THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), RAJAHMUNDRY vs. K.VENKATA RAJU, RAJAHMUNDRY

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ITA 501/VIZ/2019Status: DisposedITAT Visakhapatnam07 April 2022AY 2008-099 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that when income is estimated, all deductions are deemed to have been taken into account. Therefore, further deductions like depreciation cannot be allowed from the estimated income. The CIT(A)'s direction to allow depreciation was set aside.

What were the facts?

The Assessing Officer rejected the assessee's books of accounts and estimated net income at 9% on main contracts and 6% on sub-contracts, excluding depreciation. The CIT(A) reduced the net profit rate to 8% and 5% respectively, and allowed depreciation. The revenue appealed this decision.

What were the issues?

The primary issue was whether depreciation can be allowed as a deduction from income estimated by the Assessing Officer after rejecting the assessee's books of accounts.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 29,Section 145

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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM

Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE

For Appellant: Shri G.V.N.Hari, AR
Hearing: 10.03.2022Pronounced: 07.04.2022

Heard together (2 matters)

I.T.A.No.501/Viz/2019
CO No.153/Viz/2019

Read from the judgment's own cause title. This page is filed under one of them.

Per Shri Balakrishnan S, Accountant Member Condonation of Delay :

This appeal is filed by the revenue against the order of Commissioner of Income Tax (Appeals) [CIT(A)], Rajamahendravaram in ITA No.10322/2018-19 dated 30.04.2019 / Corrigendum dated

20.05.

2019 u/s 143(3) of the Income Tax Act, 1961 (in short ‘Act’) for the Assessment Year (A.Y.) 2008-09 with the delay of 4 days. The revenue

filed condonation petition submitting that the delay in filing the appeal

was due to unforeseen circumstances beyond the control of the revenue

which is neither deliberate nor intentional, hence requested to condone

the delay and admit the appeal.

After going through the condonation petition filed, we observe that there is sufficient cause for the delay in filing the appeal, hence, we

condone the delay and admit the appeal.

2.

The revenue raised the following grounds of appeal :

1.

The order of the Ld. CIT(A), Rajahmundry is erroneous on facts and in law.

2.

The CIT(A) erred in directing the Assessing Officer to allow depreciation from the net profit estimated from contractual receipt.

3.

The CIT(A) ought to have appreciated that in the case of Y Ramachandra Reddy, the Hon’ble AP High Court had allowed depreciation from profit estimated @ 12% and also on assumption that the provisions of Sec.44Ab were not in existence in the AY 1994-95, which stipulates only allowance of remuneration, interest paid to partners from the income estimated from such provisions and no other deduction including depreciation.

4.

The CIT(A) while directing the AO to estimate the net profit at 8% prescribed under the provisions of Sec,44AD, ought not to have allowed depreciation from such profits.

5.

The CIT(A) erred in not following the decision of Hon’bIe ITAT, 46), wherein it was held that once net profit is estimated at 8% of the gross receipts, the assessee is not eligible for separate deduction towards depreciation.

6.

The appellant craves leave to add or amend or alter or delete any ground at the time of hearing of the appeal.

7.

For these any other ground that may be urged at the time of appeal hearing before the Hon’ble ITAT, the estimation of net income clear of depreciation made by the AO be upheld.

The crux of the issue is allowability of depreciation from the estimation of income.

3.

Brief facts of the case are that the assessee firm is engaged in execution of civil contracts. During the A.Y.2008-09, the firm filed its return of income on 28.09.2008, declaring total income of Rs.2,48,42,090/-. After processing the return of income u/s 143(1), the case was selected for scrutiny through CASS and accordingly notices

u/s 143(2) & 142(1) were issued. In response to the notices, the assessee

filed letter dated 25.11.2010, stating that the books and other connected

records could not be produced as the said books and relevant records are with Insurance Company in respect of pending claim. The assessee also stated that with the help of CD, hard copies of ledger and day book have been printed and filed before the AO. Subsequently, summons u/s 131 were issued on the assessee on 21.12.2010. In response to the summons,

Shri Kola Srinivas, partner of the firm appeared on 24.12.2010. A statement was recorded u/s 131. Sri Kola Srinivasa stated that the books

of account for the A.Y.2008-09 have been submitted to the Insurance

Surveyor, Coimbatore in April 2010 in connection with finalization of an insurance claim. He also stated that construction of Palemvagu project

near Bhadrachalam, Khammam District was completely collapsed due to heavy floods in the month of August. The books of accounts were submitted to the insurance surveyor as called upon by the United India

Insurance. Based on the submissions before the AO, the AO observed that the assessee produced some self made vouchers with respect to salary

payments and labour payments. The AO also noticed that the assessee has failed to comply with the provisions of section 194C of the Act and concluded that the expenditure vouchers produced by the assessee cannot

be relied upon. The AO also observed that in the audit report furnished by the assessee, it was mentioned that the payments in excess of Rs.20,000/-

made by way of cheque or demand draft could not be verified as necessary

evidence was not in possession of the assessee. In view of the above

discrepancies noticed, the AO rejected the books of accounts of the assessee and estimated the net income at 9% on gross receipts of main contract works and 6% on the gross receipts of the sub contract works

clear off depreciation, interest and remuneration to partners. This proposal was agreed by the assessee also as observed by the AO. The AO

as mentioned in para 10 of the assessment order, estimated total income

at Rs.4,38,33,473/-.

3.

Aggrieved by the order of the AO, the assessee filed appeal before

the CIT(A), Rajahmundry. The Ld.CIT(A) based on the submissions made

by the assessee and relying on the Hon’ble Juri ictional Tribunal,

Visakhapatnam in ITA No.270/Viz/2016 dated 22.12.2017 in the assessee’s own case for the A.Y.2011-12, estimated the income @ 8% on main contracts and @5% on sub contract works.

4.

Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal

before us. The Ld.DR, referring to page No.6 of the assessment order,

submitted that the assessee has agreed for the estimation of income by the AO. The Ld.DR relied on the decision of Hon’ble juri ictional High Court paragraph :

“The pattern of assessment under the Income-tax Act is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 and 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If these books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgement. When such an estimate is made it is in substitution of the income that is to be computed under section 29. In other words, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account.”

The Ld.DR also relied on the decision of G.Raja Gopala Rao Vs.

Deputy Commissioner of Income Tax, Circle-4(1), Visakhapatnam Bench.

The Ld.DR pleaded that the order of the AO shall be upheld.

5.

On the contrary, the Ld.AR relied on the decision of assessee’s own

case for the A.Y.2009-10. The Ld.AR also stated that they are not contesting allowability of interest and remuneration, but pressing on the allowability of depreciation from the estimated income.

6.

We have heard both the parties, perused the material available on record and also the orders of the authorities below. We find from section 29 of the Income Tax Act that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections

30 to 43D. As quoted by the Ld.DR, we note that all deductions are referred to under section 29 are deemed to have been taken into account

while making such an estimate. This means that the allowability of expenditure as specified in section 28 to 44 are deemed to have been allowed and no further deductions shall be allowed when the incomes are estimated. We also note that the Ld.CIT(A) has adopted net profit of 8%

on gross contract receipts, which is reasonable.

The Ld.CIT(A) after considering the facts and circumstances of the case

rightly estimated the net profit at 8% on gross contract receipts. However

we are of the view that the Ld.CIT(A) has erred in allowing further

deduction such as interest / remuneration to partners and depreciation. Gopala Rao Vs. Deputy Commissioner of Income Tax, Circle-4(1) [163 ITD

46], Visakhapatnam Bench we are inclined to set aside the directions of the Ld.CIT(A) w.r.t allowing further deduction such as interest /

remuneration to partners and depreciation from the estimated income,

and allow the appeal of the revenue.

7.

The assessee filed cross objections. Since we upheld the order of the Ld.CIT(A), on the estimated rate, ground No.2 is dismissed.

8.

With regard to Ground No.3 of the cross objections, since the order of the Ld.CIT(A) is dismissed with regard to allowing of depreciation from the income estimated, this ground is also dismissed. The Ld.AR further has not pressed on the allowability on partners remuneration and interest on capital, hence, dismissed as not pressed.

9.

Other grounds in the cross objection are general in nature and need not be adjudicated.

10.

In the result, the appeal of the revenue is allowed and the cross objections of the assessee are dismissed.

Order pronounced in the open court on 07th April, 2022. (दुव्िूरु आर.एऱ रेड्डी) (एस बाऱाकृष्णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) न्याययकसदस्य/JUDICIAL MEMBER ऱेखा सदस्य/ACCOUNTANT MEMBER Dated : 07.04.2022 L.Rama, SPS आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. रधजस्व/The Revenue – Asst.Commissioner of Income Tax, Circle-2(1) Rajahmundry 2. ननधधाररती/ The Assessee– M/s K.Venkata Raju, D.No.2-59, Vemagiri Kadiam Mandal, Rajahmundry

3.

The Principal Commissioner of Income Tax, Rajamahendravaram 4. आयकर आयुक्त (अऩीऱ)/ The Commissioner of Income Tax (Appeals), Rajamahendravaram

5.

ववभधगीय प्रनतननधध, आयकर अऩीऱीय अधधकरण, ववशधखधऩटणम/ DR,ITAT, Visakhapatnam 6.गधर्ा फ़धईऱ / Guard file

आदेशधनुसधर / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam

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