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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 ..... act 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 auditor's report and other evidence and noted the following defects in the books of account maintained by the assessee:- (a) with effect from 1-4-1997 an assessee was obliged to follow either cash or mercantile method of accounting while maintaining his books of account. Earlier to assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that wages paid were not verifiable. The Tribunal held that the above reasons, assigned by the Assessing Officer for rejecting the book results, were not sufficient. It was further held that the circumstances of the case warranted only disallowance of the unverifiable expenses, and estimation of income by application of a net profit rate was not justified. Finally, the Tribunal remanded the matter to the Assessing Officer for making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 computed at Rs. 21,000/-. 2.7 The Assessing Officer thus computed the income of the assessee as follows: 1. income from contract work, as discussed above Rs. 21,87,880/- 2. interest income Rs. 28,05,615/- 3. income from TATA 407 Rs. 21,600/- Rs. 50,15,095/- say Total income: Rs. 50,15,100/- 3. The facts as far as assessment year 1998-99 are concerned are more or less identical. In this year, the Assessing Officer has detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business and made an addition of Rs. 50,52,709/-. Thus, the income for assessment year 1998-99 was computed by the Assessing Officer as follows:- "Net profit from contract work as computed in para (A) above. Rs. 50,52,709/- Add: Income from other sources as discussed in para (B) above. Rs. 44,69,262/- Rs. 95,21,971/-" (It appears that the Assessing Officer should have taken net profit from Contract Work at Rs. 52,43,140/- as against Rs. 50,52,709/-) 4. In the appeal for assessment year 1997-98, the learned CIT (Appeals) upheld the rejection of books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 respect of hiring charges of Tata Truck-407 for two months because thereafter it has been utilized in own business of the assessee. This would result in an income of Rs. 21,91,080/-. No further deduction including depreciation is admissible thereafter. The deduction for interest and salary to partners is also not allowable because it has not been allowed even in earlier years." 7.1 The CIT (Appeals) also held that the income determined as above would cover income from the business of truck plying and no separate addition was required to be made. The CIT (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 year 1996-97 required reconsideration and hence the Division Bench made a reference to the President to constitute a Special Bench to hear and decide the appeals and cross-objections including the following question:- "Whether, in the facts and circumstances of the case, the net interest income earned by the assessee on bank FDRs having nexus to its contracting business can be added separately to its income from the said business computed on estimated basis by applying a net profit rate." 12. Accordingly a Special Bench was constituted. The learned De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 thereon, the character of such interest income will not be that of agricultural income. According to him the source of the interest income is alone relevant and that source is traceable only to the fixed deposits and not business. Therefore interest income cannot be income from business. 16. On the action of the Assessing Officer in assessment year 1998-99 in allowing deduction on account of interest paid to bank against interest income from FDRs, strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 something which has a direct or immediate nexus with the assessee's industrial undertaking. According to him there is no nexus direct or immediate between the interest income on FDRs and the business of the assessee. 18. On the question whether interest income should enter into the computation of business income from civil construction, the learned Departmental Representative submitted that once interest income is held not to be a part of business income from civil construction, then it follows that the same has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are deemed to have been allowed and there is no question to allow separate deduction. In this regard the learned Departmental Representative placed reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions v. CIT [1998] 232 ITR 776. In the aforesaid decision the Assessing Officer for making estimate of income after rejecting the books of account made a further addition towards interest and remuneration paid to partners. The Hon'ble Andhra Pradesh High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considered as part of the business receipts and net profit rate has to be applied including such interest as part of the contract receipts and that no separate addition could be made for the interest received from bank. 25. On the question of allowing deduction of interest paid to bank against interest received on FDRs, the learned counsel submitted that in assessment year 1997-98 the Assessing Officer himself has allowed such a deduction and in this appeal by the Revenue the Tribunal is not competent to modify the origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal 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, therefore, the past history in the assessee's own case may not be as worth-while guide. On this submission the learned Counsel for the assessee pointed out that even if an average of the past five years prior to assessment year 1997-98 is considered, still, the past history of the case would not justify making an estimation of 8 per cent. The average of the past five years, if adopted, would eliminate effect of hybrid method of accounting followed by the assessee. 27. We have considered the rival submissions. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 a particular amount is taxed under this or that head. Therefore, the Tribunal had come to the erroneous conclusion from the mere fact that the FDRs were utilized for business purposes, that interest thereon has to be considered as business receipts of the assessee. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed. 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 from other sources. 29. In assessment year 1998-99, the Assessing Officer considered the interest paid to the bank as not the expenses incurred for earning the interest income. In view of our conclusions above 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 under section 57(iii) of the Act. It cannot be said that interest paid to the bank wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod 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. On the other hand, the case of the learned Departmental Representative was that provision contained in sub-section (1) was mandatory and the assessee ought to have switched over either to cash or mercantile method of accounting, which was not done. In view thereof, provision contained in subsection (3) became applicable on the facts of the case, which provides that where the method of accounting provided in subsection (1) has not been regularly followed by the assessee, the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 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-à-vis earlier years. Such increase will necessarily have the effect of depressing the net profit rate. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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