2014 (5) TMI 285 - AT - Income Tax

Tribunal Upholds Income Estimation & Deductions

The Tribunal upheld the rejection of the books of account due to discrepancies, confirmed the income estimation at 3%, and denied separate allowance for ... Gross receipts to be estimated @5% instead of 3% - Rejection of books of accounts – Held that:- Following CIT v. Jain Construction Co. & Others [1999 (9) TMI 26 - RAJASTHAN High Court] - the estimation of income of the assessee made by the assessing officer adopting a rate of 5% is on higher side, and it would meet the ends of justice if the income is estimated applying a rate of 3% - the assessee does not own trucks used in the business and is incurring huge incidental expenditure - From such income estimated applying rate of 3%, deduction towards interest and remuneration to partners in terms of S. 40(b) of the Act may be allowed - the assessee produced the books of account and vouchers - On examination of the books of account with reference to the voucher produced, the AO found that the voucher does not tally with the cashbook - When the voucher does not tally with cashbook, the assessee has not maintained the books of account properly - the book result will not reflect the correct profit of the assessee - the AO has rightly rejected the books of account – thus, there was no infirmity in the order in rejecting the books of account and estimating the profit – Decided against Assessee. Claim of seigniorage charges – Held that:- The material supplied by the Government/contractor will not have any element of profit - it shall be reduced from the contract receipts - the seigniorage charges shall be reduced from the total contract receipts for the purpose of estimating the profit – thus, the AO is directed that while computing the total contract receipts the seigniorage charges shall be reduced from the total contract receipts for the purpose of estimating the profit. Estimation of income @5% - Grant of depreciation - Held that:- Following Indwell Constructions Versus Commissioner Of Income-Tax [1998 (3) TMI 121 - ANDHRA PRADESH High Court] - the deduction available u/ss. 30 to 38 shall be deemed to have been already given full effect and no further deduction under those sections shall be allowed - Depreciation is allowable u/s. 32 of the Income-tax Act - as provided in section 44AD no further/separate deduction shall be allowed - the claim of depreciation on the estimated income is not justified. Payment of interest and salary to the partner – Held that:- The provision of section 44AD as it is applicable for the assessment year under consideration and the amendment made with effect from1.4.2011 it is obvious that the Legislature intended to allow the interest and salary separately from the estimated income – the AO is directed to allow the salary and interest paid to the partner subject to the limitation provided in section 40(b) of the Act – Decided against Revenue. Issues Involved:1. Rejection of Books of Account2. Estimation of Income Percentage3. Allowance of Depreciation4. Allowance of Interest and Finance Charges5. Applicability of Previous Tribunal DecisionsDetailed Analysis:1. Rejection of Books of Account:The assessee contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in rejecting the books of account maintained in the normal course of business. The Assessing Officer (AO) had rejected the books due to the inability of the assessee to produce complete vouchers for freight charges and other deficiencies. The Tribunal upheld the rejection of the books of account, citing that the vouchers did not tally with the cashbook, indicating improper maintenance of books.2. Estimation of Income Percentage:The AO estimated the income at 5% of the turnover, while the CIT(A) reduced this to 3%. The assessee argued that the estimation should be lower, while the Revenue contended for maintaining the 5% estimation. The Tribunal referred to previous decisions, including Sri Gundapaneni Nageswara Rao vs. ITO and M/s. C. Eswara Reddy & Co., where a 3% estimation was deemed appropriate. Consequently, the Tribunal confirmed the CIT(A)'s decision to estimate the income at 3% of the gross receipts net of all expenses.3. Allowance of Depreciation:The assessee argued that depreciation should be allowed separately from the estimated income, referencing CBDT circular no: 29-D dated 31-8-1965. However, the Tribunal, following the jurisdictional High Court's judgment in Indwell Constructions and previous Tribunal decisions, held that when income is estimated, depreciation is deemed to have been considered within that estimation. Therefore, no separate allowance for depreciation was granted.4. Allowance of Interest and Finance Charges:The assessee claimed that interest paid should be allowed as a deduction from the estimated income. The Tribunal, referencing section 44AD of the Income-tax Act and previous judgments, held that interest and salary to partners should be allowed as deductions from the estimated income, subject to the limitations specified in section 40(b) of the Act. However, this specific case did not involve partners, so the interest was not separately allowed.5. Applicability of Previous Tribunal Decisions:The Tribunal noted that the CIT(A) had followed the earlier order of the Tribunal in the case of Sri Veera Vadivel Murugan vs. ITO, which was based on the decision in M/s. C. Eswara Reddy & Co. The Tribunal emphasized the need for consistency and finality in legal proceedings, rejecting the attempts by both parties to re-litigate settled issues. The Tribunal also declined to follow the Cochin Bench's decision in Sri P. Srinivas, Calicut, as it was not aligned with the jurisdictional High Court's judgment.Conclusion:The Tribunal confirmed the CIT(A)'s order to estimate the income at 3% of the gross receipts net of all expenses and denied the allowance of separate depreciation. The appeals of both the Revenue and the assessee were dismissed, maintaining the consistency with previous Tribunal decisions and the jurisdictional High Court's judgment.