2017 (5) TMI 5 - AT - Income Tax

Nature of the sales tax refund - Addition u/s 41 - Estimation of income where books of accounts have been rejected - Treating sales tax refund separately while determining the N.P rate - Held that - The sales tax is payable on the sales affected by the assessee and the same is considered as deemed business receipts and the same is eligible as a business deduction in the year of payment in terms of section 43B of the Act. Where the sales tax which was paid earlier is refunded to the assessee in a subsequent financial year, it will therefore form part of the business receipts which is assessable under the head profit and loss account of business and profession . In the instant case, where the books of account have been rejected and the N.P. rate has been estimated by the Assessing Officer, the said receipts on accounts of sales tax refund have to be taken into consideration while determining the total business receipts/turnover and the estimation of N.P rate has to be determined accordingly. We are therefore of the view that the AO was not correct in treating sales tax refund separately while determining the N.P rate - Decided in favour of assessee Interest receipts - treated as income from other sources or business income - Held that - Firstly, regarding interest on income tax refund and interest on sales tax refund, the same has rightly been treated by the Ld. CIT (A) as income from other sources and we donot see any infirmity in the same. Regarding interest on FDR, it is noted that the FDRs were placed with the Banks to obtain bank guarantee which was necessarily required to be furnished to the various government department and in absence of such bank guarantee, the assessee could not have proceeded with the execution of contracts with the government department. Further, there is no finding that the surplus funds have been invested by the assessee in the FDRs. Any interest on such FDR, therefore, must be treated as inextricably linked with the business of the assessee and therefore to be treated as business income and not as income from other sources. It is noted that similar view has been taken by Co-ordinate Bench in case of M/s Maya Construction (2014 (7) TMI 1237 - ITAT JODHPUR). The contention the ld. AR is therefore accepted and the order of ld CIT(A) to this extent stand modified. Addition by estimating N.P. rate - Held that - After taking into consideration the sales tax refund, interest on FDR as business income, the N.P. rate declared by the assessee is better than the N.P. rate declared in the earlier years. Further, unlike A.Y. 2006-07 wherein specific instances have been highlighted by the Ld. CIT (A) in estimating the N.P. rate, no such instances which form the basis of reasonable estimation is seen in the year under consideration. Taken into consideration, all the facts and circumstances of the case, the trading addition made by the Assessing Officer is hereby deleted.- Decided in favour of assessee

Summary

Issues Involved:
- Invocation of section 145(3) of the Income Tax Act and rejection of books of accounts
- Taxability of sales tax refund under section 41 of the Income Tax Act
- Estimation of Net Profit rate on contract receipts
- Treatment of interest income as "income from other sources" or "business income"
- Trading addition based on estimated Net Profit rate

Invocation of Section 145(3) and Rejection of Books of Accounts:
The appeals were filed against the order of the Ld. CIT (A), Kota for A.Y. 2008-09. The assessee challenged the invocation of section 145(3) by the Assessing Officer and the rejection of books of accounts. The ground related to this issue was dismissed as it was not pressed before the Ld. CIT(A).

Taxability of Sales Tax Refund under Section 41:
The Assessing Officer brought the sales tax refund to tax under section 41(1) of the Act, which was confirmed by the Ld. CIT (A). The assessee argued that the sales tax refund was credited to the sales tax account and was part of the business receipts. The Tribunal held that the sales tax refund should be treated as part of the business receipts and not separately while determining the Net Profit rate. Thus, the ground taken by the assessee was allowed.

Estimation of Net Profit Rate on Contract Receipts:
The Assessing Officer estimated the Net Profit rate at 11% on contract receipts, while the Ld. CIT (A) restricted it to 8%. The Tribunal found that after considering all factors, the trading addition made by the Assessing Officer was not justified, and it was deleted.

Treatment of Interest Income:
The interest income of the assessee was categorized as "income from other sources" by the Ld. CIT (A). However, the assessee argued that the interest was linked to the business as it was necessary to obtain bank guarantees for contracts. The Tribunal agreed with the assessee, modifying the decision to treat the interest income as business income.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the Department. The sales tax refund was considered part of business receipts, the interest income was treated as business income, and the trading addition based on the estimated Net Profit rate was deleted. The decision was pronounced in open court on 25/04/2017.