ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE, SIKAR vs. M/S DURGA CONSTRUCTION COMPANY, SIKAR

This appeal by the revenue is directed against the order dated 31st January, 2019 of ld. CIT (A)-4, Jaipur for the assessment year 2014-15. The revenue has raised the following grounds :-

“ (i) On the facts and in the circumstances of the case, whether the ld. CIT (A) was justified in adopting net profit rate @ 4.6% instead of net profit rate @ 8% adopted by the AO subject to allowance of interest and remuneration to the partners. (ii) On the facts and in the circumstances of the case, whether the ld. CIT (A) was justified in treating the interest on FDR as business income instead of income from other source as assessed by the AO.

(iii) The appellant craves leave to add, alter, amend, withdraw or insert any ground or grounds of appeal before or at the time of hearing of the appeal.”

Ground No. 1 is regarding trading addition made by the AO by applying net profit @ 8% was restricted by the ld. CIT (A) by adopting net profit @ 4.6%.

“6. Regarding estimation of net profit, we find that merely because there is an increase in turnover during the year, the same by itself wouldn’t be sufficient to justify a low net profit during the year. The assessee has to demonstrate through verifiable evidence as to why there is a fall in net profit rate during the year. There is nothing on record in terms of which it can be determined that the margins have come under pressure either due to increase competition or higher input costs or incurrence of any extra-ordinary expenditure during the year. Therefore, merely because the assessee has disclosed a higher turnover, the same is not sufficient enough to justify a lower net profit rate. Therefore, consistent with A.Y 2012-13, where the ld CIT(A) has applied net profit rate of 5% and the said finding has been accepted by the assessee in the earlier year, we don’t see any justifiable reason to interfere with the said findings.

High Court in case of Bhawan Path Nirman (supra) wherein it was held as under:

“Held dismissing the appeal, that the Tribunal linked the process of estimating income with the past practice followed in the assessee’s case by the Revenue itself consistently for five years prior to the relevant years in question. In this case the very foundation of fixing the net profit rate had been the average net profit rate as had been applied by the Revenue in the past consistently since the assessment year 1989-90 and which had been followed in determining the texable income of the assessee year after year. In the net profit so fixed the element of depreciation on the fixed asset and interest on borrowings had not been taken into consideration in determining the net profit rate. Consequently, the trading result obtained by applying such net profit rate needed further appropriation towards allowable depreciation and interest on borrowings. The Tribunal was right in modifying the order passed by the assessing authority by making the net profit rate subject to adjustment towards depreciation and interest on borrowings. This conclusion was a pure finding of fact and would not give rise to a question of law much less a substantial question of law.”

Therefore, for the assessment year 2013-14 the Tribunal has upheld the decision of the ld. CIT (A) adopting the net profit at 5%. For the year under consideration, the ld. CIT (A) has adopted the net profit by considering the average net profit declared by the assessee for the preceding three years as well as for the year under consideration. Thus it is clear that the ld. CIT (A) has not applied the average net profit which was applied in the preceding year and has attained the finality. We find that for the last three years the net profit adopted for estimation of the income was 5% and, therefore, for the year under consideration if the average of the net profit applied for the preceding three years which has attained the finality, then it ought to have been 5% instead of 4.6% subject to interest paid to the bank/financial institution. Accordingly, we modify the impugned order of the ld. CIT (A) and direct the AO to apply the net profit at 5% for estimating the income of the assessee. This ground is partly allowed.

Ground No. 2 is regarding treating the interest on FDR as Business income by the ld. CIT (A) as against Income from other sources assessed by the AO.

Choudhary & Brothers vs. DCIT (DBIT No. 355/2017 dt. 31.08.2018) wherein it was held as under:-

“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 has 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 as income from other sources and would rather be an income earned from business."

and thus there seems to a direct nexus of pledging of FDR and business. The said findings of the ld CIT(A) remain uncontrovered before us. Following the ratio laid down by the Hon’ble Rajasthan High Court in case of M/s Choudhary & Brothers (supra), obtaining and pledging the FDR for the purposes of obtaining bank guarantee for the purposes of its business, the assessee has thus established the necessary nexus with his business and interest earned from such FDRs cannot be treated as income from other sources and would rather be treated an income earned from business. The findings of the ld CIT(A) are accordingly confirmed and ground of Revenue’s appeal is dismissed.”

The interest in question was earned for the year under consideration on the same FDR which were for the assessment year 2013-14. Accordingly, following the earlier decision of this Tribunal in assessee’s own case, we do not find any error or illegality in the order of the ld. CIT (A) qua this issue. The same is upheld.

Order is pronounced in the open court on 12/07/2019.