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2015 (11) TMI 1637 - AT - Income TaxAssessment order u/s 144 - estimation of net profit @ 12.5% on gross contract receipts - Held that - In the present case on hand, the assessee is a sub contractor executing works contract for main contractor. It is a admitted fact that element of profit is less in sub contract works when compared to main contract works. The CIT(A) after considering the facts and circumstances of the case rightly estimated 8% net profit in respect of sub contracts works executed directly by the assessee and 4% net profit in respect of sub contracts works executed by the assessee through third parties. Therefore, we are of the opinion that the CIT(A) has rightly estimated the net profit and his order does not require any interference. Hence, we are inclined to upheld the order of the CIT(A) on this issue. Additions made towards income from other sources - as per CIT(A) income from other sources being interest received, royalty and discount received is nothing to do with business activity of the assessee, therefore, even after estimation of net profit, these items should be brought to tax separately - Held that - We find force in the arguments of the Ld. D.R. that income from other sources being interest received, royalty and discount received are not connected with the business activity of the assessee. Therefore, while estimating the net profit from the contract receipts, these items cannot be included. There is no nexus between interest and Royalty receipts to works contract receipts. If these receipts are originated from work contracts, then definitely these items forms part of contract receipts. But, in this case, it is not so. The A.O. as well as CIT(A) rightly held that these items are separately taxable even in case of estimation of net profit from the contract receipts. Therefore, we upheld the order of the CIT(A) and reject the ground raised by the assessee on this issue. Claim of deduction of depreciation denied - Held that - We are of the opinion that depreciation is a allowable deduction, even after estimation of net profit on gross receipts. Accordingly, we direct the A.O. to allow the admissible depreciation against the income estimated from the contract receipts.
Issues Involved:
1. Estimation of net profit from contract receipts. 2. Addition towards income from other sources. 3. Claim of depreciation on fixed assets. Detailed Analysis: 1. Estimation of Net Profit from Contract Receipts: The case involves a partnership firm engaged in civil construction, which filed its return for the assessment year 2008-09. The Assessing Officer (A.O.) passed an ex-parte assessment order under section 144 of the Income Tax Act, rejecting the books of accounts due to the assessee's failure to furnish required details. The A.O. estimated the net profit at 12.5% on the total contract receipts, citing doubts about the genuineness of the expenses claimed. The CIT(A) reviewed the order and adjusted the gross contract receipts to Rs. 7,72,88,655, correcting the A.O.'s figure. The CIT(A) considered the assessee's status as a sub-contractor and scaled down the net profit estimation to 8% for works executed directly by the assessee and 4% for works executed through other contractors, referencing the ITAT Hyderabad Bench decision in ACIT Vs. Teja Constructions. The Tribunal upheld the CIT(A)'s decision, acknowledging the lower profit margins in sub-contract works compared to main contracts. The Tribunal found the CIT(A)'s estimation reasonable and consistent with past practices and case law, thus requiring no interference. 2. Addition Towards Income from Other Sources: The A.O. made separate additions for income from other sources, including interest received, royalty, and discounts, arguing these were unrelated to the contract works. The CIT(A) confirmed this view, stating these items should be taxed separately as they do not connect with the business activities of the assessee. The Tribunal agreed with the CIT(A) and the A.O., emphasizing the lack of nexus between these receipts and the contract works. The Tribunal upheld the separate taxation of these items, rejecting the assessee's contention that they should be included in the net profit estimation from contract receipts. 3. Claim of Depreciation on Fixed Assets: Both the A.O. and the CIT(A) rejected the assessee's claim for depreciation, asserting that once net profit is estimated, all deductions under sections 30 to 38 of the Act are considered allowed, precluding separate depreciation deductions. The assessee argued that depreciation is a statutory deduction and should be allowed even after net profit estimation. The Tribunal referred to its previous decisions, including ITAT Visakhapatnam Bench in Srivalli Shipping & Transports Pvt. Ltd., which supported the allowance of depreciation separately. The Tribunal directed the A.O. to allow the admissible depreciation against the estimated income from contract receipts, recognizing depreciation as a non-cash, statutory deduction essential for reflecting the true value of assets. Conclusion: - The appeal by the revenue was dismissed. - The appeal by the assessee was partly allowed, specifically regarding the allowance of depreciation. The above order was pronounced in the open court on 6th Nov'15.
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