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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 ..... t 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts, 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 expenses, entertainment expenses, medical, postage etc.] 2.1 The net profit declared after adding interest and hire charges and deducting the expenses to and from the gross profit was Rs. 1,41,931/-. 2.2 The Assessing Officer examined the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 the book results in absence of the stock register, un-vouched purchases, unvouched expenses and for the reason tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 per month. Thus, income from the business of plying on hire TATA 407 truck, under the said provisions was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1998 was not supported by any document evidencing its transportation; (g) labour expenses of Rs. 1,40,79,074/- were not verifiable since name 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. 6,55,39,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income on FDRs had to be considered as business income. The corresponding interest paid to banks had also to be treated as business expenditure. He also held that the interest on FDRs which have not been offered as security to the banks or the departments, had to be considered as income from other 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer for fresh consideration [vide order in I.T. Appeal No. 1748 (Delhi) of 1999]. The Tribunal held that the facts warranted only disallowance of expenses, which were not verifiable and rejection of accounts was not proper. The Assessing Officer was directed to consider the expenses to be disallowed after allowing opportunity of being heard to the assessee. 10. The Assessing Officer heard the assessee and framed fresh assessment. On the issue of interest on FDRs, the Assessing Officer again held that they were to be considered 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. Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome chargeable under the head 'Income from other sources'. 2. As the ld. CIT (Appeals) has erred in law and on facts, therefore, order of ld. CIT (Appeals) be set-aside and that of the Assessing. Officer restored on this issue. 14. Grounds raised by the assessee in cross-objections: 1. For that on the facts and circumstances of the case the ld. CIT (Appeals) was not justified in estimating the net profit at the rate of 8 per cent after rejecting the books of account, the method of the accounting has been followed as regularly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e:- Under the Income-tax Act, 1961, the distinct heads under which the income of an assessee are to be classified are set out in section 14 of the Income-tax Act, 1961. The income received by an assessee has to be fitted under one or other head having regard to the source from which that income is derived. The fact that a person carries on business does not lead to the inference that all income received by such a person is business income. The same assessee can have income, which may require to be classified under more than one head. It is the 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 Representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt either on the cash method or mercantile method of accounting and it could not have followed hybrid method of accounting. On this ground alone, according to the learned Departmental Representative, the rejection of books of account by the Assessing Officer was fully justified. Apart from the above he also relied on the other reasons given by the Assessing Officer for rejecting the books of account in the assessment years 1997-98 and 1998-99. 20. On the question of the estimation of income from the business of civil construction, the learned Departmental 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee further submitted that the interest earned on the bank FDRs had a nexus with the contract receipts as the assessee had offered these FDR as security for obtaining cash credit limit and other facilities in connection with its business from the banks. According to him, therefore, the interest income forms part and parcel of the business income. The only business of the assessee was that of civil contract business and, therefore, interest income has also to be considered as part of the income from contract business. In this regard reliance was placed on the decision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egative figure from assessment years 1994-95 to 1997-98 and was a paltry 0.29 per cent in assessment year 1998-99. According to him once the book results are rejected what becomes germane is the past history of the assessee's own case, which does not justify the rate of 8 per cent adopted by the CIT (Appeals). In para 17 of his written submissions, filed before the Tribunal, it has been specifically stated that the assessee has no objection if interest earned is separately assessed and income from contract business is separately estimated. It has, however, been clarified 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 als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325, the Privy Council held interest on arrears of rent payable in respect of agricultural land was not agricultural income. The decision of the Hon'ble Madras High Court in the case of South India Shipping Corpn. Ltd. supports the plea of the learned Departmental Representativein this regard. The Hon'ble Madras High Court relied on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Hon'ble Allahabad High 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in the cases of Pandian Chemicals Ltd. and Tuticorin Alkali Chemicals Fertilizers Ltd. 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. 28. On the question of allowing the interest expenses against interest income received on FDRs, as far as ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by the Assessing Officer is, therefore, upheld. The depreciation on this vehicle will, however, be allowed to the extent provided in section 38(2) of the Act against business income. 31. The issue which remains to be considered now is about the estimation of income of the assessee from the business of contract works. However, before proceeding with that, we may deal with the provisions of section 145 of the Act, as applicable to assessment year 1997-98 and onwards. In this connection, it may be pointed out that Finance Act, 1995, substituted this section with effect from1-4-1997. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , regarding special provision for computing profits and gains of business of civil construction etc., provides a statutory guideline for estimating the income at 8 per cent of the receipts. It was fairly conceded by him that the provision contained in the aforesaid section shall not apply in the case where gross receipts payable exceed an amount of 40 lakhs rupees. That, however, will not detract from the conclusion that estimation at the rate of 8 per cent of the gross receipts payable would not be fair in a case where such receipts exceed Rs. 40 lakhs and the income is to be estimated. 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X
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