Case Law Details
R.G. Colonizers Pvt. Ltd. Vs DCIT (ITAT Jaipur)
Conclusion: Interest income on FDR which was earned out of the funds placed with the bank by utilizing the bank overdraft limit was to be considered as business income and not as income from other sources.
Held: Assessee had shown interest income of Rs.12,58,998/- on the FDR and miscellaneous receipts of Rs.2,89,200/-. AO assessed the same as income from other sources. CIT(A) confirmed the action of AO. It was held that the interest income earned on FDR was part of business income as FDRs’ were made for the purpose of business for giving bank guarantees to the awarder of contract. For this purpose assessee had to obtain the FDR from the bank which was pledged to it. Also, the FDR were made by utilizing the cash credit limit on which interest was paid to the bank and which formed part of the business expenditure. Thus, the interest income on such FDR which was earned out of the funds placed with the bank by utilizing the bank overdraft limit was to be considered as business income and not as income from other sources. Similarly, the miscellaneous receipts of Rs.2,89,200/- was from sale of scrap and was part of business income.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This is an appeal filed by the assessee against the order of ld.
National Faceless Appeal Centre (NFAC), Delhi dated 06/08/2021 for the A.Y. 2014-15, wherein following grounds have been taken.
“1. The ld. CIT(A), NFAC has erred on facts and in law in upholding the rejection of books of account by applying the provisions of Sec. 145(3).
2. The ld. CIT(A), NFAC has erred on facts and in law in upholding the action of AO in applying n.p. rate of 8% on total receipts of Rs. 18,63,73,549/-, thereby computing the business income at Rs. 78,42,549/- (18,63,73,549*8%-70,67,877 depreciation) as against net loss of Rs. 68,43,810/- computed by the assessee)
3. The ld. CIT(A), NFAC has erred on facts and in law in confirming the addition of interest income of Rs. 12,58,998/- and miscellaneous receipts of Rs. 2,89,200/- totaling to Rs. 15,48,198/- under the head income from other sources apart from the business income sustained by him.
4. The appellant craves to alter, amend and modify any ground of appeal.
4. Necessary cost be awarded to the assessee.”
2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
3. The brief facts of the case are that the assessee company is engaged in civil construction work. Return of income for the year under consideration was filed by the assessee on 29/11/2014 declaring NIL income comprising loss of Rs. 68,43,810/-. The case of the assessee was selected for scrutiny under CASS and statutory notices were issued and served to the assessee. After making enquiry and material placed on record, the A.O. finally completed the assessment by rejecting the books of account of assessee U/s 145(3) of the Income Tax Act, 1961 (in short, the Act) as well as assessing the total income of the assessee at Rs. 93,90,204/- by making various additions.
4. Being aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A), who after considering the submissions of both the parties and material placed on record, dismissed the appeal of the assessee. Against the order of the ld. CIT(A), the assessee has preferred the present appeal before the ITAT on the grounds mentioned above.
5. Grounds No. 1 and 2 of the appeal are interrelated and interconnected and mainly relates to challenging the order of the ld. CIT(A) in confirming the rejection of books of account and confirming the action of A.O. with regard to applying to N.P. rate @ 8%. In this regard, the ld. AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and also relied on the written submissions filed before the Bench and the contents of the same are reproduced as under:
“1. It is submitted that the assessee is maintaining day to day books of accounts which are subject to statutory audit under the Companies Act, 2013 as also tax audit u/s 44AB of the IT Act, 1961. These books are duly supported by the bills and vouchers. Neither the auditor have pointed out any defect in the purchase bills/ vouchers and the contract receipt nor the AO has found any defect in the same. The only observation is that stock register is not maintained ignoring the nature of business of assessee whereby all the materia l purchased is directly off loaded at site and consumed. The unbilled work at the end of the year is taken as work-in-progress (WIP). The AO has not disputed the opening and closing WIP declared by the assessee (PB 16). Hence, simply because stock register is not maintained, rejection of books of accounts is not justified. The assessee has regularly maintained books of accounts in similar manner which has been accepted by the AO in the scrutiny assessment made for AY 2012-13 (PB 18-21) and AY 2013-14 (PB 22-25). The definition of books of accounts u/s 2(12A) nowhere specifically includes the stock register. Section 145(3) is applicable when AO is not satisfied about the correctness or completeness o f the accounts or method of accounting or the accounting standard have not been regularly followed. There is no dispute about the method of accounting and the accounting standard regularly followed by the assessee. The only dispute is that AO is not satisfied about the correctness or completeness of account which is only on account of non maintenance ofstock register ignoring the peculiar nature of the activities carried out by the assessee where the purchase of material like sand, grit, cement, steel, etc. is directly uploaded at site and consumed and the unbilled work is accounted for as WIP.Hence, invocation of section 145(3) is unjustified and the consequent addition made by AO and confirmed by Ld. CIT(A) be deleted. Reliance in this connection is placed on the following cases:-
(i) Malani Ramjivan Jagannath Vs. ACIT (2009) 316 ITR 120 / 207 CTR 19 (Raj.) (HC)
(ii) CIT Vs. Smt. Poonam Rani (2010) 326 ITR 223/ 41 DTR 194 (Del.) (HC)
(iii) Ashok Refractories Pvt. Ltd. Vs. CIT 279 ITR 457 (Cal.) (HC)
(iv) PCIT Vs. Bhawani Silicate Industries (2016) 236 Taxman 596 (Raj.) (HC)
2. On merit it is submitted that during the year the assessee mainly executed the work which was awarded to him in FY 2011-12 & 201213. In between the rate of sand, bricks, cement and steel increased between 10% to 20%. Further due to financial constraints, some o f the parties provided the steel/ cement, the cost of which was deducted from the running bill of the assessee. In case of work o f Classic Infra Solution Pvt. Ltd. assessee has to use ready mix concrete which increased the cost of work. The statement of various contract executed during the year and the cost of raw material as compared to earlier two years is enclosed. From the financial statements it can be noted that cost of raw material during the year has increased by around 3%, finance cost by around 5% and other expenses by around 4% as compared to the last year as tabulated below:-
| Particulars | AY 2014-15 | % | AY 2013-14 | % |
| Revenue | 18,63,73,549/- | 21,64,20,671/- | ||
| Cost of material & components consumed |
9,51,67,672/- | 51.06 | 10,47,32,370/- | 48.15 |
| Employee benefit expenses | 5,95,82,221/- | 31.97 | 7,65,74,818/- | 35.38 |
| Finance Cost | 1,10,07,464/- | 59.06 | 1,17,38,450/- | 54.23 |
| Other Expenses | 2,22,38,565/- | 11.91 | 1,56,71,623/- | 7.24 |
From the above table it can be noted that cost of raw material as % of turnover has increased by around 3% for the reasons stated above. Finance cost as % of turnover has increased by around 5% which is mainly on account of increase in interest payment on loan taken from bank (PB 16, Note 3.7). Other expenses as % of turnover has increased by around 5% which is on account of the fact that Central Excise Commissionerate, Jaipur vide order dt. 30.08.2013 raised demand of Rs.26,74,240/- (PB 26) which was paid during the year (PB 30) and because of applicability of Works Contract Tax in the state of Haryana, the assessee has to pay WCT o f Rs.40,18,047/- during the year (PB 33-42). For all these reasons the assessee suffered loss during the year which is fully verifiable. Hence, addition made by the AO and confirmed by Ld. CIT(A) by applying n.p. rate of 8% subject to depreciation is unjustified and be deleted.
3. Without prejudice to above, it is submitted that the Hon’ble Rajasthan High Court and Hon’ble ITAT, Jaipur Bench in various decisions has held that even when books of accounts are rejected and n.p. rate is to be applied, the same should be subject to depreciation and interest. The AO has allowed the depreciation but not allowed the interest payment of Rs.1,10,07,464/- from the n.p. rate of 8% applied by him. If the same is allowed, there would not remain any income chargeable to tax. For this proposition reliance is placed on the following cases:-
(i) CIT Vs. Jain Construction Company 245 ITR 527 (Raj.)
(ii) CIT Vs. Bhawan Path Nirman (Bohra) and Co. 258 ITR 440 (Raj.) and 258 ITR 431 (Raj.)
(iii) Shri Ganpatlal Sharma Vs. ITO ITA No.1675/JP/1993 dt. 26.5.2000 (Jaipur) (Trib.)Assessee was contractor and his income was assessed by estimating net profit rate subject to depreciation. AO declined to allow interest paid to creditors. CIT(A) upheld the addition. Tribuna l reversed the decision of CIT(A) by holding that in the case o f contractors where NP Rate is applied, same should be subject to allowance of depreciation and interest paid to creditors.
(iv) Rishabh Construction Pvt. Ltd. Vs. DCIT ITA No. 108/JP/2011dt.31.08.2012 (Jaipur) (Trib.)
(v) Kirodimal Modi Vs. ACIT in MA No. 37/JP/2009 for AY 05-06(Jaipur) (Trib.) (vi) DCIT Vs. Kirodimal Modi in ITA No. 119/JP/2010 dt.10.09.2010 for AY 07-08(Jaipur) (Trib.).
6. On the other hand, the ld. DR has vehemently supported the order of the authorities below.
7. We have considered the rival contentions and carefully perused the material placed on record. As per facts of the case, we noticed that the assessee is engaged in the business of civil construction. It filed the return declaring Nil income. For the year under consideration it declared loss of Rs.68,43,810/- on turnover of Rs.1863.74 lacs as against net profit of 9.98% on turnover of Rs.2164.21 lacs in AY 2013-14 and net profit of 10.01% on turnover of Rs.1935.82 lacs in AY 2012-13. During course of assessment proceedings, AO vide show cause notice dated 09.12.2016 referred to the observation of auditor that assessee has not maintained the stock register and records produced for verification of payment as to whether they are made by account payee cheque are not sufficient. He further observed that certain payment falls in the category of offence which are not allowable and therefore, proposed to reject books of accounts invoking section 145(3) and estimate the n.p. rate at 8%. The assessee filed reply as reproduced at Para 4.1 of the assessment order. The AO, however, on the basis of the show cause notice invoked section 145(3) and applied n.p. rate of 8% on the total turnover and thus, assessed the business income after allowing the depreciation at Rs.78,42,006/-. The Ld. CIT(A) after referring to the definition of books of accounts u/s 2(12A) of the Act, section 145(3) of the Act and the observation of the auditor in Form 3CA, upheld the rejection of books of accounts. He further held that true and correct profit of the assessee cannot be adduced from its books of accounts and therefore, upheld the application of n.p. rate of 8% and determination of business income of Rs.78,42,006/- as done by the AO.
8. We observed that, as per the assessee, it is maintaining day to day books of accounts which are subject to statutory audit under the Companies Act, 2013 as also tax audit u/s 44AB of the Act. These books are duly supported by the bills and vouchers. Neither the auditor have pointed out any defect in the purchase bills/ vouchers and the contract receipt nor the AO has found any defect in the same. The only observation is that stock register is not maintained ignoring the nature of business of assessee whereby all the material purchased is directly off loaded at site and consumed. The unbilled work at the end of the year is taken as work-in-progress (WIP). The AO has not disputed the opening and closing WIP declared by the assessee. Hence, simply because stock register is not maintained, rejection of books of accounts is not justified. The assessee has regularly maintained books of accounts in similar manner which has been accepted by the AO in the scrutiny assessment made for AY 2012-13 and AY 2013-14. The definition of books of accounts u/s 2(12A) nowhere specifically includes the stock register. Section 145(3) is applicable when AO is not satisfied about the correctness or completeness of the accounts or method of accounting or the accounting standard have not been regularly followed. There is no dispute about the method of accounting and the accounting standard regularly followed by the assessee. The only dispute is that AO is not satisfied about the correctness or completeness of account which is only on account of non maintenance of stock register ignoring the peculiar nature of the activities carried out by the assessee where the purchase of material like sand, grit, cement, steel, etc. is directly uploaded at site and consumed and the unbilled work is accounted for as WIP. Hence, invocation of section 145(3) is unjustified. In this regard, we draw strength from the decision of Hon’ble Jurisdictional High Court, as relied by the assessee, in the case of Malani Ramjivan Jagannath Vs. ACIT (2009) 316 ITR 120 / 207 CTR 19 (Raj.) (HC) wherein the Hon’ble Court has held as under:
“In each trading account, only four entries were there of opening stock and purchases on debit side, sales and closing stock on credit side. The quantum and value of purchases and sales had not been in dispute in as much as they were held to be fully vouched. Value of opening stock also cannot be disputed as it came from closing stock of previous year. The inventories of closing stock were also not found to be incorrect. That is to say actual stock position was not in dispute. The previous year’s books of accounts were not found to be incorrect. In the face of these undisputed facts and circumstances, the Tribunal could not have interfered with the order of CIT (A). In doing so, it had ignored all admitted facts in the face of which there was no occasion for the AO to have resorted to estimate method. There being no dispute about the sales and purchases, non maintenance of stock register lost its significance so far as arriving at GP rate is concerned. Therefore the CIT(A) was right in his reasoning about admitted state of affairs. Resorting to estimate of GP rate was founded on no materiality. Mere deviation in GP rate cannot be a ground for rejecting books of accounts and entering realm of estimate and guesswork. Lower GP rate shown in the books of accounts during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore fall in GP rate lost its significance. Having accepted the reason for fall in GP rate namely stiff competition in market and also that huge loss caused in particular transaction, neither the rejection o f books of accounts was justified nor resorts to substitution of estimate GP by rule of thumb merely for making certain additions. Therefore, the findings arrived at by the Tribunals suffers from basic defect of not applying his mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of accounts. Therefore, the order of the Tribunal cannot be sustained.
We also draw strength from the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Smt. Poonam Rani (2010) 326 ITR 223/ 41 DTR 194 (Del.) (HC) wherein the Hon’ble High Court has held that “if the stock register was not maintained by the assessee that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee. But the absence of one register alone did not amount to such a material as would lead to the conclusion that the account books were incomplete or inaccurate”. The Hon’ble Kolkata High Court in the case of Ashok Refractories Pvt. Ltd.Vs. CIT 279 ITR 457 (Cal.) (HC) has held that “there was no finding that in the opinion of the Assessing Officer, the methods applied were such that the income could not be deduced from the books of account maintained by the assessee or that the accounts were not correct or complete, the books of account could not be rejected only in the absence of stock register or the item-wise stocks were not maintained in the stock register.” We also draw strength from the decision of Hon’ble Rajasthan High Court in the case of PCIT Vs. Bhawani Silicate Industries (2016) 236 Taxman 596 (Raj.) (HC) wherein the Hon’ble High Court has held as under:
“Assessee firm was carrying on business of manufacturing of edible oi l and oil cake from mustard seeds and sale thereof. It maintained complete books of accounts supported by supporting materials and also maintained complete details of production of edible oil and stock register/production register in quantitative details of trading account. AO rejected books o f account inter alia on ground that stock register/production register were not maintained quality wise and in absence of quality of seeds, proper /actual analysis of yield of edible oil and oil cake from mustard oil could not be ascertained. He also made certain trading addition by applying GP rate. Tribunal had found that except quality, quantity wise stock details had been maintained and no other defect was noticed by AO in quantitative details. It was held that merely because qualitative record was not maintained, books of account could not be rejected. Further, merely because there was some deficiency of quality wise record in books of accounts, it would not necessarily lead to addition in income of assessee. ”
9. On merit we are of the view that during the year, the assessee mainly executed the work which was awarded to him in FY 2011-12 & 2012-13. In between the rate of sand, bricks, cement and steel increased between 10% to 20%. Further due to financial constraints, some of the parties provided the steel/ cement, the cost of which was deducted from the running bill of the assessee. In case of work of Classic Infra Solution Pvt. Ltd. assessee has to use ready mix concrete which increased the cost of work. From the financial statements it can be noted that cost of raw material during the year has increased by around 3%, finance cost by around 5% and other expenses by around 4% as compared to the last year as tabulated below:-
| Particulars | AY 2014-15 | % | AY 2013-14 | % |
| Revenue | 18,63,73,549/- | 21,64,20,671/- | ||
| Cost of material & components consumed | 9,51,67,672/- | 51.06 | 10,47,32,370/- | 48.15 |
| Employee benefit expenses | 5,95,82,221/- | 31.97 | 7,65,74,818/- | 35.38 |
| Finance Cost | 1,10,07,464/- | 59.06 | 1,17,38,450/- | 54.23 |
| Other Expenses | 2,22,38,565/- | 11.91 | 1,56,71,623/- | 7.24 |
From the above table we found that cost of raw material as % of turnover has increased by around 3% for the reasons stated above. Finance cost as % of turnover has increased by around 5% which is mainly on account of increase in interest payment on loan taken from bank. Other expenses as % of turnover has increased by around 5% which is on account of the fact that Central Excise Commissionerate, Jaipur vide order dated 30.08.2013 raised demand of Rs.26,74,240/- which was paid during the year and because of applicability of Works Contract Tax in the state of Haryana, the assessee has to pay WCT of Rs.40,18,047/- during the year. For all these reasons the assessee suffered loss during the year which is fully verifiable. Hence, addition made by the AO and confirmed by Ld. CIT(A) by applying n.p. rate of 8% subject to depreciation is unjustified. Without prejudice to above, we found that the Hon’ble Rajasthan High Court and the Coordinate Benches of this Tribunal in various decisions has held that even when books of accounts are rejected and n.p. rate is to be applied, the same should be subject to depreciation and interest. The AO has allowed the depreciation but not allowed the interest payment of Rs.1,10,07,464/- from the n.p. rate of 8% applied by him. If the same is allowed, there would not remain any income chargeable to tax. In this regard, we draw strength from the decision of Hon’ble Rajasthan High Court in the case of CIT Vs. Jain Construction Company 245 ITR 527 (Raj.) wherein it was held that “in a case of rejection of accounts and estimate of net profit, deprecation is required to be worked out separately. The Tribunal had directed the assessing authority to recompute the total income as estimated by him and allow relief on account of payment of interest and claim of deprecation. The finding recorded by the Tribunal was purely a finding of fact based on proper appreciation of material on record and the evidence produced by the assessee. No question of law arose out of the order of the Tribunal.” In the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. 258 ITR 440 (Raj.) and 258 ITR 431 (Raj.) the Hon’ble Jurisdictional High Court has held that “books of the assessee were rejected. Net profit rate applied for preceding years subject to adjustment towards depreciation and interest on borrowed money. Appellate Tribunal adopted same method in the current year. High Court held that no interference is required in the order of ITAT.” SLP filed by the department against the decision reported at 258 ITR 431 is dismissed by Hon’ble Supreme Court which is reported in 264 ITR 36 (Statute). We also draw strength from the decision of Coordinate Bench of this Tribunal in the case of Shri Ganpatlal Sharma Vs. ITO ITA No.1675/JP/1993 order dated 26.5.2000 (Jaipur) (Trib.) wherein the assessee was contractor and his income was assessed by estimating net profit rate subject to depreciation. AO declined to allow interest paid to creditors. CIT(A) upheld the addition. Tribunal reversed the decision of CIT(A) by holding that in the case of contractors where NP Rate is applied, same should be subject to allowance of depreciation and interest paid to creditors. In the case of Rishabh Construction Pvt. Ltd. Vs. DCIT ITA No. 108/JP/2011 order dated 31.08.2012 (Jaipur) (Trib.) the Coordinate Bench while disposing the appeal of department held that “the Ld. CIT(A) directed the AO to allow the benefit of depreciation and financial expenses to the assessee after applying the net profit rate and that view is also supported by judgments of Hon’ble jurisdictional High Court in the case of CIT Vs. Jain Construction, 245 ITR 527 and CIT Vs. Bhawan Path Nirman (Bohra) and Co.258 ITR 440. We therefore do not see any valid ground to interfere with the impugned order passed by the Ld. CIT(A).” In the case of Kirodimal Modi Vs. ACIT in MA No. 37/JP/2009 for AY 05-06(Jaipur) (Trib.) and DCIT Vs. Kirodimal Modi in ITA No. 119/JP/2010 order dated 10.09.2010 for AY 07-08(Jaipur) (Trib.) has held that beside depreciation, interest paid to third parties is also allowable from the net profit rate applied. Considering the totality of the facts and circumstances of the case as well as judicial precedents followed in this regard, we found merit in the contention of the assessee and we direct to delete the addition made and confirmed by the lower authorities as well as set aside the action with regard to rejection of books of account U/s 145(3) of the Act. We direct accordingly.
10. Ground No. 3 raised by the assessee in the appeal relates to challenging the order of the ld. CIT(A) in confirming the addition of interest income of Rs. 12,58,998/- and miscellaneous receipts of Rs. 2,89,200/-under the head income from other sources.
11. Having considered the rival contentions and carefully perused the material placed on record. From perusal of the record, we observed that the assessee had shown interest income of Rs.12,58,998/- on the FDR and miscellaneous receipts of Rs.2,89,200/-. The AO assessed the same as income from other sources. The Ld. CIT(A) confirmed the action of AO. We found that the interest income earned on FDR is part of business income as FDRs’ were made for the purpose of business for giving bank guarantees to the awarder of contract. For this purpose assessee has to obtain the FDR from the bank which was pledged to it. From Note No.3.0 of the financial statements which is at page No. 15 of the paper book, we noticed that the FDR of Rs.1.98 crores has been pledged with the bank for obtaining the bank guarantee. Thus, interest on FDR is part of business income. Also, the FDR were made by utilizing the cash credit limit on which interest is paid to the bank and which forms part of the business expenditure. Thus, the interest income on such FDR which was earned out of the funds placed with the bank by utilizing the bank overdraft limit is to be considered as business income and not as income from other sources. Similarly, the miscellaneous receipts of Rs.2,89,200/- is from sale of scrap and is part of business income. In earlier years also the same was considered as business income in the assessment made u/s 143(3) which are at page No. 18-25 of the paper book. Hence, the separate addition of Rs.15,48,198/- made by AO and confirmed by Ld. CIT(A) is unjustified. In this regard, we draw strength from the decision of Coordinate Bench of Delhi Tribunal in the case of ACIT vs. Gallium Equipment (P) Ltd. (2001) 79 ITD 41 (Del.)(Trib.)(TM) wherein the Bench has held as under:
“In this case assessee made FDRs with the bank out of money borrowed from the bank which was offered as security for obtaining bank guarantees in favour of customers who demanded such guarantees while making deposits (advance) with the assessee and also while releasing full payment after execution of the order. In these facts, it was held that assessee was forced to deposit the borrowed funds in FDRs for the satisfaction of its customers. Interest income earned by assessee on FDRs is to be treated as business income. There is also direct nexus between the interest income and the industrial undertaking of the assessee. FDRs were totally interwoven with the carrying on of the business. Therefore, interest income is to be treated as derived from the said undertaking.”
In the case of M/s Rajendra Mittal Construction Co. Pvt. Ltd. ITA No.331/JP/2014 & CO 17/JP/2014 order 20.07.2016 for AY 201011 (Jaipur) (Trib.), the Coordinate Bench of this Tribunal at page 13, Para 7.3 has held that “when the interest paid and earned is in course of business then interest income cannot be taxed separately and accordingly the addition made by the Ld. CIT(A) on this account was deleted.” In the case of Mehru Electricals & Engg. Pvt. Ltd. ITA No. 215/JP/2009 order dated 18.07.2014 for A.Y. 04-05 (Jaipur) (Trib.) wherein the Coordinate Bench of this Tribunal in Para 11 of the order has held that “the FDRs were made for providing bank guarantee to the Electricity Board. Apparently, the interest on FDRs is directly connected with the industrial undertaking. Even the assessee’s argument of netting of interest income is accepted. The FDRs were made for business purposes and for getting the tender from the Electricity Board and income from interest is directly connected with the industrial undertaking.” Considering the totality of the facts and circumstances of the case as well as judicial precedents followed in this regard, we found merit in the contention of the assessee and we direct to delete the addition made and confirmed by the lower authorities qua this issue.
12. In the result, this appeal of the assessee stands allowed.
Order pronounced in the open court on 4th March, 2022.
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