2010 (7) TMI 1101 - AT - Income Tax

Tax Tribunal Allows Deductions for Depreciation, Interest & Remuneration

Income Tax Officer Versus Zuberi Engineering Co.

The Department objected to the CIT(A)'s order granting further relief of allowing depreciation, interest to bank, and remuneration to partner out of net ... - Issues Involved:1. Granting further relief of allowing depreciation, interest to bank, and remuneration to partner out of net income estimated by applying net profit rate of 8%.Summary:Issue 1: Granting Further Relief of Allowing Depreciation, Interest to Bank, and Remuneration to Partner Out of Net Income Estimated by Applying Net Profit Rate of 8%The Department objected to the CIT(A)'s order granting further relief of allowing depreciation, interest to bank, and remuneration to partner out of net income estimated by applying a net profit rate of 8%, which was accepted by the assessee during the course of the survey. The assessee, a contractor engaged in erection and fabrication, did not produce books of account and supporting vouchers for verification. The AO observed that the return of income was filed late, and the audit report was not enclosed. A survey u/s 133A revealed that regular books of account were not maintained, and incomplete accounts in Tally form were found. The AO estimated the net profit rate of 8% on the receipt of Rs. 22,77,28,588, resulting in a total income of Rs. 1,82,18,287 against the returned income of Rs. 49,46,020. The AO also assessed interest income of Rs. 15,80,884 separately under the head 'Income from other sources'.The assessee appealed to the CIT(A), arguing that the declared GP rate was 11%, and the fall in GP rate was due to a substantial increase in turnover. The CIT(A) upheld the application of s. 145(3) and the estimation of the net profit rate of 8% but directed the AO to allow deductions for depreciation, interest to the bank, and remuneration to partners after verifying from the P&L a/c. The Department contended that the assessee had admitted to applying a net profit rate of 8% without claiming any expenses, and thus, the CIT(A) was not justified in allowing these deductions.The Tribunal considered the rival submissions and found that the assessee admitted to applying a net profit rate of 8% during the survey due to incomplete books of account and vouchers. However, the return was filed based on the P&L a/c prepared by auditors. The CIT(A) accepted the assessee's contention that the admission was made under a wrong notion and directed the AO to allow depreciation, interest, and salary to partners based on decisions of the Tribunal and Hon'ble jurisdictional High Court. The Tribunal upheld this view, noting that various Benches of the Tribunal and the Hon'ble jurisdictional High Court have held that separate deductions for depreciation, interest, and salary to partners should be allowed when applying a net profit rate of 8%.The Tribunal also referred to the Hon'ble Supreme Court's decision in CIT vs. V. MR. P. Firm (1965) 56 ITR 67 (SC), which held that an admission made by the assessee is not conclusive and can be retracted if incorrect. The Tribunal found that the retraction by the assessee was bona fide and supported by various case laws, including CIT vs. S. Khader Khan Son (2008) 214 CTR (Mad) 589 and Asstt. CIT vs. Ravi Agricultural Industries (2009) 121 TTJ (Agra)(TM) 903. The Tribunal concluded that the CIT(A) was justified in directing the AO to allow deductions for depreciation, interest, and salary to partners, and dismissed the Department's appeal.In the result, the appeal of the Department is dismissed.