The ACIT, Circle-3(1),., Visakhapatnam V. M/s Sri Lakshmi Builders, Visakhapatnam

ITA 244/VIZ/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 2692 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 25-10-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 02-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Keywords: Business income; Depreciation; Tax effect; Set aside
• Section: 143(3); 40(a)(ia); 80IB; 43D; 28; 154

Judgement Text

ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.244/VIZAG/2008 ASSESSMENT YEAR: 2005 - 06 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1) VISAKHAPATNAM VS. SRI LAKSHMI BUILDERS, VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO: AAUFS 3966 R ITA NO.323/VIZAG/2010 ASSESSMENT YEAR: 2005-06 THE DY. COMMISSIONER OF INCOME TAX CIRCLE-3(1) VISAKHAPATNAM VS. SRI LAKSHMI BUILDERS, VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO: AAUFS 3966 R APPELLANT BY: SHRI D.S.SUNDER SINGH, DR RESPONDENT BY: SHRI G.V.N. HARI, CA ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: BOTH THE APPEALS PREFERRED BY THE REVENUE ARE DIREC TED AGAINST THE ORDER DATED 5-3-2008 PASSED BY LEARNED CIT (A)-I VIS AKHAPATNAM AND THEY RELATE TO THE ASSESSMENT YEAR 2005-06. THE APPEAL N UMBERED AS ITA 244/VIZAG/2008 RELATES TO THE ASSESSMENT ORDER PASS ED U/S 143(3) AND THE OTHER APPEAL NUMBERED AS ITA NO.323/VIZAG/2010 RELA TES TO THE ORDER PASSED U/S 154 OF THE ACT. 2. THE APPEAL NUMBERED AS ITA NO.323/VIZAG/2010 REL ATING TO THE ORDER PASSED U/S 154 OF THE ACT IS TIME BARRED BY 7 42 DAYS. THE LD DR EXPLAINED THE REASON FOR THE DELAY IN FILING THE SA ID APPEAL. IT IS NOTICED ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 2 OF 6 THAT THE LEARNED CIT(A) HAD PASSED A COMBINED ORDER AGAINST BOTH THE ORDERS PASSED UNDER SECTION 143(3) AND SECTION 154 OF THE ACT AND THE REVENUE INITIALLY FILED A SINGLE APPEAL AGAINST THE COMMON ORDER OF THE LD CIT (A). WHEN THE DEFECT WAS POINTED OUT BY THE RE GISTRY, THE REVENUE HAS FILED ANOTHER APPEAL IMMEDIATELY THEREAFTER AND THE SAME HAS RESULTED IN A DELAY OF 742 DAYS. THE LEARNED DEPARTMENTAL R EPRESENTATIVE SUBMITTED THAT THE DELAY BEING TECHNICAL IN NATURE, BE CONDONED AND THE APPEAL BE ADMITTED. HAVING REGARD TO THE SUBMISSION S OF THE LD DR, WE CONDONE THE DELAY AND ADMIT THE SAME. 3. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE TAX EFFECT IN THE APPEAL NUMBERED AS ITA 244/VIZAG/2008 IS LES S THAN RS.2 LAKHS AND HENCE THE REVENUE SHOULD NOT HAVE PREFERRED THE APP EAL, AS THE SAME IS IN VIOLATION OF THE CIRCULAR ISSUED BY THE CBDT. HOWE VER, WE NOTICE THAT THE TAX EFFECT AFTER PASSING OF THE ORDER U/S 154 IS MO RE THAN RS.2 LAKHS AND FURTHER SINCE THE ORDER PASSED U/S 154 IS ONLY A RE CTIFICATION OF THE ASSESSMENT ORDER ORIGINALLY PASSED, WE ARE OF THE V IEW THAT THE TAX EFFECT SHOULD BE CALCULATED AFTER TAKING INTO ACCOUNT THE RECTIFICATIONS MADE U/S 154 OF THE ACT. ACCORDINGLY THIS PLEA OF THE LD AR IS DISMISSED. 4. IN THESE TWO APPEALS, THE REVENUE IS ASSAILING TH E DECISION OF THE LD CIT (A) IN GRANTING DEDUCTIONS U/S 80IB(10) OF THE A CT IN RESPECT OF THE FOLLOWING ITEMS: I INTEREST RECEIVED FROM BANK DEPOSIT RS.1,00,968/ - II COMMISSION PAYMENT DISALLOWED U/S 40(A)(IA) RS.3,50 ,000/- III PAYMENT MADE TO THE SUB CONTRACTOR DISALLOWED U/S 40(A)(IA) RS.15,26,200/- WHILE THE FIRST TWO ITEMS ARE EMANATING FROM THE AS SESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE ACT, THE LAST ITEM IS E MANATING FROM THE ORDER PASSED UNDER SECTION 154 OF THE ACT. ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 3 OF 6 5. THE FACTS RELATING TO THE ISSUES ARE STATED IN B RIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF RESIDENT IAL APARTMENTS. THE ASSESSEE CLAIMED DEDUCTION U/S 80IB(10) OF THE ACT I N ITS RETURN OF INCOME ON THE INTEREST RECEIVED ON BANK DEPOSITS. HOWEVER , THE AO TREATED THE INTEREST RECEIVED ON BANK DEPOSIT AS INCOME FROM OT HER SOURCES AND ACCORDINGLY DENIED DEDUCTION U/S 80IB OF THE ACT ON IT. THE AO ALSO DISALLOWED A SUM OF RS.3.50 LAKHS U/S 40(A)(IA) OF THE ACT IN THE ORIGINAL ASSESSMENT PASSED U/S 143(3) OF THE ACT AND MADE DI SALLOWANCE UNDER THE SAME SECTION OF RS.15,26,200/- IN THE ORDER PASSED U/S 154 OF THE ACT. ON BOTH THE DISALLOWANCES, THE AO DENIED DEDUCTION U/S 80IB(10) OF THE ACT. IN THE APPEAL FILED BY THE ASSESSEE, THE LEARNED CI T (A) ALLOWED THE CLAIM OF THE ASSESSEE ON ALL THE THREE ISSUES. HENCE THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. THE FIRST ISSUE RELATES TO THE DENIAL OF D EDUCTION UNDER SECTION 80IB(10) OF THE ACT ON THE INTEREST INCOME RECEIVED FROM THE BANK DEPOSITS. IT WAS SUBMITTED THAT THE BANK DEPOSITS W ERE MADE FOR PROCURING THE BANK GUARANTEE, WHICH WERE REQUIRED TO BE SUBMI TTED AS A SECURITY DEPOSIT TO THE MUNICIPAL CORPORATION OF VISAKHAPATN AM FOR THE PURPOSES OF OBTAINING APPROVAL OF CONSTRUCTION PLAN. ACCORDINGL Y IT WAS CONTENDED THAT THERE IS BUSINESS EXIGENCY FOR MAKING THE IMPUGNED DEPOSITS AND HENCE THE SAID INTEREST SHOULD BE TREATED AS PART OF BUSI NESS INCOME AND DEDUCTION U/S 80IB(10) SHOULD BE ALLOWED ON THE SAME . HOWEVER, THE LD DR SUBMITTED THAT AS PER THE PROVISION OF SECTION 8 0IB(10), THE DEDUCTION U/S 80IB(10) SHOULD BE RESTRICTED TO THE PROFITS AN D GAINS DERIVED FROM THE BUSINESS OF DEVELOPING AND BUILDING HOUSING PRO JECTS. ACCORDINGLY, HE CONTENDED THAT THE DEDUCTION CANNOT BE ALLOWED ON T HE INTEREST INCOME EARNED ON BANK DEPOSITS, SINCE THE IMMEDIATE SOURCE FOR GETTING THE SAID INCOME IS BANK DEPOSIT AND NOT THE BUSINESS ACTIVIT Y CITED ABOVE. ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 4 OF 6 6.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS POINTED OUT BY LEARNED DEPARTMENTAL REPRESENTATIVE, THE DEDUCTION UNDER SE CTION 80IB(10) HAS TO BE ALLOWED ON THE PROFITS AND GAINS DERIVED FROM THE BUSINESS OF DEVELOPING AND BUILDING HOUSING PROJECTS. THOUGH T HERE IS A COMMERCIAL NECESSITY FOR MAKING THE IMPUGNED DEPOSITS, YET THE INTEREST INCOME RECEIVED FROM THE SAID DEPOSITS CANNOT BE TREATED A S THE PROFITS DERIVED FROM THE BUSINESS ACTIVITY CITED ABOVE. THE LAW IN THIS REGARD HAS BEEN SETTLED BY THE HON'BLE SUPREME COURT IN THE CASE OF STERLING FOOD VS. CIT (1999) 237 ITR 579 (SC). IT IS NOW WELL SETTLED LEG AL PROPOSITION THAT WHEN THE ACT USES WORD DERIVED , IT IS NOT SUFFICIENT IF A COMMERCIAL CONNECTION IS ESTABLISHED BETWEEN THE INCOME EARNED AND THE IN DUSTRIAL UNDERTAKING. THE LAW REQUIRES THAT SUCH PROFITS MUST HAVE BEEN D ERIVED FROM THE INDUSTRIAL UNDERTAKINGS. IN VIEW OF THE FOREGOING DI SCUSSIONS, WE HOLD THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION U/S 80IB(1 0) OF THE ACT ON THE INTEREST INCOME EARNED FROM THE BANK DEPOSITS, EVEN THOUGH THE SAID DEPOSITS HAVE BEEN MADE OUT OF COMMERCIAL EXIGENCIE S. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LD CIT (A) ON THIS ISSUE AND RESTORE THE ORDER OF THE ASSESSING OFFICER ON THIS ISSUE. 7. THE NEXT ISSUE RELATES TO THE ACTION OF THE AO I N DENYING DEDUCTION UNDER SECTION 80IB(10) OF THE ACT ON THE AMOUNT DIS ALLOWED U/S 40(A)(IA) OF THE ACT. WE HAVE GONE THROUGH THE ORDER OF THE LD CIT (A) IN THIS REGARD. THE FIRST APPELLATE AUTHORITY HAS OBSERVED THAT THE PROFITS AND GAINS OF BUSINESS OF PROFESSIONS ARE CHARGEABLE TO TAX UN DER THE PROVISIONS OF SECTION 28. THEN, AS PER PROVISIONS OF SEC.29, THE BUSINESS INCOME REFERRED IN SEC.28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SEC.30 TO 43D OF THE I.T. ACT. THUS, W HILE COMPUTING THE BUSINESS INCOME AS PER SEC.30 TO 43D, ALL ALLOWANCE S AND DISALLOWANCES SPECIFIED THEREIN HAVE TO BE ADJUSTED AGAINST THE P ROFITS AND GAINS OF BUSINESS. THE INCOME SO ARRIVED AT, AFTER MAKING T HE ADJUSTMENTS STATED ABOVE, IS TREATED AS THE INCOME UNDER THE HEAD PRO FITS AND GAINS OF ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 5 OF 6 BUSINESS. SINCE THE SEC.40 IS A PART OF SUCH COMP UTATION PROCESS, ANY DISALLOWANCE MADE U/S 40(A)(IA) SHALL ALSO CONSTIT UTE THE BUSINESS INCOME ONLY AND HENCE DEDUCTION U/S 80IB(10) IS ALLOWABLE T HEREON. 7.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE ARG UED THAT THE DISALLOWANCES MADE UNDER SECTION 40(A)(IA) CANNOT B E TREATED AS THE INCOME DERIVED FROM THE BUSINESS AND ACCORDINGLY SU BMITTED THAT THE DEDUCTION UNDER SECTION 80IB(10) SHOULD BE DENIED ON SUCH DISALLOWANCES. HOWEVER, WE ARE UNABLE TO AGREE WITH THOSE SUBMISSI ONS OF LEARNED D.R. THE ACT PROVIDES THE PROCESS OF COMPUTATION OF INCO ME OF INCOME FROM BUSINESS. THE PROFIT DISCLOSED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT IS CHARGEABLE TO TAX AS PER SECTION 28 OF T HE ACT. HOWEVER, SECTION 29 OF THE ACT PROVIDES THE MANNER OF COMPUTATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION, ACCORDING TO W HICH, THE PROFIT SHOWN UNDER SECTION 28 IS SUBJECTED TO MANY ADJUSTMENTS A S PROVIDED FOR IN SECTIONS 30 TO 43D OF THE ACT. THE INCOME SO ARRIV ED AT AFTER MAKING THE ADJUSTMENTS REFERRED ABOVE CONSTITUTES THE INCOME T AXABLE UNDER THE HEAD INCOME FROM BUSINESS. NOW THE QUESTION THAT ARIS ES IS WHETHER THE ADJUSTMENTS REFERRED TO IN SECTIONS 30 TO 43D CAN B E TREATED AS INCOME DERIVED FROM THE BUSINESS ACTIVITY OF THE ASSESSEE . IT CANNOT BE DENIED THAT THE ADJUSTMENTS SO REQUIRED TO BE MADE ARE VER Y MUCH RELATED TO THE ITEMS WHICH ARE INTIMATELY CONNECTED TO THE BUSINES S ACTIVITY CARRIED ON BY THE ASSESSEE. FOR EXAMPLE, THE ACT PROVIDES FOR TH E ADJUSTMENTS RELATING TO RENT, REPAIRS, DEPRECIATION ETC. IN THESE SECTIO NS AND THEY ARE ALLOWED AS DEDUCTIONS ONLY IN ACCORDANCE WITH THE SAID PROVISI ONS. SIMILARLY THE DISALLOWANCES, IF ANY, REQUIRED TO BE MADE CAN ONLY BE MADE IN ACCORDANCE WITH THE SAID PROVISIONS. ALL THESE ALLOWANCES AND DISALLOWANCES ARE RELATED TO THE BUSINESS ACTIVITY OF THE ASSESSEE AND HENCE NONE CAN ESTABLISH THAT THEY EMANATE FROM ANY OTHER SOURCE. HENCE WE ARE O F THE VIEW THAT THE DISALLOWANCES SO MADE CAN ONLY BE TREATED AS THE IN COME DERIVED FROM THE IMPUGNED BUSINESS ACTIVITY, WHEN THE INCOME AFTER M AKING THE SAID ITANOS.244 OF 08 AND 323 OF 2010 SRI LAKSHMI BUILDE RS PAGE 6 OF 6 DISALLOWANCES IS SUBJECTED TO TAX AS THE BUSINESS P ROFITS. IN VIEW OF THE ABOVE DISCUSSIONS, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF THE LD CIT (A) IN HOLDING THAT THE DEDUCTION U/S 80IB IS ALLOWA BLE ON THE AMOUNT DISALLOWED U/S 40(A)(IA) OF THE ACT. 8. IN THE RESULT THE APPEAL NUMBERED AS ITA 244/VIZA G/2008 IS PARTLY ALLOWED AND THE OTHER APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 22 ND NOVEMBER, 2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 22-11-2010 COPY TO 1 THE ASSISTANT COMMISSIONER OF INCOME TAX RANGE-3, VISAKHAPATNAM 2 THE D.C.I.T. CIRCLE - 3(1) VISAKHAPATNAM 3 4. 5 M/S. SRI LAKSHMI BUILDERS, 1-1-82 NEW VENKOJIPALEM, VISAKHAPATNAM THE CIT(A)-I, VISAKHAPATNAM THE CIT-1 VISAKHAPATNAM 6 THE DR, ITAT, VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM