Case Law Details

Case Name : Shri Devasamparambil Hassainar Kutty Vs ACIT (ITAT Jaipur)
Appeal Number : ITA No. 827/JP/2014 & 511/JP/2015
Date of Judgement/Order : 30/07/2019
Related Assessment Year : 2009-10
Courts : All ITAT (6382) ITAT Jaipur (165)

Shri Devasamparambil Hassainar Kutty Vs ACIT (ITAT Jaipur)

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.

FULL TEXT OF THE ITAT JUDGEMENT

These two appeals by the assessee arc directed against two separate orders of Id. CIT (Appeals), Kota dated 16.09.2011 and 25.03.2015 arising from assessment order passed under section 143(3) and penalty levied under section 271(1Xc) of the IT Act respectively for the assessment year 2009-10. In the quantum appeal, the Messee has raised the following grounds :-

“1. That on the facts, in the circumstances of the case and in law, the Id. Lower authorities grossly erred in rejecting the books of accounts of the assessee appellant u/s 115(3) of the Income-tax Act

1.1. That the Id. Commissioner or Income-tax (appeals) grossly-erred in applying 11% NP Rate on gross receipts of Rs. 5,45;19,491/- and in further enhancing the trading addition by Rs.1949,1.68/- u/s 251(2) of the Income-tax Act and in computing the total business income at Rs. 59,97,144/- as against Rs. 25,42,865/- declared by the assessee appellant, in turn making total addition of Rs. 34,54,279/- against the assessee appellant.

1.2. That the Id. Assessing Officer grossly erred in applying 8% NP Rate on gross receipts of Rs. 5,15,19,491/- and on uncertified work in progress of Rs. 5,00,000/- and in computing total business income at Rs. 41,67,451/- as against Rs. 25,42,865/-declared by the assesses appellant, in turn making total addition of Rs. 16,24,586/- against the assessee appellant.

2. That on the fact, in the circumstances of the case and in law, the Id. Lower authorities grossly erred in treating the interest earned on Fixed Deposit Receipt 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 Id. counsel for the asscssee has stated at bar that the assessee does not press this ground of appeal and the same may be dismissed as not pressed. The Id. D/R has raised no objection if the assessee’s ground no. 1 is dismissed as not pressed. Accordingly, the ground no. 1 of the assessee’s appeal is dismissed being not pressed

Ground No. 1.1 and 1.2 are regarding estimation of income by the AO by applying 8% NP rate and enhancement made by the Id. CIT (A) by applying 11% NP rate on gross receipts.

3. The assessee is an Individual and engaged in the business of contract of labour supply, civil contract, mechanical and electrical contract. The assessee is carrying on business under the name and style of M/s. H.D. Kutty & Sons (Engineers & Contractors) for the last several yeari. During the year under consideration, the assessee has got executed various contracts awarded by Kota Thermal Power, RAAP Rawatbhata, Chanderiya near Udaipur, Abucha Distt. Bhilwara, all in the State Of Rajasthan, Bhav Nagar in the. State of Gujarat and Tarapur Boisal in the State of Maharastra with a total turnover or Rs. 5,45,19,491/-. The assessee filed his return of income on 30.09.2009 declaring total income of Rs. 24,43,450/-. During the scrutiny assessment, on examination Of books of account, the AO found various deficiencies/discrepancies and consequently invoked the provisions of section 145(3) of the IT Act whereby the book result of the assessee was rejected by the AO. The AO then estimated the income of the assessee by adopting NP at 8% of the gross receipts and thereby an addition of Rs. 16,24,586/- was made. The assessee challenged the action of the AO before the Id. CiT (A). The Id. CIT (A) upheld the rejection of books of account under section 145(3) of the IT Act and further doubted the sub-contract payment made by the assessee to the sub-contractors. The Id. CIT (A) has undertaken the exercise to examine the sub-contractors and got recorded their statement. Since there were discrepancies in the statements vis-a-vis the receipts shown in the books of account of the sub-contractors as well as the payment claimed by the assessee to these sub-contractors, the Id. CIT (A) held that the payment to sub-contractors is bogus and accordingly proposed to enhance the, assessment by issuing .8 show cause notice under section 251(2) of the IT Act. The Id. Cr (A) estimated the income of the assessee by adopting NP rate of 11% and consequently the income of the assessee was enhanced by Rs. 19,29,108/-.

4. Before us, the Id. 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 Id. A/R has submitted that the non­-compliance or deficiencies as pointed out by the A.O. and Id. 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 Id. 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 Id. 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 Id. Counsel for the assessee has referred to the comparative details of net profit charged of the assessee for the preceding three years and the current year and submitted that the net profit declared by the assessee for the year under consideration is in line with the past history of the assessee and rather it is higher than the immediate preceding year. He has pointed out that the net profit for the year under consideration before the tax, interest and depredation as declared by the assessee is 5.38% in comparison to 3.12% in the immediate preceding year and this is also in line with the average of the preceding years being assessment years 2006-07, 07-08 and 08-09. Thus the Id. Counsel has submitted that even if the books of accounts of the assessee are rejected under. section 145(3), the same would not ipso facto lead to. any trading addition if the profit declared by the assessee is in line with the past history of the assessee. He has further contended that once the assessment is framed based on the estimation of income under section 144 of the IT Act read with section 145(3), then the enhancement by the Id: CIT (A) based on disallowance of some expenditure is unwarranted as the entire expenditure subsumed in the process of estimation of the income by adopting the net Profit. Therefore, the basis of enhancement itself is not proper and in accordance with the provisions of section 145(3) of the Act. In support of his contention, he has relied upon the decision of Honble Jurisdictional High Court in case of CIT vs. Dr. A.P. Bahal, 322 ITR 71 (Raj.) and submitted that the Montle High Court has held that the mere rejection of books of account would not mean that it must necessarily lead to addition to the returned income. He has then relied upon the decision in case of CIT vs. Gupta K.N. Construction Co., 59 taxmann.com 293 and submitted that after rejection of books of account the AO has to consider eirner the past history of the assessee or history of similarly situated other businessmen/traders. Thus in view of the fact that the assessee’s own past history is available and the net profit declared by the assessce is in line with the average of the past history, then no addition is called for. The Id. Counsel has then relied upon the decision in case of CIT vs. Garment Crafts, 68 taxmann.com 222 (Raj.) as well as the decision in case of cnys. Ashok Behi Bharat Sethi & Party, 35 taxmann.com 214 and submitted that the Honble 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 (Ran

Thus the Id. Counsel For the assessee has submitted that the addition made by the AO as well as enhanced by the Id. CIT (A) is without any basis, the same deserves to be deleted.

5. On the other hand, the Id. 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 Id. 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, there was material with the Id. CiT (A) to enhance the assessment by considering the fact that the claim of subcontract payment is not genuine. He has relied upon the orders of the authorities below.

6. I have considered the rival submissions as well as carefully perused the relevant record including the orders of the AO as well as the Id. CIT (A). The dispute is limited on the point of estimation of income of the assessee after rejection of books of account under section 145(3) of the Act. It is settled position of law that once the AO invoked the provisions of section 145(3) and rejected the books of account of the assessee, then the only course of action to assess the income of the assessee is on the basis of estimation and best judgment as per the provisions of section 144 of the IT Act. The estimation of income on the best judgment should not be on some arbitrary basis but it has to be a decision based on the relevant facts, proper and reasonable criteria to justify the estimation of income. It is also settled position of law as held by the Honble Jurisdictional High Court in a series of decisions relied upon by the Id. Counsel for the assessee that after invoking the provisions of section 145(3), the AO has to consider either the past history of the assessee or the history of similarly situated businessmen/traders. Thus the past history of the assessee which has attained the finality or was not in dispute has to be preferred over the profit of the comparable cases. In case of CIT vs. Ashok Behi Bharat Sethi & Party (supra), the Honble High Court has specifically observed that the AO in making the assessment with reference to the case of another assessee but if it is not a directly comparable case then it is not a safe guide more particularly when the assessee’s past history was available. In the case in hand, the assessee is in the same business and doing the same contract work for various corporate houses rather big and reputed corporate houses. Therefore, the assessee’s contract work is not only audited by the auditors but it is also certified by the other companies including some future companies before making the payment to the assessee. When the facts pertaining to the assessment year under consideration are not different from the preceding years as far as the business activities of the assessee are concerned, then the assessee’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 Honible 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 far less than the G.P.Rate (gross profit rate) shown by the other assessees who are in the same line of business, and applied the G.P. Rate at 14.5 per cent. Against this the assessee filed appeal being Appeal No. 448 of 2004, and the revenue also filed appeal being Appeal No. 464 of 2004. The learned Tribunal negatived the contention of the assessee about challenge to invoking the provisions of section 145. Then, the aspect of gross profit rate to be applied was considered in para 4 and it was found that the Assessing Officer considered certain cases as comparable applied G.P. Rate of 15 per cent which was reduced in appeal to 14.5 per cent but then it was considered that the Assessing Officer does not get unfettered powers to apply any G.P. Rate of his choice, and he is supposed to be guided either by the G.P. Rate declared by the assessee or the profit rates declared by the comparable cases. Then, it was considered that in resorting to the application of Gross Profit rate on the basis of comparable cases, it is necessary that those cases, should be, in fact, comparable with reference to the volume of business, location and other host of factors, and it was found that the objections raised by the assessee were not however dealt with, and therefore, in the absence of any change in the factual position normally the profit rate declared and accepted in the preceding year, constitutes a good basis for working out the Gross Profit. Accordingly since in the earlier year the Gross Profit rate declared and accepted was 2.51 per cent, the same rate should be applied by the learned Tribunal for this year also.”

Therefore, ignoring the past history of the assessee adopting profit rate by the AO without any proper basis is not permitted. Further, once the books of account of the assessee are rejected  by invoking the provisions of section 145(3) and the said ..etiori; ;of Ilia AO was upheld by the Id. CIT (A) then doubting some of the expenditures as debted in the Profit & Loss account by the Id.CIT(A) would not affect the assessment which is based on estimation. The Id. CT (A) has though took the pain to examine the genuineness of the claim and in that process the statements of the sub-contractors were recorded. On careful perusal of the statements recorded of the sub-contractors as well as the other relevant material, it is noted that there were some discrepancies 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 Id. CIT (Appeals) has held that the claim of payment to sub-contractor iS bogus. However; this finding of the Id. 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 assesses 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 assesses; 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 Id. CT (A) in examination of the correctness and genuineness of the sub-contract payment is futile and is irrelevant when the final income of the assessce has been assessed on the basis of estimation as net profit rate on the turnover. Hence enhancement made by the Id. CIT (A) is completely unwarranted and unjustified apart from inconsistent with the provisions of section 144 of the Act as well as the settled regal proposition laying down the guidance for estimation of income after. rejection of books of account. The comparative GP and NP for the preceding years as well as the current year is as under :-

Particulars A.Y. 2006-07 A.Y. 2007-08 A.Y. 2008-09 A.Y. 2009-10
Sales 12954632 39300143 81181008 54519491
Gross Profit 1910954 4214550 6318373 3821710
GP Ratio 14.75 10.72 7.82 7.01
Net Profit before tax 667098 2200404 1881506 2542865
NP ratio before tax 5.15 5.60 2.32 4.66
Interest 25763 20900 410930 141528
Depreciation
charged
101560 169500 241837 216355
Net Profit before tax, interest   &
depreciation
794421 2390804 2534273 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 Id. 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 shown by the assessee at Rs. 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 sates 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 Rs. 5,00,000/- shown in the closing stack 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 Id. CIT (A) are deleted.

Ground No. 2 is regarding the interest on the fixed deposits was treated as income from other sources as against the claim of business income.

7. I have heard the Id. Counsel for the assessee as well as the Id. D/R and considered the relevant material on record. The Id. Counsel for the assessee has pointed out that the interest earned on the FDRs taken for the purpose of contracts and, therefore, the said interest income is business income of the assessee. He has further pointed out that this income of interest was already offered by the assessee as part of the Profit & Loss account and making an addition of the said amount under the head Income from other sources without reducing the same from the business income will amount to double taxation. In support of his contention he has relied upon the following decisions :-

Kishan Kumar Saraiwala vs. CIT

(DB IT Appeal No. 325/2011 dated 29.08.2017)

Mohd. Construction Co. vs. ACT

(ITA No. 389/2/2012 dated 25.01.2017)

Choudhary & Brothers vs. OCT

(DB IT Appeal No. 355/2017 dated 31.08.2018)

8. The ld. D/R has relied upon the orders of the authorities 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 Honible 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. Facts were thus identical. The judgement of the Supreme Court in Karnal Cooperative Sugar Mills Ltd., supra thus provides guidance on the point of law involved in this case. It was held therein that income earned would fall in the category of income from other sources, but may come in the category of income earned from business. The Supreme Court in the aforesaid case has considered the judgement in Tuticorn Alkali Chemicals and Fertilizers Ltd., supra and held thus:

“In the present case the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee’s agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank fur the purpose of earning interest- The deposit of money in the present case is directly linked with the purchase of plant and machinery. lime, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and  fertilisers Limited v. CIT. (1997( 227 aft 172 , will not be attracted. The more appropriate decision in the factual situation in the present (8 of 12) [ITA-355/20171 case is in CO v. Bokaro Steal Ltd.-(1999) 23G RR 315 (SC). The appeal is dismissed. There will be no order as to costs.”

The Delhi High Court in Jaypee DSC Ventures Ltd., supra was dealing with a case where the assessee filed its return of income for the relevant assessment year declaring nil income. It had furnished performance guarantee in favour of National Highway Authority of India to get the contract awarded in its favour and to procure the said guarantee, it had kept the amount in a fixed deposit in the bank. The amount of interest income from fixed deposits was set off against the project expenses. The case of the assessee was that the furnishing of bank guarantee had a direct nexus with the carrying on of the project and, therefore, the said set off deserves to be allowed. The Assessing Officer held that interest received by the company on the bank deposit was taxable as income under the head ‘income from other sources’. 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 obligations. Quite apart from the above, the release of the same was dependent on the satisfaction of certain conditions. Thus, the present case is not one where the assessee had made the deposit of surplus money lying idle with it in order to earn interest; on the contrary, the amount of interest was earned from fixed deposits which was kept in the bank for furnishing the bank guarantee. It had an inextricable nexus with securing the contract. Therefore, we are disposed to think that the factual matrix is covered by the decisions rendered in Bokaro Steel Ltd. (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Koshika Telecom Ltd. (supra) and, accordingly, we hold that the view expressed by the tribunal cannot be found fault with.”

Another judgment on the similar facts is of Madhya Pradesh High Court in Bharat Oman Refineries Ltd., supra. That was a case in which assessee-company filed nil return and along with the return, statement of income and expenditure was filed. In this statement, income from interest on account of short-term deposit with the bank was indicated. The Assessing Officer made assessment and treated the said sum as income from ‘other sources’. The assessee challenged the said assessment pointing out that interest income could not be added under the head ‘income from other sources’. On appeal, both the Commissioner (Appeals) and the Tribunal upheld the order of Assessing Officer. The High Court however held that the appellant has not earned interest on the money lying idle with him for running industry. On the contrary by virtue of terms and conditions of the contract (10 of 12) [ITA-355/2017] petitioner was to submit a performance guarantee and for that purpose, he had to deposit certain funds with the Bank as margin money and it is on this margin money the interest was earned in the light of the nature of deposit made and the source form which the interest was received.

We may in this connection also refer to the judgement of the Karnataka High Court in CIT vs. Chinna Nachimuthu Constructions-(2008) 297 ITR 70 (Karn). That was a case somewhat similar on facts where the assessee being a contractor, in order to secure a contract work was required to offer a bank guarantee to the contractee. There also the assessee had shown the interest accrued on the fixed deposit as business income but the 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 TTR 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, therefore, it should have been treated as income from business and not from other sources. The Patna High Court relying on the judgement of Karnataka High Court held that the Tribunal as well as the subordinate Revenue authorities erred in holding that interest accrued on security deposits to the extent used for the purpose of securing the contract work would also be assessable as income from other sources.

The aforesaid judgement of the Karnataka High Court was followed by Patna High Court in Shvam Bihari vs. Commissioner of Income Tax & Anr. (2012) 345 ITIk 233. Thar was also a case where the asscmce was a civil contractor and his business income was (mm 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) (I FA-3552017) deposited in FDRs and NSCs, which was required to he furnished by way of security for securing the contract work and. therefore, it should have been treated as income front business and not from other :mutes. The Palma High Court relying on the judgement of Karnataka High Court herd that the Tribunal’ as well as the subordinate Revenue authorities erred in holding that interest accrued on security deposits to the extent used for the purpose of securing the Contract work wound also be assessable as income from other sources.

In the present case also, on the facts of the present case, 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 (12 of 12) [ITA-355/2017] as income from other sources and would rather be an income earned from business.

In view of above discussion, the question of law extracted above is answered in the terms that “in the facts and circumstances of the case, 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.”

In the result, the appeals are allowed. The judgement of the ITAT dated 24.7.2017 is set aside and that of the CIT(A) in regard to interest earned on FDRs and NSCs dated 18.3.2016 is restored and the matter is remitted back to the Assessing Officer for passing fresh order 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. LIT (A) as income from other sources and we do not see any infirmity in the same. Regarding interest on, for 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 within 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 for, 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 similar view Ms been taken by Coordinate Bench in case of M/s Maya Construction (supra). The contention the Id. AR is therefore accepted and the order of Id CIT(A) to this extent stand modified.”

Accordingly, in view of the binding precedent of the Hon’ble Jurisdictional High Court as well as the decision of the Coordinate Bench of the Tribunal, the interest on FDRs taken for the purposes of guarantee furnished in relation to the contract will be part and parcel of the business income. Ground No. 2 is decided in favour of the assessee.

ITA No. 511/JP/2025 :

10. In the Penalty appeal, the assessec has challenged the levy of penalty by the Id. CIT (A) in respect of the enhancement made by the Id. CIT (A) while passing the quantum order.

11. I have heard the Id. Counsel for the assessee as well as the Id. D/R. The Id. CIT (A) after making enhancement of assessment has also levied the penalty under section 271(1)(c) of the IT Act in respect of the said addition being enhancement of income of Rs. 10,29,108/. In view of the finding of the Tribunal on quantum appeal when the said enhancement is deleted, the penalty levied under section 271(1)(c) Will not survive. Even otherwise, the penalty levied against the addition made on the basis of estimation of income is not justified in view of decision of coordinate bench of the tribunal dated 16.12.2016 in case of Shri Collector Ram Sharma vs. ACTT in ITA No. 19/2/2014 as relied upon by the Id. Counsel for the assessee. Accordingly, the penalty levied under section 271(1)(c) is deleted.

7. In the result, both the appeals of the assessee are allowed.

Order is pronounced in the open court on 30/07/2019. –

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