M/S Choudhary And Brothers, Village Ladana Phagi, Jaipurrajasthan v. Deputy Commissioner Of Income Tax, Circle Jaipur Raj

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 355/2017 M/s Choudhary And Brothers, Village Ladana Phagi, JaipurRajasthan. ----Appellant Versus Deputy Commissioner Of Income Tax, Circle Jaipur Raj. ----RespondentConnected With D.B. Income Tax Appeal No. 356/2017 M/s Choudhary And Brothers, Village Ladana Phagi, JaipurRajasthan. ----Appellant Versus Deputy Commissioner Of Income Tax, Circle-7, Jaipur Rajasthan.----Respondent For Appellant(s) : Dr. S.L. Jain & Shri Ashok Kumar GuptaFor Respondent(s): Shri Daksh Pareek on behalf of Shri Sameer Jain HON'BLE MR. JUSTICE MOHAMMAD RAFIQ HON'BLE MR. JUSTICE GOVERDHAN BARDHAR REPORTABLEJudgment 31/08/2018 (PER HON’BLE MOHAMMAD RAFIQ, J.) These two income tax appeals are directed against thecommon judgement dated 24.7.2017 passed by the Income TaxAppellate Tribunal, Jaipur Bench, Jaipur (for short-`the ITAT’)allowing the two appeals filed by the Revenue and dismissing thecross objections filed by the assessee. Appellant-assessee is a Civil Contractor. The case of theappellant was picked up for scrutiny and assessment order underSection 143(3) of the Income Tax Act, 1961 (hereinafter referredto as `the Act’) was framed. The Assessing Officer while framingthe assessment order rejected the books of account and estimatedthe profit and applied net profit @ 13%, thereby he made anaddition of Rs.19,72,584. The Assessing Officer also madeaddition on account of income from interest on FDR and discountsreceived from suppliers of material, treating the same as incomefrom other sources. The Assessing Officer computed the taxableincome at Rs.56,78,516 against the income of Rs.7,08,390declared by the assessee in respect of assessment year 2011-12.Aggrieved thereby, the assessee preferred appeal before theCIT(A), who partly allowed the same and estimated the net profit@ 11.5% and deleted the addition made on account of interestfrom FDR treating the same as business profit. The CIT(A) alsodeleted the addition made on account of various unverifiablepayments. The Revenue aggrieved thereby preferred appealbefore the ITAT. Similar orders were passed by the AssessingOfficer in respect of assessment year 2012-13 by holding thatinterest income on FDR of the assessee as income from othersources. The CIT(A) reduced the G.P. rate under Section 145(3)from 13% to 11.75% and treated the income from FDR and NSCas business income. The ITAT while partly allowing the appeal filedby the Revenue reduced the discount received by the assesseefrom various suppliers against the purchases made against thecost of raw material consumed in contract work and treated theincome from FDR and NSC as income from other sources, butmaintained the order passed by the CIT(A) on other aspects and dismissed the cross objection filed by the assessee. This Courtadmitted the appeals filed by the assessee on 24.04.2018 on thefollowing substantial question of law: “Whether in facts and in the circumstances of the case, thelearned Income Tax Appellate Tribunal was justified inholding the interest income from FDR & NSC as income fromother sources by not considering the same as businessincome and part of total receipts?” We have heard Dr. S.L. Jain, learned counsel for theappellant-assessee and Shri Daksh Pareek, learned counsel for therespondent-revenue. dismissed the cross objection filed by the assessee. This Courtadmitted the appeals filed by the assessee on 24.04.2018 on thefollowing substantial question of law: “Whether in facts and in the circumstances of the case, thelearned Income Tax Appellate Tribunal was justified inholding the interest income from FDR & NSC as income fromother sources by not considering the same as businessincome and part of total receipts?” We have heard Dr. S.L. Jain, learned counsel for theappellant-assessee and Shri Daksh Pareek, learned counsel for therespondent-revenue. Dr. S.L. Jain, learned counsel for the appellant-assessee hasargued that the Tribunal has erred in law in computing the interestincome from FDRs and NSCs as income from other sources,whereas the appellant is a Civil Contractor and is required tofurnish the performance guarantee to the various worksdepartments by way of FDRs and NSCs. The furnishing of FDRsand NSCs by the appellant to the Public Works Department is,therefore, incidental to his main business. It has got a nexus withthe business and therefore the interest derived from FDRs andNSCs has to be treated as a business income. It is contended thatthe interest income earned on FDRs/NSCs is part of the businessincome as they were obtained for the purpose of business forgiving bank guarantee to various departments. FDRs were madeby utilising the bank overdraft limit on which interest was paid tothe banks which forms a part of the business expenditure. Thusthe interest income on such FDRs/NSCs, which was earned out ofthe funds placed with the bank by utilizing the bank overdraft limithas to be considered as business income and not `income fromother sources’. Dr. S.L. Jain, learned counsel, further submitted that suchargument of the assessee has been accepted by the AssessingOfficer in the own case of assessee in respect of assessment years2007-08 to continuously till 2010-11. The ITAT has erred in law inapplying the judgement of this Court in the Commissioner ofIncome Tax vs. M/s. Bhawal Synthetics (India), Udaipur-(2017) 81Taxmann.com 478 (Raj.), which is distinguishable on facts.Moreover, this court in M/s. Bhawal Synthetics (India) did notnotice the judgement of the Supreme Court in Commissioner ofIncome Tax vs. Karnal Co-operative Sugar Mills Ltd.-(2001) 118Taxman 489 (SC), which arose out of somewhat identical case andtaken a contrary view. That was a case where the money in FDRwas part of the amount that was kept to obtain letter of credit forpurchase of machinery and, therefore, the interest earned thereonwas held to be income from other sources. Learned counsel insupport of his arguments has also relied on the judgement ofMadhya Pradesh High Court in Bharat Oman Refineries Ltd. vs.Income-tax Officer, Bhopal-(2014) 52 Taxmann.com 347 (MadhyaPradesh), judgement of Gujarat High Court in Cedan Vinimay (P.)Ltd. vs. Assistant Commissioner of Income-tax-(2015) 54Taxmann.com 425 (Gujarat) and judgement of Delhi High Court inCommissioner of Income-tax vs. Jaypee DSC Ventures Ltd.-(2012)17 Taxmann.com 257 (Delhi). Per contra, Shri Daksh Pareek, learned counsel for therespondent-revenue has submitted that since the interest incomeon the FDR is not part of contract receipt, the same is liable to betaxed under the head ‘income from other source’. The Tribunal wasperfectly justified in treating such interest income earned onFDR/NSC as income from other source. Learned counsel submitted Per contra, Shri Daksh Pareek, learned counsel for therespondent-revenue has submitted that since the interest incomeon the FDR is not part of contract receipt, the same is liable to betaxed under the head ‘income from other source’. The Tribunal wasperfectly justified in treating such interest income earned onFDR/NSC as income from other source. Learned counsel submitted that this issue is squarely covered by judgement of this Court inM/s. Bhawal Synthetics (India), Udaipur, supra, in which assesseehad income of interest through FDRs. Assessee claimed deductionor set off of his income from other sources against interestpayable on the borrowed fund. The reason given was that theamount pertaining to FDR was not surplus amount but part ofamount that was kept to obtain letter of credit for purchase ofmachinery. It was held by this Court that interest earnedthereupon was nothing but income from other source andtherefore the Commissioner of Income Tax rightly treated thesame as taxable income. Learned counsel for the respondent hasalso relied on judgement of the Supreme Court in M/s. TuticorinAlkali Chemicals and Fertilizers Ltd. vs. Commissioner of Income-tax-1997 (6) SCC 117. We have given our anxious consideration to the rivalsubmissions and perused the material on record. This Court in M/s. Bhawal Synthetics (India), Udaipur, suprawas dealing with a case where the case of the assessee wasselected for scrutiny and the Assessing Officer considering theexplanation given by the assessee arrived at the conclusion thatsince no expenditure or depreciation was claimed by the assessee,the addition sought to be made is set off and the returned incomebe treated as nil. The Commissioner of Income Tax, however, heldthat interest earned on FDRs amounting to Rs.9,31,572 had notbeen brought to tax and was wrongly set off. A show cause noticeunder Section 263 of the Act was thus issued. The Commissionerof Income Tax arrived at the conclusion that the order passed bythe Assessing Officer was erroneous and, therefore, set aside theorder of assessment with a direction that the same should be passed afresh after making due and proper enquiry. The matterwas taken to ITAT by the assessee, which set aside the order ofCommissioner of Income Tax. This is how the matter reached theHigh Court in the appeal filed by the revenue. It was held by thisCourt that FDR was taken for obtaining letter of credit to purchasemachinery but so far as interest earned thereon is concerned, thatis nothing but income through other sources, as such,Commissioner of Income Tax rightly treated the same as taxableincome. This Court in the aforesaid judgement has relied on thejudgement of the Supreme Court in Tuticorin Alkali Chemicals &Fertilizers, supra in which case it was held that the interest earnedon short-term investment of funds borrowed for setting up offactory during construction of factory before commencement ofbusiness has to be assessed as income from other sources and itcannot be said that interest income is not taxable on the groundthat it would go to reduce interest on borrowed amount whichwould be capitalized. The Supreme Court in para 14 of the reportin Tuticorin Alkali Chemicals and Fertilizers Ltd., supra has heldthat “if the capital of a company is fruitfully utilised instead ofkeeping it idle the income thus generated will be of revenuenature and not accretion of capital. Whether the company raisedthe capital by issue of shares or debentures or by borrowing willnot make any difference to this principle. If borrowed capital isused for the purpose of earning income that income will have tobe taxed in accordance with law. Income is something which flowsfrom the property. Something received in place of the property willbe capital receipt. The amount of interest received by thecompany flows from its investments and is its income and is clearly taxable even though the interest amount is earned byutilising borrowed capital.” Then in para 22, the Supreme Courtnoted that “the company had surplus funds in its hands. In orderto earn income out of the surplus funds, it invested the amount forthe purpose of earning interest. The interest thus earned is clearlyof revenue nature and will have to be taxed accordingly.” This Court in M/s. Bhawal Synthetics, supra where theamount in the FDR was kept for obtaining letter of credit forpurchase of machinery has indeed not noticed the judgment of theSupreme Court in Karnal Cooperative Sugar Mills Ltd, supra. Inthat also, money in FDR was part of the amount that was kept toobtain later of credit for purchase of machinery. Facts were thusidentical. The judgement of the Supreme Court in KarnalCooperative Sugar Mills Ltd., supra thus provides guidance on thepoint of law involved in this case. It was held therein that incomeearned would fall in the category of income from other sources,but may come in the category of income earned from business.The Supreme Court in the aforesaid case has considered thejudgement in Tuticorn Alkali Chemicals and Fertilizers Ltd., supraand held thus: “In the present case, the assessee had deposited moneyto open a letter of credit for the purchase of themachinery required for setting up its plant in terms of theassessee's agreement with the supplier. It was on themoney so deposited that some interest has been earned.This is, therefore, not a case where any surplus sharecapital money which is lying idle has been deposited in thebank for the purpose of earning interest. The deposit ofmoney in the present case is directly linked with thepurchase of plant and machinery. Hence, any incomeearned on such deposit is incidental to the acquisition ofassets for the setting up of the plant and machinery. Inthis view of the matter the ratio laid down by this court inTuticorin Alkali Chemicals and Fertilizers Limited v. CIT-(1997( 227 ITR 172 , will not be attracted. The moreappropriate decision in the factual situation in the presentto open a letter of credit for the purchase of themachinery required for setting up its plant in terms of theassessee's agreement with the supplier. It was on themoney so deposited that some interest has been earned.This is, therefore, not a case where any surplus sharecapital money which is lying idle has been deposited in thebank for the purpose of earning interest. The deposit ofmoney in the present case is directly linked with thepurchase of plant and machinery. Hence, any incomeearned on such deposit is incidental to the acquisition ofassets for the setting up of the plant and machinery. Inthis view of the matter the ratio laid down by this court inTuticorin Alkali Chemicals and Fertilizers Limited v. CIT-(1997( 227 ITR 172 , will not be attracted. The moreappropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd.-(1999) 236 ITR 315(SC). The appeal is dismissed. There will be no order as tocosts.” case is in CIT v. Bokaro Steel Ltd.-(1999) 236 ITR 315(SC). The appeal is dismissed. There will be no order as tocosts.” The Delhi High Court in Jaypee DSC Ventures Ltd., supra wasdealing with a case where the assessee filed its return of incomefor the relevant assessment year declaring nil income. It hadfurnished performance guarantee in favour of National HighwayAuthority of India to get the contract awarded in its favour and toprocure the said guarantee, it had kept the amount in a fixeddeposit in the bank. The amount of interest income from fixeddeposits was set off against the project expenses. The case of theassessee was that the furnishing of bank guarantee had a directnexus with the carrying on of the project and, therefore, the saidset off deserves to be allowed. The Assessing Officer held thatinterest received by the company on the bank deposit was taxableas income under the head `income from other sources’. Accordingto the Assessing Officer, project expenses did not have evenremote proximity with the earning of interest and thus the samecould not be allowed to be set off against the interest income. Onsecond appeal, the ITAT allowed the assessee’s claim. The revenueapproached the High Court. The High Court on consideration ofthe number of precedents including the Tuticorin Alkali Chemicals& Fertilizers, supra dismissed the appeal holding thus:- “21. Keeping in view the aforesaid pronouncements in thefield, the present controversy is to be adjudged. As isnoticeable from the stipulations in the agreement, theperformance guarantee by way of bank guarantee wasrequired for faithful performance of its obligations. Thenon-submission of the guarantee would have entailed intermination of the agreement and NHAI would have beenat liberty to appropriate bid security. That apart, thefield, the present controversy is to be adjudged. As isnoticeable from the stipulations in the agreement, theperformance guarantee by way of bank guarantee wasrequired for faithful performance of its obligations. Thenon-submission of the guarantee would have entailed intermination of the agreement and NHAI would have beenat liberty to appropriate bid security. That apart, the release of such performance security depended uponcertain conditions. Thus, it is clearly evincible that thebank guarantee was furnished as a condition precedent toentering the contract and further it was to be kept alive tofulfill the obligations. Quite apart from the above, therelease of the same was dependent on the satisfaction ofcertain conditions. Thus, the present case is not onewhere the assessee had made the deposit of surplusmoney lying idle with it in order to earn interest; on thecontrary, the amount of interest was earned from fixeddeposits which was kept in the bank for furnishing thebank guarantee. It had an inextricable nexus withsecuring the contract. Therefore, we are disposed to thinkthat the factual matrix is covered by the decisionsrendered in Bokaro Steel Ltd. (supra), Karnal Co-operativeSugar Mills Ltd. (supra) and Koshika Telecom Ltd. (supra)and, accordingly, we hold that the view expressed by thetribunal cannot be found fault with.” Another judgment on the similar facts is of Madhya PradeshHigh Court in Bharat Oman Refineries Ltd., supra. That was a casein which assessee-company filed nil return and along with thereturn, statement of income and expenditure was filed. In thisstatement, income from interest on account of short-term depositwith the bank was indicated. The Assessing Officer madeassessment and treated the said sum as income from `othersources’. The assessee challenged the said assessment pointingout that interest income could not be added under the head`income from other sources’. On appeal, both the Commissioner(Appeals) and the Tribunal upheld the order of Assessing Officer.The High Court however held that the appellant has not earnedinterest on the money lying idle with him for running industry. Onthe contrary by virtue of terms and conditions of the contract petitioner was to submit a performance guarantee and for thatpurpose, he had to deposit certain funds with the Bank as marginmoney and it is on this margin money the interest was earned inthe light of the nature of deposit made and the source form whichthe interest was received. We may in this connection also refer to the judgement of theKarnataka High Court in CIT vs. Chinna NachimuthuConstructions-(2008) 297 ITR 70 (Karn). That was a casesomewhat similar on facts where the assessee being a contractor,in order to secure a contract work was required to offer a bankguarantee to the contractee. There also the assessee had shownthe interest accrued on the fixed deposit as business income butthe Assessing Officer treated the interest as “Income from othersources”. The Karnataka High Court noticed that the investment ofamount in fixed deposits by the assessee was only to provide abank guarantee to the contractee in order to acquire the contractwork. It was held that the interest income could not be treated asincome from other sources and had to be treated as businessincome only. Karnataka High Court in that case relied uponjudgement of the Supreme Court in the Supreme Court in CIT vs.Govinda Choudhary and Sons-(1993) 203 ITR 881. The aforesaid judgement of the Karnataka High Court wasfollowed by Patna High Court in Shyam Bihari vs. Commissioner ofIncome Tax & Anr.-(2012) 345 ITR 283. That was also a casewhere the assessee was a civil contractor and his business incomewas from the contract work obtained from Governmentdepartments. The assessee objected before the Tribunal that theinclusion of interest income being assessed as “income from othersources” on the ground that the income was from money deposited in FDRs and NSCs, which was required to be furnishedby way of security for securing the contract work and, therefore, itshould have been treated as income from business and not fromother sources. The Patna High Court relying on the judgement ofKarnataka High Court held that the Tribunal as well as thesubordinate Revenue authorities erred in holding that interestaccrued on security deposits to the extent used for the purpose ofsecuring the contract work would also be assessable as incomefrom other sources. deposited in FDRs and NSCs, which was required to be furnishedby way of security for securing the contract work and, therefore, itshould have been treated as income from business and not fromother sources. The Patna High Court relying on the judgement ofKarnataka High Court held that the Tribunal as well as thesubordinate Revenue authorities erred in holding that interestaccrued on security deposits to the extent used for the purpose ofsecuring the contract work would also be assessable as incomefrom other sources. In the present case also, on the facts of the present case, wefind that appellant being a civil contractor was required to providea performance guarantee to the various works departments forobtaining contracts of civil construction. He to keep suchperformance guarantee alive by way of utilizing the bank overdraftlimit against which he had to furnish FDRs/NSC for execution ofthe contracts. His failure to submit the performance guarantee orinability to keep them alive would have resulted in termination ofthe contract awarded to him and in that event, the concerneddepartments/employer could encash the security. Release of suchperformance guarantee is dependent on fulfillment of certainconditions. It is not that the appellant had invested surplus moneylying idle with him only in FDRs/NSCs with a view to earninginterest. Obtaining of FDRs/NSCs and furnishing of the sameagainst the performance guarantee by the appellant, therefore,had an inextricable nexus with his business of securing civilcontracts and integral to his working as civil contractor. Theincome of interest earned from the interest such FDRs/NSCs bythe appellant therefore, in our considered view, cannot be treated as income from other sources and would rather be an incomeearned from business. In view of above discussion, the question of law extractedabove is answered in the terms that “in the facts andcircumstances of the case, the interest income from FDRs andNSCs of the petitioner has to be treated as income from businessand not income from other sources as the income is part of thetotal receipts and not from other sources.” In the result, the appeals are allowed. The judgement of theITAT dated 24.7.2017 is set aside and that of the CIT(A) in regardto interest earned on FDRs and NSCs dated 18.3.2016 is restoredand the matter is remitted back to the Assessing Officer forpassing fresh order of assessment in accordance with law keepingview the question answered by this Court. Office to place a copy of this judgment in connected matter. (GOVERDHAN BARDHAR),JRS/35-36 (MOHAMMAD RAFIQ),J