Depreciation allowed after income estimation, section 80-IA deduction granted for infrastructure work despite consortium arrangement

ITAT Hyderabad allowed depreciation after income estimation, following jurisdictional HC precedent that depreciation remains allowable even when books are rejected and income estimated. Tribunal granted section 80-IA deduction for infrastructure development work despite consortium arrangement. CIT(A)'s 15% estimation of FMS income was upheld considering necessary expenditure. Exclusion of subcontractor works from estimation was confirmed following consistent departmental practice and SC precedent. Profit rate was modified from 12.5% to 11.5% considering increased finance charges. Interest income from fixed deposits was confirmed taxable as income from other sources.

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Issues Involved:
1. Allowance of depreciation after estimation of income.
2. Allowance of deduction under section 80-IA of the Income Tax Act.
3. Estimation of Facility Management Services (FMS) income.
4. Exclusion of works allotted to sub-contractors.
5. Adoption of profit rate on contract receipts.
6. Taxability of interest income as 'income from other sources'.

Summary:

1. Allowance of Depreciation After Estimation of Income:
The learned Assessing Officer (AO) did not allow depreciation after estimating the income of the assessee at 8% on works executed by the assessee and 5% on works executed by sub-contractors, arguing that the lower percentage of estimation accounted for depreciation. However, the learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed depreciation based on the precedent set by the ITAT and the jurisdictional High Court in the case of CIT vs. Y. Ramachandra Reddy. The Tribunal upheld the CIT(A)'s decision, noting that depreciation should be allowed even after income estimation.

2. Allowance of Deduction Under Section 80-IA:
The AO denied the deduction under section 80-IA, stating that the assessee did not meet the conditions to be considered a developer. CIT(A) allowed the deduction based on the CBDT Circular No. 4/2010 and the Tribunal's findings in the assessee's earlier assessment years. The Tribunal upheld CIT(A)'s decision, noting that the facts of the case remained unchanged from previous years where the deduction was allowed.

3. Estimation of FMS Income:
For the assessment years 2012-13 and 2014-15, the AO added the entire receipts from FMS as 'income from other sources.' CIT(A) estimated the income component at 15% of the receipts, considering the assessee's claim that 90% of the receipts constituted expenditure. The Tribunal upheld this estimation, agreeing that the entire receipt could not be considered income and that some expenditure was inevitable.

4. Exclusion of Works Allotted to Sub-Contractors:
For the assessment year 2012-13, the AO estimated the income at 12.5% of the turnover without considering depreciation and departmental recoveries. CIT(A) directed the AO to exclude the works allotted to sub-contractors and estimate the income at 8% for such works. The Tribunal upheld CIT(A)'s decision, noting that this method was consistent with the approach adopted in previous years.

5. Adoption of Profit Rate on Contract Receipts:
The AO estimated the income at 8% on works executed by the assessee and 5% on works executed through sub-contractors. CIT(A) directed the AO to estimate the income at 12.5% on own contract works and 5% on sub-contracts, allowing depreciation thereafter. The Tribunal modified this to 11.5%, considering the significant increase in financial charges in the relevant years.

6. Taxability of Interest Income as 'Income from Other Sources':
The AO treated the interest income on Fixed Deposits as 'income from other sources.' CIT(A) upheld this, following the precedent set in earlier years. The Tribunal confirmed this treatment, referencing the Supreme Court decisions in Tuticorin Alkali Chemicals & Fertilisers Ltd. and Pandian Chemicals vs. CIT, which established that such interest income should be assessed under 'income from other sources.'

Conclusion:
All the Revenue appeals were dismissed, and the assessee's appeals were partly allowed. The Tribunal upheld the CIT(A)'s decisions on depreciation, section 80-IA deduction, FMS income estimation, and exclusion of works allotted to sub-contractors. However, it modified the profit rate on contract receipts to 11.5% and upheld the treatment of interest income as 'income from other sources.'

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