2013 (11) TMI 409 - AT - Income Tax

Tribunal Adjusts Partnership Firm's Income Rates for Civil Contracts

K VENKATARAJU Versus ADDL COMMISSIONER OF INCOME TAX

K VENKATARAJU Versus ADDL COMMISSIONER OF INCOME TAX - TMI Issues Involved:1. Estimation of income from contract business.2. Assessment of interest received from banks on fixed deposits.3. Disallowance made under section 40(a)(ia) of the Income Tax Act.Issue-wise Detailed Analysis:1. Estimation of Income from Contract Business:The assessee, a partnership firm engaged in civil contract works, filed its return declaring an income of Rs. 82,40,970/-. The Assessing Officer (AO) rejected the book results due to incomplete records and estimated the income at 8% of net contract receipts. The AO also assessed interest on fixed deposits separately under 'Income from other sources' and disallowed freight charges under section 40(a)(ia) for non-deduction of tax at source.The first appellate authority (CIT(A)) estimated income from subcontract works at 6% and confirmed the AO's estimation of 8% for main contract works. The assessee argued that the profit declared after depreciation was more than 5% and that the depreciation alone exceeded 8% of contract receipts, thus the estimated rates were high. The CIT(A) recognized the lower profit margin in subcontract works and maintained a 2% difference between main and subcontract works.The Tribunal observed that the assessee declared a profit of 5.20% after depreciation and noted the significant depreciation benefit. It directed the AO to estimate the profit from main contract works at 6.5% and from subcontract works at 4.5%, modifying the CIT(A)'s order accordingly.2. Assessment of Interest Received from Banks on Fixed Deposits:The assessee claimed that interest on fixed deposits, used as security for contract works, should be treated as business income. The AO and CIT(A) assessed it under 'Income from other sources,' citing no direct nexus between the interest income and contract receipts.The Tribunal upheld the CIT(A)'s view, referencing Supreme Court decisions (e.g., Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT) which held that interest on deposits does not qualify as business income. The Tribunal agreed that the interest income should be assessed separately, even if the business income is estimated.3. Disallowance Made Under Section 40(a)(ia) of the Act:The AO disallowed freight charges due to non-deduction of tax at source, and the CIT(A) confirmed this disallowance. The assessee argued that since the income was estimated after rejecting the books, no separate addition should be made based on the same books.The Tribunal noted that section 40(a)(ia) prescribes a technical disallowance for non-compliance with TDS provisions, which is not an absolute disallowance but a deferment. It emphasized that such disallowance is linked to TDS compliance and cannot be equated with other disallowances. The Tribunal concluded that the disallowance under section 40(a)(ia) can be made independently of the estimation of business income and upheld the CIT(A)'s order.Conclusion:The appeal was partly allowed, with modifications to the income estimation from contract works and upholding the separate assessment of interest income and the disallowance under section 40(a)(ia).