2023 (6) TMI 922 - AT - Income Tax

Receipt of contract money and compensation on delayed payment as interest - Addition of arbitration receipts - Year of assessment - subsequent year s expenses - award amount consist of contract amount and interest - Income from other sources or business income - assessee not produced details of the expenditure incurred to support the contentions while offering the income on estimate basis - assessee has not disclosed the award amount consist of contract amount and interest in the return of income filed for the year under consideration - assessee also in response to notice u/s. 148 offered only 8 % of the amount of the contract receipts - action of the assessee is not voluntary - assessee has capitalized the entire interest receipts in his original ITR HELD THAT - Both the learned DR and the AR before us vehemently supported the order of the authorities below as favorable to them. The bench noted that the assessee collected the demand draft on 20.11.2010 and the same was deposited in the bank account and the assessee has shown his amount in the books of account of account ended on 31.03.2011. The break up of this liability is at is appearing in the audited account of the assessee and the other related notes to the audited accounts. Assessee has even though the amount received in 2010-11 recorded the same income in the year under consideration i.e. 2011-12. Both the parties not disputed about the chargeability of the income the same is considered as chargeable to the year under consideration i.e. F.Y. 2011-12, relevant to assessment year 2012-13. The bench noted that the assessee is aware that even though the assessee facing similar dispute in the past has not shown the interest income as business receipt and has considered it as capital receipt and credited to the capital account as per note no. 5 of the audited account in Schedule-IV. The bench also noted the assessee in the profit loss account has offered only contract receipt and offered profit @ 8 % and interest amount shown as capital receipt. The income in this case is not the interest on compensation or interest on enhanced compensation chargeable to tax as per provision of section 56(2)(viii) which is chargeable to tax on receipt of such interest irrespective of method of accounting followed by the assessee. But in this case the interest is on delayed payment of the contract amount executed by the assessee and as decided by the apex court in the case of CIT Vs. Govinda Choudhury 1992 (4) TMI 8 - SUPREME COURT this interest is only an accretion to the assessee s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. In this case it is not disputed that the receipt in questions are related to A. Y. 1989-90 1990-91 wherein due to non receipt of contract amount, the assessee claimed loss which was refused in assessment proceedings and finally it has been decided for that year income @ 8.5% of the receipt in that years. AO while making the addition has broadly relied on the ITAT s order in assessee s own case for A.Y. 2006-07 where the Bench held that no claim of expenses will be allowable and the matter was pending before the Hon ble Rajasthan High Court. Subsequently, the Hon ble Rajasthan High Court held that the ld. CIT(A) has rightly held the profit rate and Tribunal committed serious error in concluding that subsequent year s expenses which are claimed ought to have been allowed in the relevant year. Thus, considering that aspect of the matter in the present case the entire receipt of contract money and compensation on delayed payment as interest covered under the award pertaining to A.Ys. 1989-90 1990-91 is required to be considered as business income only. What would be the amount to be considered as income out of the said business receipts? - Of course considering the decision of the assessee s own case wherein the A.Y. 2006-07 Bench has not accepted the profit estimate and the said finding was reversed by the jurisdictional High Court and thus, in the absence of contrary finding of challenging the order of Hon ble High Court we have to respectfully considered the findings of the Hon ble Jurisdictional High Court in assessee s own case that considering the facts of this case that originally the assessee has claimed loss in A.Y. 1989-90 1990-91 wherein the loss has been claimed for both the years, which was not considered, had it been considered the assessee would have taken as set off of the same against subsequent year income. No infirmity in the detailed finding of the ld. CIT(A). Based on these observations the appeal of the Revenue raising only one ground is dismissed.

Issues Involved:

1. Maintainability of the appeal filed against a deceased person.
2. Validity of reopening proceedings under Section 148.
3. Taxability of arbitration receipts and interest received by the assessee.
4. Applicability of net profit rate to the arbitration receipts.

Summary:

1. Maintainability of the Appeal Filed Against a Deceased Person:

The assessee raised a preliminary objection against the maintainability of the appeal on the grounds that the department had filed the appeal against a deceased person. The Tribunal noted that the assessee had expired on 21st February 2017 during the pendency of the appeal before the CIT(A). Despite being informed, the CIT(A) passed the order in the name of the deceased. However, the Tribunal allowed the department to substitute the deceased with the legal heir and condoned the delay in filing the revised Memorandum of Appeal. The preliminary objection was dismissed, and the appeal was admitted for hearing on merits.

2. Validity of Reopening Proceedings under Section 148:

The assessee contended that there was no understatement of income and no income had escaped assessment. The AO issued a notice under Section 148 after recording reasons to believe that income had escaped assessment. The CIT(A) upheld the reopening proceedings, and the Tribunal found no infirmity in this decision.

3. Taxability of Arbitration Receipts and Interest Received by the Assessee:

The assessee received arbitration awards and interest for works executed in AY 1989-90 and 1990-91. The AO treated the entire receipts as taxable income, rejecting the assessee's claim of applying a net profit rate of 8.5%. The CIT(A) accepted the assessee's revised computation, applying an 8.5% net profit rate to the receipts, and deleted the balance addition. The Tribunal upheld the CIT(A)'s decision, noting that the interest was attributable to the business receipts and should be treated as such, following the Supreme Court's decision in CIT vs. Govinda Choudhury & Sons.

4. Applicability of Net Profit Rate to the Arbitration Receipts:

The CIT(A) applied a net profit rate of 8.5% to the arbitration receipts, considering the assessee's history of assessments where books were rejected, and income was estimated. The Tribunal agreed with this approach, referencing the Rajasthan High Court's decision in the assessee's own case for AY 2006-07, which supported the application of a net profit rate to such receipts. The Tribunal found no reason to deviate from this established practice and upheld the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order that applied an 8.5% net profit rate to the arbitration receipts and interest, and deleted the balance addition. The Tribunal found that the reopening proceedings were valid, and the receipts were correctly treated as business income, following the principles established in the assessee's earlier assessments and judicial precedents.

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