TMI Blog2016 (5) TMI 1013X X X X Extracts X X X X X X X X Extracts X X X X ..... are furnished for obtaining contract works, the interest earned from these deposits cannot be at any stretch of imagination considered as business receipts for the purpose of estimation of net profit. There is no direct nexus between the earning of interest and works contract, except for the fact that it is kept in bank for obtaining bank guarantee. There should be direct nexus between business activity and earning of income so as to treat the receipt earned from the business. If these interest receipts arise from the works contract, then definitely the interest forms part of contract receipts. But, in the present case on hand, interest earned on fixed deposits is having no direct nexus between the business activities of the assessee. Just because, the bank deposits are kept as margin money towards obtaining bank guarantee, interest earned on such deposits would not alter the characteristics of income. Therefore, we are of the opinion that the A.O. has rightly assessed the interest earned on fixed deposits and other miscellaneous receipts under the head ‘Income from Other Sources’. The CIT(A) has rightly upheld the additions made by the A.O.- Decided against assessee. Deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no direct nexus between contribution to chit and business activity of the assessee. The dividend received from chits cannot be considered as part of business receipts for the purpose of estimation of profit. Therefore, we are of the opinion that the A.O. has rightly assessed the chit dividend under the head ‘Income from Other Sources’. - Decided against assessee - I.T.A.Nos.713 to 715/Vizag/2013, I.T.A.Nos.721 to 723/Vizag/2013 - - - Dated:- 19-4-2016 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For the Appellant : Appellant by : 07.04.2016 For The Respondent : Shri K. Ravi, DR ORDER PER Bench: These cross appeals filed by the assessee, as well as revenue are directed against the separate, but identical orders of the Commissioner of Income Tax (A), Visakhapatnam dated 14.10.2013 for the assessment years 2009-10, 2010-11 2011-12. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed off, by way of this common order for the sake of convenience. 2. The brief facts extracted from ITA No.713/Vizag/2013 are that the assessee is a partnership firm, which is engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the A.O. has applied a net profit of 10%, which is quite high when compared to the nature of business undertaken by the assessee. It was further submitted that the A.O. has not considered the sub contract receipt of the year which is major part of the gross receipts from the contract, therefore applying a uniform net profit rate of 10% on total contract receipts is arbitrary. The assessee further submitted that the A.O. was not correct in not allowing deductions towards interest and remunerations to partners after estimation of net profit. Therefore, requested to allow interest and remuneration to partners capital accounts. As regards the additions towards Income from Other Sources , it was submitted that the interest earned on fixed deposits kept in the bank should be considered as part of gross receipts from business, as the fixed deposit was kept in the bank towards bank guarantee to be given for obtaining the contracts. When the income is estimated by applying the net profit rate, the A.O. was not correct in making separate additions towards interest on fixed deposits. Alternatively, it was contended that interest paid on bank over draft, which was availed by keeping th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein it was held that the computation u/s 29 of the Act is to be made u/s 145 of the Act, on the basis of the books regularly maintained by the assessee and if those books are not correct and complete, the assessing officer may reject those books and estimate the income to the best of his judgement. When such estimation is made, it is in substitution of the income that is to be computed u/s 29 of the Act. In other words, all the deductions which are referred to u/s 29 of the Act are deemed to have been taken into account while making such an estimate. The Ld. D.R. further submitted that the A.O. has estimated net profit of 10% after rejecting the books of accounts as the assessee has failed to substantiate the expenditure claimed with any evidences. Therefore, the A.O. order should be upheld. 6. On the other hand, the Ld. A.R. of the assessee submitted that the CIT(A) was erred in estimating the net profit of 8% without pointing out any mistakes in the books of accounts of the assessee. The A.R. further submitted that the assessee has maintained books of accounts which were audited u/s 44AB of the Act and the auditor has not pointed out any mistakes in the books of accounts. Thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers Pvt. Ltd. (Supra) took a clue from the provisions of section 44AD of the Act, held that 8% net profit from civil contracts is justified. The relevant portion of ITAT order is reproduced hereunder: 17. Therefore, respectfully following the view expressed by the Hon ble jurisdictional High Court and also considering the coordinate bench decision of this Tribunal, we are of the opinion that depreciation is a allowable deduction, even after estimation of net profit from the contract receipts. Therefore, we direct the assessing officer to allow the depreciation against the income estimated from the contract receipts. As far as the disallowance of remuneration to partners and interest on partner s capital account is concerned, the statute itself in section 44AD of the Act, allowed separate deductions towards interest on capital accounts and remuneration to partner s, after estimation of net profit from the gross receipts. The CIT (A) after considering the facts and circumstances of the case, has rightly directed the A.O. to allow remuneration to partners and interest on partner s capital account from the net profit estimated. Therefore, we find no error or infirmity in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors. Similar is the position in the case of contracts taken by assessee on subcontract from other parties. Further, the assessee is entitled for depreciation and remuneration, and interests to partners on the profit estimated by AO at applicable rates, because the income estimated as above of the assessee is before the depreciation and interest and remuneration of the partners. accordingly, the AO is directed to compute the income of the assessee afresh. 9. In the present case on hand, the assessee declared a net profit of 9.12% for the previous financial year. The A.O. has estimated net profit of 10% on gross contract receipts. The CIT(A) has scaled down the net profit to 8%. The CIT(A) after considering the facts and circumstances of the case, rightly scaled down the net profit to 8%. There is no error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the order passed by the CIT(A) and reject the ground raised by the revenue. 10. The next issue came up for our consideration is separate additions towards Income from Other Sources being interest on fixed deposits and other miscellaneous receipts. The A.O., in addition to estimation of net prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtaining contract works, the interest earned from these deposits cannot be at any stretch of imagination considered as business receipts for the purpose of estimation of net profit. There is no direct nexus between the earning of interest and works contract, except for the fact that it is kept in bank for obtaining bank guarantee. There should be direct nexus between business activity and earning of income so as to treat the receipt earned from the business. If these interest receipts arise from the works contract, then definitely the interest forms part of contract receipts. But, in the present case on hand, interest earned on fixed deposits is having no direct nexus between the business activities of the assessee. Just because, the bank deposits are kept as margin money towards obtaining bank guarantee, interest earned on such deposits would not alter the characteristics of income. Therefore, we are of the opinion that the A.O. has rightly assessed the interest earned on fixed deposits and other miscellaneous receipts under the head Income from Other Sources . The CIT(A) has rightly upheld the additions made by the A.O. We do not see any error or infirmity in the order passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.79 to 95/Vizag/2013 held that separate deductions towards interest on partner s capital account and remuneration to partner should be allowed when net profit is estimated. The relevant portion of the order is reproduced hereunder: 24. On consideration of rival contentions, we find merit in the submissions made by the assessee. The capital expenditure incurred is not allowed as deduction, but the deterioration in their value is allowed as deduction with the name depreciation . Hence, it is called non-cash expenditure and also called statutory deduction. While estimating the income, the trading 17 I.T.A. Nos.79 to 85/Viz/2013 I.T.A. Nos.89 to 95/Viz/2013 Assessment Years : 2004- 05 to 2010-2011 Srivalli Shipping Transport results only are estimated on the basis of sales/gross receipts, meaning thereby, what is estimated is only the net profit before allowing any non-cash expenditure/statutory deductions. Further, the quantum of depreciation would also depend upon the value of assets. For example, a business man having lower version of Car or Air conditioner would be entitled to claim lower amount of depreciation, since the cost of the lower version of car and Air conditioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest on partner s capital account and remuneration to partners is allowable deductions even after estimation of net profit from the contract receipts. The CIT(A) after considering the facts and circumstances of the case, has rightly directed the A.O. to allow remuneration to partners and interest on partner s capital account. We do not see any error in the CIT(A) order, hence, we inclined to uphold the order of the CIT(A) and reject the ground raised by the revenue. 17. The next issue came up for our consideration is separate additions towards receipts from arbitration award and miscellaneous income under the head income from other sources. The Ld. A.R. submitted that the A.O. has erred in making separate additions towards arbitration award and other miscellaneous receipts received from Jagadalpur works. The A.R. further submitted that these receipts forms part of business and the assessee has received the arbitration award towards works contract, therefore, when the net profit is estimated by applying the net profit rate, the A.O. should have considered the arbitration award received towards contract receipts as business receipts. On the other hand, the Ld. D.R. stron ..... X X X X Extracts X X X X X X X X Extracts X X X X
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