2020 (7) TMI 129 - AT - Income Tax

Correct head of income - Interest from Fixed deposits made in connection with Contract business - income from Other sources or Business income - HELD THAT - As noted that though the assessee has replied to the AO vide dated18-12-2017 the aforesaid facts like the FDR was used as security for obtaining the contract and was essential condition for bagging the contract, however, the assessee has not bothered to give any material/evidence to show that the interest accrued on the FDRs/deposit was incidental and that the main purpose of FDR s was it was a condition for getting the contract or to avail the bank guarantee/security deposit/ E-money/tender money etc. As noted that the assessee only made these contentions, but failed to produce any material to substantiate his contention that the interest accrued from FDR should be treated as income from business. As noted that there is shortfall of (₹ 93,46,927 ₹ 91,65,482) ₹ 2,31,445/- because even if the contention of assessee is correct, then he should have shown the contract/business income at ₹ 88,00,954 ₹ 5,45,973 ₹ 93,46,127.80, thus there is a clear shortfall of ₹ 2,31,445/-. Set aside the impugned order of the ld. CIT(A) and remand the matter back to the AO with a direction to examine the matter afresh regarding the characterization/nature of receipt in the light of the above mentioned case laws as well as the facts which the assessee bring to the notice of the AO. And if the assessee brings the notice of AO the terms of contract etc and is able to show that the FDR s in question was essential/necessary for obtaining the contract, then the interest income from these FDRs to be treated as business income and if the assessee fails to do so, then AO is at liberty to treat it as income from Other Sources and assessment may be framed in accordance to law. - Appeal of assessee is allowed for statistical purpose.

Summary

Issues:
Characterization of interest income from Fixed Deposits in connection with Contract business as income from 'Other sources' instead of income from 'Business'.

Analysis:
The appeal was filed against the order of the Ld. CIT(A) for the assessment year 2015-16. The dispute revolved around the treatment of interest income from Fixed Deposits (FDRs) made in connection with the Contract business. The AO noted a discrepancy in the income declared by the assessee and the actual receipts. The AO observed that the interest income of ?5,45,973/- from FDRs was not reflected in the income tax return of the assessee. The AO treated this amount as undisclosed income under section 69A of the Income-tax Act. The assessee contended that the FDRs were made solely for business purposes and were used as collateral securities for obtaining contracts. The assessee argued that the interest income should be considered as part of the business income rather than income from 'Other Sources'. The assessee provided explanations and cited relevant case laws to support this argument.

The ITAT Kolkata, after hearing both parties, noted that the assessee failed to provide concrete evidence to substantiate that the interest income from FDRs should be treated as business income. There was a shortfall in the declared income compared to the actual receipts. The ITAT Kolkata set aside the order of the Ld. CIT(A) and remanded the matter back to the AO for re-examination. The AO was directed to consider the nature of the receipt in light of the case laws cited and the additional evidence that the assessee may provide regarding the essential nature of the FDRs for obtaining contracts. If the assessee could establish the direct nexus between FDRs and contract work, the interest income could be treated as business income; otherwise, it could be treated as income from 'Other Sources'. The assessee was given the opportunity to submit necessary contracts, documents, and evidence to support their contentions. The appeal of the assessee was allowed for statistical purposes.

In conclusion, the ITAT Kolkata emphasized the importance of establishing a clear link between the interest income from FDRs and the business activities to determine the appropriate characterization of income. The decision highlighted the need for concrete evidence to support claims regarding the nature of receipts in tax assessments.