TMI Blog2017 (6) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. AO is directed to apply net profit rate of 11.5% before depreciation, remuneration and interest payment to partners and interest to third parties (bank). Accordingly, there would not be any further disallowance of interest paid to third parties - Appeal of the assessee is partly allowed. - ITA No.722/JP/2014 Assessment Year : 2010-11 - - - Dated:- 30-6-2017 - Shri Kul Bharat, JM And Shri Vikram Singh Yadav, AM Assessee by : Shri Rajeev Sogani (CA) Revenue by : Shri R.A.Verma (Addl.CIT) ORDER Vikram Singh Yadav, This is an appeal filed by the assessee against the order of Ld. CIT(A)III, Jaipur 05.09.2014 for A.Y. 2010-11 wherein the assessee has taken following ground of appeal:- 1. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in estimating the net profit rate at 11.50% against the declared N.P. rate of 11.44% which resulted into confirming the addition of ₹ 1,05,428/-. The action of the ld. CIT(A) is illegal, unjustified arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- other income of ₹ 3306619/- including capital gain of ₹ 439320/- whereas the closing stock was shown for ₹ 1670300/-. The AO excluding capital gain of ₹ 439320/- determined total receipts for ₹ 177384011/- (172846412 + 3306619+1670300-439320). As regards estimation of profit on such gross receipts including closing stock/WIP, the A.O. has applied N.P. rate of 13% out of which deduction on account of depreciation was allowed but deduction on account of third party interest amounting to ₹ 2410948/- was not allowed. As per A.O the estimation of N.P. was to be made keeping in view the contribution of depreciation, interest of partners and remuneration to partners and that in the assessment year under consideration such contribution/claim on account of depreciation/interest to partners and remuneration to partners was about 2% more as compared to immediately preceding assessment year. As regards non-allowing of interest to third parties the A.O noted that claim of interest to third parties was not a statutory deduction and that such claim was inherently included in the allowance of expenses to the extent of 87% to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant case the declared N.P rate at 11.44% was much higher. It is also contended that in the immediately preceding year the assessee has shown N.P. rate of 10.40% subject to depreciation, interest to partners, remuneration to partners and interest to third parties. While completing the assessment the A.O has made various additions amounting to ₹ 14971912/- and against such additions the appellant has filed appeal before the CIT (A)-III, Jaipur. As per the appellant while deciding the appeal of the appellant the CIT(A) applied N.P. rate of 11.50% subject to partners payment, depreciation and bank interest. The Department has filed appeal against the order of CIT(A) which is pending. As per the appellant in A.Y 2007-08 and 2008-09 also the N.P rate of 11.50% was applied by AO which was confirmed both by CIT(A) and Hon ble ITAT. It is contended that the AO has not completed the assessment as per the past history of the appellant case as also that in appellant own case in A.Y 2006-07 the Hon ble ITAT has directed that the previous history of the appellant is the best basis for estimation of profit. As regards non-allowance of interest payment to bank apart from the past hist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hushan Lal Pradhuman Kumar vs. CIT, 115 ITR 524 II) Shree Shankar Khandsari Sugar Mills vs. CIT, 193 ITR 669 III) CIT vs Dr. A.P. Bahel 2 DTR 387 (Raj) IV) CIT vs. Suresh Marbles Pvt. Ltd. 18 DTR 118 (Raj) V) CIT vs. Inani Marbles Pvt. Ltd. [2009] 316 ITR 125 (Raj) VI) Shri Ram Jhanwar vs. ITO 98 TTJ, (ITAT, Jodhpur) VII) Ajay Goyal vs. ITO 99 TTJ 164, (ITAT, Jodhpur) VIII) Ghasi Ram Todarmal Vs. ITO 196 ITR 329 (Raj.)] IX) M/s Bhikha Ram Devrath Vs. ITO, Ward-1, Chura, ITA No. 245/Jodh/2013, date of order 23.09.2013 (ITAT, Jodhpur) X) The income Tax Officer, Ward-2, Chura Vs. M/s Jai Construction Co., ITA No. 64/Ju/2014, date of order 12.06.2014 (ITAT, Jodhpur). The Hon ble Jurisdictional High Court and Hon ble Jurisdictional ITAT has consistently held that estimation of profit after rejection of books of accounts u/s 145 (3) of IT Act, the past history of the assessee s own case should be the best guide. Keeping in view the consistent decisions of Hon ble Jurisdictional High Court as also Hon ble ITAT, the profit is to be determined on the basis of past history of the appellant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the N.P. rate of 11.50% subject to depreciation and interest/remuneration or partners on total receipts of ₹ 175713711/-. The fact that the Hon ble ITAT has directed to apply N.P. rate of 11.50% subject to depreciation and interest/remuneration to partners is further proved from the decision of the Hon ble ITAT in M.A. No. 40/JP/2012 order dated 18.07.2014 which has been filed by the assessee in respect of ITA No. 1177/JP/2012, A.Y. 2007-08 for rectification in the order and for direction that N.P. rate of 11.50% was subject to depreciation, interest to partners and interest to third parties wherein the M.A. was dismissed by the Hon ble ITAT. As regards the claim of the appellant of interest to third parties from the net profit, as discussed above, after rejection of books of accounts the profit is to be determined on the basis of past history of the appellant case and as per the past history decided by Hon ble ITAT, N.P. rate of 11.50% was to be applied subject to depreciation and interest/remuneration to partners (not interest to third parties). As regards reliance on various case laws by the appellant for allowing of interest to third parties, it may be stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther person may do business with borrowed capital having interest expenditure. Even for assessee doing business with borrowed capital, rate of interest may vary. Even in different years of the same assessee, financial cost can be different. Therefore, finance cost cannot be part of estimation and has to be given deduction further to estimation of profit. Ld. CIT(A) has wrongly observed that in the case laws relied upon by the assessee, High Court has given case specific finding. High Court decides on issue of law and not facts. The decision in those cases lay down a ratio that interest is to be allowed on actual basis further to estimation of profit. Ld. CIT(A), at Page 19 of his order, has given a factually wrong finding for AY 2007-08 that NP before depreciation, payment to partner and interest to partner was ₹ 1,68,67,510. The facts remains that this amount of ₹ 1,68,67,510 was subject to further deductions the details of which are as under:- Particulars A.Y. 2007-08 Depreciation 3,510,651 Payment to Partners (Remuneration and Interest) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be determined. In fact there is no dispute about appropriation towards depreciation, notwithstanding the assessing authority has applied net profit rate excluding appropriation towards any allowable expenditure. We are in agreement with the Tribunal for modifying the order passed by the assessing authority by making net profit rate subject to adjustment towards depreciation and interest on borrowings... Further, Hon ble Jurisdictional High Court in the case of Jain Construction Company, Barmer [2014] 52 taxmann.com 167 (Rajasthan), observed that: ......After rejecting the books of accounts and while referring to the order as passed in relation to the assessee for the Assessment Year 1993-94, the AO proceeded to apply net profit rate of 12.5% on the net contract receipts subject to depreciation, interest, remuneration to partners and interest payment to third parties for the purpose of making assessment of income..... To this, Hon ble Jurisdictional High Court even allowed deduction of Sales Tax Payment from the Net Profit Estimated in addition to deduction of depreciation, interest, remuneration to partners and interest payment to thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dated 25.05.2012. Thus, the subsequent order, which explicitly provides for Net Profit Rate of 11.50% subject to Depreciation, Interest and Remuneration to Partners has to be followed as a precedence. Otherwise also, ld. CIT(A) has held that 11.50% is subject to Depreciation, Interest And Remuneration To Partners except Interest To Third Parties. To this extent, the finding of ld. CIT(A) is accepted by the Department, as Department is not in appeal. It is a settled principle of law, that any order has to be read in its entirety and that reading the order in piecemeal can result into absurd results which should be avoided. 5. On the contrary, the ld. DR vehemently argued the matter and supported the orders of the authorities below. 6. We have heard the rival contentions and perused the material available on record. The limited issue under consideration relates to estimation of net profit rate after the books of accounts have been rejected. The ld CIT(A) has directed the A.O. to apply the N.P. rate of 11.5% subject to depreciation and interest/remuneration to partners on total receipts of ₹ 175713711/-. The Revenue has accepted the said findings of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses head-wise, a reasonable N.P rate should be applied and directed to apply net profit rate of 11.5% as against net profit rate of 10.07% shown by the assessee. Before us, the ld AR has contended that net profit rate of 10.07% computed by the assessee and as compared by the Tribunal while directing net profit rate of 11.5% was before depreciation, remuneration and interest payment to partners and interest to third parties and accordingly, there was no disallowance of interest paid to third parties. We find force in the said contention of the ld AR given that firstly, there is no disallowance of third party interest done by the AO and secondly, the Coordinate Bench has held that instead of specific disallowances as done by the AO, net profit rate of 11.5% should be applied as compared to 10.07% as computed by the assessee which is claimed to be before interest payment to third party. 9. Similarly, for AY 2008-09, the AO had made various disallowances of expenses @ 10%, expenses disallowed u/s 40(a)(ia), 40A(3), addition of creditors and wages payable, however, there is no disallowance of interest paid to third parties. The ld CIT(A) directed to apply net profit rate of 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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