2013 (11) TMI 409 - AT - Income Tax

Estimation of income from works contract business - rejection of books of accounts - Disallowance of freight charges u/s 40(a)(ia) - TDS deduction u/s 194C - Held that - CIT(A) has accepted the contentions of the assessee that the profit from sub-contract works will be lower than the main contract works and accordingly maintained a difference of 2% in the rate of profit estimated for main contract works and sub-contract works. There should not be any dispute that the income estimated for a particular assessee would depend upon the facts and circumstances prevailing in that case and such kind of estimates cannot be generalized or standardised - assessee himself has declared a profit of 5.20% after depreciation on the combined Gross receipts - assessee deserves further reduction in the estimate made by the Ld. CIT(A) in view of the huge depreciation benefit available to the assessee - the matter would meet the ends of justice if the profit from main contract works is estimated @ 6.5% of the relevant net contract receipts. Since the Learned CIT(A) has maintained a difference of 2% between the income estimated for main contract works and sub-contract works, we also direct the assessing officer to estimate the income sub-contract works @ 4.5% of the relevant net contract receipts - Decided in favour of assessee. Business income or capital gain - Income from other sources - Interest on Fixed deposit receipts - Held that - facts were that on account of delay in payment of contract receipts, interest was paid additionally with reference to such delayed receipts, and, therefore, such interest was only accretion to the assessee s receipts from the contract works and was attributable to and incidental to the business carried on by it. There being a direct nexus between the contract receipts and interest thereon in the said case, the interest income was held as business income, whereas in the appellant s case, the interest income did not flow directly from the contract receipts, and, therefore, it cannot be said that the interest income had a direct nexus with such receipts, and, accordingly, it cannot be treated as business income of the appellant. Interest earned on bank deposits has to be assessed separately, even if the income from contract works is estimated - Following decision of CIT Vs. Govinda Choudhary and Sons 1992 (4) TMI 8 - SUPREME Court - Decided against Assessee. Disallowance prescribed under section 40(a)(ia) is a technical disallowance, which shall be attracted only if there is a failure on the part of the assessee to deduct and pay the TDS amounts as per the relevant provisions of the Act. It is also further seen that the expenses so disallowed can be claimed as expenditure in the year in which such failure is made good. The modalities prescribed in sec. 40(a)(ia) would show that the disallowance prescribed in that section is not an absolute disallowance to be made once for all, but it is only deferment of allowance of expenditure for non-compliance of TDS provisions. Where as, in the case of disallowances prescribed in other provisions like sec. 40A(1), 40A(3) etc., they are absolute disallowances, which are not allowed as expenses at all in computing the business income. Further such disallowances shall apply uniformly to all assessees - disallowance can be made under section 40(a)(ia) of the Act independently, even if the business income is estimated after rejecting the book results.

Issues Involved:
1. Estimation of income from contract business.
2. Assessment of interest received from banks on fixed deposits.
3. Disallowance made under section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Estimation of Income from Contract Business:
The assessee, a partnership firm engaged in civil contract works, filed its return declaring an income of Rs. 82,40,970/-. The Assessing Officer (AO) rejected the book results due to incomplete records and estimated the income at 8% of net contract receipts. The AO also assessed interest on fixed deposits separately under "Income from other sources" and disallowed freight charges under section 40(a)(ia) for non-deduction of tax at source.

The first appellate authority (CIT(A)) estimated income from subcontract works at 6% and confirmed the AO's estimation of 8% for main contract works. The assessee argued that the profit declared after depreciation was more than 5% and that the depreciation alone exceeded 8% of contract receipts, thus the estimated rates were high. The CIT(A) recognized the lower profit margin in subcontract works and maintained a 2% difference between main and subcontract works.

The Tribunal observed that the assessee declared a profit of 5.20% after depreciation and noted the significant depreciation benefit. It directed the AO to estimate the profit from main contract works at 6.5% and from subcontract works at 4.5%, modifying the CIT(A)'s order accordingly.

2. Assessment of Interest Received from Banks on Fixed Deposits:
The assessee claimed that interest on fixed deposits, used as security for contract works, should be treated as business income. The AO and CIT(A) assessed it under "Income from other sources," citing no direct nexus between the interest income and contract receipts.

The Tribunal upheld the CIT(A)'s view, referencing Supreme Court decisions (e.g., Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT) which held that interest on deposits does not qualify as business income. The Tribunal agreed that the interest income should be assessed separately, even if the business income is estimated.

3. Disallowance Made Under Section 40(a)(ia) of the Act:
The AO disallowed freight charges due to non-deduction of tax at source, and the CIT(A) confirmed this disallowance. The assessee argued that since the income was estimated after rejecting the books, no separate addition should be made based on the same books.

The Tribunal noted that section 40(a)(ia) prescribes a technical disallowance for non-compliance with TDS provisions, which is not an absolute disallowance but a deferment. It emphasized that such disallowance is linked to TDS compliance and cannot be equated with other disallowances. The Tribunal concluded that the disallowance under section 40(a)(ia) can be made independently of the estimation of business income and upheld the CIT(A)'s order.

Conclusion:
The appeal was partly allowed, with modifications to the income estimation from contract works and upholding the separate assessment of interest income and the disallowance under section 40(a)(ia).

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