2013 (4) TMI 309 - AT - Income Tax

Taxing the Net Profit at 8% or 9% of gross receipts on estimation - Held that - The issue raised by the assessee is partly covered by the decision of the Tribunal in assessee s own case for the Assessment Year 2003-04 which was followed by the AO in the Assessment Year 2004-05. Thus the contention of the assessee has to be interpreted on the basis of financial statements duly submitted along with the return and were considered for estimation after rejecting the book result. The bifurcation between the contract receipts and the hiring out receipts was considered for computation of correct income by the assessing authorities when the same rate has been applied to both the nature of receipts. The assessee has submitted that the interest is part and parcel of the assessee s expenditure when the secured loans are against the assets held by the assessee amounting to more than Rs.5 Crores. Similarly the interest earned by the assessee has no bearing to the expenditure of interest along with the depreciation claimed when the CIT(A) has considered taxation of the contract receipts at 8% net of depreciation. That means the bulk of the secured loans against which assets are held requires claim of interest and depreciation in accordance with the law and not because the assessing authorities have tried to tax 8% of the gross receipts when the direct expenditure being interest and depreciation on account of hire receipts would lead to loss in the business of hiring out would be paid for by the assessee from the contract receipts leading the net income of 6.45% only. The assessee has returned more than 8% as per the benchmark of Section 44AD provisions which the authorities have applied clinches the issue in favour of the assessee that the estimation has to be in accordance with the provisions of law as was also considered by the Tribunal in assessee s own case for the Assessment Year 2003-04 when the assessment having been made by the AO in the impugned AY u/s.144 required consideration of the computation of the correct income as rendered to tax by the assessee. The depreciation and interest being indirectly paid could not be segregated required by the assessee being integral part of the consolidated business of the assessee being a Private Limited Company was to be considered insofar as the contention of the CIT-DR that the service tax percentage income at 0.8% could also be retained by the assessee has been explained by the assessee in the form of the ratio of Net Profit being 6.45% will be below the estimation as well. In this view of the matter, set aside the impugned order of the CIT(A) and direct the AO to tax 8% of the gross receipts net of service tax and allow interest and depreciation thereafter insofar as the income should not be rendered less than as returned by the assessee in the first place - in favour of assessee.

Summary

Issues:
Estimation of income at 8% by Assessing Officer, Separate taxation of interest income, Consideration of service tax in estimation, Application of Section 44AE for computation, Interpretation of financial statements for estimation.

Estimation of income at 8% by Assessing Officer:
The appeal raised the issue of the Assessing Officer estimating income at 8% of total receipts, including interest income, for a Private Limited Company deriving income from civil construction works. The Counsel argued that the estimation was misinterpreted as it did not consider interest and depreciation correctly. The CIT(A) reduced the estimation to 8% net of depreciation but separately taxed interest income without considering the interest paid by the company. The Tribunal found that the interest and depreciation should be allowed after taxing 8% of gross receipts net of service tax, ensuring the income is not less than initially declared.

Separate taxation of interest income:
The Assessing Officer separately taxed interest income without considering the interest paid by the company, leading to a higher estimation of income at 8% of total receipts. The Counsel argued that interest and depreciation should be considered together to ensure a fair estimation of income. The Tribunal directed the Assessing Officer to tax 8% of gross receipts net of service tax and allow interest and depreciation thereafter, ensuring the income is not reduced below the initial declaration.

Consideration of service tax in estimation:
The Counsel argued that service tax should be eliminated from gross receipts for accurate estimation as it was not part of the company's income. The CIT-DR supported the estimation at 8% of gross receipts, including service tax, as it was not claimed as an expenditure. The Tribunal directed to tax 8% of gross receipts net of service tax and allow interest and depreciation thereafter to prevent the income from being less than initially declared.

Application of Section 44AE for computation:
The Counsel contended that the application of Section 44AE for computation was not correctly done as the Assessing Officer did not consider interest and depreciation in estimating income at 8% of total receipts. The Tribunal held that interest and depreciation should be allowed after taxing 8% of gross receipts net of service tax, ensuring the income is not reduced below the initial declaration.

Interpretation of financial statements for estimation:
The Tribunal interpreted the financial statements submitted by the company along with the return for accurate estimation of income. It considered the bifurcation between contract receipts and hiring out receipts, ensuring interest and depreciation were factored in after taxing 8% of gross receipts net of service tax. The Tribunal set aside the CIT(A) order and directed the correct computation of income to prevent it from being less than the initial declaration, ultimately allowing the appeal of the assessee.