International Construction Company, Kakinada V. THE DCIT, CIRCLE-1, Kakinada

ITA 338/VIZ/2013

• Counselvise Citation: 33825314 RSA 2013
• Duration Of Justice: 1 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 15-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LUCAS PETER; RAJEEN K SINGH
• Keywords: Opportunity of being heard; Assessment record; Capital receipt
• Section: 263

Judgement Text

ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER, & SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.338/VIZAG/2013 ASSESSMENT YEAR: 2009-10 M/S. INTERNATIONAL CONSTRUCTION CO. NO.3, IDA RAMANAIAHPETA, KAKINADA DY. COMMISSIONER OF INCOME TAX, CIRCLE-1 KAKINADA (APPELLANT) PAN NO: AACFI 4102 R VS. (RESPONDENT) ASSESSEE BY: SHRI G.V.N. HARI, CA DEPARTMENT BY: SHRI LUCAS PETER,CIT-DR & SHRI RAJEEN K. SINGH, DR DATE OF HEARING: 27/02/2015 DATE OF PRONOUNCEMENT: 04/03/2015 ORDER PER SAKTIJIT DEY. THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 26.3.2013 OF THE LEARNED CIT, RAJAHMUNDRY PASSE D UNDER SECTION 263 OF THE ACT FOR THE ASSESSMENT YEAR 200 9-10. 2. BRIEFLY THE FACTS ARE, ASSESSEE A PARTNERSHIP FIRM , DURING THE RELEVANT YEAR WAS ENGAGED IN THE BUSINESS OF EXECU TING CIVIL CONTRACT WORK. FOR THE ASSESSMENT YEAR UNDER CONSIDERATI ON, ASSESSEE FILED ITS RETURN OF INCOME ON 26.3.2010 DECL ARING TOTAL INCOME OF RS.52,76,180. DURING ASSESSMENT PROCEEDING S IT WAS NOTICED BY THE ASSESSING OFFICER THAT ASSESSEE ON 19.1 0.1980 HAD ENTERED INTO AN AGREEMENT WITH GOVT. FOR CONSTRUCTIO N OF SHIPPING HARBOUR AT KAKINADA. IN PURSUANCE TO THE SAI D ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 2 OF 8 AGREEMENT ASSESSEE STARTED WORK IN JANUARY 1981. HOWE VER, DUE TO SOME UNFORESEEN CIRCUMSTANCES, THERE WAS CHANGE IN THE SEABED LEVEL RESULTING IN INCREASED QUANTITY OF RU BBLE. WHEN ASSESSEE CLAIMED PAYMENT FOR THE INCREASED QUANTI TY OF RUBBLE, DISPUTE AROSE BETWEEN ASSESSEE AND THE DEPARTM ENT AND THE MATTER WENT TO ARBITRATION. THE ARBITRATOR ULTIMATELY PASSED AN AWARD IN FAVOUR OF THE ASSESSEE DIRECTING P AYMENT OF RS.5,34,43,330 WHICH INCLUDED CONTRACT RECEIPT OF RS.1,62,60,500 AND INTEREST OF RS.3,71,85,830. THE EN TIRE AWARDED AMOUNT WAS RECEIVED BY ASSESSEE DURING THE Y EAR UNDER CONSIDERATION. IN THE RETURN FILED, ASSESSEE TR EATED THE INTEREST ON ARBITRATION AWARD AS A PART OF THE CONTRACT REC EIPTS AND ESTIMATED PROFIT AT 8% BY RELYING UPON THE DECISION OF THE HON'BLE SUPREME COURT IN CASE OF CIT VS. GOVINDA CH OWDURY & SONS (74 TAXMANN 331). ASSESSING OFFICER HOWEVER, D ID NOT ACCEPT THE RATE OF PROFIT DECLARED BY THE ASSESSEE AT 8 % AND BY FOLLOWING THE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF M/S TEJA CONSTRUCTIONS VS. ACIT (36 DTR 220) ESTIM ATED THE INCOME OF THE ASSESSEE AT 9% ON THE ENTIRE RECEIPT OF RS.5,34,46,330. AS A RESULT TOTAL INCOME WAS DETERMIN ED AT RS.58,10,644. 3. THE LEARNED CIT IN EXERCISE OF POWER UNDER SECTIO N 263 OF THE ACT CALLED FOR ASSESSMENT RECORD OF ASSESSEE FOR TH E IMPUGNED ASSESSMENT YEAR AND AFTER VERIFYING THE SAME WAS OF THE VIEW THAT THE ASSESSMENT ORDER PASSED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE AS THE ASSES SING OFFICER HAS APPLIED THE NET PROFIT RATE OF 9% IN RESP ECT OF THE INTEREST COMPONENT ALSO. ACCORDINGLY, HE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE REQUIRING HIM TO EXPLAIN AS TO W HY ASSESSMENT ORDER SHALL NOT BE SET ASIDE. THOUGH, THE ASSESSEE ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 3 OF 8 OBJECTED TO THE PROPOSED ACTION OF THE CIT TO REVISE THE ASSESSMENT ORDER AND CONTENDED THAT, THE ASSESSING OFFI CER HAVING COMPLETED THE ASSESSMENT BY APPLYING THE RATIO OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. GOVINDA CHOWDURY IT CANNOT BE SAID TO BE ERRONEOUS AND PREJUDI CIAL TO THE INTEREST OF REVENUE. BUT, THE LEARNED CIT REJECTIN G SUCH CONTENTIONS OF THE ASSESSEE SET ASIDE THE ASSESSMENT ORDE R WITH THE FOLLOWING OBSERVATIONS: 9. SINCE THE ASSESSING OFFICER DID NOT CONDUCT PROPER ENQUIRY WITH REGARD TO THE TAXABILITY OF THE INTEREST PORTION, THE ASSESSMENT ORDER CAN BE TREAT ED AS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE AND NEEDS TO BE REVISED. THEREFORE, THE ASSESSMENT ORDER IS SET ASIDE ON THE ABOVE ISSUES. 10. IN VIEW OF THIS, THE ASSESSING OFFICER IS DIRE CTED TO MAKE A CRITICAL ANALYSIS OF THE TAXATION OF THE AWARD AMOUNT AFTER EXAMINING THE FACTS OF THE CASE AND ON COMPARISON OF THE SAME WITH THAT OF THE DECISION OF THE APEX COURT IN THE CASE OF GOVINDA CHOWDURY TO SEE IF THE FACTS OF THE CASE ARE IDENTI CAL AND DECIDE THE ISSUE OF TAXABILITY OF INTEREST PORT ION IN FULL. THE ASSESSING OFFICER IS DIRECTED TO PASS A CONSEQUENTIAL ORDER GIVING EFFECT TO THIS ORDER WIT HIN THE TIME FRAME STIPULATED AFTER AFFORDING REASONABL E OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 4. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED BEFOR E US, AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. GOVINDA CHOWDURY (SUPRA) THE INTEREST A WARDED BY THE ARBITRATOR ALSO PARTAKES THE CHARACTER OF CONTRA CT RECEIPT. THEREFORE, THE PROFIT RATE APPLICABLE TO THE CO NTRACT RECEIPT WILL ALSO APPLY TO THE INTEREST INCOME. THE LE ARNED AUTHORISED REPRESENTATIVE REFERRING TO THE OBSERVATIONS MADE BY THE CIT AT PARA 6 OF HIS ORDER SUBMITTED, THE CIT H IMSELF ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 4 OF 8 WAS NOT ABLE TO TAKE A VIEW AS HE HAS OBSERVED THAT THE ASSESSING OFFICER EITHER SHOULD HAVE TAXED THE INTERES T INCOME FULLY OR APPLY PERCENTAGE OF ESTIMATION ACCEPTED BY THE APEX COURT IN THE CASE OF CIT VS. GOVINDA CHOWDURY. THUS, IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE, WHEN THE CIT HIMSELF COULD NOT FORM A VIEW, HE CANNOT QUESTION THE VIEW TAKEN BY THE ASSESSING OFFICER, WHO AFTER EXAMINING T HE FACTS AND MATERIALS ON RECORD IN THE CONTEXT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. GOVINDA CHOWDURY AND PROPERLY APPLYING HIS MIND HAS TAKEN A DECISION WHILE ESTIMATING THE PROFIT ON THE INTEREST INCOME. THER EFORE, IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE, AS THE ASSESSING OFFICER AFTER PROPER APPLICATION OF MIN D AND CONDUCTING NECESSARY ENQUIRY HAS TAKEN A DECISION, W HICH IS ONE OF THE POSSIBLE VIEW IN TERMS WITH THE DECISION OF THE HON'BLE SUPREME COURT, THE VIEW TAKEN CANNOT BE HELD TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REV ENUE. THEREFORE, THE EXERCISE OF POWER UNDER SECTION 263 IS NOT VALID. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUBMITTED, WHEN ASSESSEE HAS NOT INCURRED ANY EXPENDITURE ON THE INTEREST INCOME AWARDED BY THE ARBITRA TOR, PROFIT OF SUCH INCOME CANNOT BE ESTIMATED BY APPLYING THE RATE APPLICABLE TO THE CONTRACT RECEIPTS, EVEN THOUGH SUCH IN TEREST INCOME IS CONSIDERED TO BE THE TRADING RECEIPTS. HOWEVE R, EVEN IF IT IS A TRADING RECEIPT, IT CANNOT BE TREATED AS A RE CEIPT FROM CONTRACT. THEREFORE, THE ASSESSING OFFICER HAVING ESTI MATED THE PROFIT BY APPLYING THE RATE APPLICABLE TO ESTIMATION OF PROFIT ON CONTRACT BUSINESS, THE ASSESSMENT ORDER IS ERRONEOUS AN D PREJUDICIAL TO THE INTEREST OF THE REVENUE. ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 5 OF 8 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD AS WELL AS THE DECISIO N RELIED UPON BY THE PARTIES. THERE IS NO DISPUTE TO THE FACT THAT DURING THE RELEVANT PREVIOUS YEAR ASSESSEE IN TERMS WITH THE A WARD PASSED BY THE ARBITRATOR HAS RECEIVED AN AMOUNT OF RS.5,34,46,330 OUT OF WHICH THE INTEREST COMPONENT IS RS.3,71,81,830. ASSESSEE HAS ESTIMATED THE PROFIT @ 8% EVEN ON THE INTEREST COMPONENT BY TREATING IT AS PART OF CONTRACT RECEIPT, WHEREAS THE ASSESSING OFFICER ENHANCED THE PR OFIT TO 9%. HOWEVER, LEARNED CIT HAS CONSIDERED THE ASSESSME NT ORDER TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE, AS ACCORDING TO THE CIT, AS PER THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF CIT VS. GOVINDA CHOWDURY & SONS (SUPRA) THOUGH THE INTEREST INCOME PARTAKES OF TH E SAME CHARACTER AS THE RECEIPT FOR THE PAYMENT OF WHICH HE WAS OTHERWISE ENTITLED AND SUCH PAYMENT HAS BEEN DELAYED AS A RESULT OF CERTAIN DISPUTE BETWEEN PARTIES, BUT HON'BLE SUPREME COURT FINALLY CONCLUDED THAT THE INTEREST INCOME CANNOT B E SEPARATE FROM THE OTHER AMOUNT GRANTED TO THE ASSESSEE UNDER THE AWARD AND TREATED AS INCOME FROM OTHER SOURCES. 7. BEFORE DECIDING THE VALIDITY OF POWER EXERCISED UNDER SECTION 263, LET US EXAMINE THE RATIO LAID DOWN BY THE H ONBLE SUPREME COURT IN THE CASE OF CIT VS. GOVINDA CHOWDURY & SONS. IT IS EVIDENT, THE HON'BLE HIGH COURT WHILE DECI DING THE NATURE AND CHARACTER OF INTEREST AWARDED BY AN ARBITRATO R IN CASE OF GOVINDA CHOWDURY & SONS HAS HELD THAT IT IS IN THE NATURE OF THE CAPITAL RECEIPTS, HENCE NOT TAXABLE. HOWEVE R, IN AN APPEAL PREFERRED BY THE DEPARTMENT AGAINST THE AFORE SAID JUDGMENT OF THE HON'BLE HIGH COURT OF ORISSA, THE HON'B LE SUPREME COURT HELD AS UNDER: ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 6 OF 8 THIS BRINGS US TO A CONSIDERATION OF THE SECOND QUESTION. THE SUM OF RS. 2,77,692 WAS RECEIVED BY T HE ASSESSEE AS INTEREST ON THE AMOUNTS WHICH WERE DETERMINED TO BE PAYABLE BY THE ASSESSEE IN RESPECT OF CERTAIN CONTRACTS EXECUTED BY THE ASSESSEE AND IN R EGARD TO THE PAYMENTS UNDER WHICH THERE WAS A DISPUTE BET WEEN THE TWO PARTIES. THE ASSESSEE IS A CONTRACTOR. HIS BUSINESS IS TO ENTER INTO CONTRACTS. IN THE COURSE OF THE EXECUTION OF THESE CONTRACTS, HE HAS ALSO TO FACE D ISPUTES WITH THE STATE GOVERNMENT AND HE HAS ALSO TO RECKON WITH DELAYS IN PAYMENT OF AMOUNTS THAT ARE DUE TO HIM. I F THE AMOUNTS ARE NOT PAID AT THE PROPER TIME AND INTERES T IS AWARDED OR PAID FOR SUCH DELAY, SUCH INTEREST IS ON LY AN ACCRETION TO THE ASSESSEE'S RECEIPTS FROM THE CONTR ACTS. IT IS OBVIOUSLY ATTRIBUTABLE AND INCIDENTAL TO THE BUS INESS CARRIED ON BY HIM. IT WOULD NOT BE CORRECT, AS THE TRIBUNAL HAS HELD, TO SAY THAT THIS INTEREST IS TOT ALLY DE HORS THE CONTRACT BUSINESS CARRIED ON BY THE ASSESS EE. IT IS WELL-SETTLED THAT INTEREST CAN BE ASSESSED UNDER THE HEAD 'INCOME FROM OTHER SOURCES 'ONLY IF IT CANNOT BE BROUGHT WITHIN ONE OR THE OTHER OF THE SPECIFIC HEA DS OF CHARGE. WE FIND IT DIFFICULT TO COMPREHEND HOW THE INTEREST RECEIPTS BY THE ASSESSEE CAN BE TREATED AS RECEIPTS WHICH FLOW TO HIM DE HORS THE BUSINESS WHI CH IS CARRIED ON BY HIM. IN OUR VIEW, THE INTEREST PAYABL E TO HIM CERTAINLY PARTAKES OF THE SAME CHARACTER AS THE RECEIPTS FOR THE PAYMENT OF WHICH HE WAS OTHERWISE ENTITLED UNDER THE CONTRACT AND WHICH PAYMENT HAS B EEN DELAYED AS A RESULT OF CERTAIN DISPUTES BETWEEN THE PARTIES. IT CANNOT BE SEPARATED FROM THE OTHER AMOU NTS GRANTED TO THE ASSESSEE UNDER THE AWARDS AND TREATE D AS 'INCOME FROM OTHER SOURCES'. THE SECOND QUESTION IS , THEREFORE, ANSWERED IN FAVOUR OF THE ASSESSEE AND A GAINST THE REVENUE. WE ARE CONSCIOUS THAT THE SECOND QUEST ION HAS NOT BEEN ANSWERED BY THE HIGH COURT IN VIEW OF ITS ANSWER TO THE FIRST QUESTION. WE HAVE CONSIDERED WH ETHER IT IS NECESSARY TO SEND THE MATTER BACK FOR THE DEC ISION OF THE HIGH COURT. BUT, HAVING REGARD TO THE FACTS THA T THE APPEAL RELATES TO A VERY OLD ASSESSMENT YEAR (1972- 73) AND ALSO THAT ALL THE NECESSARY FACTS AND THE DECIS ION OF THE TRIBUNAL ARE AVAILABLE BEFORE US, WE HAVE ALSO PROCEEDED TO ANSWER THE SECOND QUESTION STRAIGHTAWA Y IN ORDER TO AVOID FURTHER UNNECESSARY DELAY. ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 7 OF 8 8. AS CAN BE SEEN FROM THE OBSERVATIONS MADE BY THE HON'BLE SUPREME COURT EXTRACTED HEREIN ABOVE, THE HON'B LE SUPREME COURT HELD THAT THE INTERESTS PAYABLE BY VIRTUE OF THE ARBITRATION AWARD PARTAKES THE CHARACTER OF THE CONTRACT RECEIPTS AND CANNOT BE SEPARATED FROM THE CONTRACT RECEI PT TO TREAT IT AS INCOME FROM OTHER SOURCES. IN OTHER WORDS THE HON'BLE SUPREME COURT HELD THAT INTEREST INCOME HAS TO BE TAKEN AT PAR WITH CONTRACT RECEIPTS. 9. ON A PERUSAL OF THE ASSESSMENT ORDER IT IS APPARENT AND OBVIOUS THAT THE ASSESSING OFFICER WHILE CONSIDERING THE ISSUE ON TAXABILITY OF THE INTEREST INCOME HAS TAKEN INTO ACCO UNT THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CA SE OF CIT VS. GOVINDA CHOWDURY & SONS AND AFTER FULLY APPL YING HIS MIND HAS ESTIMATED PROFIT BY TREATING THE INTEREST INCOME AS PART OF THE CONTRACT RECEIPTS. AS IT APPEARS FROM THE OBSERVATIONS MADE BY THE LEARNED CIT IN PARA 6 OF HI S ORDER, HE IS AGGRIEVED WITH THE ESTIMATION OF PROFIT AT 9% AS ACCO RDING TO HIM THE ASSESSING OFFICER SHOULD HAVE FULLY TAXED THE INTEREST INCOME OR APPLIED THE PERCENTAGE (10%) OF ESTIMATION AC CEPTED BY THE APEX COURT IN CASE OF CIT VS. GOVINDA CHOUDHUR Y & SONS (SUPRA). THEREFORE, FROM THE AFORESAID FACTS, I T APPEARS, THE LEARNED CIT HIMSELF IS NOT SURE IN WHAT WAY THE INTE REST INCOME SHOULD BE TAXED. MOREOVER, THERE IS NO DENYING THE FACT THAT THE ASSESSING OFFICER KEEPING IN VIEW THE RATIO LAI D DOWN BY THE HON'BLE SC IN CASE OF CIT VS. GOVINDA CHOUDH URY (SUPRA) HAS TAKEN A DECISION WHICH CERTAINLY CAN BE C ONSIDERED TO BE ONE OF THE POSSIBLE VIEW. THAT BEING THE CASE, THE LEARNED CIT CANNOT SUBSTITUTE HIS VIEW IN PLACE OF THE VIEW TAKE N BY THE ASSESSING OFFICER WHILE TERMING IT TO BE ERRONEOUS AN D PREJUDICIAL TO THE INTERESTS OF THE REVENUE. WHEN THERE IS NO ITA NO.338 OF 2013 INTERNATIONAL CONSTRUCTION CO. K AKINADA PAGE 8 OF 8 DISPUTE TO THE FACT THAT THE INTEREST INCOME AS PER THE D ECISION OF THE HON'BLE SUPREME COURT PARTAKES THE CHARACTER OF THE CONTRACT RECEIPTS, THE ASSESSING OFFICER ON INTERPRETING THE SAID DECISION OF THE HON'BLE SUPREME COURT HAS TAKEN A VIEW . LEARNED CIT INTERPRETING THE SAME DECISION IN A DIFFE RENT MANNER HAS TAKEN ANOTHER VIEW. HOWEVER, THAT BY ITSELF WILL NOT RENDER THE VIEW TAKEN BY THE ASSESSING OFFICER TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVE NUE ONLY BECAUSE IT IS NOT ACCEPTABLE TO LEARNED CIT. IN THE AFOR ESAID FACTS AND CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE EXERCISE OF POWER UNDER SECTION 263 OF THE ACT IN THE PRESENT CASE IS NOT VALID. ACCORDINGLY WE SET ASIDE THE IMPUGN ED ORDER OF THE LEARNED CIT AND RESTORE THAT OF THE ASSESSING OFF ICER. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE I S ALLOWED. PRONOUNCED IN THE OPEN COURT ON 4 TH MARCH, 2015 SD/- SD/- (J. SUDHAKAR REDDY) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 4 TH MARCH, 2015 PVV/SPS CAMP: VISAKHAPATNAM, COPY TO 1 M/S. INTERNATIONAL CONSTRUCTION CO. NO.3, IDA RAMANAIAHPETA, KAKINADA 2 THE DY.COMMISSIONER OF INCOME TAX CIRCLE 1 KAKINA DA 3 THE CIT RAJAHMUNDRY 4 THE DEPARTMENTAL REPRESENTATIVE ITAT VISAKHAPATNAM 5 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM