2018 (10) TMI 1226 - HC - Income Tax

Nature of interest income - interest received from FDRs/NSCs - discounts received from suppliers of material - income from other sources OR busniss income - nexus with business activity - Rejection of books of accounts - Held that - We find that appellant being a civil contractor was required to provide a performance guarantee to the various works departments for obtaining contracts of civil construction. He to keep such performance guarantee alive by way of utilizing the bank overdraft limit against which he had to furnish FDRs/NSC for execution of the contracts. His failure to submit the performance guarantee or inability to keep them alive would have resulted in termination of the contract awarded to him and in that event, the concerned departments/employer could encash the security. Release of such performance guarantee is dependent on fulfillment of certain conditions. It is not that the appellant had invested surplus money lying idle with him only in FDRs/NSCs with a view to earning interest. Obtaining of FDRs/NSCs and furnishing of the same against the performance guarantee by the appellant, therefore, had an inextricable nexus with his business of securing civil contracts and integral to his working as civil contractor. The income of interest earned from the interest such FDRs/NSCs by the appellant therefore, in our considered view, cannot be treated as income from other sources and would rather be an income earned from business. The interest income from FDRs and NSCs of the petitioner has to be treated as income from business and not income from other sources as the income is part of the total receipts and not from other sources. Matter is remitted back to the AO for passing fresh order of assessment in accordance with law keeping view the question answered by this Court in THE COMMISSIONER OF INCOME TAX VERSUS M/S BHAWAL SYNTHETICS (INDIA) UDAIPUR 2017 (5) TMI 540 - RAJASTHAN HIGH COURT

Issues Involved:

1. Whether the interest income from Fixed Deposit Receipts (FDRs) and National Savings Certificates (NSCs) should be treated as business income or income from other sources.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income from FDRs and NSCs:

The appellant, a civil contractor, had their case scrutinized, leading to an assessment order under Section 143(3) of the Income Tax Act, 1961. The Assessing Officer (AO) rejected the books of account, estimated the profit at a net profit rate of 13%, and made additions, including interest income from FDRs and discounts from suppliers, treating these as income from other sources.

The appellant contested this before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal, reducing the net profit rate to 11.5% and treating the interest from FDRs as business income. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which reversed the CIT(A)'s decision regarding the interest income, treating it as income from other sources.

The core legal question presented to the High Court was whether the interest income from FDRs and NSCs should be considered business income or income from other sources.

Arguments by the Appellant:

The appellant argued that the FDRs and NSCs were furnished as performance guarantees necessary for obtaining contracts from various departments. Thus, the interest earned on these should be considered business income, as they were directly linked to the business operations. The appellant cited previous favorable assessments and judgments, including the Supreme Court's ruling in Commissioner of Income Tax vs. Karnal Co-operative Sugar Mills Ltd., where interest on FDRs used for business purposes was treated as business income.

Arguments by the Respondent:

The respondent contended that the interest income on FDRs should be taxed as income from other sources, as it was not part of the contract receipts. They relied on the judgment in Commissioner of Income Tax vs. M/s. Bhawal Synthetics (India), where similar interest income was treated as income from other sources.

Court's Analysis:

The High Court reviewed the relevant case laws, including the Supreme Court's judgments in Tuticorin Alkali Chemicals and Fertilizers Ltd. and Karnal Co-operative Sugar Mills Ltd. The court noted that in the latter, the interest earned on FDRs linked to business activities was considered business income.

The court also examined judgments from various High Courts, including the Delhi High Court in Jaypee DSC Ventures Ltd. and the Madhya Pradesh High Court in Bharat Oman Refineries Ltd., which supported the appellant's stance that interest income from FDRs used as performance guarantees should be treated as business income.

Conclusion:

The High Court concluded that the interest income from FDRs and NSCs, which were integral to the appellant's business operations and necessary for securing contracts, should be treated as business income. The court set aside the ITAT's judgment and restored the CIT(A)'s decision, remitting the matter back to the AO for a fresh assessment in line with this determination.

Judgment:

The appeals were allowed, and the ITAT's judgment dated 24.7.2017 was set aside. The matter was remitted back to the AO for passing a fresh order of assessment, treating the interest income from FDRs and NSCs as business income.

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