2021 (6) TMI 366 - AT - Income Tax

Limited scrutiny under CASS - Whether sales turnover / receipts have been correctly offered for tax ? - Whether contract receipts/fees have been correctly offered for tax ? - HELD THAT - AO has verified and found from the I.T data that the assessee has received contract receipts. He, therefore, accepted it as correct. Whether correct contract receipts have been offered to tax? - In this regard when the Assessing Officer verified the P L A/c and Balance Sheet of the assessee he observed that the assessee has declared the net profit and that it included indirect income also such as interest income on FDR and interest on deposits and also refund of VAT. Since they did not form part of business receipts, he reduced them from the net profit declared by the assessee. AO was right in considering the contract receipts and working out the net profit from business and whether the net profit offered by the assessee was correct and since the assessee has failed to produce the books of account, the Assessing Officer had no option but to estimate the income of the assessee at a percentage of the turnover. Therefore, as rightly held by the CIT (A), the Assessing Officer has restricted himself to the points of limited scrutiny and has not converted limited scrutiny into complete scrutiny as alleged by the assessee and therefore, there was no need for him to obtain the approval of the Pr. CIT before completing the assessment. Therefore, the case law relied upon by the learned Counsel for the assessee are not applicable to the case before us. Therefore, Ground of appeal Nos.1, 2 and 3 are rejected. Correct head of income - Interest income from the fixed deposits made with the Bank - DR supported the orders of the CIT (A) but held that there is no direct nexus between the interest from deposits and the actual business of the assessee i.e., undertaking construction contracts and hence cannot be conside3red as business income of the assessee - HELD THAT - CIT (A) has held that the interest income from fixed deposits is incidental to the main business activities, but however, he further held that the same cannot be termed as trading receipts or income derived from the business of the assessee as placing reliance upon the decisions of Liberty India vs. CIT 2009 (8) TMI 63 - SUPREME COURT and decision in the case of DCIT vs. Allied Constructions 2006 (11) TMI 242 - ITAT DELHI-A To come to this conclusion, we find that in these decisions, the Hon'ble Courts have held that there has to be direct nexus between the interest income and the business of the assessee. In the case of Allied Construction (Supra), the Special Bench observed that where FD s made in the Bank were utilized to give bank guarantees or as a performance security, the interest income therefrom cannot be said to have any nexus with the business of the assessee. Assessee has not been able to rebut these findings of the CIT (A) with any evidence or decision to the contrary and therefore, the assessee s ground of appeal No.4 is also rejected. Estimation of net profit at 6% of the gross receipts by the CIT (A) - HELD THAT - As the average net profit disclosed by the assessee and determined by the Assessing Officer in the earlier A.Y is in the range of 2.5% to 5.8%, we deem it fit and proper to restrict the net profit to 5% of the gross total turnover during the relevant A.Y. In the result, assessee s ground of appeal No.5 is treated as partly allowed.

Summary

Issues:
1. Limited scrutiny assessment converting into complete scrutiny without approval of Principal CIT.
2. Rejection of books of accounts and estimation of profit.
3. Treatment of interest income from fixed deposits as business income.
4. Estimation of net profit at 6% of gross receipts.

Limited Scrutiny Assessment:
The case involved an appeal against an order of Commissioner of Income Tax (Appeals) concerning limited scrutiny under CASS for the Assessment Year 2016-17. The Assessing Officer observed discrepancies in the assessee's declared income and initiated a complete scrutiny assessment without obtaining the approval of the Principal CIT. The CIT (A) confirmed the assessment order, accepting the income by refund of VAT as business income and reducing the profit estimation to 6% of the turnover. The appellant contended that the Assessing Officer exceeded his jurisdiction and violated the principles of natural justice. However, the Tribunal found that the Assessing Officer did not convert limited scrutiny into complete scrutiny and acted within the parameters of the initial scrutiny, thus rejecting the appellant's grounds of appeal.

Rejection of Books of Accounts and Profit Estimation:
The Assessing Officer, upon finding discrepancies in the assessee's income declaration, rejected the books of accounts due to self-made vouchers and estimated the profit at 8% of the turnover. The appellant challenged this decision, arguing that the assessment was based on audited books of accounts for previous years where the net profit was consistently below 4%. The Tribunal upheld the Assessing Officer's actions, emphasizing that the estimation was justified due to the lack of proper documentation and upheld the CIT (A)'s decision to restrict the profit estimation to 6% of the turnover.

Treatment of Interest Income from Fixed Deposits:
The appellant claimed that interest income from fixed deposits, used for bank guarantees related to construction contracts, should be considered as business income. However, the Tribunal agreed with the CIT (A) that such interest income lacked a direct nexus with the core business activities and cited relevant judicial precedents to support this conclusion. Therefore, the appellant's argument was dismissed.

Estimation of Net Profit:
Regarding the estimation of net profit at 6% of the gross receipts, the Tribunal considered the appellant's historical net profit percentages and decided to restrict the net profit to 5% of the gross total turnover for the relevant assessment year. Consequently, the appellant's appeal was partly allowed based on this adjustment.

This detailed analysis of the judgment covers all the issues involved in the case, providing a comprehensive understanding of the legal proceedings and outcomes.