under heading "C- deduction 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 9 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 profits and gains of the housing project for the relevant assessment year 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 view of submissions made above and case laws cited, it is clear that deduction u/s 80 HHBA has to be allowed before adjusting the brought forward losses and unabsorbed depreciation, if any, and consequently brought forward losses be set off from the profits available after deduction u/s 80 HHBA shall be carried forward for set off in the subsequent year.

In support of his contention the assessee's AR has relied upon the following decisions of various courts:-

Ø CIT Vs Viskha Inds. Ltd. (2001) 171 CTR (AP) 300 Ø M. N. Dasatur & Co. Ltd. Vs Dy. CIT (1992) 42 TTJ (Cal) 10 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 11 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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:

Ø CIT Vs Yen Peyes Rubber Pvt. Ltd. (1999) 239 ITR 734 (Mad.) Ø CIT Vs South India Flour Mills Ltd. (2000) 243 ITR 458 (Mad.) Ø CIT Vs Chemical and Metallurgical Design Co.

Ltd. (2001) 247 ITR 749 (Del) (FB) Ø 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 that the assessee knows that the claim was admissible only on net income after 12 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

adjustment of brought forward losses/unabsorbed depreciation. Accordingly, the AO held that the deduction u/s 80HHBA of the Act was to be computed on the income which was arrived at after adjustment of brought forward losses/unabsorbed depreciation.

11. The AO also noticed that the assessee had credited a sum of Rs. 11,76,44,667/- under the head interest received which included interest on FDR amounting to Rs. 11,49,32,567/- and Income Tax Refund amounting to Rs. 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 amount of money was required to be kept with the bank in the form of fixed deposits as security. It was also stated that there was no surplus funds in the hands of the assessee which had been invested in the banks and no borrowed money/advances from NJPC had been invested in bank in the form of fixed deposits, the amount of such fixed deposits came from retention money held by NJPC, 13 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

therefore, any interest arising from 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 14 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 manner it was attributable to assessee's 15 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

business and as such no deduction u/s 80HHBA of the Act was admissible to the assessee. The reliance was placed on the following case laws:

Ø CIT Vs Cochin Refineries Ltd. (1982) 135 ITR 278 (Ker) Ø CIT Vs Cement Distributors Ltd. (1994) 208 ITR 355 (Del) Ø CIT Vs Sterling Foods (1999) 237 ITR 579 (SC) Accordingly interest income of Rs. 11,76,44,667/- was assessed by the AO under the head "Income from Other Sources".

14. Being aggrieved 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 profit and loss 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 16 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 17 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 in negative total income and similar is the application of section 80AB of the Act, so that actual deduction allowing special benefit to a particular nature of income, does not exceed such profits & gains actually forming part of the gross total income, 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.

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(2001) 251 ITR 471. It was further submitted that the AO's reliance on the case laws in relation to section 80M, 80O & 80HHC was bad, as the ratio of those judgments could not be applied to the present case since in those cases, the issue was mainly relating to the claim of expenses incurred in the same year and the contentious issues had been whether, the gross receipts of the specified nature or the net income, after expenses was to be taken for computing the amount of eligible deduction. It was contended that computation of eligible deduction u/s 80HHBA of the Act 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 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) 19 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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, 20 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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-deductions in respect of certain incomes", which includes section 80HHBA as well. Accordingly, the ld. CIT(A) held that deduction u/s 80HHBA of the Act shall be calculated on the profits & gains derived from execution of housing project and included in the gross total income which has to be determined after setting off brought forward depreciation and losses against the current year's income.

16. As regards to the another issue relating to exclusion of "interest income" from "business income" and its assessment 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 21 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

and during execution of project, the assessee was required to furnish various types of guarantees from time to time. It was stated that the interest had been earned by the assessee on the fixed deposits kept with the banks as margin money against the guarantees issued for release of the retention money kept by the client. It was further stated that 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 22 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 placed on the following case laws:

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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 would not qualify for deduction u/s 80HHBA of the Act was not correct because the AO himself has stated, on having doubts as to the treatment of such interest as income from other sources, that the interest could be business income, if that is so, with the other conditions u/s 80HHBA of the Act for separate maintenance of books of accounts for eligible business, it is unimaginable, how such interest income could be taken out from the books of accounts, on the ground that such interest income, even 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 24 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 expense of Rs. 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 25 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 Rs. 89,05,87,488/- which included income from interest amounting to Rs.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) Rs. 9,28,70,416/- on FDRs with Banks ii) Rs. 27,12,100/- on I.T. Refund iii) Rs. 4,62,207/- on A/c with Citi Bank in London iv) Rs. 2,15,99,944/- on DRB (Dispute Revie w Board) claims Total Rs. 11,76,44,667/-

19. The ld. CIT(A) was of the view that the aforesaid interest income mentioned at item no. (i), (iii) & (iv) are closely and intimately linked with the business of the assessee and therefore, it shall be assessed as business income. The reliance was placed on the decision of the Hon'ble Apex Court in the case of Govind Choudhury 26 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

reported at 203 ITR 881 and the 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 assessee had been derived from the execution of the housing project or not. The ld. CIT(A) further observed that the acid test to determine whether an income is derived from a particular source had been laid down succinctly by the Privy Council in the case of Raja Bahadur Kamakhya Narain Singh reported at 16 ITR 325 wherein it has been observed as under:

"The word "derived from" is not a term of art. Its use in the definition indeed demands an inquiry into the genealogy of the 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 27 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 giving guarantee on which interest of Rs. 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 Rs.

28 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

2,15,99,944/- entitled to deduction u/s 80HHBA of the Act and reducing the guarantee commission of Rs. 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 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 for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee was required to invest in the FDR which were necessary for making the bank guarantee needed to get the contract for execution of the project. It was further submitted that the 29 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

ld. CIT(A) in paras 7 & 7.1 of the impugned order categorically stated that the interest earned on FDRs, Income Tax Refund and accounts maintained with Citi Bank, London shall be assessed as business income 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 the AO to reduce the Bank guarantee commission from interest on FDRs. It was further submitted that 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.

30 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 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 Rs. 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 31 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

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 amounting to Rs. 2,15,99,944/- 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 amounting to Rs. 72,67,980/- 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. Accordingly, we do 32 ITA Nos.3736, 4204, 1168 & 1737/Del/2006 Continental Foundation Joint Venture

not see any merit in this issue of the departmental appeal raised vide Ground No. 2.

25. The facts for the assessment year 2003-04 in the cross appeals are similar as were involved in the assessment year 2002-03, therefore, our findings given in the cross appeals for the assessment year 2002-03 shall apply mutatis mutandis for the assessment year 2003-04.

26. In the result, appeals of the assessee are partly allowed for statistical purposes and that of the department are dismissed.

(Order Pronounced in the Court on 24/06/2015).

Sd/- Sd/- (H. S. Sidhu) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24/06/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR