2014 (7) TMI 1237 - AT - Income Tax

Trading addition - rejection of books of account - Held that - After rejection of books of account facts of the earlier years are found to be same and similar, then it would be reasonable to adopt net profit rate of the earlier year without mentioning the words. However, when the assessee further explained the fall in ratio of profit and same is plausible, it is also to be considered as has been held in the case of CIT Vs. Amrapali Jewels P Ltd. 2011 (10) TMI 470 - RAJASTHAN HIGH COURT in which it has been held that abnormal increase in the turnover definitely compromises its margins and same has to be definitely considered while making fair estimation. It has been found in this case that during the relevant period, the assessee has made heavy investment in plant and machinery which is evident from the closing balance of the fixed assets which were produced before the A.O. The steep rise in the cost and consumption are also relevant which are found to be correct. The fact that from the table itself it has been noted that in A.Y. 2007-08, net profit ratio was 3.85% and it has been accepted by the A.O. showing that in this assessee s case, there has been variance in the net profit rate for various reasons applicable to that particular A.Y. The ld. CIT(A) has considered these factors and has given part relief to the assessee. Thus it would be fair and reasonable to sustain a lumpsum addition of ₹ 2.5 lakhs to answer the fall in net profit. Accordingly, we partly allow the assessee s ground raised in its cross objection and cannot allow revenue. Treating the interest income arising from compulsory FDRs deposits as income from other sources - Held that - It is an undeniable fact of this case that the deposits were made for obtaining contracts in question and as per the settled position of law in this regard, this interest income has to be treated as income from assessee s business and not income from other sources. In this regard, we may refer to the decision of the Hon ble Delhi High Court in the case of CIT Vs. K & Co. 2013 (4) TMI 284 - DELHI HIGH COURT for ready reference. Otherwise we have been taking this view consistently in contractor s cases. Accordingly, we allow this ground of appeal of the assessee.

Summary

Issues:
1. Dispute over trading addition and net profit rate adjustments.
2. Treatment of interest income from compulsory FDRs.

Analysis:

Issue 1: Dispute over Trading Addition and Net Profit Rate Adjustments

The appeal involved a dispute between the revenue and the assessee regarding the trading addition and net profit rate adjustments for the assessment year 2009-2010. The revenue contested the reduction of trading addition from Rs. 40,38,427 to Rs. 18,56,260 by the CIT(A), arguing that the net profit rate should be maintained at 5.75%. On the other hand, the assessee challenged the application of Section 145(3) and the net profit rate reduction to 4.5%, advocating for the deletion of the trading addition. The Tribunal considered the arguments and evidence presented by both parties, emphasizing the need for a fair estimation of income post the rejection of books of account. It acknowledged the substantial increase in turnover and cost factors affecting the net profit ratio. The Tribunal recognized the historical performance of the assessee and allowed a partial relief of Rs. 2.5 lakhs towards the trading addition, considering the plausible reasons for the fall in the net profit ratio.

Issue 2: Treatment of Interest Income from Compulsory FDRs

The second issue revolved around the treatment of interest income arising from compulsory FDRs deposits. The assessee contended that this interest income should be classified as business income rather than income from other sources, citing precedents and the purpose of the deposits for obtaining contracts. The Tribunal agreed with the assessee's position, referencing a decision of the Hon'ble Delhi High Court and consistent practices in contractor cases. Consequently, the Tribunal allowed this ground of appeal for the assessee.

In conclusion, the Tribunal dismissed the revenue's appeal while partially allowing the assessee's cross objection. The judgment highlighted the importance of fair estimation post-book rejection, consideration of historical performance, and appropriate classification of income sources based on legal principles and business practices.