2015 (5) TMI 1225 - AT - Income Tax

Appellate Tribunal modifies Commissioner's order, directs Assessing Officer to allow deductions as per law.

M/s Engineering Design & Construction Co. Versus ITO, Ward-2 (2), Bhubaneswar

The Appellate Tribunal allowed the appeals of the assessee for statistical purposes, modifying the order of the Commissioner of Income Tax (Appeals-II) ... Estimation of Net profit - provisions of Section 44AD applicability - interest on capital paid to partners and the remuneration paid to working partners from the income estimated @8% of turnover - assessee has submitted that the assessment was framed u/s.144 of the Act and the books of accounts were rejected by the AO and estimated the net profit @8% of the gross turnover - HELD THAT:- In the instant case, the turnover of the assessee is more than ₹ 1 crore, therefore, provisions of Section 44AD cannot be strictly applied but inference can be drawn from this provision. Even the proviso to Section 44AD says that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of Section 40 of the Act. In the instant case, the Assessing Officer has estimated the income @8% of the total turnover of the assessee but he has not allowed the salary and interest paid to the partners, though the AO was required to allow the same even as per the provisions of Section 44AD of the Act. In the light of the these facts, we find force in the contention of the ld. AR of the assessee, therefore, we direct the AO to allow deduction on salary paid to working partners and interest paid to them on their capital from the estimated income subject to the conditions and limits specified in clause (b) of Section 40 of the Act. Accordingly, we modify the order of the CIT(A) and direct the AO to allow deduction of interest and salary paid to the partners subject to conditions and limits specified in clause (b) of Section 40 of the Act. Appeals of the assessee are allowed for statistical purposes. Issues:1. Treatment of closing work in progress in gross turnover2. Estimation of income from contract business3. Disallowance of depreciation from estimated income4. Disallowance of interest on capital and remuneration paid to partners5. Application of Section 44AD in the assessmentAnalysis:Issue 1: Treatment of closing work in progress in gross turnoverThe assessee contested the inclusion of closing work in progress in the gross turnover. The Commissioner of Income Tax (Appeals-II) upheld the action of the Assessing Officer. The Appellate Tribunal noted the grounds raised by the assessee and directed the Assessing Officer to allow deductions as per law.Issue 2: Estimation of income from contract businessThe Assessing Officer estimated the income from contract business at 8% of the contract receipts, which the Commissioner of Income Tax (Appeals-II) upheld. The assessee moved an additional ground regarding the disallowance of interest on capital and remuneration paid to partners. The Tribunal directed the Assessing Officer to allow these deductions as per the provisions of law.Issue 3: Disallowance of depreciation from estimated incomeThe Commissioner of Income Tax (Appeals-II) upheld the disallowance of depreciation from the estimated income. The assessee argued that depreciation should have been allowed against the estimated income. The Tribunal directed the Assessing Officer to allow depreciation as per law.Issue 4: Disallowance of interest on capital and remuneration paid to partnersThe Assessing Officer did not allow interest on capital and remuneration paid to partners from the estimated income. The Tribunal found that these deductions should have been allowed as per the provisions of Section 44AD. Therefore, the Tribunal directed the Assessing Officer to allow these deductions subject to specified conditions and limits.Issue 5: Application of Section 44AD in the assessmentThe Tribunal analyzed the applicability of Section 44AD, which pertains to the estimation of income for certain assesses with turnover below a prescribed limit. In this case, the turnover exceeded the limit, but the Tribunal inferred that the provisions of Section 44AD could guide the assessment. The Tribunal directed the Assessing Officer to allow deductions for salary and interest paid to partners in accordance with the provisions of Section 44AD.In conclusion, the Appellate Tribunal allowed the appeals of the assessee for statistical purposes, modifying the order of the Commissioner of Income Tax (Appeals-II) and directing the Assessing Officer to allow the necessary deductions as per law.