SHRI AJAY BAKLIWAL,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, KOTA

For the purpose of present discussions, the case of the assessee in ITA No. 323/JP/2018 was taken lead case with the consent of both the parties, wherein the assessee has taken following grounds of appeal:- “1. The assessment order passed u/s 143(2) is bad in law as well as on facts and hence, the same may please be quashed.

Rs. 1,00,000/- The ld. AO erred in law as well as on the facts of the present case in making ad-hoc addition after rejecting the books of account of the assessee and the ld. CIT(A) erred in sustaining the same.

Rs. 1878448/- The ld. AO erred in law as well as on the facts of the present case in making addition of interest on FDR separately under the head ‘Income from other source’ and the ld. CIT(A) erred in sustaining the same. The same is prayed to be deleted.

At the outset, the ld. AR submitted that the assessee does not want to press ground nos. 1 and 2 of its appeal. Hence, these two grounds are dismissed as not pressed.

Regarding ground no. 3, briefly the facts of the case are that during the year under consideration, the assessee was engaged in civil construction business for government and semi-government Departments and also for private concerns. During the course of assessment proceedings, the Assessing Officer observed that the assessee has shown interest income of Rs. 16,16,898/- in M/s Navbharat Nirman Company and Rs. 2,61,550/- in M/s Ajay Bakliwal & Associates which are two proprietorship concerns of the assessee and a show cause was issued to the assessee as to why the interest income may not be assessed under the head “income from other sources”.

In response, the assessee submitted that in the past assessment years where the matter was scrutinized by the Assessing Officer, the interest income on FDR was not considered U/s 56 of the Act and the interest expenditure on OD/cash credit was set off against interest income. Even in the assessment year 2013-14, the interest income was considered as business income and interest expenditure was set off against income and balance was either debited or credited to profit and loss account. It was further submitted that the assessee being civil contractor, the FDRs were made to furnish bank guarantee to the awarders of the contract and thus, fixed deposits were inextricably linked and intrinsically connected with the execution of the contract being awarded to the assessee and hence, the interest so received on such FDRs was only incidental to the very execution of the contract. It was submitted that furnishing of bank guarantee was the sine qua non for initiation of the project and only on furnishing the bank guarantee, could the assessee enter into the contract for the construction of the project. It was submitted that it is not a case where surplus funds have been deployed to earn the interest income rather the activity of depositing money was incidental to the business of the assessee. It was accordingly submitted that the interest received/accrued on these deposits is not a separate income which is dehors the main business of the assessee and same should be considered as income from business only. The reply so filed by the assessee was considered however, not found acceptable as the Assessing Officer was of the view that the FDRs are investment and interest earned thereon are not business income as assessee is a contractor and therefore, the interest received by the Shri Ajay Bakliwal Vs. ACIT

Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and the ld. CIT(A) has sustained the addition holding that it has never been held by the higher authority that the interest income is business income in the assessee case. It has also not been proved by the assessee that the deposits were intrinsically linked to earning the contract income. Against the said findings, the assessee is in appeal before us.

During the course of hearing, referring to the assessment years passed for A.Ys. 2010-11 to 2013-14, the ld. AR submitted that since last many years, the interest received by the assessee has been treated as part of its trading results and interest has never been assessed as income from other sources. It was submitted that the department has never assessed the interest income as income from other sources and given that there is no change in the business of the assessee and as such, there is no reason to deviate from the past settled position which has been accepted by the Department. It was further submitted that the observation of the ld. CIT(A) that the assessee has not proved that the deposits were intrinsically linked to earning of contract income is not correct as the Department is consistently making assessment while treating interest income as business income of the assessee and further, the detailed written submissions were filed before the ld. CIT(A) which have not been properly appreciated. It was further submitted that the matter is squarely covered by the decision of the Hon’ble Rajasthan High Court in case of M/s Choudhary and Brothers vs. DCIT (DB. ITA No. 355/2017 dated 31.08.2018). It was further submitted that the Coordinate Benches are also taking a consistent view that where the interest on FDR is inextricably linked with the business of the assessee, the same is to be treated as part of business income and not income from other sources and in support, reliance was placed on the decision of Coordinate Bench in case of M/s Mohd Construction Company vs. ACIT (ITA No. 389/JP/2012). It was further submitted that the bank guarantee is of a certain percentage of the contract value which is to be submitted to the awarder of contract and such Bank Guarantee are mostly given as performance security without which the contract cannot be awarded to the assessee. It is also notable that in case of contract business, this is a very regular feature whereby Bank Guarantees are made and released after sometime. It is notable that these Bank Guarantees are issued by the Bank on the basis of pledging of FDRs by the assessee and therefore, for this purpose only, the FDRs are made which works as lien for the issuance of Bank Guarantees by the Bank and in support, various letters issued by the awarder of the contract for submission of performance security was placed on record. Further, our reference was drawn to the certificate issued by the Punjab National Bank certifying that FDRs have been kept under lien for the period from 01.04.2013 to 31.03.2014 which is placed in the assessee’s paper book. It was accordingly submitted that the addition so made by the Assessing

The ld. DR is heard who has relied on the findings of the lower authorities. It was submitted that each year is a separate assessment year and the principles of res judicata doesn’t apply in the income tax proceedings. It was further submitted that the assessee has earned interest on FDR receipts and interest so received has been rightly brought to tax under the head “Income from other sources”.

We have heard the rival contentions and perused the material available on record. We find that the matter is covered in favour of the assessee by the decision of Hon’ble Rajasthan High Court in case of M/s Choudhary and Brothers vs. DCIT (supra) wherein the Hon’ble High Court has held as under:-

In ITA No. 322/JP/2018 for A.Y 2011-12, both the parties fairly submitted that facts and circumstances of the case are exactly identical and thus, similar contentions have been advanced by them. Therefore, following our findings and directions in ITA No. 323/JP/2018, interest earned from such FDRs cannot be treated as income from other sources and would rather be treated an income earned from business and ground no. 2 of assessee’s appeal is allowed.

In ground No. 1, the assessee has challenged the reopening of the proceedings by issuance of notice U/s 148 of the Act. In view of our findings on merit, the said ground has become academic and the same is therefore, dismissed as infructious.

In the result, the appeal of the assessee is allowed.