2013 (8) TMI 989 - AT - Income Tax

NP rate sustained at 7% subject to the depreciation and interest to the third parties - Held that - In the present case it is an admitted fact that certain discrepancies were pointed out by the AO in the books of accounts maintained by the assessee in his regular course of business. Therefore the provisions of Section 145(3) of the Act were applicable and the books were liable to be rejected. When the books were rejected the only way left to determine the income is estimation by applying the GP rate or NP rate. In the present case the AO applied NP rate of 12.5% which was reduced to 7% by the ld. CIT(A). The said estimates were without any basis or comparable case. It is also an admitted fact that in such type of cases past history or comparable case is to be considered to estimate the income but preference is to be given to the past history of the assessee s own case. In the instant case it is noticed that the NP rate shown by the assessee for the year under consideration was at 3.26% in comparison to 3.08% in the immediately preceding year. Therefore keeping in view the past history of the assessee own case it can be said that the NP rate shown by the assessee was progressive so no addition was called for even after rejecting the books of accounts. Addition made by treating the FDR interest as income from other sources - Held that - it is not the case of the department that the FDRs were purchased by the assessee from surplus money which was lying idle and had been deposited in the bank for the purpose of earning interest. On the contrary the FDRs were purchased from out of money which were necessary to get bank guarantee which was assessed to get the contract and there was a direct link with the purchase of FDRs and the contract awarded to the assessee. Therefore ld. CIT(A) was not justified in holding that the AO rightly taxed the interest income as income from other sources. We therefore set aside the impugned order of the ld. CIT(A) on this issue and direct the AO to treat the amount in question as business income.

Summary

Issues:
1. Estimation of NP rate at 7% subject to depreciation and interest to third parties compared to 12.50% applied by AO.
2. Addition of FDR interest as income from other sources.

Issue 1:
The appeal was against the CIT(A)'s order sustaining the NP rate at 7% with depreciation and interest to third parties, instead of the 12.50% applied by the AO. The AO rejected the books of accounts under Section 145(3) due to discrepancies in GP rate. The CIT(A) considered the past history of the assessee and comparable cases, concluding that 7% NP rate was fair. The tribunal found the NP rate declared by the assessee to be progressive, with no basis for the estimates by the AO or CIT(A). Citing past tribunal decisions, the tribunal deleted the addition sustained by the CIT(A).

Issue 2:
The second issue related to the AO treating FDR interest as income from other sources without discussing it in the assessment order. The CIT(A) affirmed this decision, stating FDR interest was not business income. The tribunal noted that the FDRs were purchased for obtaining contract work, and the interest earned was part of business income. Citing relevant tribunal decisions and the Supreme Court case law, the tribunal held that the interest income had a direct link to securing contracts and business operations. Consequently, the tribunal directed the AO to treat the interest income as business income, overturning the CIT(A)'s decision.

In conclusion, the tribunal allowed the appeal, deleting the addition related to NP rate estimation and directing the treatment of FDR interest as business income.