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TMI Blog2006 (11) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... declaring total income of Rs. 1,41,930/-. The return was accompanied by audited trading account, profit and loss account, balance sheet and report of auditor. During the previous year the assessee derived receipts from three sources, namely, contract receipts, hire charges and interest. Contract receipts were shown in the trading account and other receipts were shown in profit and loss account. Gross receipts were Rs. 2,73,48,503/- from execution of civil construction contracts, Rs. 47,65,609/- by way of interest on FDRs with bank and Rs. 40,000/- from the business of plying a TATA 409 truck on hire. As far as contract receipts were concerned, the gross profit after deducting direct expenses like purchases, labour expenses, carriage and cartage, fuel and lubricants, tools and plant and machinery repairs and spares was Rs. 7,90,811/-, which gave a G.P. rate of 2.89 per cent. The assessee had claimed further expenses in the profit and loss account. The major items of expense so claimed were: Bank interest and charges Rs. 19,59,994/- Depreciation Rs. 11,55,260/- Salary to partners Rs. 1,82,120/- Interest to partners Rs. 1,45,093/- General expenses Rs. 5,05,769/- [Mess expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by self-made vouchers; (h) even in the auditors' report there was a comment that petty expenses were not supported by vouchers; and (i) in assessment year 1996-97 books of account were rejected and a net profit rate of 10 per cent was applied to gross contract receipts which was latter on reduced to 8 per cent by the CIT (Appeals). 2.3 The Assessing Officer; after making references to the above defects, called upon the assessee to show cause as to why the income of the assessee be not determined in the following manner:- (a) income from civil contracts be estimated at 10 per cent of the gross contract receipts; (b) the interest on bank deposits received be not separately assessed to tax as income, separate and apart from the income from civil contracts; (c) income from plying of trucks also be estimated. 2.4 In reply the assessee pointed out that its turnover was more than Rs. 40 lakhs and brought to the notice of the Assessing Officer that in assessment year 1996-97, similar action by the Assessing Officer was not approved by the ITAT in its order dated 15-2-2000 in I.T. Appeal No. 1746 (Delhi) of 1999. In assessment year 1996-97 the Assessing Officer had rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining C.C. limit, some FDRs had also been used against bank guarantees given to various departments for due execution of contracts or given to the Government departments themselves as security for due performance of contracts. The assessee, therefore, pleaded that the interest income on FDRs related to business and formed part and parcel of contract receipts. The Assessing Officer held that the fact that the FDRs were offered as security for obtaining C.C. limits/guarantees would not make the interest income as income from business of civil construction. He, however, held that it would be fair to allow bank charges and interest of Rs. 19,59,994/- as expenditure against interest income. He, thus, brought to tax a sum of Rs. 28,05,615/- (Rs. 47,65,605/- minus Rs. 19,59,994/-). (c) Income from plying of truck TATA 407 - The TATA truck in question was purchased during this previous year for Rs. 3,44,479/-. Depreciation of Rs. 68,896/- was claimed on the same and the depreciation of Rs. 11,55,260/- claimed in the profit and loss account included this depreciation also. The Assessing Officer applied the provisions of section 44AE of the Act and adopted income at the rate of Rs. 1,800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and address of the persons to whom they were paid were not available. 3.1 For assessment year 1998-99, the assessee had maintained only profit and loss account. It had declared a total income of Rs. 46,71,997/-. The interest received on FDRs with banks of Rs. 45,45,850/- and the interest paid to banks of Rs. 44,69,262/- were included in the profit and loss account in arriving at an income of Rs. 46,59,693/- as per accounts. The Assessing Officer excluded the interest income on FDRs from the income as per profit and loss account and found that the profit on contract work was only Rs. 1,90,431/- (Rs. 46,59,693/- minus Rs. 44,69,262/-) giving a net profit rate of 0.29 per cent. This, in his opinion, was on the lower side. The Assessing Officer was of the view that the interest on FDRs was not business income, but income from other sources. He, therefore, brought to tax Rs. 44,69,262/- being interest on FDRs as income from other sources. The Assessing Officer also applied 8 per cent net profit rate on total con tract receipts of Rs. 6,55,39,260/- and estimated income at Rs. 52,43,140/-. He gave credit for income of Rs. 1,90,431 already shown by the assessee as income from contract bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources. The interest on such FDRs was quantified at Rs. 8,78,563/-. 6. Before the CIT (Appeals) the assessee pleaded that the interest income on FDRs was only Rs. 35,34,762/- and not Rs. 47,65,609/- as shown in. the profit and loss account and that this was due to mistake in the TDS certificates issued by the banks. The CIT (Appeals) did not give any definite findings in the matter, probably because it was not necessary to do so in the scheme of his order. He, however, held that out of the whole interest, an amount of Rs. 8,78,563/-, being interest on FDRs which were not offered as security, had to be treated as 'Income from other sources'. 7. The findings of the CIT (Appeals) in respect of business income were as follows:- "taking an overall view of the case, considering the interest income on FDRs and interest paid to the banks, considering the income on banks FDRs which has to be taken as income from other sources and that this was the first year of the contract business of construction of dams, it would be reasonable and fair to apply a net profit rate of 8 per cent on the total gross receipts of Rs. 2,73,88,303/-. These receipts also include the receipts in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only as 'income from other sources'. The Assessing Officer also disallowed certain expenses. On appeal by the assessee, some expenses were directed to be allowed. On the issue of treating interest income as income from business, the CIT (Appeals) found that some FDRs purchased were given as security for various purposes connected with the business of the assessee. He, therefore, held that the interest income on these FDRs was income from business. In respect of interest on FDRs, which were not offered as security, the CIT (Appeals) held that the same was taxable as income from other sources. The Revenue preferred appeal before the ITA Tin I.T. Appeal No. 3009 (Delhi) of 2003. The Tribunal upheld the order of the CIT (Appeals). It is this order of the ITAT that was relied upon by the learned counsel for the assessee before the Division Bench in support of his argument that interest income on FDRs, which were offered as security to bank, had nexus with the business and, therefore, has to be considered as 'Income from business'. 11. The Division Bench felt that the view of the Tribunal in I.T. Appeal No. 3009 (Delhi) of 2003 in assessee's own case for assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly employed in the preceding years. 2. For that on the facts and circumstances of the case the ld. CIT (Appeals) was not justified in not allowing the depreciation on fixed assets used for the business, in estimating the income. 3. For that on the facts and circumstances of the case the ld. CIT (Appeals) was not justified in not adjudicating the ground number 3 taken before him, in levying the interest any charge of interest, which is vague, is untenable and unwarranted in law." 15. The learned Departmental Representative, at the outset, submitted that the interest on FDRs ought to have been added separately as 'Income from other sources' and that it could not be part of income from the business of civil construction. He pointed out that the FDRs in question were purchased out of surplus funds generated in business by the assessee in the form of profits but mainly by way of damages awarded by the arbitrators in the course of performing civil construction work. According to him the latter sum received would not be in the nature of profits of business. He submitted that if a person earns agricultural income and deposits that income in FDRs and receives interest there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner in which the income is derived that is relevant and not merely the fact that the person is engaged in a business or in a profession. Interest received by a company which carries on business, from bank deposits and loans could only be taxable as 'income from other sources' and not as 'business income'. Interest paid on overdraft obtained for the purpose of business cannot be...deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to be taxed under the head 'Income from other sources'." 17. The learned Departmental Representative submitted that in the present case interest received on FDRs and interest paid to bank on credit facilities were two distinct transactions and, therefore, the assessee cannot claim deduction of interest paid even under section 57(iii) of the Act against interest received on FDRs. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 wherein the Hon'ble Supreme Court had laid down that the words "derived from" in section 80HH of the Act has to be understood as somet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Representative submitted that the Assessing Officer had applied the presumptive rate as envisaged under section 44AD of the Act. Though this was applicable only in the case of assessees having gross receipts of less than Rs. 40 lakhs, yet the principle behind the enactment of the said provisions will equally apply to civil construction contractors, more so, in the case of an assessee, who has not maintained proper books of account. According to him the estimate made by the Assessing Officer cannot be questioned so long as it is not arbitrary. According to him, the estimate in the present case by the Assessing Officer was a bona fide estimate and is based on the rational basis and, therefore, the same has to be upheld. Reliance was placed by the learned Departmental Representative on the decision of the Hon'ble Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271. 21. On the question regarding the Assessing Officer not allowing depreciation and interest on salary paid to partners against the income estimated by applying a net profit percentage, the learned Departmental Representative submitted that once an estimate of income is made, all deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Delhi Bench of the ITAT in the case of Mrs. Saroj Dassani v. Asstt. CIT [2006] 99 TTJ (Delhi) 345 wherein the Tribunal has held that once FDRs were utilized by the assessee for the purpose of business in placing them with the bank as margin money, they cease a commercial asset, therefore, interest on fixed deposits is liable to be assessed as business income. Further, reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Punit Commercial Ltd. [2000] 245 ITR 550 in support of the contention that interest income is also income from business. 24. The further submission of the learned Counsel for the assessee was that once interest income is considered as business income, no separate addition on account of net interest income can be made. Reliance was placed by the learned Counsel for the assessee on the decision of the Jabalpur Bench of the Tribunal in the case of ITO v. Tahir Ali [2001] 116 Taxman 266 (Mag.) the case of a contractor, where books were rejected and income determined by applying net profit percentage rate. The Tribunal held that where bank interest was directly relatable to contract business, the same has to be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larified that the estimate of income from contract business ought to be made on the basis of past history in the assessee's own case. The further submission was that if income from contract business is td be estimated, deductions from such income towards depreciation and interest and salary paid to partners has to be allowed. Reliance in this regard was placed on the decision of the Hon'ble Chandigarh Bench of the ITAT in the case of Chopra Bros. (India) (P.) Ltd. v. ITO [1993] 45 ITD 85 (TM) wherein the Tribunal has made references to the CBDT Circular No. 29-D (XIX-14), dated31-8-1985. Further reliance was also placed in the decision of Hon'ble Rajasthan High Court in the case of CIT v. Jain Construction Co. [2000] 245 ITR 527. 26. In reply the learned Departmental Representative submitted that it is no doubt true that when the books of account are rejected, past history in assessee's own case becomes a relevant factor, but the same has to be taken into consideration in the light of all the facts and circumstances. In this regard he pointed out that in the past i.e. prior to assessment year 1997-98, the assessee was following a hybrid method of accounting and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of CIT v. Kisan Sahakari Chini Mills Ltd. [IT Reference No. 219 of 1992 by order dated 7-4-2005] - [2006] 280 ITR 617 also came to the same conclusion by relying on the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. The decision in the case of Puneet Commercial Ltd. as well as in the case of Mrs. Saroj Dassani were rendered in the context of provisions of section 80HHC of the Act where the "profits of business" have to be computed on the basis of express provisions of section 80HHC of the Act. Source of interest income is FDRs, which is different separate from contract receipts. Even if contract business is stopped, the assessee can continue to receive interest and vice versa. Thus, it follows that interest received cannot be considered as part of the contract receipts while estimating income from the business of civil construction contracts. We are also of the view that in assessment year 1996-97, the Tribunal had not dealt with this issue in proper perspective. The reason seems to be that this issue was not material as the Tribunal directed the computation of income on the basis of the book. Once that is done, it is immaterial whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 28. On the question of allowing the interest expenses against interest income received on FDRs, as far as assessment year 1997-98 is concerned, the Assessing Officer had allowed such a deduction and has brought to tax only the net interest income. That basis cannot be altered by the Tribunal. Before the CIT (Appeals), the assessee submitted that the actual interest income that accrued to the assessee for assessment year 1997-98 was only Rs. 35,34,762/- as against Rs. 47,65,609/- declared by the assessee. Out of this interest income, interest paid to bank of Rs. 19,59,944/- was to be allowed as a deduction. The CIT (Appeals) directed that Rs. 8,78,563/- should be assessed as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997. Therefore, the provisions of the substituted section are applicable to the proceedings of assessment year 1997-98 and thereafter. Sub-section (1) of the substituted section, interalia, provides that the income chargeable under the head "Profits and gains of business or profession" shall, subject to provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The assessee had been employing hybrid method of accounting for and up to assessment year 1996-97. Therefore, in view of the provision contained in the aforesaid sub-section, he was required to change his method of accounting and maintain books either on mercantile method or on cash method. However, such a change was not made and the assessee continued to follow the hybrid method of accounting for recognizing income and expenditure in the books of account. The case of the learned Counsel before us was that in spite of the aforesaid substitution of the section, the assessee was justified in continuing to maintain the books of account of hybrid method of accounting basis. However, he was not able to cite any authority in support of his case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. On the other hand, the case of the learned Counsel of the assessee was that his receipts far exceeded the aforesaid sum of Rs. 40 lakhs and, therefore, the provisions contained in section 44AD were not applicable at all. It was contended by him that on the facts of the case, it would be most appropriate if the past results accepted by the revenue in the case of the assessee, are used as guidelines for estimating the income. The learned Departmental Representative did not contest this proposition seriously, but pointed out that in the past the books were maintained on hybrid method, while in this year the income is to be computed on mercantile or cash method of accounting and, therefore, suitable amendments will have to be made to the results accepted in the past to bring them in line with the mercantile method of accounting. The case of the learned Counsel on this issue was that if results of past five years are taken into consideration in aberration arising on account of hybrid method of accounting would even out, giving true picture of the results of the operations of the assessee as a civil contract. 33. We have considered this matter also. The amendment in section 145 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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