FDR Interest Business Income-No addition when books rejected. AO cannot fall back upon same books for making addition of interest reflected therein

FDR Interest Business Income-No addition when books rejected

In an interesting judgment which is quite opposite to the view held by another ITAT reported in ABCAUS 951 (2016) (06) ITAT, it has been held by ITAT that where the books of accounts were rejected and profits were estimated applying 10%  net profit rate the Assessing Officer cannot fall back upon the same books for making a separate addition on account of interest accrued on the FDRs reflected in the books of account.

ABCAUS Case Law Citation:
953 2016 (06) ITAT
Assessment Years:2010-11 & 2011-12
Date/Month of Judgment: June, 2016

Important Judgments Cited:
Daljit Singh & Bros. in ITA 201(Asr)2002

Brief Facts of the Case:

The assessee company was engaged in construction work as contractor. In the present appeal, the assessee was was aggrieved by the order of CIT(A) which while reducing the 10% net profit rate on gross receipts to 8% upheld the separate addition of interest on fixed deposits receipts which were claimed to have been held as business assets. The CT(A) upheld the separate addition of interest on the ground that the said interest income of FDRs was not a part of the gross contract receipts of the assessee. The assessee’s contention was that once books of accounts were rejected, the same books of accounts can not be relied upon to make separate addition of interest income.

However the Tribunal  observed that in case of Daljit Singh (supra), under similar facts and circumstances it was held that once the books of accounts had been rejected the Assessing Officer cannot fall back upon the same books for making addition on account of interest accrued on the FDRs reflected in the books of account. 

Excerpts from ITAT Judgment:

The findings of the Hon’ble Bench as contained in para 6.6 are reproduced below.

“6.6 After considering the rival submissions and going through the material available on the record, it has been noticed that the Assessing Officer rejected the books of account of the assessee and applied a net profit rate of 8% on the gross receipts of the assessee. In other words, the Assessing Officer has not accepted the books results. On the other hand, he took the figure of Rs.2,94,700/- on account of interest accrued on FDRs as reflected by the assessee in the books of account. We, therefore find substantial force in this contention of the learned counsel for the assessee that once the books of account has been rejected, the Assessing Officer cannot fall back upon the same books for making addition on account of interest accrued on the FDRs reflected in the books of account. It is well settled that when net profit rate is applied, all the income has been considered. It is also true that the Assessing Officer had not denied this fact that the FDRs were related to the business because he himself admitted that the assessee has reflected the interest accrued in the profit and loss account which was based on the books of account maintained by the assessee. We, therefore, considering the totality of the facts as discussed above, are of the view that the Assessing Officer was not justified in making separate addition on account of interest on FDR’s when he had applied a net profit rate of 8% on the gross receipts for the full- year by invoking the provisions of Sec. 145 of the Income Tax Act, 1961. We, therefore, set aside the order of the learned CIT(A) on this issue and direct the Assessing Officer not to include the interest accrued on the FDR’s amounting to Rs.2,94,700/- in the income of the assessee”