Estimated subcontract income and separate depreciation claims turn on reasonableness after rejection of books

After rejection of the books, subcontract income was estimated at 5% rather than a higher rate, with the lower margin justified by the assessee's status as a subcontractor and by earlier tribunal approaches to similar work. The estimated-profit framework was treated as the governing basis for assessment, and the higher estimation proposed by the Revenue was not accepted. On the separate depreciation claim, the tribunal applied the principle that no further deduction is allowable once income is computed on an estimated basis, so depreciation was denied independently.

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Issues: (i) Whether the income from subcontract receipts was to be estimated at 5% instead of 8% or 12.5% after rejection of the books of account. (ii) Whether depreciation was allowable when income was determined on estimated basis.

Issue (i): Whether the income from subcontract receipts was to be estimated at 5% instead of 8% or 12.5% after rejection of the books of account.

Analysis: The books of account had been rejected and the income had to be determined on an estimate. The estimation was guided by the approach adopted in earlier tribunal decisions, particularly in cases involving subcontract work, where the profit rate was viewed as lower than that of a main contractor. The decision also drew support from the estimate-based framework reflected in section 44AD of the Income-tax Act, 1961, and the assessee's status as a subcontractor was treated as relevant to the lower profit margin.

Conclusion: The income from subcontract receipts was to be estimated at 5%, which was in favour of the assessee.

Issue (ii): Whether depreciation was allowable when income was determined on estimated basis.

Analysis: Once income was computed on an estimated basis, the tribunal applied the principle that no separate deduction beyond the estimation was to be granted. The reasoning treated depreciation as not separately allowable in such estimation cases, while referring to the statutory framework of section 32 of the Income-tax Act, 1961 in the context of estimated profits.

Conclusion: Depreciation was not allowable separately, which was against the assessee.

Final Conclusion: The assessee succeeded on the rate of estimation, but failed on the claim for separate depreciation, and the Revenue's challenge to the lower estimation was rejected.

Ratio Decidendi: Where income is computed on an estimated basis after rejection of books, the estimation must be reasonable having regard to the nature of the contract work, and separate deductions are not independently allowable unless the estimation itself so permits.

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