2011 (12) TMI 583 - AT - Income Tax

Addition in contract account - GP determination - sub-letting commission paid to the main contractor from whom the work was received on the basis of the payment of sublet commission - interest received on FDR, NSC etc. pledged with the department for obtaining contract work as business income and not from other sources

Summary

Issues Involved:
1. Addition of Rs. 4,06,540/- in the contract account.
2. Disallowance of sub-letting commission amounting to Rs. 33,38,926/-.
3. Classification of interest of Rs. 2,51,241/- received on FDR, NSC, etc., as income from other sources instead of business income.

Detailed Analysis:

1. Addition of Rs. 4,06,540/- in the Contract Account:
- Assessee's Argument: The assessee, engaged in contract work, presented comparative gross profit and net profit for the last four years, showing a gross profit rate of 12.21% for the assessment year 2006-07, which was better than the preceding year but lower than 2004-05. The assessee did not maintain a stock register or provide a headwise breakup of expenses. The auditor noted potential personal expenses for partners.
- AO's Decision: The AO applied a gross profit rate of 12.5%, consistent with past years, and added Rs. 4,06,540/-.
- CIT(A)'s Decision: The CIT(A) upheld the addition, emphasizing that past history is the best guide for determining the profit rate.
- Tribunal's Decision: The Tribunal noted a substantial increase in turnover to Rs. 14.01 crores from Rs. 5.48 crores in the preceding year and acknowledged better net profit rates. Considering these factors and potential personal expenses noted by the auditor, the Tribunal deemed it fair to restrict the addition to Rs. 2,03,000/-.

2. Disallowance of Sub-letting Commission Amounting to Rs. 33,38,926/-:
- Assessee's Argument: The assessee argued that sublet commission was allowed in the past and cited the ITAT's decision in M/s. Bhawan Va Path Nirman (Bohra) and Co., where subletting commission was allowed separately.
- CIT(A)'s Decision: The CIT(A) issued a show cause notice and concluded that the liability to pay sublet commission crystallized at the moment of signing the agreement. Therefore, the gross receipt should be reduced by the sublet commission before applying the gross profit rate, and no further deduction for sublet commission should be allowed.
- Tribunal's Decision: The Tribunal referred to the ITAT's decision and the Jurisdictional High Court's ruling, which upheld the separate allowance of subletting commission. Consequently, the Tribunal held that the CIT(A) was not justified in disallowing the sublet commission of Rs. 33,38,926/-.

3. Classification of Interest of Rs. 2,51,241/- Received on FDR, NSC, etc., as Income from Other Sources:
- Assessee's Argument: The assessee received interest on FDRs and NSCs pledged for obtaining contract work and claimed it as business income.
- CIT(A)'s Decision: The CIT(A) treated the interest as income from other sources.
- Tribunal's Decision: The Tribunal noted that the interest should be treated as business income, referencing the ITAT Jodhpur bench's decision in Radha Krishan Beniwal vs ACIT, where interest on FDRs and NSCs used for tender submissions was considered business income. The AO did not dispute that the FDRs and NSCs were purchased for tender submissions. Hence, the Tribunal ruled in favor of the assessee, treating the interest as business income.

Conclusion:
The appeal of the assessee is partly allowed. The Tribunal restricted the addition in the contract account to Rs. 2,03,000/-, allowed the subletting commission of Rs. 33,38,926/-, and classified the interest of Rs. 2,51,241/- as business income. The order was pronounced in the open Court on 09-12-2011.