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TMI Blog2019 (11) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... this matter regarding the closing stock shown by the assessee at ₹ 5,00,000/- regarding the contract amount which was not certified by one of the companies, namely, M.C. Nally Bharat Engineering Co. Ltd. and consequently the assessee has shown the same in the closing stock instead of recognizing the same as sales for the year under consideration. This is only a method of accounting and if the assessee has been following a consistent method of accounting for recognizing the revenue/sales subject to the certification of the work by the awarder company, then it shall have no revenue effect as the same will be shown as sales in the subsequent year. The assessee has also claimed that this amount of ₹ 5,00,000/- shown in the closing stock has been offered as part of the income of the subsequent year and, therefore, if an addition is made in respect of the said amount for the year under consideration, it would be double taxation. Since this is a method of accounting consistently followed by the assessee and having no revenue impact, then considering the said amount as part of sale is not justified. Accordingly, the addition made by the AO and enhancement made by the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2. That the ld. Assessing Officer grossly erred in applying 8% NP Rate on gross receipts of ₹ 5,45,19,491/- and on uncertified work in progress of ₹ 5,00,000/- and in computing total business income at ₹ 41,67,451/- as against ₹ 25,42,865/- declared by the assessee appellant, in turn making total addition of ₹ 16,24,586/- against the assessee appellant. 2. That on the facts, in the circumstances of the case and in law, the ld. Lower authorities grossly erred in treating the interest earned on Fixed Deposit Receipts as Income chargeable to tax under the head Income from Other Sources and in not allowing the set-off against interest paid by the assessee appellant to the bank, even when limits were availed from the bank against the FDRs pledged with the bank. 3. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing. Ground no. 1 is regarding rejection of books of account under section 145(3) of the IT Act. 2. At the time of hearing, the ld. Counsel for the assessee has stated at bar that the assessee does not pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g NP rate of 11% and consequently the income of the assessee was enhanced by ₹ 19,29,108/-. 4. Before us, the ld. Counsel for the assessee has submitted that during the year under consideration the assessee suffered a paralytic attack and his half body got paralyzed. The assessee was undergoing treatment in Kerala and, therefore, was not able to look after the matter personally during the assessment proceedings as well as in the appellate proceedings. Thus the ld. A/R has submitted that the noncompliance or deficiencies as pointed out by the A.O. and ld. CIT (A) are only due to the reason that it was not possible for the assessee to look after and take appropriate steps in this respect as he was suffering from health problem and undergoing treatment in Kerala. However, the ld. Counsel has submitted that even if the books of account of the assessee are rejected by invoking the provisions of section 145(3), the estimation of income by the AO as well as by the ld. CIT (Appeals) is not based on some reasonable and proper criteria being the past history of the assessee as well as the prevailing profit in the comparable and identical business activities. The ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Ashok Behi Bharat Sethi Party, 35 taxmann.com 214 and submitted that the Hon ble High Court has taken a consistent view that the past history of the assessee is a proper and reasonable basis for estimation of income. He has also relied upon the following decisions :- CIT vs. Jaimal Ram Kasturi, 33 taxmann.com 315 (Raj.) CIT vs. Inani Marbles Pvt. Ltd. 175 taxman 56 (Raj.) Thus the ld. Counsel for the assessee has submitted that the addition made by the AO as well as enhanced by the ld. CIT (A) is without any basis, the same deserves to be deleted. 5. On the other hand, the ld. D/R has submitted that the AO has pointed out specific deficiency in the books of account and, therefore, by taking guidance of section 44AD the AO has applied 8% NP to estimate the income of the assessee. He has further submitted that the ld. CIT (A) has undertaken the exercise to verify the genuineness of the sub-contract payment by the assessee and during the enquiry, the statements of sub-contractors were recorded wherein it was found that the claim of the assessee was not genuine and the same was treated as bogus. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s own past history should be the proper basis for estimation of income for the year under consideration. In the case of CIT vs. Inani Marbles Pvt. Ltd. (supra), the Hon ble High Court while dealing with this issue has held para 3 as under :- 3. We have heard learned counsel for the parties, and have gone through the impugned judgments. The Assessing Officer rejected the books of account for valid reasons, and invoked provisions of section 145 of the Income-tax Act, and made assessment by applying gross profit rate of 15 per cent on the sales disclosed by the assessee, and accordingly additions were made to the different result. This matter relates to assessment year 2000-01. The Assessing Officer for arriving at this conclusion considered that the assessee had disclosed gross profit rate of 2.30 per cent as compared to 2.51 per cent in 1999-2000, and 16.04 per cent in assessment year 1998-99. Against that order the assessee filed appeal, and the learned Commissioner upheld the invoking of section 145, and examined the aspect of gross profit rate to be applied and considered that gross profit rate declared by the assessee during the year is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscrepancies regarding the quantum of sub-contract receipts by these sub-contractors from the assessee as recorded in the books of account and stated in their statements as well as the payments to these sub-contractors claimed by the assessee. Therefore, owing to these discrepancies and inconsistencies, the ld. CIT (Appeals) has held that the claim of payment to sub-contractor is bogus. However, this finding of the ld. CIT (A) is also inconsistent with the fact that the execution of the particular work for which the sub contract payments were made by the assessee is not in dispute and the revenue generated by the assessee from execution of the said work is also not in dispute. Therefore, even if there is a discrepancy in the amounts of the sub-contract payment, it is inevitable that the assessee has to incur the expenditure for execution of a particular contract work. Therefore, even if the claim of sub-contract work is found to be not correct, the income of the assessee has to be estimated on the basis of turnover and not on the basis of cost in execution of the contract work. Therefore, the entire exercise of the ld. CIT (A) in examination of the correctness and genuineness of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2930748 NP ratio before tax, interest depreciation 6.13 6.08 3.12 5.38 The AO has adopted the net profit rate as estimation of the income. Similarly the ld. CIT (A) has also applied the net profit though at a higher percentage for estimation of income, therefore, even if considering net profit for the purpose of estimation of the income, the average of past history of the assessee has to be the proper and reasonable basis. The average of the preceding three years 2006-07 to 2008-09 of net profit before tax, interest and depreciation comes to 5.11% in comparison to the current year s net profit declared by the assessee at 5.38%. Therefore, the net profit declared by the assessee for the year under consideration is in line with the past history of the assessee and consequently even after the rejection of books of account no trading addition is warranted in the case of the assessee. 6.1. There is another point involved in this matter regarding the closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below. 9. Having considered the rival submissions as well as the relevant material on record, it is noted that the revenue has not disputed the fact that the FDRs taken by the assessee are for the purpose of furnishing the security/guarantee to the companies those have awarded the contract to the assessee. Therefore, these FDRs were furnished as a performance guarantee by the assessee. Once the FDRs in question were obtained for the purpose of furnishing the performance guarantee for taking the contracts, then the interest on such FDRs has a direct nexus with the business activity of the assessee and consequently the same has to be treated as business income of the assessee. The Hon ble Jurisdictional High Court in case of Choudhary Brothers vs. DCIT (supra) has held as under :- This Court in M/s. Bhawal Synthetics, supra where the amount in the FDR was kept for obtaining letter of credit for purchase of machinery has indeed not noticed the judgment of the Supreme Court in Karnal Cooperative Sugar Mills Ltd, supra. In that also, money in FDR was part of the amount that was kept to obtain later of credit for purchase of machinery. Fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the Assessing Officer, project expenses did not have even remote proximity with the earning of interest and thus the same could not be allowed to be set off against the interest income. On second appeal, the ITAT allowed the assessee's claim. The revenue approached the High Court. The High Court on consideration of the number of precedents including the Tuticorin Alkali Chemicals Fertilizers, supra dismissed the appeal holding thus:- 21. Keeping in view the aforesaid pronouncements in the field, the present controversy is to be adjudged. As is noticeable from the stipulations in the agreement, the performance guarantee by way of bank guarantee was required for faithful performance of its obligations. The non-submission of the guarantee would have entailed in termination of the agreement and NHAI would have been at liberty to appropriate bid security. That apart, the (9 of 12) [ITA-355/2017] release of such performance security depended upon certain conditions. Thus, it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering the contract and further it was to be kept alive to fulfill the oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer treated the interest as Income from other sources . The Karnataka High Court noticed that the investment of amount in fixed deposits by the assessee was only to provide a bank guarantee to the contractee in order to acquire the contract work. It was held that the interest income could not be treated as income from other sources and had to be treated as business income only. Karnataka High Court in that case relied upon judgement of the Supreme Court in the Supreme Court in CIT vs. Govinda Choudhary and Sons-(1993) 203 ITR 881. The aforesaid judgement of the Karnataka High Court was followed by Patna High Court in Shyam Bihari vs. Commissioner of Income Tax Anr.-(2012) 345 ITR 283. That was also a case where the assessee was a civil contractor and his business income was from the contract work obtained from Government departments. The assessee objected before the Tribunal that the inclusion of interest income being assessed as income from other sources on the ground that the income was from money (11 of 12) [ITA-355/2017] deposited in FDRs and NSCs, which was required to be furnished by way of security for securing the contract work and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of assessment in accordance with law keeping view the question answered by this Court. This Tribunal in case of Mohd. Construction Co. vs. ACIT (supra) has also considered this issue in para 5.6 as under :- 5.6 We have heard the rival contentions and pursued the material available on record. Firstly, regarding interest on income tax refund and interest on sales tax refund, the same has rightly been treated by the Ld. CIT (A) as income from other sources and we donot see any infirmity in the same. Regarding interest on FDR, it is noted that the FDRs were placed with the Banks to obtain bank guarantee which was necessarily required to be furnished to the various government department and in absence of such bank guarantee, the assessee could not have proceeded with the execution of contracts with the government department. Further, there is no finding that the surplus funds have been invested by the assessee in the FDRs. Any interest on such FDR, therefore, must be treated as inextricably linked with the business of the assessee and therefore to be treated as business income and not as income from other sources. It is noted that si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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