2012 (5) TMI 653 - AT - Income Tax

Appeal result: Income estimation, deductions allowed, principles on insurance claims & damages

M/s. ECI Engineering & Construction Co. Ltd., Versus Deputy Commissioner of Income-tax, Circle-2 (2) Hyderabad

The Tribunal partly allowed the appeal, directing the estimation of income based on the average rate of assessed income before depreciation and interest ... Rejection of books of accounts - estimation of NP - Disallowance u/s. 40(a)(ia) - Held that:- Where the books of account have been rejected the revenue cannot rely on the same books of account for making any other addition. It was also held that when an estimate is made towards income of the assessee, it is in substitution of the income that is to be computed u/s. 29 and in other words, all the deductions which are referred to u/s. 29 are deemed to have been taken into account, while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account. There cannot be any further addition u/s. 40A(3), 40(a)(ia) of the act or towards prior period income. However, we make it clear that the income so determined consequent to this order, after considering the above directions, shall not go below the income returned by the assessee for the assessment year under consideration, if so returned income to be considered. Issues Involved:1. Justification of CIT(A)'s observations regarding the rejection of books of account.2. Appropriateness of estimating profit at 8% of turnover.3. Consideration of material supplied by the contractee in the estimation of total income.4. Deductibility of depreciation and interest from the estimated total income.5. Applicability of disallowances under sections 40(a)(ia), 40A(3), and 43B after estimation of profit.6. Deductibility of liquidated damages paid.7. Treatment of insurance claims received as part of contract receipts.Detailed Analysis:1. Justification of CIT(A)'s Observations Regarding the Rejection of Books of Account:The assessee argued that the CIT(A) was incorrect in stating that the books of account were not rejected by the Assessing Officer (AO). The Tribunal noted that the AO had indeed rejected the books of account due to the assessee's failure to produce them for verification despite multiple opportunities. Consequently, the rejection of books and estimation of income was deemed justified.2. Appropriateness of Estimating Profit at 8% of Turnover:The assessee contended that the estimation of profit at 8% of turnover was excessive and unsupported by material evidence. The Tribunal agreed that the estimation should consider the assessee's past performance. Therefore, the income should be estimated based on the average rate of assessed income before depreciation and interest to gross receipts for the last three preceding years. This method was preferred over a flat 8% estimation, acknowledging the assessee's significant borrowings and interest payments.3. Consideration of Material Supplied by the Contractee in the Estimation of Total Income:The Tribunal directed that while determining the gross receipts, the entire contract receipts should be considered. If insurance receipts are related to current assets, they should be included in gross receipts. If related to fixed assets, only the profit element should be considered as income.4. Deductibility of Depreciation and Interest from the Estimated Total Income:The Tribunal held that after estimating the income based on past performance, deductions for interest and depreciation should be allowed. This approach aligns with the principle that the past history of the assessee is the best yardstick for assessing income.5. Applicability of Disallowances under Sections 40(a)(ia), 40A(3), and 43B After Estimation of Profit:The Tribunal referenced the jurisdictional High Court decision in Indwell Constructions vs. CIT, which held that when books of account are rejected and income is estimated, the revenue cannot rely on the same books for making further additions. Thus, disallowances under sections 40(a)(ia), 40A(3), and 43B should not be made once income is estimated. This principle was reiterated by the Special Bench of the Tribunal in the case of Income Tax Officer vs. Kenaram Saha & Subhash Saha.6. Deductibility of Liquidated Damages Paid:The assessee did not press this ground during the hearing, and it was dismissed as not pressed.7. Treatment of Insurance Claims Received as Part of Contract Receipts:The AO had added the insurance claim receipt of Rs. 62,30,044 to the income under 'income from other sources,' stating it had no nexus with business receipts. The Tribunal clarified that insurance receipts should be included in gross receipts if related to current assets. If related to fixed assets, only the profit element should be considered as income from contracts.Conclusion:The appeal was partly allowed. The Tribunal directed that the income should be estimated based on the average rate of assessed income before depreciation and interest for the last three years, with appropriate deductions for interest and depreciation. Further additions under sections 40(a)(ia), 40A(3), and 43B were deemed incorrect once income was estimated. The total income should not fall below the returned income.