2021 (3) TMI 554 - AT - Income Tax

Chargebility of interest income - investment on FDR - allowable business income OR income from other sources. - deposit of fixed deposit receipts with the government - HELD THAT - Admittedly the assessee is a contractor working for the various government department and for the purpose of getting the contract from them it is essential for the assessee to give bank guarantee and the bank guarantee are issued by the banks on the deposit of like amount in the form of fixed deposit. The assessee in the submissions before the lower authority had categorically mentioned that due to shortage of funds, the assessee has to submit B/G in favour of various departments and as per norms of the bank, the assessee has to provide 25% cash margin in the shape of FDRS. FDRs have been prepared as per terms of contract and terms of bank guarantee and these are not investment, but are in the shape of security deposit as per terms and condition of the contract. The assessee accordingly credited investment on FDRs in their books of account as business income. The above receipts are part of contract receipt. Deposit of fixed deposit receipts with the government are essential for providing the contract in favour of the assessee. In the absence of fixed deposits, the assessee would not be able to fulfill the conditions of the contract and the contract could not be awarded to the assessee. In view of the terms of contract, the fixed deposit and earning of interest on such fixed deposit was intricately connected with the business of the assessee and there is a direct and clear nexus with the business of the assessee and the interest earned on fixed deposits, in our considered opinion, is required to be considered as business income. Income from insurance claim - amount as already included in profit and loss account and subjected to assessment u/s 143(3) already - HELD THAT - On this aspect there was no argument before the ld. CIT(A) and as such there was no occasion for the Commissioner (Appeal) to examine the submission of the assessee. As recorded above none appeared on behalf of the assessee during the course of appellate proceedings before us, as the authorised representative had passed away. In view of the above we are of the opinion that the ground raised in the present appeal is required to be remanded back to the file of the Commissioner (appeals) for fresh adjudication. The Commissioner (appeals) is directed to decide the issue after issuing notice to the assessee and granting the opportunity of hearing to the assessee in accordance with law.

Summary

Issues:
1. Reopening of assessment under sec. 147
2. Tax treatment of interest income on FDRs
3. Taxability of income from insurance claim

Analysis:

Reopening of Assessment under sec. 147:
The assessee challenged the reopening of assessment under sec. 147 as illegal. The Appellate Tribunal noted that the assessing officer had used powers under sec. 147 to review his own order completed under sec. 143(3), which was deemed illegal and without jurisdiction. However, since the authorized representative of the assessee had passed away, and no replacement was appointed, the Tribunal proceeded to decide the matter based on the available records.

Tax Treatment of Interest Income on FDRs:
The assessing officer had taxed the interest income on Fixed Deposit Receipts (FDRs) under the head income from other sources, totaling to &8377; 1,97,809. The assessee contended that the FDRs were deposited as security for contracts with government departments and were not investments but security deposits as per contract terms. The Tribunal held that the interest earned on FDRs was intricately connected with the business of the assessee, as without these deposits, the contracts could not have been awarded. Citing precedents, the Tribunal concluded that the interest income on FDRs should be considered as business income, allowing the appeal on this ground.

Taxability of Income from Insurance Claim:
The issue regarding the income from an insurance claim of &8377; 2,10,973, which was already included in the profit and loss account and assessed under sec. 143(3), was not argued before the Commissioner (Appeals) due to the absence of the authorized representative. The Tribunal remanded this issue back to the Commissioner (Appeals) for fresh adjudication, directing to grant the assessee an opportunity for a hearing in accordance with the law.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal deciding in favor of the assessee on the tax treatment of interest income on FDRs. The issue of income from the insurance claim was remanded back for fresh adjudication. Other grounds raised were not decided as the Tribunal focused on the merits of the additions made in the assessment.