9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2006 (11) TMI 242 - AT - Income TaxInterest income on FDRs - income from other sources or income from business - Rejection of books of account - Method of accounting - Surplus funds - award of the arbitrators for damages for breach of contract - deduction of interest paid to bank against interest received on FDRs - Estimation of income - net profit rate to the contract receipts - trucks on hire - Whether the A.O is justified in applying 8% net profit rate - HELD THAT - Admittedly, the investment infixed deposits was made out of the surplus generated from the business and mainly out of the award of the arbitrators for damages for breach of contract. All the funds used for making the investments in FDRs were, therefore, surplus funds of the assessee. The assessee was free to utilize these funds in any manner. The assessee chose to invest these funds in fixed deposits. The fact that the fixed deposits were partly offered as security for the various facilities availed by the assessee from the banks would not make the income from the fixed deposits as business income. We would like to add here that as per scheme of the Act, interest is, generally speaking, income from other sources unless the assessee is carrying on money-lending business or some very special circumstance exists to hold interest income to be business income, such as interest on delayed payments of sale consideration or other receipts like contract receipts. However, onus to prove so will be on the assessee. Interest income is separate and independent of contract receipts. Apart from that interest income, by no stretch of imagination can be considered as contract receipts for estimation of income by applying net profit rate to the contract receipts. We, therefore, hold that the interest on FDRs with the bank continued to have their sources as the bank and the fixed deposits placed with it, and the fact that these FDRs were offered as security for financial facilities obtained by an assessee for the purpose of business would not change the character of the income as one from business. We are, however, faced with the fact that the Assessing Officer, in the order of assessment year 1997-98, has indirectly held interest income to be the business income. The ld. CIT (Appeals) also considered a major part of interest income to be the business income. The learned Counsel had argued that the texture of the order of the Assessing Officer cannot be altered at this stage. We tend to agree with him in this matter. We, however, hold that the interest income in assessment year 1997-98 also cannot form part of the contract receipts for estimation of income by applying net profit rate and have to be separately assessed. Interest expenses against interest income received on FDRs - HELD THAT - In view of our conclusions that the interest income on FDRs is income from other sources, we are of the view that the entire interest income should be brought to tax as income from other sources after allowing deduction of expenses u/s 57(iii) of the Act. It cannot be said that interest paid to the bank was incurred for the purpose of earning the interest income on FDRs. The decision of the Hon'ble Supreme Court in the case of Dr. V.P. Gopinathan 2001 (2) TMI 10 - SUPREME COURT clearly supports the stand taken on behalf of the Revenue. As observed, the funds in question were surplus funds, generated from the profits of business and the award money in the circumstances there is no expenses incurred by way of interest in earning the interest on FDRs. We, therefore, direct that the interest income in this assessment year be assessed as income from other sources. As far as question of interest income in assessment year 1997-98 is concerned, the Assessing Officer will only examine the plea of the assessee that actual interest income that accrued to the assessee was only Rs. 35,34,762. Thus, this matter will require a fresh decision from the Assessing Officer after hearing the assessee. Estimation of income - The books of the assessee suffered from a number of defects and sub-section (3) also provided that where the Assessing Officer is not satisfied about the correctness or completeness of accounts of the assessee, he may make an assessment in the manner provided in section 144. We have considered this matter. Sub-section (1) uses the word shall , which means that from assessment year 1997-98, it is mandatory to compute the income under the head Profits and gains of business or profession in accordance with either cash or mercantile method of accounting. It is seen that from assessment year 1997-98, the assessee has not regularly followed any of these two methods. Therefore, we are of the view that the Assessing Officer was justified in rejecting the books of account. In view of the provisions of section 145(3) of the Act the Assessing Officer, therefore, had to proceed to make an assessment in the manner provided u/s 144 of the Act. The amendment in section 145 was brought in because the hybrid method of accounting was used by the assessees to postpone the tax liability. In this connection, we are of the view that only like things can be compared and there can be no comparison between unlike things. It was also argued by the learned Counsel that the gross receipts have significantly increased in those years vis- -vis earlier years. Such increase will necessarily have the effect of depressing the net profit rate. The learned Counsel did not furnish any empirical data to support his argument. Having come to the conclusion that the assessment has to be made in the manner provided in section 144 of the Act, we may add that such assessment has to be reasonable and based on good faith and not arbitrary or capricious. It is the case of both the parties that past results, as assessed finally, form a reasonable basis for such an estimation, although other material on record can also be taken into account. If past results showed loss or nominal net profit rate, then, the Assessing Officer will not be justified in applying 8 per cent rate. The claim of the assessee for allowing depreciation separately will also be examined by the Assessing Officer in the light of various judicial pronouncements referred to by the learned Counsel for the assessee. However, it is clarified that if in the past estimation of income had been done before allowing depreciation then the Assessing Officer will be justified in allowing depreciation in these years also and not otherwise, because only like things can be compared. In the result, both the appeals by the Revenue and the cross objections by the assessee are treated as partly allowed, for statistical purposes.
Issues Involved:
1. Rejection of books of account and estimation of income. 2. Classification of interest income on FDRs. 3. Deduction of interest paid to banks against interest income on FDRs. 4. Estimation of income from the business of civil construction. 5. Separate assessment of income from truck plying. 6. Allowance of depreciation and interest on salary paid to partners. 7. Consequential relief regarding interest. Detailed Analysis: 1. Rejection of Books of Account and Estimation of Income: The Assessing Officer (AO) noted several defects in the books of account maintained by the assessee, including the use of a hybrid method of accounting, lack of stock register, unverifiable purchases and expenses, and discrepancies in labour expenses. Consequently, the AO rejected the books of account and proceeded to estimate the income from civil construction contracts at a net profit rate of 8% on the gross receipts. The CIT (Appeals) upheld the rejection of books but applied a net profit rate of 8% on the gross contract receipts, including hire charges of a truck, resulting in an income of Rs. 21,91,080/- for the assessment year 1997-98. 2. Classification of Interest Income on FDRs: The AO treated the interest income on FDRs as separate from the business income of civil construction. The CIT (Appeals) concluded that the FDRs were linked to the business, thus treating the interest income as business income, except for Rs. 8,78,563/- which was considered as 'Income from other sources.' The Special Bench held that interest income on FDRs should be classified as 'Income from other sources' and not part of business income, relying on precedents like the Supreme Court's decision in Pandian Chemicals Ltd. and Tuticorin Alkali Chemicals & Fertilizers Ltd. 3. Deduction of Interest Paid to Banks Against Interest Income on FDRs: For the assessment year 1997-98, the AO allowed deduction of bank interest against interest income on FDRs, resulting in net interest income being taxed. For 1998-99, the AO did not allow such deduction, treating the interest paid to banks as unrelated to earning interest on FDRs. The Special Bench upheld the AO's approach for 1998-99, citing the Supreme Court's decision in Dr. V.P. Gopinathan, which held that interest paid on loans cannot be deducted from interest earned on FDRs. 4. Estimation of Income from the Business of Civil Construction: The CIT (Appeals) estimated the income from civil construction at 8% of the gross receipts for both assessment years. The Special Bench agreed with this approach but emphasized that the estimation should be reasonable and based on past results. The Bench directed the AO to consider past results and judicial precedents while estimating income and clarified that depreciation should be allowed if it was allowed in past assessments. 5. Separate Assessment of Income from Truck Plying: The AO separately estimated income from plying a truck (TATA 407) on hire, applying the provisions of section 44AE of the Act. The Special Bench upheld this estimation, noting that the truck was subsequently used in the business of civil construction, but the income from truck plying should be assessed separately. 6. Allowance of Depreciation and Interest on Salary Paid to Partners: The CIT (Appeals) did not allow separate deductions for depreciation and interest on salary paid to partners. The Special Bench directed the AO to examine the allowance of depreciation based on judicial precedents and past assessments. If depreciation was allowed in past estimations, it should be allowed in the current assessments as well. 7. Consequential Relief Regarding Interest: The Special Bench directed the AO to provide consequential relief regarding interest, based on the final determination of income. Conclusion: The appeals by the Revenue and the cross-objections by the assessee were partly allowed for statistical purposes, with directions for fresh consideration by the AO on specific issues, including the classification of interest income, estimation of business income, and allowance of depreciation.
|
