TMI Blog2019 (8) TMI 1603X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld.DR with regard to nature of the receipts. From the explanation offered by the assessee, we understand that the term deposits were made by the assessee for the purpose of obtaining the bank guarantee as margin money on which the assessee had received the interest. Since the deposits were made from the funds of the business and for the purpose of bank guarantee, the interest on term deposits are required to be treated as business income, but not to be taxed separately under other sources. The scope of profits and gains of the business are wider than the income derived from the industrial activity. With regard to deduction u/s 80(IA), the deduction is allowable only from the profits derived from the industrial activity. The interest earned on bank deposits would cover under the scope of business income, but not for industrial activity, therefore, the Hon ble Delhi High Court held that the interest on bank deposits cannot be treated as profit and gain derived from the manufacturing activity by an industrial unit. Thus, the facts of the case law relied upon by the Ld.DR in Krishak Bharati Cooperative Ltd. [ 2012 (4) TMI 454 - DELHI HIGH COURT] are distinguishable, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent accounts of partners, constitute business income and taken care of in estimation of income. Similarly in the case of sundry creditors credit balances constitute business transactions as discussed in the earlier paragraphs. Since the interest on partners capital account, interest on term deposits and sundry creditors balances written back constitutes business income, no separate addition required. Therefore, we hold that there is no error in the assessment order which is prejudicial to the interest of the revenue with regard to items of interest on term deposits, interest on partners current accounts and sundry creditors balances written back. Accordingly, we set aside the order of the CIT passed u/s 263 on the items of interest on term deposits, interest on partners current account and the sundry creditors balances written back and allow the appeal of the assessee. Estimation of income by the AO @9% - On the very same issue, the assessee went on appeal before the CIT(A) requesting for allowing depreciation from estimated income and the CIT(A) enhanced the estimation of income from @9% to 12.5% before depreciation and directed the AO to allow the depreciation. Therefore, si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER Shri D.S.Sunder Singh, These appeals filed by the revenue are against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)], Vijayawada dated 24.12.2012, 31.03.2015 and 31.08.2016, by the assessee against the order of the CIT dated 27.03.2015 and against the order of the CIT(A) dated 30.09.2016 and cross objections filed by the assessee is in support of the order of the Ld. CIT(A) for the Assessment Year (A.Ys.)2008-09 to 2010-11. For the sake of convenience these appeals are clubbed, heard together and a common order is being passed as under. I.T.A. No.445/Viz/2016, 112/Viz/2013 and CO No. 106/Viz/2019 and 79/Viz/2013 I.T.A. No.112/Viz/2013, A.Y.2008-09 2. All the grounds in this appeal are related to the other income admitted by the assessee in the return of income assessed separately as income from other sources. Brief facts of the case are that the assessee is engaged in the business of civil contract works, filed it s return of income declaring total income of Rs. Nil on 30.09.2008. Subsequently, filed the revised return of income admitting taxable income of ₹ 1,34,26,464/- on 29.10.2008. The return was processed u/s 143(1) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income, hence directed the AO not to assess the same separately except rental income, dividend on chits and IT refund. For the sake of clarity and convenience, we extract order of the Ld.CIT(A) in para No.5B which reads as under : pg.5 5B. Second grievance relates to items of other income added to the business income estimated. As stated already, there are 8 items, which the AO prima facie contested that all of them come under business head. First item is interest on term deoosjts-₹ 14,40,509/-. It is explained that while issuing bank guarantees for EMD of work orders obtained by the appellant, the banks require fixed deposits as counter guarantee. Unless the EMD are paid, works cannot be commenced. Thus the interest earned on these fixed deposits has nexus with the business of the appellant and hence this would not form part of other income and accordingly, the AO is directed to delete the same, as it is a part of business income. Second item is interest received on partners current accounts and interest on partners capital. These also being on business account, the amount of ₹ 77,72,358 being business income cannot form receipts under the other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the firm since the books of accounts were rejected, hence argued that all such expenditure is deemed to have been considered in estimation of income, thus, argued that once the income is estimated, no separate addition is required to be made on partners capital account. 5.1. With regard to the insurance claim receipts and scrap sales, the Ld.AR submitted that both are business receipts which are inter linked to the expenditure incurred, hence, no separate addition is warranted on account of insurance claims received on scrap sales / insurance claim. 5.2. With regard to sundry creditors credit balances written off, the Ld.AR argued that the sundry creditors balances written off represent trade creditors and once the business income is estimated after rejecting the books of accounts, the AO cannot make separate addition. In a nut shell, the Ld.AR argued that the assessee is engaged in only one business that is civil construction and all the transactions are from the same business. Therefore, once the books of accounts are rejected, the AO is not permitted to make use of the same books of accounts, to make separate addition. The Ld.AR relied on the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the explanation offered by the assessee, we understand that the term deposits were made by the assessee for the purpose of obtaining the bank guarantee as margin money on which the assessee had received the interest. Since the deposits were made from the funds of the business and for the purpose of bank guarantee, the interest on term deposits are required to be treated as business income, but not to be taxed separately under other sources. The Ld.DR relied on the decision of Krishak Bharati Cooperative Ltd. (supra). The said case was related to revision u/s 263 and allowability of deduction u/s 80(IA) of the Act. The deduction u/s 80(IA) is to be allowed from the profits of the industrial undertaking but not the profits and gains of the business. The scope of profits and gains of the business are wider than the income derived from the industrial activity. With regard to deduction u/s 80(IA), the deduction is allowable only from the profits derived from the industrial activity. The interest earned on bank deposits would cover under the scope of business income, but not for industrial activity, therefore, the Hon ble Delhi High Court held that the interest on bank deposits cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the character of the business income. Similarly, the assessee submitted that the firm has advanced the amounts out of the bank borrowings. Once the amounts are advanced from the borrowed funds and the interest receivable required to be taxed, the interest paid on borrowing also required to be allowed as deduction. As discussed earlier, the AO has not given any reason for making the addition and did not bring any evidence to show that the assessee had advanced the amounts to the partners with an intention to earn the interest income out of the surplus funds available. Therefore, following the decision of the Coordinate Bench of ITAT in the case of Triveni Enterprises, under the facts of the case, we hold that the interest on partners capital accounts is to be treated as business income as held by the Ld.CIT(A), thus no separate addition is required to be made on account of interest on current account debit balances. 8. The next item of disallowance is net insurance claims received, scrap sales and sundry creditors credit balances written off. All the three items constitute business transactions which takes the character of business income. Further if the AO wants to tax the sundr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head other income . We do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue is dismissed. Cross Objection No.79/Viz/2013, A.Y.2008-09 9. The assessee filed cross objection in CO 79/Viz/2013 with delay of 15 days. The reason explained in the petition for condonation of delay is due to professional preoccupation is neither convincing nor satisfactory. Hence, the cross objection filed by the assessee is dismissed. I.T.A. 445/Viz/2016, A.Y.2008-09 10. In the assessment order dated 01.12.2010, the AO estimated the income @12.5% placing reliance on the ratio laid down in the case of M/s KNR Constructions of ITAT Hyderabad. The AO allowed the depreciation from the income so estimated. In a nut shell, the AO estimated the gross income @12.5% before depreciation on gross contract receipts and allowed the depreciation. Subsequently, the AO found that the depreciation was erroneously allowed contrary to the ratio laid down in the case of KNR Constructions, hence, the AO issued notice u/s 154 on 27.03.2015 proposing to make the disallowance of depreciation already allowed called for the objections of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 154 of the Act. 12. We have heard both the parties and perused the material placed on record. The AO estimated the income @12.5% and allowed the depreciation originally in the assessment order. Subsequently, the AO sought to withdraw the depreciation u/s 154 of the Act and the reason assigned for withdrawing depreciation is wrong adoption of the ratio of case law in KNR Constructions. There are several decisions including the decision of jurisdictional High Court in the case of Y Ramachandra Reddy (supra), wherein the Hon ble High Courts have held that even in cases of estimation of income, separate deduction required to be allowed for depreciation which is the statutory allowance. Therefore, the issue of allowability of depreciation or otherwise require detailed examination of records, facts and the case laws. As held by the Ld.CIT(A), there can be no rectification u/s 154 of the Act for point of law. Wrong adoption of the ratio laid down by the court is a point of law and the same is not maintainable for rectification u/s 154 of the Act. Even the Board Circular No.29-D(XXX-14) [F.No:45/239/65-ITJ] dated 31.08.1965 says that the gross profit should be estimated and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference of ₹ 7,98,79,632/- short admission by the assessee. Thus, the Ld.CIT(A) held that the AO neither examined the gross receipts nor considered for estimation of income by the AO, hence, set aside the order of the AO dated 17.10.2011 passed u/s 143(3) and directed the AO to redo the assessment. The Ld.CIT further observed that the AO estimated the income and allowed depreciation from the income so estimated which is incorrect. According to Ld.CIT, once the income is estimated, the deduction allowable u/s 30 to 38 are deemed to have been considered and no separate deduction needs to be allowed for depreciation. Thus, the Ld.CIT remitted the issue back to the file of the AO to redo the assessment as per the directions given in the order u/s 263. The AO passed consequential order giving effect to the order of the Ld.CIT u/s 143(3) r.w.s. 263 by an order dated 31.03.2015. In the consequential order, the AO disallowed the depreciation originally allowed as directed by CIT in revision order u/s 263. Accordingly, the AO made the addition of ₹ 6,80,34,031/- to the income assessed u/s 143(3) by an order dated 17.10.2011. 15. Aggrieved by the order of the AO dated 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is....... The conclusions arrived at by us, get support from the Circular dated 31.08.1965 issued by the Central Board of Direct Taxes. Though the circular was with reference to the 1922 Act, it holds good for the analogous provisions under the 1961 In the instant case, we are concerned 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 5.2.1. Hon ble ITAT, Visakhapatnam in ITA No47/Vizag/2013 order dated 06.11.2015 held that depreciation is an allowable deduction, even after estimation of net profit on gross receipts. 10. ..... We have considered the submissions made by either parties and also gone through the case laws relied upon by the A.R. We find that the ITAT Visakhapatnam bench in the case of Srivalli Shipping Transports Pvt. Ltd. (supra) held the issue in favour of assessee. The ITAT while dealing with the similar issue held as under: 24, On consideration of rival contentions, we find merit in the submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and perused the material placed on record. The AO estimated the income and allowed the depreciation originally. Subsequently, the Ld.CIT has taken up the case for revision u/s 263 and held that the assessment order passed by the AO allowing the depreciation is erroneous and prejudicial to the interest of the revenue and directed the AO to redo the assessment withdrawing the depreciation allowance already granted by the AO. However, the Ld.CIT kept the issue open for deciding the same on merits. Accordingly, the AO passed consequential order u/s 143(3) r.w.s. 263. On appeal, the first appellate authority allowed the appeal of the assessee and directed the AO to allow the depreciation which is being agitated by the revenue. The Ld.CIT(A) has followed the order of this Tribunal and the decision of Jurisdictional High Court and the Board Circular dated 31.08.1965 giving instructions to the field officers to make estimation of gross profit and to allow the depreciation from the gross profit. In the original assessment, the AO made discussion in detail in para No.5 allowing depreciation. Since the CIT(A) has followed the order of this Tribunal and the decision of Jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002 for allowance of depreciation. In view of facts and circumstances of the case and judicial opinion prevalent, the Assessing Officer is directed to adopt the rate of profit @ 12.5% instead of 9% to determine the income subject to allowance of depreciation. 21. Against the order of the Ld.CIT(A), the revenue has filed appeal challenging the allowing of depreciation and interest on remuneration to partners. 22. We have heard both the parties and perused the material placed on record. In the instant case, the CIT(A) found that the AO estimated the income @9% without giving any reasoning and the Ld.CIT(A) followed the orders of the earlier assessment years, wherein the income was estimated @12.5% subject to allowance of depreciation, therefore, following the orders of the earlier years and the decision of Hon ble Jurisdictional High Court in the case of Y.Ramachandra Reddy, the Ld.CIT(A) directed the AO to estimate the income @12.5% instead of 9% subject to allowance of depreciation. The facts are identical to the case of A.Y.2009-10 which was decided in favour of the assessee. Since the Ld.CIT(A) followed the order of the Hon ble jurisdictional High Court and this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reexamining the possibility of enhancing the percentage of profit estimated by the AO @9% on gross receipts. Challenging the order of the Ld.CIT, the assessee raised the following grounds of appeal. 1. The order of Learned Commissioner of Income Tax, Vijayawada is contrary to the facts and also the law applicable to the facts of the case. 2. The learned Commissioner of Income Tax is not justified in invoking the provisions of S.263 of the Act in as much as the order dt.27-03-2013 u/s 143(3) of the Act is neither erroneous nor prejudicial to the interests of revenue. 3. The learned Commissioner of Income-Tax is not justified in directing the Assessing Officer to reexamine whether separate addition is warranted in respect of following incomes even after the net profit of the business is estimated as % of gross receipts. Rs. a) Interest on term deposits 1,70,837 b) Interest on partners current account 2,27,12,838 c) Rental Income 03,01,250 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sundry creditors balances written back and allow the appeal of the assessee. 28. Ground No.5 is related to the estimation of income by the AO @9%. On the very same issue, the assessee went on appeal before the CIT(A) requesting for allowing depreciation from estimated income and the Ld.CIT(A) enhanced the estimation of income from @9% to 12.5% before depreciation and directed the AO to allow the depreciation. Therefore, since the appeal was pending before the CIT(A) on the very same issue and the Ld.CIT being parallel authority, CIT has no jurisdiction to invoke the provisions of section 263 of the Act on pending issues before the Ld.CIT(A). This view is supported by the decision of Hon ble Madras High Court in the case of Smt. Renuka Philip.v.Income-tax Officer, Business WardXV(2)Chennai, [2019] 101 taxmann.com 119 (Madras), wherein Hon ble High Court held that when the appeal is pending before the Commissioner(A), the exercise of jurisdiction under Section 263 of the Act is barred. Therefore, we set aside the order of the Ld.CIT on this issue and allow the appeal of the assessee on this ground. 29. Ground No.4 is related to the interest on income tax refund which was gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was a mistake in the assessment order, the Ld.(A) viewed that the AO rightly passed the order u/s 154, accordingly upheld the order passed u/s 154. 33. Against the order of the CIT(A), the assessee is in appeal before this Tribunal. 34. We have heard both the parties and perused the material placed on record. In this order for the earlier assessment years in the preceding paragraphs, we have held that the interest on current account constitutes business income as per the detailed discussion made in this order. As per the submissions made by the Ld.AR, the issue is not a simple issue for invoking jurisdiction u/s 154 of the Act. The issue required to be examined from the point of view of allowability of interest charged on accumulated business losses debited to the partners current accounts and allowability of deduction on the bank borrowings. The issue is debatable whether the interest charged on accumulated losses required to be considered as business income or the income from other sources. Similarly the AR submitted that the amounts were advanced from the borrowed funds hence, whether the interest paid required to be allowed as deduction or not? Since the business in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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