Interest income on FDR’s pleaded as intrinsically connected with business of assessee- whether business income or income from other source?

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Interest income on FDR’s pleaded as intrinsically connected with business of assessee- whether business income or income from other source?

Short Overview  If interest income on FDR’s was found to be intrinsically related to business of assessee, the same would be considered as business income.

Assessee-contractor declared interest income on FDR’s as business income. AO taxed the same as income from other sources. Assessee’s case was that interest on FDR’s was received by placing FDR’s as security amount for purposes of obtaining contracts and tenders as deposit of FDR’s other securities was pre-requisite condition of bank for issuance of performance guarantees. 

It is held that  Matter was remanded as if it was found on examination that the interest income was intrinsically related to business of assessee, the same would be considered as business income.

Decision: Matter remanded.

IN THE ITAT, AGRA BENCH

LALIET KUMAR, J.M. & MITHA LAL MEENA, A.M.

Awasthi Traders v. DCIT

ITA No. 119/Agr/2016, ITA No. 441/Agr/2018

8 July, 2020

Appellant by: Gaurav Goyal, CA

Respondent by: Waseem Arshad, Sr. DR

ORDER

Per Bench:

These two appeals are filed by the assessee against the Orders, dated 30-12-2015 and 29-3-2018 passed by learned Commissioner (Appeals)-I, Agra for the assessment years 2012-13 and 2014-15 respectively. The assessee has raised following grounds in the respective appeals :–

Assessment Year 2012-13:

“1. That interest income on FDR’s pledged for security purposes in obtaining the contract business comes within the ambit of business income.

2. That the learned Commissioner (Appeals) wrongly held interest income on securities as income from other sources.

3. That on 26-8-2015, whatever queries were given to the appellant for 7-9-2015, they were properly responded by speed post on 4-9-2015 and they are all on record.

4. That the appellant cited the judgment of Hon’ble Karnataka High Court in Commissioner of Income Tax and another v. Chinna Nachimuthv Constructions (2008) 297 ITR 70 (Kar) : 2008 TaxPub(DT) 1230 (Karn-HC) wherein the Court relying on an Apex Court decision in the case of CIT v. Govinda Choudhury and Sons (1993) 203 ITR 881 (SC) : 1993 TaxPub(DT) 0419 (SC) and also the case of Mahesh Chandra Contractor, Etawah v. Income Tax Officer, Etawah ITA No. 382/Agra/2012 of Hon’ble ITAT Agra Bench Agra in both the cases interest added as income from other sources was deleted.

5. That one of the cases cited by leaned Commissioner (Appeals) on interest do not apply to the facts and circumstances of the case.

6. That the authorities below erred in not allowing depreciation which was property claimed and full details were furnished before the learned assessing officer.

7. That the depreciation is allowable even if N.P. rate is applied.

8. That the allowance of depreciation is mandatory as per provisions of section 32 Explanation 5 of the Income Tax Act, 1961.

9. That a number of decisions were cited before the learned Commissioner (Appeals) where depreciation was allowed both by Hon’ble High Courts and by Hon’ble Tribunals.

10. That the case cited by the learned Commissioner (Appeals) is not applicable in the facts & circumstances of the case on depreciation.

11. That the provisions o section 44AD not apply in the facts and circumstances of the case as the accounts were maintained and audited as per provisions of section 44AB of the Income Tax Act, 1961.

12. That the appeal is liable to be allowed.”

Assessment Year 2014-15:

1. That the appellant is a civil contractor and disclosed N.P. rate at 3.44% and the learned assessing officer applied N.P. rate at 8% which is excessive.

2. That the application of 8% N.P. rate is applied by learned assessing officer on the basis of written submissions of the appellant on 11-11-2016 the offer of net profit was conditional the offer was not accepted by learned assessing officer in toto. Hence the offer became redundant.

3. That in the case of the appellant in assessment year 2011-12 6.5% N.P. rate was applied and in subsequent as year in 2015-16, 7% N.P. rate was applied by the learned assessing officer.

4. That the appellant vide written submissions dated 7-11-2016 explained before the learned assessing officer that interest on FDRs amounting to Rs. 31,95,171 was received by placing the FDRs as security amount for purposes of obtaining contracts & tenders. This was examined by the learned assessing officer and nothing adverse was found. Hence income from interest is business income and cannot be taken as income from other sources.

2. The first issue involved in both the appeals I.E Ground No. 1 to 5 in appeal no. 119/16 and ground no. 4 in appeal no. 441/18 is with regard to treatment of interest income on FDRs in the attending facts and circumstances of the cases – whether business income or income from other sources.

3. The learned AR of the assessee had filed an application for acceptance of additional evidence in both the appeals. He has filed certificate from Banks, details of FDRs, copy of FDRs and copies of bank guarantee. It was submitted that these documents were not filed before the lower authorities for the reasons mentioned in the application and further these documents are filed in pursuance to the directions of the Bench.

4. On the other hand, learned DR has objected to filing of these documents, more particularly, the copies of bank guarantees and submitted that these are in the nature of performance bank guarantee issued by the bank, for which the expenses have already been debited to the profit & loss account by the assessee. The contention of the AR for assessee in rebuttal, was that, performance guarantee were issued by the banks on the basis of FDRs deposited by the assessee and therefore, the interest income received by the assessee on such FDRs were intrinsically connected with the business of the assessee, as deposit of FDRs/other securities were prerequisite condition of the bank for issuance of Performance guarantees.

5. We have heard the rival submissions and gone through the material on record. Undisputedly, the assessee had not produced these documents before the lower authorities, as is clear from para 5.3.1 of the impugned order where the learned Commissioner (Appeals) had mentioned that the assessee had not attended the hearing nor filed any application for adjournment. Further, the learned Commissioner (Appeals) had also observed that this interest income cannot be considered as business income as the assessee is not able to prove that FDRs were intrinsically related to the business of the assessee and was required to be considered as income from other sources, Since now documents have been filed in the form of FDRs, performance bank guarantees etc, we are of the opinion that these documents are required to be admitted as additional evidence in support of claim of the assessee that the interest income earned on the FDRs is intrinsically related to the business of the assessee and it was necessary for issuance of performance guarantees by the banks to the third parties. The purpose of Tax adjudication is to tax correct taxable income and is not adversial litigation. Moreover these documents were issued by the Nationalized Bank In the light of above, these documents are admitted.

6. Ground No. 1 to 5 of Appeal No. 119/Agra/2016 and ground no. 4 in appeal no. 441/18 pertain to interest income. The assessee submitted that the Tribunal in the case of assessee itself in the previous year had allowed the interest income as business income and has not separately added the same to the total income of the assessee. The learned DR had submitted that whether the income earned by assessee on FDRs was related to the business of the assessee or not and other facts are required to be examined by the authorities below or by the Tribunal.

7. We have heard the rival contentions of the assessee and perused the records. Undisputedly, the documents now admitted are required to be examined by the Tribunal or by the lower authorities. Since the documents are running into more than 64 pages and we have heard the matter on virtual platform, therefore, the detailed examination of the documents at the stage of Tribunal is not possible. Hence, considering the limitations, we deem it appropriate to remand the matters to the file of Commissioner (Appeals), pertaining to the issue involved in ground No. 1 to 5 of appeal No. 119/Agr/2016 and ground No. 4 of appeal No. 441/Agr/2018, with the direction to examine these documents (1 to 64) filed on 11-7-2019 before the Tribunal in both the appeals, in accordance with law and to find out whether the interest earned by the assessee on FDRs was intrinsically related to the business of the assessee or not. If it is found on examination that the interest income is related to the business of the assessee, the same may be considered as business income and accordingly the income of the assessee is computed by applying the NP rate.

For the above purpose, the learned Commissioner (Appeals) is duty bound to grant personal hearing and opportunity to the assessee as well as assessing officer, from whom Commissioner (Appeals) may also seek remand report from assessing officer, if required. The learned Commissioner (Appeals) shall also consider various decisions relied upon by the assessee including the decision of Tribunal in the assessee’s case for earlier years.

8. Ground No. 6 to 12 of appeal No. 119/Agr/2016 pertain to allowance of depreciation. The learned AR has drawn our attention to the order of Hon’ble Supreme Court in the case of assessee, wherein identical issue was decided by Hon’ble Supreme Court in favour of the assessee. Further, our attention was also drawn to para 8.2 of the order of Commissioner (Appeals) for assessment year 2014-15 in Appeal No. 441/18 to the following effect :–

“8.2. As regards the issue of allowance of depreciation, I find that this issue in the present proceedings is fully covered by the decision of Hon’ble Supreme Court in the appellant’s own case for assessment year 2009-10, which has been cited by the appellant in its submission in the present proceedings and reported as Awasthi Traders v. Commissioner of Income Tax-I Agra (2016) 73 taxmann.com 208 (SC) : 2016 TaxPub(DT) 4173 (SC). In due compliance to the same and under the facts and circumstances of the present proceedings, the appellant’s claim of depreciation is allowed.”

9. It was submitted that the assessing officer while computing income of the assessee has not given benefit of depreciation, as it was the opinion of the assessing officer that the depreciation was subsumed in the estimated income at 8%.

10. On the other hand, learned DR had submitted that the assessee had already been given benefit of depreciation and it was submitted that the amount of Rs. 65,28,670 was already taken into account for depreciation.

11. We have heard the rival submissions and have gone through the record. Undisputedly, the issue has been settled by Hon’ble Supreme Court in the case of assessee, as has been rightly recorded by the learned Commissioner (Appeals) in the order for assessment year 2014-15. In order to give clarity, we direct the assessing officer to compute the taxable income of the assessee after giving benefit of interest to partners, remuneration to the partners and depreciation. The taxable income of the assessee would be subject to outcome on the issue of interest on FDRs. In the light of above grounds Nos. 6 to 11 of appeal for assessment year 2012-13 are allowed —

12. Ground No. 1 to 3 of Appeal No. 441/Agr/2018 pertain to taking of net profit rate of 8% by the assessing officer and Commissioner (Appeals) for assessment year 2014-15. It was contended on behalf of the assessee that the net profit rate of 8% is too high considering the turnover of the assessee. The turnover of the assessee for the assessment year 2014-15 was Rs. 19,27,47,827 and AR relied to the following chart It was pointed out that for subsequent assessment years, the lower authorities had already applied net profit rate of 7% moreover the above said aspect has not been contested by the Revenue by filing the appeal for the subsequent year. It was submitted that parity is required to be maintained and therefore, the net profit rate of 7% may be taken instead of 8%.

13. In rebuttal, it was submitted by the learned DR that in the assessment year 2012-13, the assessee has accepted the NP rate of 8% and the same has not been challenged by the assessee. Further, for the last more than a decade, the assessee has not maintained books of accounts nor challenged the rejection of books of account by the authorities below before the Tribunal. It was submitted that the assessee should not be given premium for not maintaining the books of accounts and thus, there should not be any disturbance of NP rate of 8%.

14. We have heard the rival contentions and have gone through the record. The assessee itself has admitted net profit rate of 8% as reasonable in the preceding assessment year in the identical facts and circumstances. Further assessee cannot be given benefit of subsequent assessment year as those estimation was done after rejection of books of account. Admittedly, the assessment can be made by the assessing officer, based on previous years NP of the assessee or on the basis of comparable instance involved in the same business in the previous and subsequent assessment years. In the present case, the assessee relied upon his own cases for the subsequent years. Though found that the assessee has not challenged the NP rate of 8% applied for assessment year 2012-13 and 2013-14 in which the turnover of the assessee was 17.17 crores and 22 crore respectively, whereas the turnover in the present year was 19.27 crores. However considering the peculiar facts and circumstance of the case we restrict the net profit rate to 7.75% instead of 8% as held by the lower authorities. In the result the relevant ground of appeal of assessee is, accordingly, partly allowed.

15. In the result, both the appeals of the assessee are partly allowed for statistical purposes.

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