By TIOL News Service

VIZAG, MAY 25, 2016: THE issue is - Whether interest income from bank deposits is to be treated as 'income from other sources' if assessee fails to prove that deposits were for business purpose. YES is the answer.

Facts of the case

The assessee is engaged in the business of executing civil contracts. For the A.Y 2008-09, the assessee had filed its return admitting total income of Rs. 57,83,290/- and the same was processed u/s 143(1). Subsequently, a notice u/s 148 was issued and after following the due procedure, the assessment was completed u/s 143(3) r.w.s. 147. During assessment, the assessee was asked to file information in respect of details of expenditure such as books of accounts, bills & vouchers regarding purchase of different material. In response, the assessee filed the details. On verification of the same, the AO found that vouchers were self-made and lacking full details for which purpose the payment was made. The AO further noted that according to the assessee, it had paid wages to the workers amounting to Rs. 2,87,81,707/- and salaries to staff amounting to Rs. 32,91,750/-. When the AO asked for wage registers and other details, assessee was not able to produce the same. Even other expenditure claimed by the assessee under the head 'transport charges' and travelling expenses, printing and stationery, the assessee was not able to file details before the AO. In view of the above, the AO rejected the books of account u/s 145, and estimated income of the assessee at 10% of the gross receipts. On appeal, the CIT(A) observed that the book results adopted by the assessee was too low, whereas, the estimation adopted by the AO was too high. Therefore, the CIT(A) directed the AO to adopt 6.5% on the gross receipts.

Having heard the parties, the Tribunal held that,

++ it is found that the assessee is a civil contractor and is not able to produce bills and vouchers in respect of various expenditures incurred. Under these circumstances, the AO rejected the books of accounts and estimated income at 10%. The CIT(A) however reduced it to 6.5% without recording any reasons, simply by following the Tribunal decision, which is not relevant. In the case of estimation, facts and circumstances of each case has to be examined. In the present case, after considering the assessment order as well as CIT(A)'s order and also details, this Tribunal is of the opinion that estimation at 8% on gross receipts instead of 6.5% on gross receipts is to be adopted. In view of the above, we set aside the order passed by the CIT(A) and direct the AO to adopt estimation at 8% on gross receipts for the A.Y 2008-09 as well as 2009-10. So far as treatment of interest receipts on FDRs for A.Y 2008-09 at Rs. 3,61,934/- is concerned, the AO has treated it as an 'income from other sources'. On appeal, it was submitted before the CIT(A) that the deposits were made by the assessee for the purpose of bank guarantee to obtain the tenders and the same has to be treated as a business income. The CIT(A) by considering the submissions of the assessee, treated it as a business income. The assessee however is not able to substantiate before this Tribunal that the deposits made by the assessee are for the purpose of business. Therefore, it cannot be said that the interest income received by the assessee from the bank deposits is income from business. Therefore, we hold that interest received by the assessee is 'income from other sources' and we accordingly reverse the order of the CIT(A);

++ as far as ground raised by the department in respect of "Seigniorage & Sales Tax" relating to A.Y 2009-10, the AO has noted from the profit & loss account of the assessee as expenditure under head "Seigniorage & Sales Tax" of Rs. 56,42,897/-. However, from the TDS certificates issued by the deductors, it is noticed that actual recoveries under the heads including income tax of Rs. 10,27,693/- are at Rs. 56,06,025/-. Thus the excess claim of expenditure of Rs. 35,872/- (Rs. 56,42,897 minus Rs. 56,07,025/-) is disallowed. As income tax is not allowable u/s 40(a)(ii), the component of income tax of Rs. 10,27,693/- among the recoveries is disallowed. The CIT(A) after considering the explanation of the assessee, observed that once the income is estimated, no other addition is permissible on the basis of rejected books and as such the impugned addition made by the AO is set aside. This Tribunal finds no reason to interfere in the order passed by the CIT(A).

(See 2016-TIOL-841-ITAT-VIZAG)