2014 (1) TMI 1397 - AT - Income Tax

Estimation of profit Held that - The decision in M/s. C. Eswara Reddy & Co. vs. ACIT 2011 (1) TMI 1238 - ITAT HYDERABAD followed - On examination of the books of account with reference to the voucher produced, the Assessing Officer found that the voucher does not tally with the cashbook - When the voucher does not tally with cashbook, the book results will not reflect the correct profit of the assessee - The Assessing Officer has rightly rejected the books of account - When the books of account were rejected the only method available to the Assessing Officer is to estimate the profit. The profit ratio cannot be a constant factor for each and every year - Tribunal has been uniformly estimating the profit from main contract at 8% to 12.5% depending upon the factual situation and 5% to 7% on the sub contract depending upon the factual situation - The income of the assessee is to be estimated at 8% of gross contract receipts unless the assessee furnished the details of seigniorage charges - Before the AO the assessee has not furnished details of contract receipts thus, the assessee is directed to furnish details of contract receipts as well as seigniorage charges - On receipt of these details, the AO shall apply the net profit at 8% on the contract receipts - the issue is remitted back to the AO for fresh consideration. Deletion of addition made u/s 68 of the Act No scope for further addition - Held that - The decision in Sri P.V. Sitaramaswamy Naidu vs. Addl. CIT 2014 (1) TMI 1266 - ITAT HYDERABAD followed - The availability of funds representing the intangible additions should be quantified not with reference to what the assessee offered for taxation but what was actually adopted in assessments for taxation - the assessee has failed to show how the addition u/s. 68 is related to estimated income - the addition made towards sundry creditors made u/s. 68 of the Act falls under the head income from other sources the order of the CIT(A) set aside and the matter remitted back to the AO - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Estimation of Income from Contract Work.
2. Consideration of Seigniorage Charges.
3. Depreciation on Estimated Income.
4. Payment of Interest and Salary to Partners.
5. Addition of Sundry Creditors under Section 68.

Issue-wise Detailed Analysis:

1. Estimation of Income from Contract Work:
The Department contended that the CIT(A) erred in reducing the estimated income from 8% to 7% of the gross receipts. The Tribunal referenced previous cases, notably M/s. C. Eswara Reddy & Co. vs. ACIT, where it was established that the profit ratio is not constant and can fluctuate based on various factors. The Tribunal upheld the CIT(A)'s estimation of profit at 8% for main contracts and 5% for sub-contracts as justified, considering similar judgments and factual situations.

2. Consideration of Seigniorage Charges:
The CIT(A) directed the exclusion of seigniorage charges from the contract receipts, which the Tribunal confirmed. The Tribunal cited the Supreme Court's decision in Brij Bhushanlal, which stated that materials supplied by the government do not have a profit element and should be excluded from contract receipts for profit estimation.

3. Depreciation on Estimated Income:
The Tribunal upheld the lower authorities' rejection of the depreciation claim on estimated income. It referenced Section 44AD, which deems deductions under Sections 30 to 38, including depreciation, as already given full effect. Therefore, no further deduction for depreciation on the estimated income is justified.

4. Payment of Interest and Salary to Partners:
The Tribunal allowed the deduction of interest and salary paid to partners from the estimated income, subject to the limitations of Section 40(b). It noted that although Section 44AD initially had a turnover limit, the restriction was removed effective from 1.4.2011, allowing such deductions.

5. Addition of Sundry Creditors under Section 68:
The Tribunal reversed the CIT(A)'s deletion of the addition of Rs. 26,50,535 towards sundry creditors. It emphasized that unexplained cash credits must be treated as income from undisclosed sources under Section 68, even if the business income is estimated. The Tribunal cited several judicial precedents, including the Supreme Court's decision in Devi Prasad Viswanath Prasad, affirming that unexplained credits can be taxed separately from estimated business income.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, confirming the estimation of income at 8% of gross contract receipts, excluding seigniorage charges, and allowing deductions for partner interest and salary. However, it upheld the addition of unexplained sundry creditors under Section 68, reversing the CIT(A)'s deletion. The order was pronounced on 21st January 2014.