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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the revenue against the order of the Ld.Commissioner of Income Tax (Appeals) [CIT(A)], Rajamahendravaram, vide I.T.A.No.0096/2015-16 dated 25.07.2018 and I.T.A. No.10158/2016- 17 dated 25.07.2018. Cross Objections are filed by the assessee in support of the order of the orders of the Ld.CIT(A). Since the grounds raised in these appeals are identical, these appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under. A.Y.2012-13 2. Ground Nos.1, 8 and 9 are general in nature which does not require specific adjudication.
Ground No. 2 to 5 are related to the estimation of income and the allowance of depreciation from the estimated income. Brief facts of the case are that the assessee is a civil contractor filed it’s return of income declaring total income of Rs.4,11,23,110/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘Act’), selected for scrutiny and the notices u/s 143(2) and 142(1) were issued to
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the assessee and the assessment was completed u/s 143(3) on total income of Rs.5,02,12,206/-. During the assessment proceedings, the Assessing Officer(AO) found that the assessee has admitted the gross receipts of Rs.64,74,97,287/- which included the insurance claim of Rs.5,66,122/-. The gross contract receipts after excluding the insurance claim of Rs.5,66,122/- worked out to Rs.64,69,31,165/- out of which sub contracts taken was Rs.33,88,33,723/- and the direct contract works done by the assessee was Rs.30,80,98,442/-. During the assessment proceedings, the AO had called for the details of bills and vouchers for the expenses debited to Profit & Loss account. On verification of the bills and vouchers produced by the assessee, the AO observed that the bills and vouchers in respect of expenditure for material purchases, mess expenses, sand purchases, labour payments and freight charges were mostly self-made vouchers. Some payments were also made through contractors and the TDS has been done from the payments. The AO further observed that the assessee failed to produce the details of such expenses which were incurred through contractors. Therefore viewed that no proper verification could be made with regard to the payments made through the contractors. The Ld.AR also expressed his inability to submit the breakup of expenses towards such
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contract work and rate of profit to be given to the contractor from whom sub contracts have been taken. Due to the defects found by the AO with regard to the non-verification of the expenses, the AO rejected the books of accounts and estimated the net profit @8% on direct contracts and 5% on sub contracts undertaken by the assessee. Since the AO estimated the net profits, he has directly taken the net profit for the purpose of computation of income without allowing the statutory allowances such as the depreciation, partners salary and the interest on capitals and accordingly estimated the net profit of Rs.4,15,89,561/- as under : (a) Net profit on Direct contract works executed by the assessee i.e. 8% of Rs.30,80,98,42/- - Rs.2,46,47,875/- (b) Net profit on sub contract works taken by the assessee i.e. 5% of 33,88,33,723/- - Rs.1,69,41,686/- (c) Aggregate of such net profits - Rs.4,15,89,561/- The AO also made the following additions separately to the net profit: (a) Insurance Claim - Rs.5,66,122/- (b) Interest received - Rs.58,62,286/- (c) Machinery rent received - Rs.21,94,337/- Thus the total income of the assessee was computed at Rs.5,02,12,206/-. 5. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) upheld the rejection of books of accounts and
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estimation of income. However, the Ld.CIT(A) following the order of the this tribunal in assessee’s own case for the A.Y.2011-12 in I.T.A. No.270/Viz/2016 dated 22.12.2017 held that the estimation of income @ 8% on own contracts and 6% on sub contracts is reasonable. However, the AO has been directed to allow the statutory allowance such as depreciation, interest on capitals and the remuneration to partners from the estimated income. For the sake of clarity and convenience we extract relevant part of the order of the Ld.CIT(A) in para No.6.2 to 6.3 which reads as under :
“6.2. A perusal of the order of the Hon'ble jurisdictional Tribunal, Visakhapatnam in, I.T.A.No.270/Vizag/2016 dated. 22.12.2017 in the case of the appellant in it's own case for the A.Y.2011-12 wherein it was held that: "The A.0 completed the assessment estimating the income @10 % on impugned contracts,8% on sub-contracts, 4% on sub contracts given, however, the A.0 has not allowed the statutory allowance of depreciation. Whereas, the CIT(A) has reduced the estimation of income but did not allow the depreciation. The depreciation is a statutory allowance which require to be allowed by the AO. As per the decision of Hon'ble High Court in the case of Indwell constructions Vs.CIT and the decision of CIT Vs. Y.Ramachandra Reddy in ITTA No.48/2002 dated 30.07.2014, Hon'ble High Court held that even though the A.O rejected the books of accounts and estimated the income, depreciation is allowable unless there is on occasion to disbelieve the purchase of machinery. The only argument in this case made by the assessee was to allow the depreciation. On the similar facts and circumstances, this Tribunal in assessee's own case for the Asst.Year:2009-10 allowed the depreciation from the estimation of income." "In the instant case there is no dispute that the facts are similar to that of the assessee's case for the asst. year:2009- 10. The Ld.D.R did not
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bring any other case law or distinguished the facts of the case. Therefore, respectfully following the view taken by the ITAT for the earlier years in the assessee's own case, we direct the A.0 to allow the depreciation against the income estimated from the contract receipts. However, the income so computed shall not be less than the returned income.” 6.3. The A.O’s decision for the A.Y.2012-13 under consideration in estimating the income on percentage basis is appropriate in view of the various discrepancies, for which no valid reason was attributed by the appellant, I consider it fair and reasonable to estimate the income by the A.0 @8%/@ 6% from the contracts/sub-contract works besides in disallowing some of the receipts offered by the appellant, in absence of related proofs or evidences. On a careful consideration of the order of the Hon'ble Jurisdictional ITAT, Visakhapatnam cited (supra), I am of the view that the second appellate authority has taken a conscious decision on this issue after duly analysing the various decisions rendered by the Hon'ble High Court. Therefore, respectfully following the view taken by the ITAT in the earlier year in the assessee's own Case, it is to direct the A.O to allow the statutory allowances/deductions towards interest/ remuneration to partners and depreciation etc. from the estimated income (@8% / @6% ) from contracts.” In addition to the above, the Ld.CIT(A) also directed the AO to include the machinery rent and insurance claim as part of business turnover i.e. part of main contract receipts.
Against the order of the Ld.CIT(A), the revenue has filed appeal before this Tribunal.
We have heard both the parties and perused the material placed on record. In the instant case, the AO has estimated the income @8% on own contracts and 5% on sub contracts, however, the AO has not allowed the depreciation, interest on remuneration to partners. The AO did not give
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reasons for not allowing the depreciation and the interest on remuneration to the partners. On identical facts, this Tribunal in the assessee’s own case for the A.Y. 2011-12 upheld the rejection of books of accounts and estimation of income @8% on own contracts and 6% on sub contracts before statutory allowances of depreciation. For the sake of clarity and convenience, we extract para No.8 and 9 of the order of this Tribunal which reads as under : “8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee filed the return of income declaring total income of Rs.1,03,36,200/- and the A.O. completed the assessment on total income of Rs.2,26,89,287/-. In the assessment proceedings, the A.O. completed the assessment estimating the income @ 8% on impugned contracts, 6% on sub contracts, 2% on sub contracts given, however, the A.O. has not allowed the statutory allowance of depreciation. The Ld. CIT(A) has reduced the estimation of income but did not allow the depreciation. The depreciation is a statutory allowance which require to be allowed by the A.O., as per the decision of Hon’ble High Court in the case of Indwell Constructions Vs. CIT and the decision of CIT. vs,.Y.Ramachandra Reddy ITTA No.48/2002 dated 30/07/2014, Hon’ble High Court held that even though the A.O. rejected the books of accounts and estimated the income depreciation is allowable unless there is an occasion to disbelieve the purchase of machinery. The only argument in this case made by the assessee was to allow the depreciation. On the similar facts and circumstances, this Tribunal in assessee’s own case for the assessment year 2009-10 allowed the depreciation from the estimation of income. For the sake of convenience and clarify, we extract relevant paragraph of the ITAT’s order in para Nos.16 & 17, which reads as under: “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
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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, the income so computed works 4out to less than the income returned by the assessee, then, the total income so computed shall not go beyond the returned income and it should be restricted to the income returned by the assessee, since, the assessed income should not be less than the returned income.” 9. In the instant case there is no dispute that facts are similar to that of the assessee’s case for the assessment year 2009-10. The Ld. D.R. did not bring any other case law or distinguished the facts of the case. Therefore, respectfully following the view taken by the ITAT for the earlier year in the assessee’s own case, we direct the A.O. to allow the depreciation against the income estimated from the contract receipts. However, the income so computed shall not be less than the returned income. Accordingly, the appeal of the assessee is partly allowed.”
Since the facts are identical, respectfully following the view taken by this Tribunal in the assessee’s own case for the A.Y.2011-12, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. However, the income recomputed shall not be less than the returned income.
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Ground No.6 and 7 are related to the machinery rent and insurance received as part of main contract receipts. The AO while making the addition has not given any reason for separate addition for machinery rent and insurance claim. The Ld.CIT(A) deleted the addition holding that the machinery rent and insurance received related to the business income of the assessee, therefore, the AO was directed to include it as part of the business turnover. Further, the CIT(A) has given a finding in the appellate order that his predecessor CIT(A) and the ITAT, Visakhapatnam, for the A.Y.2009-10 has allowed the assessee’s appeal and treated the insurance receipt as part of the business income.
8.1. Machinery rent was separately treated as income from other sources by the AO without giving any reason. The said income was stated to be received from leasing out of machines. Once the AO treats the machinery rent as separate source of income, it is obligation of the AO to allow the expenditure relatable to machinery rent including the interest, repair and maintenance etc. and the depreciation separately to arrive at the income. However, no such exercise was done by the AO.
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8.2. Similarly, insurance received was a business claim stated to be part of assessee’s claim for loss of machinery. No details were furnished by the AO in the assessment order. During the appeal hearing the Ld. DR could not place any material on the additions made relating to machinery rent and the insurance claims. The Ld.CIT(A) directed the AO to treat the machinery rent as well as insurance claim as business receipt following the order of CIT(A) for earlier year. Since the department could not place any material to assess the machinery rent and insurance claim as a separate source of income, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue on this ground is dismissed.
The assessee filed cross objections supporting the order of the Ld.CIT(A). Since the order of the Ld.CIT (A) is upheld, cross objections filed by the assessee becomes infructuos, hence dismissed. A.Y. 2013-14 10. For the A.Y. 2013-14 the only issue is estimation of income and the allowance of depreciation thereon. For the A.Y.2012-13, the AO estimated the income @10% on main contracts, 8% on sub contracts and 4% on sub contracts given by the assessee. Thus, net profit from the gross contractual
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receipts were estimated @ Rs.4,89,41,116/-. The CIT(A) followed the order of this Tribunal and estimated the income @8%, 6% and 2% and directed the AO to allow the depreciation, interest and the remuneration to partners from the estimated income. Since the facts are identical, following the order of the Tribunal in the assessee’s own case, we decline to interfere with the order of the CIT(A) and dismiss the appeal of the revenue.
The assessee’s cross objections are in support of the CIT(A) order. Since the order of the CIT(A) is upheld cross objections becomes infructuous and hence dismissed.
In the result, appeal of the revenue for the A.Y. 2012-13 and A.Y.2013-14 as well as the cross objections are dismissed. Order pronounced in the open court on 30th April, 2019.
Sd/- Sd/- (िी.दुगााराि) (धड.एस. सुन्दरधसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयकसदस्य/JUDICIAL MEMBERलेखासदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नििधंक /Dated : 30.04.2019 L.Rama, SPS
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आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. रधजस्व/ The Revenue –Asst.Commissioner of Income Tax, Circle-2(1) Rajahmundry 2. निर्धाऩरती/ The Assessee-M/s K.Venkata Raju, D.No.2-59, Vemagiri, Kadiyam Mandalam, East Godavari Dist. 3. The Pr.Commissioner of Income Tax, Rajamahendravaram 4. The Commissioner of Income-Tax (Appeals), Rajamahendravaram 5. तिभागीयप्रतितिति, आयकरअिीिीयअतिकरण, तिशाखािटणम/DR, ITAT, Visakhapatnam 6.गार्ड फ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, Visakhapatnam