ACIT, CIRCLE-10, KOLKATA, KOLKATA vs. M/S GOURANGALAL CHATTERJEE, KOLKATA

This appeal of the revenue arises out of the order of the Learned CIT(A), XII, Kolkata in Appeal No. 951/XII/Cir-10/09-10 dated 13-02-2012 for the assessment year 2007-08 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

3. The brief facts of this issue is that the assessee is a company engaged in civil construction contracts awarded by Government departments. During the assessment year under appeal, the assessee filed its return of income declaring taxable income of Rs. 18,63,450/-. The accounts of the assessee were duly subjected to tax audit u/s 1 M/s. Gourangalal Chatterjee Construction Private Ltd 44AB of the Act. The net profit reported by the assessee was 2.03% of net contract receipts. During the course of assessment proceedings, the assessee did produce the books of accounts and filed details called for by the Learned AO. However, the Learned AO resorted to estimate the net profit from contract business @ 8% of total contract receipts and accordingly added a sum of Rs. 55,72,100/-. On first appeal, it was pleaded by the assessee that deduction towards bank interest , bank charges and depreciation should be allowed to be deducted from the estimated business profit of 8% u/s 44AD of the Act. The Learned CIT(A) found that if the same are reduced, then the resultant profit would be 2.1% and accordingly, the Learned CIT(A), to meet the ends of justice, resorted to estimate the net profit @ 2.5% of contract receipts. Aggrieved, the revenue is in appeal before us on the following grounds:-

1. That on the facts and in law, the Ld CIT(A) has erred in deducting bank interest, bank charges and depreciation from the profit worked out u/s 44AD of the I Tax Act, 1961, instead of the total receipt of the business.

2. The A.O. rejected the accounts u/s 145 of the I Tax Act, 1961, and calculated the profit @ 8% of net contract receipt, as the assessee did not provide necessary details as required and also did not even produce books of accounts on being specifically asked for. The Ld CIT(A) has erred in fact and law to estimate the net profit @ 2.5% of the business turnover of the assessee.

2 M/s. Gourangalal Chatterjee Construction Private Ltd a) Decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs Earth Tech Engineers reported in (2014) 46 taxmann.com 287 (P&H) b) Decision of Hon’ble Andhrapradesh High Court in the case of CIT vs Y. Ramachandra Reddy reported in (2014) 50 taxmann.com 129 (AP) c) Decision of Co-ordinate Bench of this Tribunal in the case of Amplified Engineers vs Addl CIT in for Asst Year 2005-06 dated 26.8.2011.

5.1. We find that the assessee had taken secured loans of Rs. 326.89 lakhs on which bank interest of Rs. 35,08,977/- and bank charges of Rs. 6,57,561/- was incurred by the assessee. Similarly fixed assets to the tune of Rs. 80,27,539/- was used for civil construction business and depreciation thereon of RS. 12,87,911/- was claimed as allowance u/s 32 of the Act by the assessee. The Learned CIT(A) found that these figures of bank interest, bank charges and depreciation , if reduced from the estimated profit of 8% of net contract receipts, the resultant profit figure was 2.1%. We find that the assessee had explained before the Learned AO that the assessee was formed with an objective of taking over business of an existing partnership firm and in order

3 M/s. Gourangalal Chatterjee Construction Private Ltd to build credentials of the new company in Government records, the assessee accepted contracts at substantially lower rates. As a result, the profit margin during the year was low. This fact was not disproved by the Learned AO and no evidence was brought on record by the Learned AO to show that the tenders were won by the assessee at higher prices. We find that the Learned CIT(A) had sought to restrict the estimation of net profit @ 2.5% of contract receipts by making the following observations :- “8. The assessee's plea that in estimating income; deduction for the interest and depreciation should be separately allowed is also reasonable. The issue regarding allowance of depreciation in best judgment assessment was considered by the CBDT in its Circular no 290 and it was directed as follows:-

"Even where best judgment 'is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should es.timate the income without allowing depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year".

lncome-tax Officer v. Nikka Ram Sanjeev Kumar [1999] 69 ITD 195 (CHD.) (TM) where the Third Member held as follows:

“When an estimate of an income is made, all the inputs i.e., the expenses including interest paid for capital borrowed for the purpose of the business are allowable deductions. In doing so, it is to be seen whether the assessee borrowed capital for the purpose of the business and was used for the same. If so, then the interest thereon has to be allowed as a deduction. If, however, the assessee has sufficient capital and in spite of that borrowed money which was not utilised for the purpose of the business it is for the Assessing Officer to disallow the claim as the borrowed money was not for the purpose of the business. In the present case, there is no dispute regarding the capital borrowed which was utilised for the purpose of the business. Admittedly, it is allowable deduction. "

5 M/s. Gourangalal Chatterjee Construction Private Ltd 5.2. The following decisions relied upon by the Learned AR support the case of the assessee:-

CIT vs Earth Tech Engineers reported in (2014) 46 taxmann.com 287 (P&H HC) dated 13.3.2014, wherein the questions raised before their Lordships and decision rendered thereon are reproduced below:-

Questions: 1) Whether the Hon’ble ITAT was correct in law in confirming the order of the learned CIT(A) scaling down the net profit to 8% on the gross receipts as against 12% applied by the AO at the time of assessment? 2) Whether the Hon’ble ITAT was correct in law in confirming the order of the learned CIT(A) allowing the depreciation out of the net profit? Held : “7. The issue before this Court in CIT v. Chopra Bros. India (P) Ltd [2001] 252 ITR 412/119 Taxman 866 and Girdhari Lal v. CIT [2002] 256 ITR 318 [2001] 119 Taxman 863 was with regard to deduction to be made on account of depreciation from the gross receipts while applying net profit rate. It was held on the basis of a circular issued by the Board, which was binding on the revenue that the gross receipts to which net profit rate is to be applied shall be determined after giving allowance on account of depreciation.”

CIT vs Y.Ramachandra Reddy reported in (2014) 50 taxmann.com 129 (AP HC) dated 30.7.2014, wherein the questions raised before their Lordships and decision rendered thereon are reproduced below:- Questions: “1. Whether on the facts and in the circumstances of the case the Tribunal is correct in law in directing the Assessing Officer to allow depreciation and interest payments from the estimate of profit at 12%? 2. Whether on the facts and in the circumstances of the case the Tribunal is correct in law in directing the Assessing Officer to grant reliefs on those items which are not claimed by the assessee?

6 M/s. Gourangalal Chatterjee Construction Private Ltd

Held: 13. The learned counsel for the appellant is not able to point out any provision of law in the Act or Rules made thereunder, which restricts the allowance of the depreciation and interest. On the other hand, the facility created under the Act is so firm and strong that if for any reason it becomes impermissible or unnecessary for an assessee to seek the 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 Section 44AD of the Act, that provides for a comprehensive formula of determining net profit derived by a civil contract or at 8%, takes in its fold, allowance of depreciation, interest and other benefits. The fact, however, remains that such a provision was not in exercise in the Assessment Year 1994-95.

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. “

5.3. In view of the aforesaid facts and circumstances and respectfully following the aforesaid judicial precedents , we hold that depreciation and interest is allowable as deduction from the estimated net profit of 8% by the Learned AO and the resultant profit figure was 2.1% of contract receipts and further hold that the Learned CIT(A) had rightly estimated the net profit @ 2.5% of contract receipts to meet the ends of justice. Hence we don’t find any infirmity in the order of the Learned CIT(A). Accordingly, the grounds raised by the revenue are dismissed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 20- 01-2016