Tax Tribunal allows depreciation & partner remuneration as statutory deductions from partnership income. Revenue's appeal dismissed.

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to allow depreciation and remuneration to partners from the estimated income of a partnership firm involved in civil contracts. The Tribunal emphasized that these deductions are statutory allowances and should be permitted even when income is estimated. The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, ensuring that the resultant income is not lower than the returned income of the assessee.

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Issues Involved:
1. Rejection of books of account and estimation of income.
2. Allowability of depreciation and remuneration to partners from the estimated income.

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Income:

The assessee, a partnership firm engaged in civil contracts, filed its return for the Assessment Year 2009-10. The Assessing Officer (AO) processed the return under section 143(1) and later selected it for scrutiny under CASS, completing the assessment under section 143(3) with a total income of Rs. 1,52,85,740/-. The AO found the expenditure debited to the profit & loss account under various heads to be incapable of verification. Consequently, the AO rejected the books of account and resorted to estimating income at 8% on main contract receipts and 6% on sub-contract receipts, relying on the decision of the Jurisdictional High Court of Andhra Pradesh in the case of Indwell Constructions vs. CIT (232 ITR 776, 1998). The AO also disallowed depreciation and remuneration paid to the partners, asserting that all other disallowances were taken care of in the estimation of income.

2. Allowability of Depreciation and Remuneration to Partners from the Estimated Income:

Aggrieved by the AO's order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeal and directed the AO to allow interest and remuneration from the estimated income, ensuring that the resultant income should not be less than the admitted income of the assessee. The CIT(A) followed the ITAT's order in the case of DCIT vs. R.R. Constructions (ITA No. 47/VIZ/2013). The Tribunal had held that even in cases of income estimation, further deductions towards interest and remuneration to partners are allowable, referencing the Hyderabad Bench's decision in P. Eswar Reddy (ITA No. 668/Hyderabad/2009) and the Jurisdictional High Court's judgment in ITTA No.82 of 2013.

The revenue appealed against the CIT(A)'s direction to allow depreciation and remuneration. The revenue contended that since the AO had estimated the income at 8% on main contract receipts and 6% on sub-contract receipts, no separate deduction for depreciation and remuneration was required. The assessee maintained that these deductions are statutory allowances, which should be allowed even if the income is estimated, citing the Jurisdictional High Court's decision in CIT vs. Y. Ramachandra Reddy (I.T.T.A. No. 48/2002).

The Tribunal upheld the CIT(A)'s order, agreeing that depreciation and remuneration to partners are statutory allowances that should be allowed even when income is estimated. The Tribunal referenced several decisions, including those of the ITAT Visakhapatnam Bench and the Hyderabad Bench, which supported the allowance of such deductions. The Tribunal also noted that the AO had verified the depreciation and found no defect in the transaction, thus entitling the assessee to depreciation from the estimated income.

In conclusion, the Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, upholding the CIT(A)'s order to allow depreciation and remuneration to partners, ensuring the resultant income is not less than the returned income of the assessee.

Order Pronounced:

In the result, the appeal filed by the revenue is dismissed, and the cross-objection filed by the assessee is allowed. Order pronounced in open Court on this 20th day of Dec., 2017.

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