DCIT, Shimoga V. Sri B.Diwakar, Bhadravathi

ITA 761/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8516 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-03-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 28-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V S SREELEKHA
• Assessee Lawyers: CHYTHANYA K K
• Keywords: Business income; Depreciation; Additional evidence; Commercial expediency
• Section: 44AD; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.761/BANG/2009 ASSESSMENT YEAR : 2006-07 THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE 1, SHIMOGA. : APPELLANT VS. SRI B. DIWAKAR, JAGADISH NILAYA, 5 TH CROSS, O.S.M. BHADRAVATHI. : RESPONDENT APPELLANT BY : SMT. V.S. SREELEKHA, ADDL. CIT(DR) RESPONDENT BY : SHRI CHYTHANYA K.K., ADVOCATE O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A), HUBLI IN ITA NO:280/CIT(A)/HBL/08-09 DATED: 28.5.2009 FOR THE ASSESSMENT YEAR 2006-07 IN THE CASE OF B. DIWAKAR O F BHADRAVATHI. 2. THE REVENUE HAS RAISED SEVEN GROUNDS. HOWEVER, ON A PERUSAL, THE CRUXES OF THE ISSUES WERE TWO-FOLDS, NAMELY: ITA NO.761/BANG/09 PAGE 2 OF 15 (I) THE CIT(A) ERRED IN ALLOWING DEPRECIATION ON THE ES TIMATED PROFIT, MISQUOTING THE BOARDS CIRCULARS; - THE CIT (A) ERRED IN NOT GIVING OPPORTUNITY TO TH E AO ON THE CLAIM OF ALLOWABILITY OF DEPRECIATION AND HENCE THE PROVISIONS OF RULE 46A OF THE I.T.RULES HAVE BEEN VIOLATED; & (II) THE CIT(A) ERRED IN QUOTING THE FINDING OF THE JURI SDICTIONAL H.C AND DIRECTED TO CALCULATE THE PROFIT FROM INTEREST INCOME AT THE SAME RATE AT WHICH THE CONTRACTUAL RECEIPT HAS BEEN TAXED. BRIEF FACTS: 3. THE ASSESSEE WAS CARRYING ON THE BUSINESS OF CIV IL CONTRACT FOR PWD, VISL, MPM ETC. DURING THE YEAR UNDER DISPUTE, THE ASSESSEE HAD SHOWN THE TOTAL RECEIPTS OF RS.4.3 CRORES WHEREAS H E HAD OFFERED THE INCOME FROM BUSINESS ONLY AT 5%, BESIDES THE OTHE R INCOMES BEING REMUNERATION AND INTEREST FROM THE PARTNERSHIP FIRM KRISHNA TYRES, BHADRAVATHI. THE ASSESSEE HAD NEITHER MAINTAINED A NY BOOKS OF ACCOUNT NOR GOT AUDITED U/S 44 AB OF THE ACT. 4. BY VIRTUE OF HAVING CONCURRENT JURISDICTION OVE R THE ASSESSEE, THE ADDL. CIT (THE AO HEREINAFTER), DURING THE COURS E OF ASSESSMENT PROCEEDINGS SOUGHT CERTAIN DETAILS WITH REGARD TO D IFFERENCE BETWEEN THE TOTAL CREDITS AVAILABLE IN BANK ACCOUNTS AND TOTAL RECEIPTS SHOWN BY THE ASSESSEE WHILE COMPUTING THE NET PROFIT. CONSEQUE NT ON THE RECONCILIATION OF THE TOTAL CREDITS OF BANK ACCOUNTS, THE FOLLOWIN G CREDITS AVAILABLE IN THE BANK ACCOUNTS REPRESENT THE CONTRACTUAL RECEIPTS OF THE ASSESSEE WHICH HAVE NOT BEEN INCLUDED IN THE TOTAL TURNOVER OF THE ASSESSEE: (I) RECEIPT FROM KUVEMPU UNIVERSITY RS.1408128 (II) RECEIPT OF CONTRACT AMOUNTS FROM BSNL 294760 (III)RECEIPT OF CONTRACT AMOUNT FROM MS(P) LTD. 88262 ITA NO.761/BANG/09 PAGE 3 OF 15 THUS, THE ASSESSEE HAD RECALCULATED THE TOTAL TURNOVER FROM CONTRACT BUSINESS AT RS.4.48 CRORES IN THE REVISED STATEMENT OF INCOME AND OFFERED 5% OF THIS TURNOVER AS INCOME. 4.1. SINCE NO BOOKS OF ACCOUNTS MAINTAINED AN D THE CALCULATION OF PROFIT MARGIN WAS NOT SUPPORTED BY ANY BASIC DOCUME NTS, THE AO HAD ADOPTED THE INCOME FROM THE CONTRACTUAL BUSINESS AT 8% ON RECEIPTS OF RS.4.48 CRORES, FOR WHICH, ACCORDING TO THE AO, THE ASSESSEE AND HIS AR PRESENT WERE CONSENTED. 4.2. WHILE RECONCILING THE BANK STATEMENTS, IT WAS NOTICED THAT THE ASSESSEE HAD NOT ACCOUNTED FOR THE INTEREST FROM VA RIOUS FDRS AND SAVING ACCOUNTS AND SUCH INTEREST RECEIPT WAS ARRIVED AT R S.151727/- AND AFTER DUE VERIFICATION, THE INTEREST SO RECEIVED WAS FOUN D TO BE AT RS.149170/-. 4.3. ON THIS COUNT, BRUSHING ASIDE THE ASSESSEE S CONTENTIONS AS SET- OUT IN THE ASSESSMENT ORDER AND ALSO DISTINGUISHING THE RULING OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. CHI NNA NACHIMUTHU CONSTRUCTIONS REPORTED IN 297 ITR 70, THE AO WAS O F THE VIEW THAT THE INTEREST INCOME FROM BANK DEPOSITS WERE TO BE TAXED SEPARATELY AS BUSINESS INCOME IN TOTALITY AND NOT INCLUDED IN THE GROSS RECEIPTS FROM THE CONTRACT BUSINESS. 5. ON APPEAL, THE LD. CIT (A) HAD, IN A CRYPTIC MANNER, OBSERVED THAT AS PER THE ARGUMENTS, THE ASSESSEE HAD NO OBJECTION FOR ESTIMATING THE INCOME AT 8% SINCE THE RECEIPTS WERE ABOVE RS.40 LA KHS AND THAT NO BOOKS OF ACCOUNT HAVE BEEN AUDITED. SINCE THE ASSESSEES OBJECTION WAS NOT ALLOWING DEPRECIATION AS PER THE CIRCULAR NO.29D OF 1965 NO.45/235/65-ITJ ITA NO.761/BANG/09 PAGE 4 OF 15 DT: 3.3.95, THE AO WAS DIRECTED TO ALLOW DEPRECIATI ON AS PER THE PROVISIONS OF THE ACT AND CIRCULAR OF THE BOARD. 5.1. WITH REGARD TO INCOME FROM BANK INTEREST , THE CIT(A)S INEXPLICABLE REASONING WAS THAT 6.1. THE DECISION OF THE HONBLE KARNATAKA HIGH C OURT IS SPECIFICALLY MENTIONING ABOUT TREATING OTHER RECEIPTS AS BUSINES S RECEIPTS AFTER VERIFICATION OF NEXUS BETWEEN BUSINESS RECEIPTS. I T IS ARGUED BY AR THAT SECURITY DEPOSITS ARE MAINTAINED FOR THE PURPOSE OF OBTAINING CONTRACT AND THEY ARE NOT FDS BY THE FAMILY MEMBERS OR BY AP PELLANT. AO IS DIRECTED TO MAKE LIMITED VERIFICATION WHETHER THESE DEPOSITS OF ONLY IN RESPECT OF SECURITY DEPOSITS OR EARNEST MONEY DEPOS ITS CONNECTED WITH CONTRACT OR NOT? IN CASE, THEY ARE DIRECTED RELATE D WITH THE CONTRACT OWING TO THE DECISION OF HONBLE KARNATAKA HIGH COU RT, INTEREST INCOME WILL BE TREATED AS A PART OF BUSINESS RECEIP TS. THEREFORE, AO IS DIRECTED TO ALLOW THE SAME AFTER FINDING OUT THE DE POSITS ARE RELATED TO CONTRACT BUSINESS. 6. DISILLUSIONED WITH THE STAND OF THE LD. CIT(A) O N TWIN ISSUES, THE REVENUE HAS COME UP BEFORE US FOR RE-DRESSAL. 6.1. IT WAS CONTENDED BY THE REVENUE THAT (I) THE BOARDS CIRCULAR AS RELIED BY THE CIT(A) WAS IS SUED MUCH EARLIER TO THE INTRODUCTION OF S.44AD OF THE ACT IN FINANCE ACT 1994 W.E.F 1.4.1994; - THE CIT(A) ERRED IN ALLOWING DEPRECIATION IN THIS C ASE WHERE BOOKS OF ACCOUNTS WERE NOT MAINTAINED AND THAT THE ABOVE CIRCULAR IS APPLICABLE FOR THE CASES WHERE THE BOOK S OF ACCOUNTS WERE REJECTED BY THE AO; - THE CIT (A) ERRED IN NOT GIVING OPPORTUNITY TO THE AO ON THE CLAIM OF ALLOWABILITY OF DEPRECIATION AND HENCE THE PROVISIONS OF RULE 46A OF THE I.T.RULES HAVE BEEN VIOLATED; - RELIES ON THE CASE LAW OF SURINDER PAL NAYYAR V. CI T REPORTED IN (2009) 177 TAXMAN 207 (P & H) (II) THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT HAS BEEN WRONGLY APPLIED AND, THUS, DIRECTED THE AO TO CALCU LATE PROFIT ITA NO.761/BANG/09 PAGE 5 OF 15 FROM INTEREST INCOME AT THE SAME RATE AT WHICH THE CONTRACTUAL RECEIPT HAS BEEN TAXED; & - SINCE THE ASSESSEE HAD NOT MAINTAINED ANY BOOKS OF ACCOUNTS, IT WAS NOT POSSIBLE TO ARRIVE AT A FINDING THAT THE INTEREST INCOME SHOULD BE TAXED AT THE SAME RATE AT WHICH TH E CONTRACTUAL RECEIPT WAS TAXED. 6.2. ON THE OTHER HAND, THE LD. AR CAME UP WITH LENGTHY ARGUMENTS COUPLED WITH VARIOUS CASE LAWS, THE GIST OF WHICH, ARE LISTED OUT AS UNDER: (I) THE ASSESSMENT ORDER IN QUESTION WAS CONCLUDED BY T HE ADDL. CIT ON THE BASIS OF CONCURRENT JURISDICTION WHICH WAS C HALLENGED BY THE ASSESSEE BEFORE THE CIT(A) WHO HAD PASSED AN OR DER WHICH IS UNDER DISPUTE. IF THE CIT, OBJECTS TO THE ORDER OF THE CIT(A), CAN DIRECT THE AO TO CHALLENGE THE ORDER OF THE CIT(A) BEFORE THE HONBLE TRIBUNAL. IN THE PRESENT CASE, THE CIT HAD AUTHORIZED THE DCIT TO FILE AN APPEAL TO THE TRIBUNAL AGAINST THE ORDER OF THE CIT(A) WHEREAS THE ASSESSING OFFICER BEING ADDL. CI T, THE DCIT DOES NOT HAVE JURISDICTION UPON THE ASSESSEE FOR AN Y PURPOSE AND EVEN FOR FILING AN APPEAL AGAINST THE ORDER OF THE CIT(A); - RELIES ON THE FINDING OF THE DELHI HIGH COURT IN VA LVOLINE CUMMINS LTD. V. DCIT (2008) 171 TAXMAN 241; (III) THE BOARD IN ITS CIRCULAR NO.29-D(XIX-14)(F.NO.45/2 39/65-ITJ) DATED: 31.8.1965, HAS OUTLINED THAT WHERE IT IS PRO POSED TO ESTIMATE THE PROFIT AND THE PRESCRIBED PARTICULARS HAVE BEEN FURNISHED BY THE ASSESSEE, THE DEPRECIATION SHOULD BE SEPARATELY WORKED OUT. IF IT IS CONSIDERED THAT THE NET PROFI T SHOULD BE ESTIMATED, IT SHOULD BE ESTIMATED SUBJECT TO THE AL LOWANCE FOR DEPRECIATION AND THE DEPRECIATION ALLOWANCE SHOULD BE DEDUCTED THERE-FROM; - THE STATEMENT OF PARTICULARS OF BLOCK OF FIXED ASSE TS, ADDITIONS TO THE FIXED ASSETS AND DEPRECIATION ALLOWANCE FOR THE RELEVANT YEAR WERE FURNISHED TO THE AO; - RELYING ON THE AFORESAID CIRCULAR, THE CIT(A) WAS J USTIFIED IN ALLOWING THE DEPRECIATION CLAIM OF THE ASSESSEE; - RELIES ON THE ALLAHABAD H.CS RULING IN CIT V. BISH AMBHAR DAYAL AND CO. (1994) 210 ITR 118; - AS CLAIMED BY THE REVENUE, THE ABOVE SAID CIRCULAR DOES NOT RESTRICT ITS APPLICABILITY ONLY WHEN THE BOOKS OF A CCOUNTS WERE REJECTED. IN FACT, WHILE DIRECTING THAT DEPRECIATI ON SHOULD BE ALLOWED EVEN WHEN INCOME WAS ESTIMATED ON NET PROFI T BASIS, ITA NO.761/BANG/09 PAGE 6 OF 15 THE BOARD HAD NOT REFERRED TO MAINTENANCE OR OTHERW ISE OF BOOKS OF ACCOUNT; - THERE WAS NO CONDITION IN THE INCOME-TAX PROVISION S THAT THE BOOKS OF ACCOUNT SHOULD BE MAINTAINED FOR ALLOWANCE OF DEPRECIATION WHICH IS NOT IN THE NATURE OF ANY EXPE NDITURE AS SUCH AND, THEREFORE, THE SAME CANNOT BE SUBSUMED IN TO TOTAL EXPENDITURE THAT MAY BE DEEMED TO HAVE BEEN ALLOWED WHEN INCOME IS ESTIMATED ON NET PROFIT BASIS; - CASE LAWS RELIED UPON: (A) CIT V. DAUDAYAL HOTELS P. LTD. (2006) 282 ITR 132 ( GUJ) (B) SHRI RAM JHANWAR LAL V. ITO (2009) 177 TAXMAN 135 ( RAJ) (C) CIT V. SRIRAM & CO. (2001) 250 ITR 169 (RAJ) (D) ALLAHABAD GLASS WORKS V. CIT (1961) 42 ITR 439 (ALL ) (IV) WHILE COMPUTING INCOME BY APPLYING NET PROFIT RATE, DEPRECIATION BEING IN THE NATURE OF A STATUTORY ALLOWANCE SHOULD HAVE BEEN ALLOWED BY THE AO; (V) WITH REGARD TO THE CLAIM OF DEPRECIATION, THE ASSES SEE HAD FURNISHED THE REQUISITE PARTICULARS BALANCE SHEET , FIXED ASSET DETAILS FOR THE YEARS-ENDED 31.3.04, 31.3.05 AND 31 .3.06, SCHEDULE OF OB, ADDITIONS, DELETIONS, NET BLOCK, DEPRECIATIO N AND THE WDV - WHICH WERE AVAILABLE ON THE RECORDS OF THE AO AT TH E TIME OF PASSING THE IMPUGNED ORDER OF THE AO. THUS, NO ADD ITIONAL EVIDENCE WAS FURNISHED BEFORE THE CIT(A) AND AS SUC H THERE WAS NO BREACH OF RULE 46A OF I.T.RULES AS ALLEGED BY TH E REVENUE; (VI) WITH REGARD TO INTEREST: THE ASSESSEE BEING AN INDI VIDUAL TO EXECUTE CIVIL CONTRACTS FOR GOVERNMENT AGENCIES, IN ORDER TO SAFE GUARD THE PERFORMANCE OR EXECUTION OF SUCH CONTRACT , THE CONTRACTEE INSISTED FOR PERFORMANCE BANK GUARANTEE. IN ORDER TO OBTAIN SUCH BANK GUARANTEES, FIXED DEPOSITS WERE IN SISTED UPON AND ON THE BASIS OF WHICH ONLY BANK GUARANTEES WERE OBTAINED. KEEPING FDS WITH THE BANKS WERE PURELY ON COMMERCI AL EXPEDIENCY WHICH WAS AN ANCILLARY, INCIDENTAL AND S UBSERVIENT ACTIVITY TO THE BUSINESS CARRIED ON BY THE ASSESSEE ; - CASE LAWS RELIED ON, NOTABLY: (A) CHINNA NACHIMUTHU CONSTRUCTIONS V. DCIT ITA NO:508/BANG/2000 DT: MAR, 02 (B) CIT V.CHINNA NACHIMUTHU CONSTRUCTIONS (2008) 297 IT R 70 (KAR) (C) DCIT V. MAHARAJA SHOPPING COMPLEX (2009) 312 ITR 68 (KAR) ITA NO.761/BANG/09 PAGE 7 OF 15 (VII) THUS, THE INTEREST EARNED FROM FIXED DEPO SITS WHICH WERE PLEDGED FOR OBTAINING BANK GUARANTEES FOR SECURING CONTRACT BUSINESS SHOULD BE TREATED AS BUSINESS INCOME 7. WE HAVE DULY CONSIDERED THE RIVAL SUBMISS IONS, CAREFULLY PERUSED THE RELEVANT RECORDS, CASE LAWS ON WHICH EITHER PAR TY HAVE PLACED THEIR STRONG RELIANCE. 7.1. BEFORE LOOKING INTO THE ISSUES RAISED BY T HE REVENUE, WE SHALL DEAL WITH AN ISSUE WHICH HAS BEEN RAISED BY THE ASS ESSEE DURING THE COURSE OF HEARING THAT THE ASSESSMENT ORDER WAS CON CLUDED BY THE ADDL. CIT ON THE BASIS OF CONCURRENT JURISDICTION WHICH W AS CHALLENGED BY THE ASSESSEE BEFORE THE CIT (A) WHO HAD PASSED AN ORDER WHICH IS UNDER DISPUTE. IF THE CIT, OBJECTS TO THE ORDER OF THE C IT (A), CAN DIRECT THE AO TO CHALLENGE THE ORDER OF THE CIT (A) BEFORE THE HONB LE TRIBUNAL. IN THE PRESENT CASE, THE CIT HAD AUTHORIZED THE DCIT TO FI LE AN APPEAL BEFORE THE TRIBUNAL AGAINST THE ORDER OF THE CIT (A) WHEREAS T HE ASSESSING OFFICER BEING ADDL. CIT, THE DCIT DOES NOT HAVE JURISDICTIO N UPON THE ASSESSEE FOR ANY PURPOSE AND EVEN FOR FILING AN APPEAL AGAINST T HE ORDER OF THE CIT(A). RELIANCE WAS PLACED ON THE FINDING OF THE DELHI HIG H COURT IN THE CASE OF VALVOLINE CUMMINS LTD. V. DCIT REPORTED IN (2008) 171 TAXMAN 241. 7.1.1. WE HAVE DULY CONSIDERED THE SUBMISSION OF T HE ASSESSEE AND ALSO THE CASE LAW REFERRED TO BY THE ASSESSEE. THE JURISDICTION OVER THE ASSESSEE, NO DOUBT, LIES WITH THE DCIT, SHIMOGA AND THAT THE ADDL. CIT, SHIMOGA RANGE WHO HAD CONCURRENT JURISDICTION VESTE D WITH HIM, CONCLUDED THE ASSESSMENT WHICH IS UNDER DISPUTE. S INCE THE DCIT, SHIMOGA IS HAVING JURISDICTION OVER THE ASSESSEE, T HE CIT, DAVANAGERE, ITA NO.761/BANG/09 PAGE 8 OF 15 PERHAPS, DIRECTED THE DCIT, SHIMOGA TO PREFER AN AP PEAL AGAINST THE ORDER OF THE CIT (A). THOUGH THERE WAS A TECHNICAL FLAW ON THE PART OF THE CITS DIRECTION, IN OUR CONSIDERED VIEW, IT DOES NOT ALTE R THE JURISDICTION OVER THE ASSESSEE VESTS WITH THE DCIT, SHIMOGA FOR ALL PRACT ICAL PURPOSES AND, THUS, THE APPEAL PREFERRED BY THE DCIT, SHIMOGA IS IN ORDER. 7.2. LET US NOW ANALYZE THE ISSUES RAISED BY THE R EVENUE CHRONOLOGICALLY. 7.2.1. THE BONE OF CONTENTION OF THE REVENUE IS TH AT THE CIT (A) HAD QUOTED THE DATE OF THE CIRCULAR AS 31.3.1995 INSTEA D OF 31.3.1965. WHILE POINTING OUT THE GAFFE COMMITTED BY THE CIT (A), T HE REVENUE ITSELF HAD UNWITTINGLY MADE A FAUX PAS IN MENTIONING THE DATE AS 31.3.1965 WHEREAS THE ACTUAL DATE OF THE CIRCULAR HAS BEEN 31.8.1965 . 7.2.2. TURNING TO THE MAIN ISSUE, THE URGE OF REVE NUE IS THAT THE CIRCULAR AS RELIED ON BY THE CIT(A) WAS ISSUED WAY BACK IN 1965 I.E., MUCH EARLIER TO THE INTRODUCTION OF S.44AD IN THE FINAN CE ACT 1994 W.E.F. 1.4.1994. 7.3. WE SHALL HAVE A QUICK LOOK AT S.44AD OF THE A CT (WHAT IT SAYS?): 44AD. (1) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 TO 43C, IN THE CASE OF AN ASSESSEE ENGA GED IN THE BUSINESS OF CIVIL CONSTRUCTION OR SUPPLY OF LABOUR FOR CIVIL CONSTRUCTION, A SUM EQUAL TO EIGHT PER CENT OF THE GROSS RECEIPTS PAID OR PAYABLE TO THE ASSESSEE IN THE PREVIOUS YEAR ON ACCOUNT OF SUCH BU SINESS OR, AS THE CASE MAY BE, A SUM HIGHER THAN THE AFORESAID SUM A S DECLARED BY THE ASSESSEE IN HIS RETURN OF INCOME, SHALL BE DEEMED T O BE THE PROFITS AND GAINS OF SUCH BUSINESS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION: ITA NO.761/BANG/09 PAGE 9 OF 15 PROVIDED THAT NOTHING CONTAINED IN THIS SUB-SECTION SHALL APPLY I N CASE THE AFORESAID GROSS RECEIPTS PAID OR PAYABLE E XCEED AN AMOUNT OF FORTY LAKH RUPEES. .. 7.3.1. IN THE CASE ON HAND, SINCE THE ASSESSEES G ROSS RECEIPTS FAR EXCEEDED THE AMOUNT OF RS.40 LAKHS, IN OUR CONSIDER ED VIEW; THE PROVISIONS OF S.44AD HAVE NO APPLICATION AT ALL. T O STRENGTHEN OUR VIEW, WE DRAW SUPPORT FROM THE RATIO LAID DOWN BY THE HONBL E HIGH COURT OF RAJASTHAN, JODHPUR BENCH IN THE CASE OF RAM JHANWAR LAL V. ITO REPORTED IN (2009) 177 TAXMAN 135 WHEREIN THE HONBLE HIGH COURT HAS HELD THAT A BARE READING OF THE PROVISIONS OF SECTION 44AD DO ES SHOW THAT ACCORDING TO PROVISO TO SUB-SECTION (1), NOTHING IN SUB-SECTI ON (1) APPLIES IN CASES WHERE GROSS RECEIPTS EXCEED MORE THAN RS.40 LAKHS. IT WAS NOT IN DISPUTE THAT IN THE INSTANT CASE, THE SAID AMOUNT EXCEEDED RS.40 LAKHS AND OBVIOUSLY, THEREFORE, SECTION 44AD, AS SUCH, WAS NOT APPLICABL E. THE HONBLE COURT WENT AHEAD FURTHER AND HELD THAT 8. IN OUR VIEW, SO FAR AS THE QUESTION NO.1 IS CONCERNED, IT IS CLEAR FROM THE JUDGMENTS O F THIS COURT IN JAIN CONSTRUCTION CO.S CASE [SUPRA 245 ITR 527] AND B HARAT CONSTRUCTION CO.S CASE [SUPRA 125 TAXMAN 366], THAT WHERE THE ASSESSING OFFICER HAS ADOPTED NET PROFIT RATE IN MAKING ASSESSMENT ON BES T JUDGMENT ASSESSMENT BASIS, EVEN IN THAT CASE, ALLOWANCE OF DEPRECIATION IS REQUIRED TO BE MADE. ITA NO.761/BANG/09 PAGE 10 OF 15 7.3.2. THUS, THE REVENUES BANKING HEAVILY ON THE PROVISIONS OF S.44AD OF THE ACT TO DRIVE HOME ITS POINT IS RATHER MISPLACED. 7.4. THE REVENUES OTHER GROUSE WAS THAT THE CIT (A) HAD VIOLATED THE PROVISIONS OF RULE 46A IN NOT AFFORDING AN OPPORTUN ITY TO IT OF BEING HEARD ON THE CLAIM OF ALLOWABILITY OF DEPRECIATION. 7.4.1. WHAT RULE 46A(3) SAYS? 46A (3) THE COMMISSIONER (APPEALS) SHALL NOT TAKE I NTO ACCOUNT ANY EVIDENCE PRODUCED UNDER SUB-RULE (1) UNLESS THE ASS ESSING OFFICER HAS BEEN ALLOWED A REASONABLE OPPORTUNITY- (A) TO EXAMINE THE EVIDENCE O DOCUMENT OR TO CROSS- EXAMINE THE WITNESS PRODUCED BY THE APPELLANT, OR (B) TO PRODUCE ANY EVIDENCE OR DOCUMENT OR ANY WITNESS IN REBUTTAL OF THE ADDITIONAL EVIDENCE PRODUCED BY THE APPELLANT. 7.4.2. WE COULD HAVE AGREED WITH THE REVENUES ARG UMENT THAT THE CIT(A) HAD ERRED IN NOT TAKING INTO CONFIDENCE THE REVENUE BEFORE ALLOWING THE CLAIM OF DEPRECIATION PROVIDED SUCH EVIDENCES WERE NOT FURNISHED BEFORE THE AO BY THE ASSESSEE. 7.4.3. IT HAS BEEN VOUCHED BY THE LD. AR THAT 16..THE RESPONDENT HAD ALREADY FURNISHED REQUISITE PARTICUL ARS FOR CLAIMING DEPRECIATION AND THE SAME WERE AVAILABLE ON RECORDS OF THE LD.AO AT THE TIME OF PASSING THE ORDER OF ASSESSMENT. THE RESPO NDENT HAD FILED BEFORE THE AO, BALANCE SHEET, FIXED ASSET DETAILS (FOR THREE Y EARS.), SCHEDULE OF OB, ADDITIONS, DELETIONS, NET BLOCK, DE PRECIATION AND THE WDV. IN FACT, THE AO HAD ALSO INSISTED FOR THE COPY OF I NVOICES IN RESPECT OF ADDITION TO FIXED ASSETS AND THE SAME WERE FURNISHE D TO AO [SOURCE: PAGE ITA NO.761/BANG/09 PAGE 11 OF 15 11 OF PB AR]. THIS ASSERTION OF THE ASSESSEE HAS NEITHER BEEN REF UTED NOR CONTESTED BY THE REVENUE DURING THE COURSE OF A PPELLATE PROCEEDINGS. THE REVENUE CANNOT MAKE SUCH A SWEEPING ALLEGATION AGAINST THE APPELLATE AUTHORITY THAT HE HAD VIOLATED THE PROVIS IONS OF RULE 46A WHEN THE FACT WAS OTHERWISE CONTRARY TO ITS VERY CLAIM. 7.5. WE HAVE, WITH DUE REGARDS, PERUSED THE FINDIN G OF THE HONBLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF SURIN DER PAL NAYYAR V. CIT REFERRED SUPRA. THE ISSUE BEFORE THE HONBLE COURT WAS, IN BRIEF, THAT THE FINDING RECORDED BY THE AO THAT THE ASSESSEE HAD NO T SUBMITTED COPIES OF THE BILLS OF ASSETS PURCHASED BY HIM, NOR PRODUCED ANY EVIDENCE TO PROVE THAT THESE ASSETS WERE PUT TO USE FOR THE PURPOSE O F BUSINESS DURING THE YEAR UNDER CONSIDERATION, WAS NOT CHALLENGED BEFORE THE CIT(A). THUS, THE CLAIM OF DEPRECIATION SOUGHT TO BE RAISED BY THE AS SESSEE WAS ON THE BASIS OF NON-EXISTENT FACTS. 7.5.1. HOWEVER, IN THE CASE ON HAND, AS ASSERTED B Y THE LD.A R WHICH HAS BEEN BROUGHT OUT IN THE FORE-GOING PARAGR APHS, THE ASSESSEE HAD FURNISHED THE REQUISITE PARTICULARS FOR CLAIMIN G DEPRECIATION AND, THUS, WE ARE OF THE FIRM VIEW THAT THE ABOVE CASE CITED B Y THE REVENUE IS ON THE DIFFERENT FOOTING WHICH HAS NO RELEVANCE TO THE ISS UE ON HAND. 7.6. REVERTING BACK TO THE CONTENTS OF THE CIRCULA R (SUPRA), THE BOARD, AFTER DUE CONSIDERATION OF NUMEROUS INSTANCE S WHICH HAVE BEEN BROUGHT TO ITS NOTICE, CONSIDERED THAT WHERE IT IS PROPOSED TO ESTIMATE THE PROFIT AND THE PRESCRIBED PARTICULARS HAVE BEEN FUR NISHED BY THE ASSESSEE; THE DEPRECIATION ALLOWANCE SHOULD BE SEPARATELY WO RKED OUT. IN ALL SUCH ITA NO.761/BANG/09 PAGE 12 OF 15 CASES, THE GROSS PROFIT SHOULD BE ESTIMATED AND THE DEDUCTION AND ALLOWANCES INCLUDING THE DEPRECIATION ALLOWANCE SHO ULD BE DEDUCTED FROM THE GROSS PROFIT. IF IT IS CONSIDERED THAT THE NET PROFIT SHOULD BE ESTIMATED SUBJECT TO THE ALLOWANCE FOR DEPRECIATION AND THE D EPRECIATION ALLOWANCE SHOULD BE DEDUCTED THERE-FROM. 7.6.1. THE REVENUES ARGUMENT THAT THE CIT(A) ERRE D IN ALLOWING DEPRECIATION IN THE INSTANT CASE WHERE NO BOOKS OF ACCOUNTS WERE MAINTAINED AS THE SAID CIRCULAR WOULD BE APPLICABLE WHERE THE BOOKS OF ACCOUNTS OF THE ASSESSEE REJECTED BY THE AO IS ALSO RATHER WANTING. ON A CAREFUL READING OF THE CIRCULAR, WE FIND THAT THE C IRCULAR DOESNT EXPRESSLY SAY SO AS CLAIMED BY THE REVENUE. 7.6.2. NO REFERENCE HAS BEEN BROUGHT TO THE KNOWLE DGE OF THIS BENCH BY THE REVENUE TO SUGGEST THAT THE SAID CIRCU LAR WAS EITHER SUPERSEDED OR WITHDRAWN BY THE BOARD, AND, THUS, IT HOLDS GOOD EVEN NOW. 7.6.3. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF T HE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PARAGRAPHS, THE AO IS DIRECTED TO ALLOW THE ELIGIBLE AND CORRECT DEPRECIATION ON THE BASIS OF PARTICULARS FURNISHED BY THE ASSESSEE ON THE ESTIMATED PROFIT. IT IS ORDER ED ACCORDINGLY. 8. THE OTHER GRIEVANCE OF THE REVENUE IS THAT THE CIT (A) ERRED IN QUOTING THE FINDING OF THE JURISDICTIONAL H.C AND T HEREBY DIRECTED TO CALCULATE THE PROFIT FROM INTEREST INCOME AT THE SAME RATE AT WHI CH THE CONTRACTUAL RECEIPT HAS BEEN TAXED. ITA NO.761/BANG/09 PAGE 13 OF 15 8.1. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS AS NARRATED SUPRA. WE FIND FORCE IN THE SUBMISSION OF THE LD. A R WHICH IS IN BRIEF THAT THE ASSESSEE HAD TO EXECUTE CIVIL CONTRACTS FOR GOV ERNMENT AGENCIES AND IN ORDER TO SAFE GUARD THE PERFORMANCE OR EXECUTION OF SUCH CONTRACT, THE GOVERNMENT AGENCIES INSISTED FOR PERFORMANCE BANK G UARANTEE. IN ORDER TO OBTAIN SUCH BANK GUARANTEES, FIXED DEPOSITS WERE IN SISTED UPON AND ON THE BASIS OF WHICH ONLY BANK GUARANTEES WERE OBTAINED. KEEPING FDS WITH THE BANKS WERE PURELY ON COMMERCIAL EXPEDIENCY WHICH WA S AN ANCILLARY, INCIDENTAL AND SUBSERVIENT ACTIVITY TO THE BUSINESS CARRIED ON BY THE ASSESSEE. 8.1.1. IN AN IDENTICAL ISSUE, THE HONBLE TRIBUNAL , IN THE CASE OF CHINNA NACHIMUTHU CONSTRUCTIONS REFERRED SUPRA, AFT ER DELIBERATING THE ISSUE IN A COMPREHENSIVE MANNER, HAS OBSERVED THUS - 7.4. FROM THE FACTS OF THE CASE, WE FIND THAT THE RE IS DIRECT NEXUS BETWEEN EARNING OF INCOME AND THE MAIN BUSINESS ACT IVITY OF THE ASSESSEE. THE DEPOSITS IN THE FORM OF SECURITY DEP OSIT ARE REQUIRED TO BE MAINTAINED TO OBTAIN CONTRACT FROM KPC. THE ASS ESSEE IS ALSO REQUIRED TO MAINTAIN FIXED DEPOSIT WITH BANK TO AVA IL BANK GUARANTEE FACILITY. THUS, THE BANK GUARANTEE [BG] IS REQUIRE D TO BE GIVEN TO THE KPC FOR OBTAINING A HUGE SUM AS ADVANCE TOWARDS CON STRUCTION WORK. THEREFORE, THESE IMPLY THAT ALL THE ACTIVITIES ARE PART AND PARCEL OF THE ASSESSEES MAIN BUSINESS ACTIVITY. THE SECURITY DE POSIT AS WELL AS FD WITH BANK CAN BE CONSIDERED TO BE A TRADING ASSET O NLY AND ANY INCOME ARISING FROM THE TRADING ASSET IS REQUIRED TO BE TA XED AS INCOME FROM BUSINESS ONLY. THE DECISIONS RELIED UPON BY THE L D. D R ARE NOT SUPPORTING HIS CASE. IN BOTH THE ABOVE DECISIONS, THERE IS A FINDING THAT THE ASSESSEE OBTAINED CERTAIN SHARE APPLICATION MON EY AND SINCE SAME WERE NOT IMMEDIATELY REQUIRED FOR THE PURPOSE OF BU SINESS OR BUSINESS WAS UNDER COMMENCEMENT, ASSESSEE, IN THOSE CASES, P LACED FD TO EARN INCOME. THE FACTS IN THE PRESENT CASE ARE ENTIRELY DIFFERENT AND, HENCE, THE DECISIONS RELIED UPON BY THE LD. DR ARE NOT SUP PORTING HIS CASE. ON THE OTHER HAND, WE FIND FROM DECISION RELIED JUP ON BY THE LD. COUNSEL WHEREIN IT HAS BEEN HELD BY THE HONBLE SU PREME COURT THAT WHEN THE SHARES ARE HELD AS STOCK-IN-TRADE DIVIDEND INCOME THEREFROM ITA NO.761/BANG/09 PAGE 14 OF 15 WILL BE TREATED AS BUSINESS INCOME ONLY. IN THE PR ESENT CASE BEFORE US, DEPOSITS ARE HELD AS TRADING ASSETS AND HENCE INTER EST INCOME THEREFROM CAN BE TREATED AS BUSINESS INCOME ONLY. THE FACTS AS NOTED BY THE CIT(A) AND AS PRODUCED BEFORE US BY THE LD. COUNSEL ARE NOT CHALLENGED BY THE REVENUE AUTHORITIES. IN VIEW OF THE ABOVE FINDING AND THE DECISION OF THE HONBLE SUPREME COURT, WE H OLD THAT INCOME FROM INTEREST IS TO BE TAXED AS BUSINESS INCOME ONL Y.. 8.1.2. ON APPEAL BY THE REVENUE, THE JURISDICTIONA L HONBLE HIGH COURT REPORTED IN (2008) 297 ITR 70, IN ITS WISDOM HAS OBSERVED THUS 4. HAVING HEARD COUNSEL FOR BOTH SIDES, WE HAVE NOT ICED THAT THE INVESTMENT OF AMOUNT IN FIXED DEPOSITS BY THE ASSES SEE WAS ONLY TO SECURE A BANK GUARANTEE TO BE OFFERED TO KPTCL IN O RDER TO ACQUIRE A CONTRACT WORK. THEREFORE, IT CANNOT BE TREATED AS AN INCOME FROM OTHER SOURCES AND INTEREST ACCRUED ON SUCH FIXED DEPOSITS HAS TO BE TREATED AS BUSINESS INCOME ONLY. OUR VIEW IS ALSO SUPPORTE D BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT V. GOVINDA CHOUDHURY & SONS (1993) 203 ITR 881. 8.1.3. WITH RESPECTS, WE WOULD LIKE TO POINT OUT THAT THE ISSUE ON HAND IS SIMILAR TO THAT OF THE ISSUE ON WHICH THE HONBLE H IGH COURT WAS PLEASED TO OBSERVE THAT INTEREST ACCRUED ON SUCH FIXED DEPOSITS HAS TO BE TREATED AS BUSINESS INCOME ONLY . IN CONFORMITY WITH THE ABOVE FINDING OF THE HONBLE COURT, WE DIRECT THE AO TO TREAT THE INTEREST ACCRU ED ON FIXED DEPOSITS AS BUSINESS INCOME ONLY. IT IS ORDERED ACCORDINGLY. 8.1.4. IN A NUT-SHELL, THE IMPUGNED ORDER OF T HE LD. CIT(A) IS SUSTAINED. 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. ITA NO.761/BANG/09 PAGE 15 OF 15 PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH, 2010. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 31 ST MARCH, 2010. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER3 ASSISTANT REGISTRAR ITAT, BANGALORE.