TMI Blog2015 (11) TMI 1530X X X X Extracts X X X X X X X X Extracts X X X X ..... ining contract works, the interest earned from these deposits, cannot be at any stretch of imagination considered as business receipts for the estimation of net profit. There is no nexus between the earning of interest and works contract, except the fact that it is kept in bank as margin money for obtaining bank guarantee. There should be direct nexus between business activity and earning of income. If these interest receipts are arises from the works contracts, then definitely these items forms part of contract receipts. But, in this case the interest earned is from bank deposits. Therefore, the AO rightly treated interest earned from bank deposits under the head income from other source but, the CIT (A) ignored the basic fact that there is no nexus between the earning of interest and the assessee’s contract works, deleted the additions made by the assessing officer. Therefore, considering the facts and circumstances of the case, we reverse the order of the CIT (A) and upheld the addition made by the Assessing Officer. Additions towards depreciation - difference in depreciation, in addition to estimation of net profit from the contract receipts - Held that:- As going through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the business of civil construction, filed its return of income for the assessment year 2009-10 on 25.9.2009 declaring total income of ₹ 1,76,59,741/-. The case was selected for scrutiny and notices us 143(2) and 142(1) of the Income Tax Act (hereinafter called as the Act ) were issued on 23.8.2010 which was duly served on 14.9.2010. In response to the show cause notice, the assessee s AR appeared from time to time and furnished the books of accounts and other details as required by the assessing officer. The assessing officer, however, did not convinced with the explanations furnished by the assesse, rejected the books of accounts and estimated the net profit of 10% on direct contracts and 8% net profit on sub contract works executed by the assessee. Similarly, the A.O. estimated 20% net profit on total sales of ₹ 71,42,650/- from the business of sand sales. Apart from these additions, the assessing officer made separate additions towards interest on bank deposits and also disallowed the claim of depreciation, remuneration and interest on partner s capital account. Thus, the AO, completed the assessment and determined the total income of ₹ 5,18,49,508/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is estimated from contract receipts. As regards the addition towards difference of depreciation of ₹ 45,10,496/-, the assessee submitted that as per the prevailing practice, it has debited an amount of ₹ 2,07,92,245/- depreciation computed as per books of account, however, while making adjustment to the total income, added back this depreciation to the net profit and claimed deduction of ₹ 2,55,93,041/- as per Income Tax Rules. When this discrepancy was pointed out to the assessee, the assessee filed revised computation rectifying the said mistake admitting total income of ₹ 2,21,70,240/- as against the original total income of ₹ 1,76,59,740/-, therefore, there is no difference as pointed out by the A.O. The assessee further contended that A.O. is not correct in making separate addition towards difference in depreciation, when net profit is estimated from gross receipts. As far as the issue of deductions for remuneration, interest on capital accounts and depreciation, the assessee contended that the A.O. should have allowed separate deductions towards depreciation, remuneration to partners and interest on partner s capital account, as the same a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income. Therefore, the original computation/revised computation, the depreciation claim made by the assessee loses their relevance. Therefore, A.O. is not correct in making separate additions towards the difference between the original and revised computations of depreciation. As far as the issue of deductions towards remuneration to partners, interest on capital and depreciation is concerned, the CIT (A) directed the A.O. to allow interest and remuneration paid to the partners as per the provisions of section 40(D) of the Act. However, the CIT (A) rejected the claim of deduction towards depreciation and held that in view of the decision of Hon ble jurisdictional High court decision in the case of Indwell Constructions Vs. CIT 232 ITR 776 and also Hyderabad Tribunal A bench decision in the case of Shri Eashwar Reddy and company, confirmed the disallowance made by the assessing officer. Aggrieved by the CIT (A) order the revenue as well as assessee are in appeal before us. 6. The A.R. submitted that the CIT (A) was not correct in estimating net profit of 8% on main contracts, 5% on sub contracts and 1% sub contract works given to third parties. The assessee has admitted 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders Pvt. Ltd. Vs. ACIT 291 ITR 49 and also Hyderabad bench decision in the case of C. Eashwar Reddy and company in ITA No.668 670/Hyd/2009. We have gone through the CIT (A) s order and also case laws relied upon by the parties. It is an admitted fact that estimation of net profit from civil contracts receipts is consistently followed by the Department on various rates depending upon the facts and circumstances of each case. The ITAT have upheld the estimation of net profit ranging from 8% to 12.5% on main contracts and 2% to 7% on sub contract. The coordinate bench of this Tribunal, in the case of Arihant Builders Pvt. Ltd. (supra) took a clue from section 44AD of the Act, held that 8% net profit from civil contracts is justified. The relevant portion of the Hon ble Tribunal orders is reproduced hereunder: We have carefully gone through the order of this Tribunal in the case of Krishnamohan Constructions (supra), K. C. Reddy Associates (supra), Sri Srinivasa Constructions (supra) and M. Bhaskar Reddy (supra). No doubt this Tribunal estimated the profit from 12.59165 to 8% depending upon the factual situation. The learned DR made an attempt to distinguish the order of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract and for sub contract at 5%. It may not be out of place to mention that this Tribunal uniformly estimating the profit from main contract at 8% to 12.5% depending upon the factual situation and 5% to 7% on the sub contract depending upon the factual situation. Therefore, in our opinion, estimation of profit at 8% by the CIT(A) on main contract and at 5% on sub contract is justified. We do not find any infirmity in the order of the lower authority. Accordingly the same is confirmed. 10. The ITAT, Hyderabad bench in the case of ACIT Vs. Teja Constructions in ITA No.1191/Hyd/2001, while dealing with the similar issue held as under: The assessee s past track records show that the assessee has neglected the presenting of the books of account in accordance with law. When the assessee claimed any expenditure, it is mandatory on the part of the assessee to produce the books of account supported by proper bills and vouchers. Since the assessee has not produced the proper books of account, true profits or loss cannot be deduced from the books of account of the assessee. The AO having no other option rejected the books of account and estimated the income at 10 per cent of gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income of ₹ 25,00,490/- under the head income from other sources. The CIT (A), deleted the additions held that no separate addition towards interest income is to be made, as the interest accrued on the security deposit kept for obtaining bank guarantee, used for the purpose of securing the contract works would be assessable as part of business income. The D.R. argued that interest earned from fixed deposits in bank has nothing to do with contracts executed by the assessee. Though fixed deposits are kept in bank as margin money for bank guarantee issued in favour of principles for securing the works contract, it cannot be construed as receipts accrued on account of carrying out the business activity, therefore, addition towards interest income should be sustained. We find force in the arguments of the learned D.R. that income from other sources being interest received from bank deposit cannot be construed as business receipts received on account of carrying out the business activity of the assessee. The assessee earned the interest from bank deposits, which are kept as margin money for taking bank guarantees. Though these bank guarantees are furnished for obtaining contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation. 15. The next issue emanated from the assessee s appeal is deduction towards depreciation, remuneration to partners and interest on partners capital accounts. The A.O. did not allowed the deductions towards remuneration to partners, interest on partners capital account and depreciation on fixed assets. The assessee contended that even if, net profit is estimated from the contract receipts, the deductions towards remuneration to partners and interest on capital, in the case of partnership firm is to be allowed in view of the separate deductions permitted u/s 44AD of the Act. The CIT (A), however, allowed the deductions towards remuneration to partners and interest on partners capital accounts but, denied the deduction towards depreciation by relying upon the Hon ble Andhra Pradesh High Court judgement in the case of Indwell constructions Vs. CIT 232 ITR 776. At the time of hearing, the A.R. of the assessee pointed out that the issue of deductions towards depreciation, interest on partner s capital account and remuneration to partners is covered by the decision of coordinate bench of this tribunal in the case Srivalli Shipping transports in ITA Nos.79 to 95/Vizag/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44AD of the Act provides for determination of the income of an assessee from the business at 8% of the total turnover or the gross receipts of the previous year under certain circumstances. Sub- Section (2) is to the effect that if any deduction allowable under Sections 30 to 38, which takes in its fold the deduction such as depreciation and interest, shall be deemed to have been effected. The procedure under that section, however, applies only when the turnover is below a particular figure which at the relevant point of time was ₹ 40,00,000/-. As of now, it is ₹ 1 Crore. In the instant case, Section 44AD of the Act does not apply because the turnover was above the stipulated amount. Therefore, the feasibility of deduction of turnover and interest cannot be said to have been taken away. The learned counsel for the appellant is not able to point out any provision of law in the Act or Rules made thereunder, which restricts the allowance of the depreciation and interest. On the other hand, the facility created under the Act is so firm and strong that if for any reason it becomes impermissible or unnecessary for an assessee to seek the allowance of depreciation for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh 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 of the CIT (A), hence, we inclined to upheld the order of the CIT (A). 18. The assessing officer is directed to compute the total income for the assessment year under consideration, in accordance with the decisions rendered by us on various issues in the preceding paragraphs. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
