Patna H.C : Interest accrued on security deposits to extent used for securing contract work would be assessable as business income and not as income from other sources

High Court Of Patna

Shyam Bihari vs. CIT

Assessment Year 2003-04

Section : 28(i), 56

Shiva Kirti Singh And Vikash Jain, JJ

Miscellaneous Appeal No. 808 Of 2011

May 7, 2012

JUDGMENT

Shiva Kirti Singh, J. – Heard the parties.

2. The assessee has preferred this appeal against the order passed by the Income-tax Appellate Tribunal, Patna Bench, Patna (hereinafter referred to as “the Tribunal”) dated January 31, 2008, whereby I. T. A. No. 58 (Pat) of 2007, relating to the assessment year 2003-04 preferred by the appellant was dismissed along with another I. T. A. No. 107 (Pat) of 2007 relating to the same assessment year, preferred by the Revenue.

3. As noted by the Tribunal, the assessee is a civil contractor and his business income is of contract work from Government departments. In the assessment year under consideration, the gross contract receipt of Rs. 4,71,00,968 was the basis on which the Assessing Officer applied the proviso to section 145(3) and calculated the net profit at the rate of 8 per cent. of the gross contract receipt after consideration of expenses debited in the trading and the profit and loss account, depreciation and interest salary paid to the partners. In appeal, the learned Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer rejecting the books of account and computing income as per estimate but on the basis of relevant facts and after noticing that the receipt of the assessee is in excess of Rs. 2 crores and the net profit is below 5 per cent. and also considering the provisions of section 44AD of the Income-tax Act, he held that the net profit of 6 per cent. of the net contractual receipt, i.e., gross contractual receipt less the value of material supplied by the contractee, if any, would be the estimated net profit from the contract business. The learned Commissioner of Income-tax (Appeals) has also held that the salary and interest paid to the partners should be deducted out of the net profit subject to the conditions and limits specified in section 40(b) of the Act. The learned Commissioner of Income-tax (Appeals) has further held with regard to the income from interest of Rs. 3,11,956 that the said receipt has to be assessed as “Income from other sources” as in his view, it was not an integral part of the contract.

4. Before the Tribunal the appellant-assessee objected to the inclusion of interest income being assessed as “Income from other sources” on the ground that the income was from money deposited in FDRs and NSC 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 other grievance of the assessee was that he should have been allowed depreciation allowance out of the net contractual receipt finally estimated at the rate of 6 per cent. on account of clear direction to this effect by the Central Board of Direct Taxes, vide circular dated August 31, 1965.

5. The first claim with regard to the interest was disallowed by the Tribunal on the basis of the decision of the Income-tax Appellate Tribunal, Delhi Bench, Delhi (A) in the case of Dy. CIT v. Allied Construction[2007] 105 ITD 1 (Delhi) (SB), the other grievance was also turned down on the basis of provisions of section 44AD of the Act by holding that since the coming into effect of that section from April 1, 1994, the Act itself now provides for a method of estimating the income from business of civil construction or supply of labour for civil construction work. Despite noticing that the section was applicable to those assessees only whose gross receipts from the concerned business do not exceed Rs. 40 lakhs, the Tribunal applied the said provisions or the principles thereof and did not permit taking into consideration depreciation allowance after estimating the rate of net profit.

6. The two substantial questions of law raised in this appeal are as follows : (1) whether the Tribunal was in error in not considering the element of depreciation in the estimating of income from execution of works contract ? and (2) whether the Tribunal was in error in holding that interest accrued on security deposits in the nature of National Savings Certificates and FDRs is assessable as “Income from other sources” ?

7. Learned counsel for the appellant has placed reliance upon a judgment of the Calcutta High Court reported in CIT v. Tirupati Woollen Mills Ltd.[1992] 193 ITR 252 and upon a judgment of the Karnataka High Court reported in CIT v. Chinna Nachimuthu Constructions[2008] 297 ITR 70 to support his submission in respect of question No. 2 noticed above. The judgment in the case of CIT v. Chinna Nachimuthu Constructions (supra) was rendered in a case of similar nature 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. On such facts, it held that the interest income could not be treated as income from other sources and had to be treated as business income only. In that case, reliance was also placed upon a judgment of the Supreme Court in the case of CIT v. Govinda Choudhury & Sons[1993] 203 ITR 881 (SC). In the Calcutta High Court judgment in the case of Tirupati Woollen Mills Ltd. (supra) the facts were slightly different. The assessee earned income from fixed deposits and other deposits which was sought to be assessed as income from other sources. On a finding that the assessee had utilized its commercial assets which were lying in the form of surplus cash for earning interest, it was held that such earning arising from utilization of commercial assets would be the business income and, hence, revenue expenditure could be deducted from it.

8. In view of the law laid down in clear terms in the judgment of the Karnataka High Court noticed above, we have no hesitation in holding 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. This question is thus answered in favour of the appellant.

9. So far as the first question of law is concerned, reliance has been placed on behalf of the appellant on the judgment of the Rajasthan High Court reported in Shri Ram Jhanwar Lal v. ITO[2010] 321 ITR 400. In that case, the Tribunal held that since the gross receipts were in excess of Rs. 40 lakhs, the case was not covered under section 44AD of the Income-tax Act but permitted guidance from those provisions of the Act and applied 8 per cent. net profit rate subject to interest and remuneration to partners as provided under section 44AD(2) of the Act. On appeal, the Rajasthan High Court held that in taxing statutes adopting the principles underlying the other sections which are not applicable is not permissible. It was held that the Tribunal was not justified in adopting the principles underlying section 44AD of the Act when the said section itself was not applicable. In the present case, it appears from the orders of the Assessing Officer, the Commissioner of Income-tax (Appeals) as well as of the Tribunal that all of them have been guided by the provisions or the principles emanating from the provisions of section 44AD of the Act. In such circumstances, in our view, the question of law actually falling for consideration would be whether the authorities under the Act including the Tribunal have erred in being guided by the principles underlying section 44AD of the Act when that section is clearly not applicable to the case of the appellant as his gross contract receipt is well above Rs. 40 lakhs. This question is also answered in favour of the appellant on the basis of the Rajasthan High Court judgment noticed above.

10. We have been taken through the provisions of the circular of the Board dated August 31, 1965. According to that circular, which is binding on the Department and its authorities, where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, as per the circular, the gross profit should be estimated and the deductions and allowance including the depreciation allowance should be separately deducted from the gross profit. If the net profit is required to be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom.

11. Since it is the case of the appellant that the authorities should not apply the principles emanating section 44AD of the Act but should be guided by the binding circular of the Board, we find it necessary not only to set aside the order of the Tribunal but also the orders of the Assessing Officer and the learned Commissioner of Income-tax (Appeals) as those orders also suffer from error of law on both the points. Accordingly, this appeal is allowed and the order under appeal passed by the Tribunal, the appellate order of the learned Commissioner of Income-tax (Appeals), Patna, and also the order of the Assessing Officer are set aside and the matter is remitted back to the Assessing Officer for passing a fresh order of assessment in accordance with law keeping in view the questions of law as answered by this court.

[Citation : 345 ITR 283]

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