FDRs Interest was business income but not contract income. Interest on Margin Money deposits for obtaining bank guarantee is not income out of contract business-ITAT upheld CIT order u/s 263
ABCAUS Case Law Citation:
951 2016 (06) ITAT
Assessment Year – 2009-10
Date/Month of Judgment/Order: June 2016
Brief Facts of the Case:
The assessee company was engaged in the business of construction. Its return of income was processed u/s 143(1)and later the case was selected for scrutiny and notice u/s 143(2) was issued. The AO noticed that assessee had incurred substantial labour expenses and other expenditure in cash by selfmade vouchers The assessee did not produced all vouchers and only sample vouchers were produced. The AO felt that under these circumstances, it was difficult to accept the correctness of the book result. Accordingly rejecting the books of account he estimated profit on contract work at 8.5% clear of depreciation, to which he added commission income.
Subsequent to the completion of the assessment, CIT called for records of assessment u/s 263 and found that the AO failed to add back to the estimated income at 8.5% of the contract work, the interest income from bank deposits which was shown under the head other income and to that extent the order passed u/s 143(3) was considered as erroneous and prejudicial to the interests of revenue. In this regard, show cause notice was served on the assessee, against which, the assessee filed a written submission in which it was argued that for the purpose of carrying on business of execution of contract works, assessee company has obtained huge bank guarantee for which amounts were kept as margin money deposits with the banks and also made security deposits with the Govt. authorities. As such, the interest earned also forms part of business income only and there is a direct nexus between the amounts kept in deposits as margin money/security deposits and the interest income is also to be treated as business income and cannot again be added to the estimated income as income from ‘other sources.
However, CIT exercising the revisonary power u/s 263 directed the AO to recompute the income duly adding the interest income under the head other sources.
Aggrieved with the revision order u/s 263, the assessee went in appeal before ITAT.
Contentions of the Assessee:
The assessee submitted that for the purpose of carrying on the contract business of execution of large govt. contract works, the company had to obtain huge bank guarantees for which amounts were kept as margin money deposits with the banks and also as security with the contracting govt. authorities/departments. Such deposits were not the investments made for earning interest income, but, they were compulsory deposits to be kept towards margin money for bank guarantees required for participating in tenders, performance guarantee, guarantee for obtaining mobilization advance etc., which are required for business of the assessee. Thus when the books of account were rejected and income from business was estimated, the interest income on such deposits, which was also business income could not again be added as income from ‘other sources’.
The assessee company relied on the following judicial pronouncements:
1. CIT Vs. Jayee DSC Ventures Ltd.,  17 Taxmann.com 257 (Delhi).
2. CIT Vs. Dhiraj R. Rungta,  40 Taxmann.com 284 (Guj.)
3. CIT Vs. Bokaro Steel Ltd.,  102 Taxman 94 (SC)
4. CIT Vs. Karnal Cooperative Sugar Mills Ltd.,  118 Taxman 489 (SC).
5. ITA No. 359/Agr/2011, dated 25/05/12 in case of Shri Mahesh Chandra Vs. ITO, ITAT, Agra Bench.
6. DCIT Vs. Hari Orgochem (P) Ltd.,  45 Taxmann.com 381 (Guj.)
ITAT was in agreement with the contention of the assessee company that it had to maintain/keep deposits with the banks to carry on its business activities and the same was integral part of business. Also the Tribunal was content that as held in various judicial pronouncements and relied by the assessee company, such interest would be treated as business income only. However it upheld CIT revision order holding that FDRs interest was business income but not contract income.
Important Excerpt from ITAT Judgment:
In our considered view, here, it is not the question whether the interest earned by the assessee is business income or ‘income from other sources’. The dispute is, the income of the assessee is estimated by rejecting books of account and while estimating the income of the assessee, AO has considered only the income out of contract business. The AO has fairly arrived the gross receipts after adjusting the sub-contract bills and added the sub-contract commission received and disallowances made for gratuity and leave encashment. However, he treated the interest income also as income generated out of contract business. In our considered view, there is no dispute that interest income earned can only be treated as business income only, but, whether the interest can also be treated as income out of contract business?. Hence, the AO has not considered this aspect. This interest income earned is an additional income earned. No doubt it is for the business purposes, but, outside the business activities of the assessee. Hence, it is to be added as ‘other income’ to the income of the contract business.