TMI Blog2017 (4) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... A) after considering the relevant provisions has rightly upheld the action of the A.O. treating interest income under the head ‘income from other sources’. - I.T.A.No.168/Vizag/2015, I.T.A.No.176/Vizag/2015 - - - Dated:- 12-4-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER Appellant by : Shri T. Satyanadham, DR Respondent by : Shri G.V.N. Hari, AR ORDER Per Shri Manjunatha, Accountant Member: These cross appeals filed by the revenue, as well as the assessee are directed against order of the CIT(A), Rajahmundry dated 27.2.2015 and it pertains to the assessment year 2010-11. 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 of the case are that the assessee is a partnership firm engaged in the business of civil construction, filed its return of income for the assessment year 2010-11 on 11.10.2010 declaring total income of ₹ 1,05,24,000/-. The case has been selected for scrutiny and notices u/s 143(2) 142(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act') were iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue that came up for our consideration from revenue as well as the assessee s appeal is estimation of net profit from business. At the time of hearing, the Ld. Counsel for the assessee and the Ld. D.R. submitted that the issue involved in this appeal is covered by the decision of ITAT, Visakhapatnam in assessee s own case for the assessment year 2009-10, wherein the ITAT has directed the A.O. to estimate net profit of 8% on main contract receipts, 5% on sub contract receipts and 1% on sub contract works given to third parties. We find that the coordinate bench of ITAT, Visakhapatnam in ITA No.370/Vizag/2012 dated 30.11.2015 for the assessment year 2009-10 has considered similar issue and after considering the ratio of special bench decision of ITAT, in the case of Arihant Builders Pvt. Limited Vs. ACIT 299 ITR 49 and also the decision of ITAT, Hyderabad Bench in the case of ACIT Vs. Teja Constructions in ITA No.1191/Hyd/2001, has directed the A.O. to estimate net profit of 8% on main contract receipts, 5% on sub contract receipts and 1% on sub contract works given to third parties. The relevant portion of the order is extracted below: 9. We have heard both the parties and perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e do not And any justification in the distinction made 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 the profit was estimated 896. Admittedly section 44AD would be applicable in respect of a case where the gross 4ontract receipt does not exceed ₹ 40 lakhs. Wherever the gross contract receipts exceed ₹ 40 lakhs the provisions of section 44AD are not applicable. Therefore, the profit can be estimated either at lower than 896 or above 8916 depending upon the factual situation. As discussed earlier, for the purpose of estimating the profit various factors such as the profit ratio of the assessee in the earlier year, profit ratio of the similarly placed traders in the same locality, demand for the product, availability of labourer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher 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 directed to estimate the income on the contracts executed by the assessee s own at 9 per cent. In case of contracts taken by assessee on sub-contract, the income to be estimated at 8 per cent of the gross receipts. In case of contracts given by the assessee to the 3rd party on sub-contract, 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 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital accounts and remuneration to partners is allowable deduction, even after estimation of net profit from the contract receipts. The relevant portion of the order is extracted below: 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 of the CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom bank deposits, 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 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. 10. In this view of the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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