COMMISSIONER OF INCOME TAX Vs. NATHEKKATTU CONSTRUCTIONS

JUDGEMENT

(1.) BOTH these appeals arise from the common order of the Tribunal, Cochin Bench in ITA No. 552/Coch/1998, dt. 26th Oct., 1999, in respect of the asst. yr, 1993 -94. ITA No. 32 of 2000 is filed by the Revenue and ITA No. 124 of 2000 is filed by the assessee. While admitting ITA No. 32 of 2000 notice was ordered on the following five questions of law :

(2.) THE main dispute in the appeal filed by the Department relates to the substitution of the method of estimation of the income made by the AO and the adoption of estimation of income based on a percentage of the profit. Though the assessee has produced the books of accounts and other documents along with a special audit report under Section 44AD of the Act, the AO did not accept the book results and estimated the income by disallowing the expenditure incurred by the assessee for payments to seven sub -contractors totalling Rs. 68,43,650. The AO relying on the balance -sheets of the assessee for the years 1985 -86 to 1988 -89 wherein the assessee had shown the liabilities which did not include the amounts due to the seven sub -contractors, adopted the entire award amount as income of the assessee for the assessment year. Being aggrieved by the said assessment order the assessee filed appeal before the CIT(A), who by his order dt. 30th Sept., 1998 (Annexure B) sustained the rejection of accounts but adopted a different method of estimating the income by directing the assessing authority to adopt 8 per cent of the gross receipt as the income. The Department being aggrieved by the said order took up the matter in appeal before the Tribunal, Cochin Bench. The Department contended that the assessee itself, in the balance sheet for the earlier years, had shown only a small amount as the outstanding liability under the contract and, therefore, the award amount of Rs. 87,51,092 received during the previous year relevant to the assessment year concerned has to be treated as the income. The Department also contended before the Tribunal that the AO had rejected the claim of expenses to the even sub -contractors on valid grounds and that in the absence of any evidence to show that the assessee had incurred expenses from the amount of Rs. 87,51,092 the AO was justified in treating the sum of Rs. 87,51,092 as the income of the assessee. It was also contended before the Tribunal that the interest received for belated payments of the award amount cannot be treated as business income and that it has to be assessed only as income under the head 'income from other sources'. The Tribunal had adverted to the assessment order and the first appellate authority's order and in para. 16 of the appellate order considered the matter as follows :

(3.) SHRI P. Balakrishnan, learned counsel appearing for the assessee, on the other hand, submits that the assessee had entrusted the additional work for which the arbitrator had awarded a sum of Rs. 87,51,092 under different heads, that it was got done through seven sub -contractors, that, since the assessee could not make payment to the sub -contractors for the work done by them, they had raised a police complaint and that at the instance of the police the matter was settled between the assessee and the sub -contractors. The counsel submits that an amount of Rs. 68,43,650 was paid to the said sub -contractors by crossed cheques from the amount of Rs. 87,51,092 received pursuant to the award of the arbitrator. Counsel submits that though the said sub -contractors - had given a statement to the AO on a surprise visit denying the receipt of the crossed cheque and factum of execution of sub -contract, in cross -examination by the assessee the sub -contractors had deposed that they had entered into sub -contract with the assessee, that they had executed the work, that they have received cheques for payment of the work done and that they have deposited the said amount in their pass book and also spent it. Counsel submitted that the assessee had thus discharged the burden of establishing the payment of amounts to the sub -contractors for the work done by them under the contract between the assessee and the sub -contractors referred to in the assessment order itself. Counsel also submitted that the assessee did not disclose its liability in the balance sheet for the asst. yrs. 1985 -86 to 1988 -89 only because of the liability due to the sub -contractors had not been quantified. Counsel further submitted that the assessment of the assessee for the earlier years were completed on estimate basis after rejecting the books and that the first appellate authority has rightly held that when the book results are rejected the appropriate course is to estimate the income and that it is one of the well -known methods of estimating the income from contract receipts by adopting a percentage of such receipt as the profit. Counsel also submitted that the assessing authority had treated the entire sum of Rs. 87,51,092 as income from business whereas the Tribunal for the first time on the basis of the contention raised by the Department has treated the sum of Rs. 23,42,801 representing the interest under the award as income from other sources. The counsel submitted that with regard to the interest income it is concluded by the decisions of the Supreme Court that the interest income should also have the characteristics of the amount which yielded the interest. He, in support of the above, relied on the decision of the Supreme Court in CIT v. Govinda Choudhury and Sons : [1993]203ITR881(SC) and CIT v. B.N. Agarwala and Co. : [2003]259ITR754(SC) and submitted that the effect of the said decisions is that the interest receipt under the award also must be treated as part of the total receipt which is subject to the provisions of computation of total income under the Act. On the question of separately treating the interest income, the senior counsel for the Revenue submits that though the interest income can be treated as business income since there is nothing to be adjusted from the entire interest income, it must be subjected to tax and that the decisions of the Supreme Court relied on by the assessee do not take a different view.