2015 (11) TMI 1530 - AT - Income Tax

ITAT directs AO to align income computation with decisions, balancing assessee and revenue appeals.

The ITAT directed the AO to compute the total income in line with its decisions on various issues, ensuring the assessed income does not fall below the ... Rejection of books of accounts - estimated the net profit from contract receipts @ 10% on main contracts, 8% on sub contracts and 4% on sub contracts executed through third parties - Held that:- . In the present case on hand, the assessee declared a net profit of 5.28% on gross contract receipts. The assessing officer has estimated net profit of 10% on main contract works, 8% on sub contracts and 4% on sub contracts executed through third parties. The CIT (A) scaled down the net profit to 8%, 5% and 1% respectively. The CIT (A) after considering the facts and circumstances of the case, rightly estimated the net profit, therefore, his order does not require any interference. Therefore, we are of the opinion that there is no error or infirmity in the order passed by the CIT (A), hence, we are inclined to upheld the order of the CIT (A). Additions towards income from other sources being interest earned on fixed deposits - Held that:- The assessee earned the interest from bank deposits, which are kept as margin money for taking bank guarantees. Though these bank guarantees are furnished for obtaining contract works, the interest earned from these deposits, cannot be at any stretch of imagination considered as business receipts for the estimation of net profit. There is no nexus between the earning of interest and works contract, except the fact that it is kept in bank as margin money for obtaining bank guarantee. There should be direct nexus between business activity and earning of income. If these interest receipts are arises from the works contracts, then definitely these items forms part of contract receipts. But, in this case the interest earned is from bank deposits. Therefore, the AO rightly treated interest earned from bank deposits under the head income from other source but, the CIT (A) ignored the basic fact that there is no nexus between the earning of interest and the assessee’s contract works, deleted the additions made by the assessing officer. Therefore, considering the facts and circumstances of the case, we reverse the order of the CIT (A) and upheld the addition made by the Assessing Officer. Additions towards depreciation - difference in depreciation, in addition to estimation of net profit from the contract receipts - Held that:- As going through the orders of the Assessing Officer as well as the order of CIT (A). The A.O. estimated net profit from gross contract receipts. Once net profit is estimated, all expenditures deductible have been considered as allowed. Therefore, even if there is difference in original computation and revised computation and depreciation claim made by the assesse, which does not affect the computation of profit when the net profit is estimated from the gross receipts. Therefore, we are of the opinion that the CIT (A) has rightly deleted the additions and his order does not require any interference. Hence, we direct the AO to delete the additions made on account of depreciation. Deduction towards depreciation, remuneration to partners and interest on partners capital accounts - Held that:- Depreciation is a allowable deduction, even after estimation of net profit from the contract receipts. Therefore, we direct the assessing officer to allow the depreciation against the income estimated from the contract receipts. As far as the disallowance of remuneration to partners and interest on partner’s capital account is concerned, the statute itself in section 44AD of the Act, allowed separate deductions towards interest on capital accounts and remuneration to partner’s, after estimation of net profit from the gross receipts. The CIT (A) after considering the facts and circumstances of the case, has rightly directed the A.O. to allow remuneration to partners and interest on partner’s capital account from the net profit estimated. Therefore, we find no error or infirmity in the order of the CIT (A), hence, we inclined to upheld the order of the CIT (A). Issues Involved:1. Rejection of Books of Accounts and Estimation of Net Profit2. Estimation of Net Profit from Sand Sales3. Separate Addition of Interest Income4. Addition of Depreciation Difference5. Deductions for Remuneration, Interest on Capital, and DepreciationIssue-wise Detailed Analysis:1. Rejection of Books of Accounts and Estimation of Net Profit:The assessee, a partnership firm engaged in civil construction, filed its return for the assessment year 2009-10, declaring a total income of Rs. 1,76,59,741/-. The Assessing Officer (AO) rejected the books of accounts and estimated the net profit at 10% for direct contracts, 8% for sub-contracts, and 20% for sand sales. The AO also made separate additions for interest on bank deposits and disallowed claims for depreciation, remuneration, and interest on partners' capital. The CIT (A) upheld the rejection of books but scaled down the net profit rates to 8% for main contracts, 5% for sub-contracts, and 1% for sub-contracts given to third parties, citing ITAT judgments. The ITAT confirmed the CIT (A)'s estimation, stating it was consistent with industry standards and previous tribunal decisions.2. Estimation of Net Profit from Sand Sales:The AO estimated a 20% net profit on sand sales, which the CIT (A) reduced to 15% after considering the assessee's explanations. The ITAT upheld the CIT (A)'s decision, finding it reasonable and in line with the facts and circumstances of the case.3. Separate Addition of Interest Income:The AO made a separate addition of Rs. 25,00,490/- as interest income from fixed deposits under the head 'income from other sources.' The CIT (A) deleted this addition, considering the interest as part of business income since the deposits were kept for bank guarantees to secure contracts. However, the ITAT reversed this decision, emphasizing that there was no direct nexus between the interest earned and the business activity, thus upholding the AO's addition.4. Addition of Depreciation Difference:The AO added Rs. 45,10,496/- for the difference in depreciation. The CIT (A) deleted this addition, stating that once net profit is estimated, all deductible expenditures are considered allowed, making the difference irrelevant. The ITAT agreed with the CIT (A), confirming the deletion of the depreciation difference.5. Deductions for Remuneration, Interest on Capital, and Depreciation:The AO did not allow deductions for remuneration to partners, interest on partners' capital, and depreciation. The CIT (A) allowed deductions for remuneration and interest but denied depreciation, citing the Andhra Pradesh High Court's decision in Indwell Constructions Vs. CIT. The ITAT, referencing its own and other tribunal decisions, directed the AO to allow depreciation, stating it is a statutory deduction. The ITAT upheld the CIT (A)'s decision to allow remuneration and interest, as these are permitted under section 44AD of the Act.Conclusion:The ITAT directed the AO to compute the total income in line with its decisions on various issues, ensuring the assessed income does not fall below the returned income. Both the assessee's and revenue's appeals were partly allowed.