2017 (5) TMI 1217 - AT - Income Tax

Addition u/s 14A r.w.r. 8d - assessee does not claim any expenditure against exempted income - Held that - the investment made by the assessee in his individual capacity and the same has been reflected in the balance sheet, which has been rightly observed by the CIT-A. It is also noticed that the CIT-A found that the assessee claimed no expenses towards earning of dividend income. We find that the disallowance cannot go beyond the exempt income earned. Accordingly, the order of the CIT-A is justified and needs no interference. - Decided against revenue Disallowance on account of retention of money and security deposit - accrual of income - Held that - We find that the retention money and security deposits are retained by the parties, who have given the contract to assessee and the said amounts would be refunded and accrued to assessee on satisfactory completion of contract work. Till then the assessee had no right to claim any parts of retention money, which retained by the parties. The Hon ble High Court of Calcutta in the case of CIT Vs. Simplex Concrete Piles (I) Pvt. Ltd 1988 (12) TMI 52 - CALCUTTA High Court held that all the receipts of retention and security deposit are contingent and happening of future event. The retention and security deposit deducted by various parties cannot be said to have been accrued to the assessee during the year under consideration in which year the bills are raised.- Decided against revenue Addition on account of interest earned on fixed deposits - AO added the same by treating as income from other sources - Held that - The assessee filed necessary evidences that the assessee has earned interest from UCO Bank, Indian Overseas Bank and SBI Bank. The assessee got refund from ICICI Bank on account of excess amount paid, details of which are available at pages 80 to 86 of the paper book. It is also observed that the assessee has made fixed deposits for obtaining bank guarantee towards earnest money in terms of contract and rebate received from the ICICI Bank towards excess EMI paid by the assessee. We find that the assessee being a contractor and in order to secure the contract work bank guarantee is required for smooth functioning of his contract business. Therefore, the interest as earned and refund by the assessee is to be treated as business income.- Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
2. Disallowance of retention money/security deposit.
3. Treatment of interest income from fixed deposits as 'Income from Other Sources'.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules:

The Revenue contended that the CIT(A) erred in ignoring the applicability of Rule 8D under Section 14A of the Act, even if the assessee did not claim any expenditure against exempted income. The AO found that the assessee borrowed funds to make investments that generated exempt income and proposed a disallowance of ?9,55,719/- under Rule 8D. The assessee argued that the investments were made from personal funds and no expenses were claimed towards earning the exempt income. The CIT(A) deleted the disallowance, noting that the investments were reflected in the assessee's personal balance sheet and not linked to the proprietorship concern, which had sufficient funds to support the investments. The Tribunal upheld the CIT(A)'s decision, finding no infirmity and stating that disallowance cannot exceed the exempt income earned.

2. Disallowance of retention money/security deposit:

The AO disallowed ?1,61,75,533/- claimed as retention money/security deposit, arguing that there was no clause in the agreements regarding such deductions and that the assessee followed the percentage completion method of accounting. The CIT(A) deleted the addition, referencing the Calcutta High Court's decision in CIT vs. Simplex Concrete Piles (I) Pvt. Ltd., which held that retention money does not accrue until satisfactory project completion. The Tribunal agreed, noting that the retention money was contingent on future events and could not be considered accrued income in the year the bills were raised.

3. Treatment of interest income from fixed deposits as 'Income from Other Sources':

The AO treated ?14,57,425/- earned as interest income from fixed deposits as 'Income from Other Sources', arguing that the assessee was not in the business of earning interest. The CIT(A) found that the interest income had a direct connection with the business, as the fixed deposits were necessary for obtaining bank guarantees and security deposits for contracts. The Tribunal upheld the CIT(A)'s decision, confirming that the interest income should be treated as business income due to its direct link to the business operations.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The disallowance under Section 14A read with Rule 8D was deemed unjustified as the investments were made from personal funds. The disallowance of retention money/security deposit was invalidated due to the contingent nature of the income. Lastly, the interest income from fixed deposits was rightly treated as business income due to its necessity for securing contracts.