2014 (6) TMI 1031 - AT - Income Tax

Trading addition - applying net profit rate @ 6.5% subject to allowability of depreciation, interest and remuneration to partners - HELD THAT - In this case, the past history of the assessee is available and in the immediately past A.Y., net profit rate of 5.85% has been accepted. Therefore, in continuity of consistent view taken by us, we direct that 5.85% in place of 6.5% adopted by the ld. CIT(A) has to be considered and whatever trading addition remains to be added can be added. With this observation, we partly allow ground raised in cross objection and dismiss the ground raised in appeal by the revenue. Characterization of income - Treating the interest from FDRs as income from other sources or business income - HELD THAT - Facts of the case are that by the assessee the FDRs were raised on the compulsion of taking contract from Government department on which interest accrued to the assessee. This is also a settled position of law that in such civil contract cases, when necessarily the FDRs have to be purchased and have to be kept as security for obtaining contracts, such interest received is treated as business income

Summary

Issues Involved:
1. Revenue's appeal against the deletion of trading addition
2. Assessee's cross objection against the rejection of books of account and trading addition
3. Revenue's appeal on treating interest on FDRs as business income

Analysis:

1. Revenue's Appeal - Deletion of Trading Addition:
The revenue challenged the deletion of a trading addition of Rs. 21,26,406 by the CIT(A). The dispute arose from the net profit rate applied, with the AO rejecting the books of account and adopting a 10% net profit rate, later reduced to 6.5% by the CIT(A). The assessee argued for a 5.49% net profit rate based on past history. The ITAT considered the consistent view of adopting the net profit rate from the preceding year and directed the use of 5.85% instead of 6.5%. Consequently, the ground raised by the revenue was dismissed.

2. Assessee's Cross Objection - Rejection of Books of Account and Trading Addition:
The assessee contested the rejection of books of account under section 145(3) and the subsequent trading addition of Rs. 7,11,310. The ITAT noted that the first part of the cross objection challenging the section 145(3) invocation was not pressed by the assessee. Regarding the trading addition, the ITAT partially allowed the cross objection, directing the consideration of a 5.85% net profit rate instead of the 6.5% adopted by the CIT(A), leading to the deletion of part of the trading addition.

3. Revenue's Appeal - Treatment of Interest on FDRs:
The revenue raised a ground concerning the treatment of interest on Fixed Deposit Receipts (FDRs) as income from other sources. The interest on FDRs was linked to contracts with the government, necessitating the FDRs as security, making the interest received a part of the business income. The ITAT upheld the decision of the CIT(A) on this matter, dismissing the revenue's appeal.

In conclusion, the ITAT dismissed the revenue's appeal while partially allowing the assessee's cross objection. The net profit rate from the preceding year was crucial in determining the trading addition, and the interest on FDRs was rightly considered as business income in the case of civil contract dealings. The judgment provided clarity on the application of net profit rates and the treatment of interest income, ensuring a fair resolution for both parties involved in the dispute.