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2016 (5) TMI 1013 - ITAT VISAKHAPATNAM

2016 (5) TMI 1013 - ITAT VISAKHAPATNAM - TMI - Estimation of net profit from the contract receipts - Held that:- 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 incl .....

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interest from bank deposits which are kept as margin money for obtaining bank guarantees. Though these bank guarantees 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 .....

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lter 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 towards interest on capital and remuneration to partners - Held that:- Interest on partner’s capital account and remuneration to partners is allowable deductions even afte .....

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the assessee that these receipts are forms part of contract receipts, therefore, should be considered for the purpose of estimation of net profit from the business - Held that:- We find force in the arguments of the assessee for the reason that the arbitration amount received from the clients towards works contracts. The arbitration amount received from clients towards contract works is certainly a business receipt which cannot be assessed under the head income from other sources. However, the a .....

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assessee is towards execution of works contract or not. In case the arbitration award is received towards execution of works contract, the same should be considered as part of gross receipts for the purpose of estimation of net profit. Hence, we set aside the issue to the file of the A.O. and direct him to examine the issue in the light of the discussions above.

Additions towards chit dividend - A.O. made separate additions towards chit dividend under the head ‘Income from Other Sour .....

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. 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 .....

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s for Military Engineering Services, Visakhapatnam Port Trust, HPCL, etc. The assessee has filed its return of income for the assessment year 2009-10 on 29.9.2009 declaring total income of ₹ 94,60,460/-. A survey operation u/s 133A of the Income Tax Act, 1961 (hereinafter called as 'the Act') was conducted in the business premises of the assessee on 25.7.2012. Consequent to the survey, the case has been reopened under sec. 147 by issuing notice u/s 148 of the Act. Subsequently, the .....

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verification, as such a show cause notice was issued to the assessee to explain why the books of accounts should not be rejected and net profit estimated. In response to show cause notice, the assessee has objected for estimation of net profit. However, the A.O. after considering the assessee s explanations and also taken into account the books of accounts and other relevant materials, rejected the books of accounts u/s 145(3) of the Act and estimated the net profit of 10% on gross receipts net .....

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interest on fixed deposits and other miscellaneous receipts. The assessee further submitted that the A.O. was not correct in rejection of books of accounts as he has not pointed out any mistakes in the books of accounts, other than nonavailability of vouchers for labour charges. The assessee further submitted that 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 consid .....

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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 k .....

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however it was argued that the vouchers for labour charges could be only self-made. The fact remains that the assessee could not prove the claim of its expenses with proper evidences, therefore, upheld the action of the A.O. in rejection of books of accounts. As regards the estimation of net profit, the CIT(A) after considering the explanations furnished by the assessee scaled down the estimation of net profit from 10% to 8% with further deductions towards interest and remuneration to partners. .....

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e CIT(A) upheld the action of the A.O. in making separate additions towards Income from Other Sources . Aggrieved by the CIT(A) order, the assessee, as well as revenue are in appeal before us. 5. The first issue came up for our consideration is estimation of net profit from the contract receipts. The Ld. D.R. submitted that the CIT(A) was erred in reducing the estimation of net profit from 10% to 8% without appreciating the facts of the case that the assessee has declared more than 8% net profit .....

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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. .....

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44AB of the Act and the auditor has not pointed out any mistakes in the books of accounts. Though assessee not able to file sufficient evidences in respect of labour charges, the A.O. has not pointed out any mistakes in respect of other aspects of books of accounts. Therefore, the A.O. was completely erred in rejection of books of accounts and estimation of net profit. The A.R. further submitted that the assessee is into the business of execution of works contract mainly for Government departmen .....

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7. We have heard both the parties and perused the materials available on record. The A.O. has rejected the books of accounts and estimated the net profit of 10% on gross contract receipts net of all permissible deductions. The A.O. was of the opinion that the assessee has not produced any bills & vouchers in respect of expenditure and also the books of accounts of the assessee are not susceptible for verification. The A.O. further opined that during the previous financial year, the assessee .....

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erefore, requested to scale down the net profit estimated by the A.O. We have gone through the CIT(A) order and also case law relied upon by the parties. It is an admitted fact that estimation of net profit from civil contract receipts is consistently followed by the department on various rates depending upon the facts and circumstances of the each case. The ITAT, has upheld estimation of net profit ranging from 8% to 12.5%. The coordinate bench of this Tribunal, in the case of Arihant Builders .....

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ore, 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, .....

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works out to less than the income returned by the assessee, then, the total income so computed shall not go beyond the returned income and it should be restricted to the income returned by the assessee, since, the assessed income should not be less than the returned income. 8. The ITAT, Hyderabad bench in the case of ACIT Vs. Teja Constructions 191/HYD/2001 has considered similar issue of estimation of net profit from civil contract business. The Coordinate bench decided the issue as under: The .....

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estimated the income at 10 per cent of gross receipts. But the position is that, the assessee is carrying on three kinds of contracts, as in earlier years, i.e., (i) own contracts, (ii) contracts taken from the sub-contractors, (iii) contracts given to other parties on sub-contracts. The assessee had a higher rate of profit on the contracts executed by the assessee itself. In these contracts, the assessee agreed that his income is at 9 per cent of the gross receipts. Thus, accordingly the AO is .....

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forgo certain portion of profit i.e., around 5 per cent to the sub-contractors. 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 t .....

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nd 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 profit from contract receipts, made separate additions towards interest and other miscellaneous receipts. The Ld. A.R. submitted that the A.O. was not correct in making separate additions towards Income from Other Sources , being interest on .....

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r draft availed on such deposits and as such the interest paid on bank over draft should be net off against the interest earned on fixed deposits. The Ld. D.R. on the other hand, strongly supported the order of the CIT(A). 11. We have heard both the parties and perused the materials available on record. The A.O. made separate additions towards Income from Other Sources , being interest on fixed deposits and other miscellaneous receipts. The A.O. was of the opinion that the interest earned on fix .....

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ould be assessable as part of business receipts. The assessee further contended that those fixed deposits were kept as security for obtaining the bank guarantee, therefore, interest paid on over draft should be net off against the interest earned on fixed deposits. We do not see any merits in the arguments of the assessee for the reason that interest received from bank deposits cannot be considered as business receipts received on account of carrying out the business activity of the assessee. Th .....

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d 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 dep .....

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d from the revenue appeal is deductions towards interest on capital and remuneration to partners. The A.O. did not allow the deductions towards remuneration to partners and interest on partner s capital accounts. The Ld. D.R. submitted that once net profit is estimated, no separate deductions towards interest on partner s capital and remuneration to partners is allowable as a deduction. The Ld. D.R. further submitted that the CIT(A) ought to have appreciated the fact that the interest on capital .....

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on of ITAT, Visakhapatnam in the case of M/s. K. Venkata Raju, Rajahmundry in ITA Nos.370 & 409/Vizag/2012 and also in the case of Srivalli Shipping & Transports in ITA Nos.79 to 95/Vizag/2013. Therefore, requested to uphold the order of the CIT(A). 13. We have heard both the parties and perused the materials available on record. The A.O. has not allowed separate deductions towards interest on partner s capital account and remuneration to partners. The A.O. was of the opinion that when n .....

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rds interest on partner s capital account and remuneration to partners, when net profit is estimated from the contract receipts. 14. We further noticed that the coordinate bench of this Tribunal, in the case of Srivalli Shipping & Transports in ITA Nos.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 consi .....

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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 will be less. Whereas another business man having h .....

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llowed separately. Accordingly, we direct the AO to allow the depreciation admissible to the assessee against the income estimated by us in the preceding paragraphs. 15. The assessee relied upon the coordinate bench decision of ITAT, Visakhapatnam in the case of M/s. K. Venkata Raju, Rajahmundry in ITA Nos.370 & 409/Vizag/2012. The coordinate bench of this Tribunal, under similar circumstances held that interest on partner s capital account and remuneration to partners is allowable deduction .....

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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 .....

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s. 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. .....

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. On the other hand, the Ld. D.R. strongly supported the order of the CIT(A). 18. We have heard both the parties and perused the materials available on record. The A.O. made separate additions towards miscellaneous receipts and arbitration award received from Jagadalpur works. It was the contention of the assessee that these receipts are forms part of contract receipts, therefore, should be considered for the purpose of estimation of net profit from the business. We find force in the arguments o .....

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