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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy & Shri S.S. Viswanethra Ravi
This appeal by Revenue is arising out of order dt. 02-09-2013 of CIT(A), XIV, Kolkata for the assessment year 2009-10.
In this appeal, the Revenue has raised the following grounds of appeal:-
1) Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in law as well as on facts in ignoring the facts that as per Sec. 14A(3) of the Act, Rule 8D is applicable, even if assessee does not claim any expenditure against exempted income. 2) Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in law as well as on facts in ignoring the fact that less receipt of retention money cannot be an allowable deduction against business receipt. 3) Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in law as well as on facts in ignoring the fact that interest income from fixed deposits shall be treated as 'Income from Other Sources'. 4) That the appellant craves leave to add, alter, modify, include or delete any of the above grounds of appeal.
3. The brief facts of the case are that the assessee is an individual and engaged in the contractor business. The assessee filed his return of income declaring loss of Rs.63,99,360/-. Under scrutiny, the AO determined the total income of the assessee at Rs.1,07,31,890/-, wherein 1 Shri Usha Ranjan Sarkar the additions/disallowances of Rs.9,55,719/-, Rs.1,61,75,533/- and Rs.14,57,425/- were made on account of u/s. 14A, retention money/security deposit and treated interest earned on fixed deposits as income from other sources respectively.
4. Ground no.1 is relating to disallowance of Rs.9,55,719/- made under Rule 8(1),(ii) and (iii) for the purpose of computation of expenditure u/s. 14A of the Act, the AO found that the assessee claimed that he earned an amount of Rs.48,236/- as exempt income and disallowed no expenditure in earning such income. The AO after examining the accounts observed that the assessee borrowed funds and utilized the same for making investment and in turn earned such exempt income. The AO proceeded to propose disallowance u/s. 14A r.w.r 8D of the IT Rules and assessee was asked by the AO why the expenses incurred and claimed towards exempt income should not be disallowed u/s. 14 r.w.r 8D. The assessee vide his letter dt. 11-11-2011 and 25-11-2011 stated that out of his own funds made investments and urged not to disallow any expenditure. The AO, however, computed the disallowance of expenditure under Rule 8D(i), (ii) and (iii) of the IT Rules as Rs.9,55,719/- and added the same to the total income of the assessee.
5. Aggrieved, the assessee preferred an appeal before the CIT-A. The CIT-A after considering the balance sheet as on 31-03-2009 deleted the said disallowance by observing that the assessee had enough funds in his hand to support the investments. Relevant portion of which is reproduced herein below:-
“The appellant has submitted before me that the interest paid by the appellant's proprietorship concern has no relation with the investments made by, the appellant. Investments have been made by the appellant in his individual Balance Sheet wherein no interest has been paid on any borrowings. The accounts of the proprietorship concern are completely separate from the personal Balance Sheet of the appellant. The appellant has also submitted that it had a positive balance as Capital Account in the proprietorship concern and therefore, it cannot also be alleged that the loan funds of the proprietorship concern had been withdrawn by the proprietor for investments in shares. I have considered the submission of the appellant and find no infirmity with the same. Any disallowance of interest in the hands of the appellant could have only been made if the loan funds of the appellant had been utilized for purchase of shares. It is clear from the accounts of the appellant that the loan funds have been utilized in the proprietorship concern of the appellant wherein no investment has been made in shares which has led to exempt dividend income. Even, in respect of the disallowance of item No.(iii) of Rule 2 Shri Usha Ranjan Sarkar
8D it is seen that expenses of the proprietorship concern have been disallowed on account of the same, although the investments did not pertain to the proprietorship concern. The investments are held by the appellant in his individual capacity and have been reflected in his personal Balance Sheet. No expenses have been claimed in his personal capacity in his Balance Sheet and therefore, no expenses could have been disallowed since none was claimed. The expenses of the proprietorship concern cannot be disallowed when the investments have not been made by the proprietorship concern and the investments have nothing to do with the activities of the proprietorship concern. The positive Capital Account balance of the appellant in his proprietorship concern clearly proves that the appellant has invested in the firm and not borrowed from it. Also there is clear segregation of the activities of the proprietorship concern from his personal activities. In view of the same, I delete the addition of Rs.9,55,719/- on account of section 14A'read with Rule 8D.”
The ld.DR submitted that the assessee earned dividend income and during the assessment proceeding the AO by examining the records found that the assessee borrowed funds and paid interest on such loans. He relied on the order of the AO.
The ld.AR submits that all the details have been provided to the AO. He submits that the assessee produced the balance sheet in the assessment proceeding to show that the assessee has sufficient funds to make the investment. The AO without considering the same arbitrarily made the disallowance under Rule 8D(ii) of the IT Rules and urged to dismiss the ground raised by the revenue.
Heard rival submissions and perused the material available on record. We find that the investment made by the assessee in his individual capacity and the same has been reflected in the balance sheet, which has been rightly observed by the CIT-A. It is also noticed that the CIT-A found that the assessee claimed no expenses towards earning of dividend income. We find that the disallowance cannot go beyond the exempt income earned. Accordingly, the order of the CIT-A is justified and needs no interference. Accordingly, the ground no.1 raised by the revenue is dismissed.
Ground no.2 is relating to disallowance of Rs. 1,61,75,533/-made on account of retention of money and security deposit.
During the course of scrutiny proceedings the AO found that the assessee claimed deduction on account of retention of money and security deposits. Under notice, the AO required the assessee to explain how the amount of security deposit is deductible as expenditure since the assessee did not claim the same in the previous year. The assessee explained that the deduction was claimed in the year under consideration by relying on the decision of the Hon’ble High Court of Calcutta in the case of CIT Vs. Simplex Concrete Piles (I) Pvt. Ltd reported in 179 ITR 008. The AO examining the records opined that there was no such clause in agreements regarding deduction of retention money by the parties, who have given contract to the assessee. The AO also opined that the facts in the above referred decision are different in respect of project completion method has been followed in the said decision whereas the assessee is following the percentage completion method of accounting, thereby the AO added the amount of Rs.1,61,75,533/- to the total income of the assessee.
Aggrieved, the assessee preferred an appeal before the CIT-A. Before him the assessee contended that the retention of money is linked to the condition of satisfactory performance of the contract. The payment of retention of money does not accrue to the assessee. The assessee placed his reliance on the said decision in the case of supra. The CIT-A considering the facts in terms of decision of supra held that no income on account of security deposit or retention money has accrued to assessee during the year under consideration and as such he deleted the addition made by the AO by stating as under:-
“4.3 Ground No. 3 is in respect of the disallowance of Rs.1,61,75,533/- on account of Retention Money/Security Deposit deducted by various authorities from the bills raised by the appellant which are only to be paid on satisfactory completion of the project. The appellant has relied on the agreements made with the various authorities before me and has also produced the evidences of deduction of Security Deposit / Retention Money by the various parties / authorities. The deduction of security deposit by the said authorities is not in dispute and is evident from the supporting documents issued by the various 'authorities. The agreements entered into by the appellant with the various parties also clearly shown that the security deposit is only to be paid to the appellant on satisfactory completion of the project or on various other terms and conditions. The appellant before me has relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Simplex Concrete Piles (India) Pvt. Ltd. reported in 179 ITR 008 which is directly on the said issue. In the said decision, the Hon'ble High Court at 'Calcutta held that security deposit deducted by the various authorities cannot be said to have accrued to an assessee during the year in which the bills are raised since the receipt of the security deposit is contingent upon happening of a future event. The said case law directly applies in the case of the appellant. The facts of the appellant clearly show that the security, deposit deducted by the various parties are also receivable in subsequent years by the 4 Shri Usha Ranjan Sarkar appellant' on satisfactory completion of the project or on other various terms and conditions to be fulfilled by the appellant. Therefore, in view of the Calcutta High Court's decision, it is clear that no income on account of security deposit of Rs.1,61,75,533/- has accrued to the appellant during the present assessment year. In view of the same, I delete the addition of Rs.1,61,75,533/- made by the A.O. “ 12. The ld.DR submits that the assessee did not claim the deduction in the earlier years and as such a claim made in the year under consideration is not maintainable. He further submits that the AO found that no proper accounting method was followed by the assessee and the auditor never mentioned about the retention of money and security deposit. The ld. DR submits that the facts in the case of supra are distinguishable, which has rightly been discussed by the AO in his order with the facts of the present case. The ld.DR further submits that the AO has rightly disallowed the same by following the rule of consistency since the assessee did not claim the deduction in the earlier year. The Ld. DR urged to allow the ground of appeal of the revenue.
13. On the other hand, the ld.AR submits that the assessee is a govt. contractor and involved in various projects of Central & State Govt. such as roads, bridges, harbours, irrigation etc. The ld.AR further submits that the percentage of retention money is not the same in all the contracts. It varies from 5% to 10% and referred to the details of contract annexed at page-56 of the paper book. He also submits that the finding of the AO is wrong that there was no retention clause in the agreement and as such referred to page 109 of the paper book and argued that there is clause 28 of retention money. The ld.AR placed his reliance on the decision in the case of supra and argued that the assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract work and argued that the retention of money cannot be said to be accrued to assessee in the year under consideration. In support of the contention, he relied on the order of the CIT-A.
Heard rival submissions and perused the material available on record. We find that the retention money and security deposits are retained by the parties, who have given the contract to assessee and the 5 Shri Usha Ranjan Sarkar said amounts would be refunded and accrued to assessee on satisfactory completion of contract work. Till then the assessee had no right to claim any parts of retention money, which retained by the parties. The Hon’ble High Court of Calcutta in the case of supra held that all the receipts of retention and security deposit are contingent and happening of future event. The retention and security deposit deducted by various parties cannot be said to have been accrued to the assessee during the year under consideration in which year the bills are raised.
Respectfully following the above, we find no infirmity in the impugned order of the CIT-A and it is justified. We uphold the same. Ground no. 2 of revenue’s appeal is dismissed.
Ground no. 3 is relating to an addition of Rs.14,57,425/- made on account of interest earned on fixed deposits. The AO added the same by treating as income from other sources.
The AO found that the assessee earned an amount of Rs.14,57,425/- as interest income and the same has been set off against the interest expenditure and disclosed net interest expenditure in the account. In explanation, the assessee submitted that an amount of Rs. 1,60,174/- received as rebate on loan from ICICI Bank. An amount of Rs.12,96,711/- received on account of Fixed Deposits made for the purpose of bank guarantee towards award of contract and security deposit for the contracts. The AO opined that the assessee is not in the business of earning of interest and therefore, treating the same as income from other sources added to the total income of the assessee.
The CIT-A in the first appellate proceeding found that the interest income received by the assessee has direct connection with the business of the assessee and deleted the said addition by treating the same as business income by observing as under:-
“I have perused the submission of the appellant and I am in agreement with the same. The interest income received by the appellant has direct connection with the 6 Shri Usha Ranjan Sarkar business of the appellant. It is not a case where appellant has deployed its surplus fund for earning interest income but is a case where the deposits had to be necessarily made for the purpose of business of the appellant. Therefore, the receipts have to be necessarily treated as business income and not the income from other sources. In view of the same, I direct that the receipt of Rs.14,57,425/- to be treated as business income and not the income from other sources.”
The ld.DR relied on the order of the AO.
The ld.AR submits that the said fixed deposits were necessitated due to requirement of contracts undertaken by the assessee for providing bank guarantee and security deposits. The assessee made such fixed deposits with the bank on condition for getting bank guarantee for the purpose of getting contracts, therefore, the income earned on such fixed deposits shall be considered as business income. In support of his contention, he relied on the order of the CIT-A in directing the AO to delete the same by treating as business income.
Heard rival submissions and perused the material available on record. We find that the assessee filed necessary evidences available at pages 57-86 of the paper book, wherein it shows at page: 59 that the assessee has earned interest from UCO Bank, Indian Overseas Bank and SBI Bank. The assessee got refund from ICICI Bank on account of excess amount paid, details of which are available at pages 80 to 86 of the paper book. It is also observed that the assessee has made fixed deposits for obtaining bank guarantee towards earnest money in terms of contract and rebate received from the ICICI Bank towards excess EMI paid by the assessee. We find that the assessee being a contractor and in order to secure the contract work bank guarantee is required for smooth functioning of his contract business. Therefore, the interest as earned and refund by the assessee is to be treated as business income. The CIT-A was justified in doing so. We uphold the order of the CIT-A. The ground raised by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 24 -05-2017