Tribunal rules in favor of assessee, treating interest income as business income, and deleting penalty.

Shri Devasamparambil Hassainar Kutty Versus The Asstt. Commissioner of Income-tax, Circle-1, Kota

Shri Devasamparambil Hassainar Kutty Versus The Asstt. Commissioner of Income-tax, Circle-1, Kota - TMI Issues Involved:
1. Rejection of books of account under section 145(3) of the IT Act.
2. Estimation of income by applying NP rate and enhancement by the CIT (A).
3. Treatment of interest earned on Fixed Deposit Receipts as income from other sources.
4. Penalty levied under section 271(1)(c) of the IT Act.

Detailed Analysis:

1. Rejection of Books of Account under Section 145(3) of the IT Act:

The assessee’s ground regarding the rejection of books of account under section 145(3) was dismissed as not pressed. Both parties agreed to this dismissal.

2. Estimation of Income by Applying NP Rate and Enhancement by the CIT (A):

The assessee is involved in various contracts across different states and declared a total income of Rs. 24,43,450/- for the assessment year 2009-10. The AO found discrepancies in the books of account and invoked section 145(3), estimating the income by applying an 8% NP rate on gross receipts, resulting in an addition of Rs. 16,24,586/-. The CIT (A) upheld the rejection of books and further doubted the sub-contract payments, enhancing the income by applying an 11% NP rate, leading to an additional enhancement of Rs. 19,29,108/-.

The assessee argued that the non-compliance was due to health issues and that the estimation should be based on past history and comparable business activities. The assessee's net profit for the year was higher than the immediate preceding year, suggesting it was in line with past history. The Tribunal noted that estimation should be based on relevant facts and reasonable criteria, preferring the past history of the assessee over comparable cases. The Tribunal found that the enhancement by the CIT (A) was unwarranted, as the discrepancies in sub-contract payments did not justify the enhancement. The Tribunal concluded that the net profit declared by the assessee was consistent with past history, and no trading addition was warranted.

3. Treatment of Interest Earned on Fixed Deposit Receipts as Income from Other Sources:

The assessee argued that the interest earned on FDRs, which were taken for securing contracts, should be treated as business income. The Tribunal noted that the FDRs were used as performance guarantees for contracts, and thus the interest earned had a direct nexus with the business activity. Citing various judicial precedents, the Tribunal held that the interest on such FDRs should be treated as business income, not income from other sources. This decision was in line with the judgments of the Hon’ble Jurisdictional High Court and other similar cases.

4. Penalty Levied under Section 271(1)(c) of the IT Act:

The penalty under section 271(1)(c) was levied by the CIT (A) based on the enhancement of income. Since the Tribunal deleted the enhancement, the penalty also did not survive. The Tribunal also noted that penalties on additions made based on income estimation are not justified, referencing a decision of the coordinate bench of the Tribunal.

Conclusion:

Both appeals of the assessee were allowed. The Tribunal deleted the additions and enhancements made by the AO and CIT (A) and ruled that the interest on FDRs should be treated as business income. The penalty under section 271(1)(c) was also deleted. The order was pronounced in the open court on 30/07/2019.