M/s. Satern Griha Nirman Pvt. Limited vs. Income Tax Officer - (Income Tax Appellate Tribunal) (04 May 2020)

Disallowance of deduction under Section 80IB(10) of IT Act, in respect of interest income should be restricted to net interest and not gross interest

MANU/IK/0146/2020

Direct Taxation

In facts of present case, the Assessee in the present case is a Company, which is engaged in the business of Builders and Property Developers. The return of income for the year under consideration was filed by it declaring total income at ‘NIL’. During the year under consideration, the Assessee-company had developed a housing project and the entire profit of the said project was claimed to be exempt under Section 80IB(10) of the Income Tax Act, 1961.

During the course of assessment proceedings, it was noticed by the Assessing Officer that interest income of Rs.11,10,810 received on Bank deposits, etc. as well as other income of Rs.6,36,476 earned during the year under consideration was also included by the assessee in the profit earned from developing of a housing project, which was claimed to be eligible for deduction under Section 80IB(10) of Act. According to the Assessing Officer, the said income was not derived by the assessee from the business of development of housing project and the same, therefore, was not eligible for deduction under Section 80IB(10) of Act. He accordingly disallowed the claim of the assessee for deduction under Section 80IB(10) of the Act in respect of interest income of Rs.11,10,810 and other income amounting to Rs.6,86,476. On appeal, the learned CIT(Appeals) confirmed the said disallowance made by the Assessing Officer.

As per the provisions of Section 80IB(10) of Act, the income derived from the business of developing housing project is eligible for deduction and as held in the various judicial pronouncements, the expression “derived from” in section 80IB(10) envisages a direct or first degree connection of the income eligible for deduction with the corresponding business of the assessee of developing a housing project. It means the immediate source of the income should be the business of the assessee of developing a housing project in order to make it eligible for deduction under Section 80IB(10) of the Act.

If this well settled test is applied in the present case, present Tribunal finds that, the interest of Rs.11,10,810 earned by the assessee during the year under consideration on Bank deposits etc. cannot be held to be eligible for deduction under Section 80IB(10) of the Act as the immediate source of the said interest income was not the business of the assessee of developing housing project and it was the investment made by the assessee in Bank deposits, etc.

As regards the other income amounting to Rs.6,36,476, present Tribunal finds that the income by way of transfer fees received by the assessee for Apartment Booking amounting to Rs.4,10,892 and interest received for delay in payment against Flat amounting to Rs.1,61,674 had a direct or first degree connection with the business of the assessee of developing a housing project and the same, therefore, was eligible for deduction under section 80IB(10) of the Act. The immediate source of the said income, was the business of the assessee of developing a housing project and therefore, the said income was eligible for deduction under section 80IB(10) of the Act.

As regards the Ground No. 2 raised by the assessee in present appeal relating to its alternative claim that, the disallowance of deduction under Section 80IB(10) of Act in respect of interest income should be restricted to net interest and not gross interest as done by the authorities below. This alternative claim of the assessee is duly supported by the decision of the Hon’ble Supreme Court in the case of ACG Associated Capsules Pvt. Limted –vs.- CIT, wherein it was held in the context of assesee’s claim for deduction under section 80HHC of Act that, 90% of not the gross interest but only the net interest which had been included in the profits of business of the assessee, as computed under the head “profits and gains of business or profession” should be deducted for determining the profits of the business eligible for deduction. In view the said decision of the Hon’ble Supreme Court, the assessing Officer is directed to verify the amount of net interest keeping in view the direct nexus theory and allow appropriate relief to the assessee on this issue.

As regards the issue relating to the disallowance of Rs.17,765 made by the Assessing Officer and confirmed by the learned CIT(Appeals) under Section 43B on account of ESI payable, it is observed that the ESI shown as payable amounting to Rs.17,765 was disallowed by the Assessing Officer under Section 43B of the Act as the assessee failed to produce any evidence to show that the same was deposited before furnishing its return of income for the year under consideration. No justifiable reason to interfere with the impugned order of the learned CIT(Appeals) confirming the disallowance made by the Assessing Officer. The appeal of the assessee is partly allowed.

Tags : ASSESSMENT DISALLOWANCE DEDUCTION