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M/s. K. Venkata Raju Versus Addl. CIT

2015 (11) TMI 1530 - ITAT VISAKHAPATNAM

Rejection of books of accounts - estimated the net profit from contract receipts @ 10% on main contracts, 8% on sub contracts and 4% on sub contracts executed through third parties - Held that:- . In the present case on hand, the assessee declared a net profit of 5.28% on gross contract receipts. The assessing officer has estimated net profit of 10% on main contract works, 8% on sub contracts and 4% on sub contracts executed through third parties. The CIT (A) scaled down the net profit to 8%, 5% .....

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eposits, which are kept as margin money for taking 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 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 a .....

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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 the orders of the Assessing Officer as well as the order of CIT (A). The A.O. estimated net profit from gross contract receipts. Once net profit is estimated, all expenditures .....

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Deduction towards depreciation, remuneration to partners and interest on partners capital accounts - Held 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 th .....

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No.370/Vizag/2012 & I.T.A.No.409/Vizag/2012 - Dated:- 30-11-2015 - SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For the Petitioner : Shri Th. Lucas Peter, DR For the Respondent : Shri G.V.N. Hari, AR ORDER PER G. MANJUNATHA, Accountant Member: These cross appeals filed by the revenue as well as assessee are directed against the common order of CIT (A), Visakhapatnam dated 30.7.2012 for the assessment year 2009-10. Since the issues involved in these appeals are c .....

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d 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. est .....

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ssessee preferred an appeal before the CIT (A). Before CIT (A), the assessee contended that the AO was not right in rejecting the books of accounts, as the assessee has furnished complete books of accounts along with bills and vouchers for the expenditure debited to profit & loss account. The assessee further contended that the A.O. was not correct in estimating net profit of 10% on direct contract, 8% on sub contracts and 4 % on sub contracts given to third parties. The assessee contended t .....

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ase for the assessment year 2008-09. Further, it is submitted that estimation of 4% net profit from sub contracts given to third parties, is quite contrary to the prevailing practices and also stated that normally the net profit element in the sub contract works given to the third parties is at 1%. To support his argument, the assessee has furnished certain assessment orders wherein the net profit estimated on sub contract given to third parties is at 1%. The A.R further contended that the asses .....

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for obtaining contracts. Therefore, any income in the form of interest receipts forms part of business receipts, hence, the same should be considered as part of gross contract receipts. Therefore, it is argued that the A.O. is not justified in making separate addition towards interest income, when 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 .....

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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 ar .....

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profit from the books of accounts maintained by the assessee cannot be computed, therefore, upheld the rejection of books of accounts. The CIT (A) further held that estimation of net profit from the contract receipts depends upon many factors and the department is following the estimation of net profit from the contract business. The CIT (A) further held that the Tribunal have upheld the estimation of net profit from 8% to 12,5% in respect of main contracts and 2% to 7% in respect of sub contra .....

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(A) scaled down the estimation from 20% to 15% and direct the AO to re-compute the net profit @ 15% on gross sales. As regards the separate additions towards interest income is concerned, the CIT (A) held that in view of judgements of Hon ble Patna High Court and also decision of Karnataka High Court in the case of CIT Vs. Chinna Nachimuthu Constructions 297 ITR 70, no separate addition on account of interest income is to be made as the interest earned from the bank deposits are kept as margin m .....

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ssessee 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 deprec .....

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contracts and 1% sub contract works given to third parties. The assessee has admitted 5.28% net profit on total contract receipts, which is reasonable compared to the nature of works executed by the assessee. The A.R. further submitted that the assessee has maintained books of accounts and relevant vouchers and the books of accounts are audited by the auditor, hence, rejection of books of accounts and estimation of net profit is incorrect. The AR further submitted that the final amount of incom .....

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o 8% on main contracts, 4% on sub contracts and 1% on sub contract works given to third parties respectively as against the net profit estimated by the assessing officer at 10%. The D.R. further argued that the assessee is a big contractor having a annual contract receipts of Rs. ₹ 31,45,36,573/- for the relevant year, therefore, estimation of net profit by taking the inputs from the provisions of section 44AD of the Act is not at all correct. Therefore, requested to uphold the assessment .....

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nt of profit in works contracts is less, because there is a huge competition in the market. Therefore, the profit declared by the assessee should be accepted. The CIT (A) after considering the assessee s submissions scaled down the net profit estimated by the assessing officer to 8% on main contracts, 5% on sub contracts and 1% on sub contract works executed through third parties. While doing so, the CIT (A) relied upon the ITAT special bench decision in the case of Arihant Builders Pvt. Ltd. Vs .....

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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 .....

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e by the learned DR to show that this Tribunal estimated the profit at 8% in the case of M. Bhaskar Reddy (supra) only because the turnover was ₹ 51, 40,420. A bare reading of the order of this Tribunal in M. Bhaskar Reddy (supra) dearly shows that this Tribunal after considering the judgement of the Apex Court in C. Velukutty, 60 ITR 239 and the decision of the Special Bench of this Tribunal in Arihant Builders Pvt. Ltd. vs. AC17 291 41 (SB) and by taking a due from section 44AD of LT Act .....

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e assessee in the earlier year, profit ratio of the similarly placed traders in the same locality, demand for the product, availability of labourers, raw materials, etc., and the time gap available for executing the contract work, etc., have to be taken into consideration. Therefore, ii our opinion, reference to earlier order of this Tribunal alone for the purpose of estimating the profit at 12.5910 may not be justified at all. 9. In fact, in the case of Krishnamohan Constructions in ITA Nos. 11 .....

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ion in Arihant Builders (supra) estimated the profit at 8% for main contract 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 ord .....

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ers. 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 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. .....

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ntract, income to be estimated at 4 per cent. This is, because, when the assessee gives contract to the other parties on sub-contract, the assessee cannot keep the same percentage of profit at 9 per cent, it has to 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 p .....

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arties. The CIT (A) scaled down the net profit to 8%, 5% and 1% respectively. The CIT (A) after considering the facts and circumstances of the case, rightly estimated the net profit, therefore, his order does not require any interference. Therefore, we are of the opinion that there is no error or infirmity in the order passed by the CIT (A), hence, we are inclined to upheld the order of the CIT (A). 12. Coming to the next issue, i.e. additions towards income from other sources being interest ear .....

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ss 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 o .....

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t. 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 th .....

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,496/- towards difference in depreciation, in addition to estimation of net profit from the contract receipts. The CIT (A) deleted the additions made by the assessing officer on the ground that once, the net profit is estimated from the gross receipts, all expenditures deductible have been considered as allowed. Therefore, there is no relevance for original computation, revised computation and depreciation claim made by the assesse, hence, A.O. is not correct in making separate addition towards .....

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ofit is estimated from the gross receipts. Therefore, we are of the opinion that the CIT (A) has rightly deleted the additions and his order does not require any interference. Hence, we direct the AO to delete the additions made on account of 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 .....

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ion 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/2013 of ITAT, Visakhapatnam bench and also in the case of .....

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ration 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 de .....

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tions and other things are equal between the two, the depreciation amount will be different due to the difference in the value of assets. Hence the total income shall also result in different figures between the two business men. The above said illustration would support the contentions of the assessee that the depreciation should be allowed separately. Accordingly, we direct the AO to allow the depreciation admissible to the assessee against the income estimated by us in the preceding paragraph .....

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nder 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 .....

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allowance of depreciation for a particular Assessment Year, he is entitled to carry it forward, for the subsequent years. In such an event, it assumes the character of unabsorbed depreciation. In this very case, the Assessing Officer permitted the allowance of unabsorbed depreciation to the respondent. However, he denied the benefit of the allowance of current depreciation and interest. No reference is made to any provision of law to make such distinction. His understanding of the matter is that .....

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inary course of assessment, there is no reason why the same facilities be not extended to him, merely because the profit is determined on the basis of estimation as was done in the instant case. We are of the view that depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis. The conclusions arrived at by us, get support from the Circular dated 31.08.1965 is .....

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cerned with the depreciation. The occasion to deny the deduction of depreciation or interest would arise if only the material placed before the Assessing Authority in proof of purchase of machinery and other items and payment of interest is disbelieved. No finding of that nature was recorded by the Assessing Officer. 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 .....

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