2014 (5) TMI 344 - AT - Income Tax

Gross receipts to be estimated @5% instead of 3% - Rejection of books of accounts Held that - The estimation of income of the assessee made by the assessing officer adopting a rate of 5% is on higher side, and it would meet the ends of justice if the income is estimated applying a rate of 3% - the assessee does not own trucks used in the business and is incurring huge incidental expenditure - From such income estimated applying rate of 3%, deduction towards interest and remuneration to partners in terms of S. 40(b) of the Act may be allowed - the assessee produced the books of account and vouchers - On examination of the books of account with reference to the voucher produced, the AO found that the voucher does not tally with the cashbook - When the voucher does not tally with cashbook, the assessee has not maintained the books of account properly - the book result will not reflect the correct profit of the assessee - the AO has rightly rejected the books of account thus, there was no infirmity in the order in rejecting the books of account and estimating the profit Decided against Assessee. Claim of seigniorage charges Held that - The material supplied by the Government/contractor will not have any element of profit - it shall be reduced from the contract receipts - the seigniorage charges shall be reduced from the total contract receipts for the purpose of estimating the profit thus, the AO is directed that while computing the total contract receipts the seigniorage charges shall be reduced from the total contract receipts for the purpose of estimating the profit. Estimation of income @5% - Grant of depreciation - Held that - Following Indwell Constructions Versus Commissioner Of Income-Tax 1998 (3) TMI 121 - ANDHRA PRADESH High Court - the deduction available u/ss. 30 to 38 shall be deemed to have been already given full effect and no further deduction under those sections shall be allowed - Depreciation is allowable u/s. 32 of the Income-tax Act - as provided in section 44AD no further/separate deduction shall be allowed - the claim of depreciation on the estimated income is not justified. Payment of interest and salary to the partner Held that - The provision of section 44AD as it is applicable for the assessment year under consideration and the amendment made with effect from1.4.2011 it is obvious that the Legislature intended to allow the interest and salary separately from the estimated income the AO is directed to allow the salary and interest paid to the partner subject to the limitation provided in section 40(b) of the Act Decided against Revenue.

Summary

Issues Involved:
1. Rejection of books of account and estimation of profit.
2. Applicability of past Tribunal decisions and High Court judgments.
3. Allowance of depreciation and financial charges from estimated income.
4. Determination of correct profit percentage for income estimation.

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Profit:
The Assessing Officer (AO) rejected the books of account due to the inability of the assessee to produce complete and verifiable vouchers for freight charges. The AO estimated the income at 5% of the turnover, clear of all expenditures. The CIT(A) acknowledged the shortcomings in the maintenance of books and upheld the rejection but directed the estimation of profit at 3% instead of 5%, based on comparable cases and judicial precedents.

2. Applicability of Past Tribunal Decisions and High Court Judgments:
The CIT(A) and the Tribunal relied on past decisions, particularly the case of M/s. Veeravadivel Murugan Transport Agency, where the profit was estimated at 3% of gross receipts, net of all expenses. The Tribunal also referenced the case of C. Eswar Reddy & Co., which supported the deduction of interest and remuneration from estimated profits. The Tribunal emphasized that the estimation of profit should consider comparable cases and material available on record.

3. Allowance of Depreciation and Financial Charges from Estimated Income:
The CIT(A) and the Tribunal followed the principle that depreciation and financial charges should be deducted from the estimated profit, as supported by the CBDT Circular No. 29-D dated 31.8.1965. The Tribunal noted that the deduction of depreciation is justified when proper particulars are furnished, aligning with the decisions in similar cases like Sree Venkateswara Swamy Lorry Service and Jain Constructions.

4. Determination of Correct Profit Percentage for Income Estimation:
The AO initially estimated the profit at 5%, but the CIT(A) and the Tribunal found this to be on the higher side. They directed the profit to be estimated at 3%, considering the nature of the assessee's business and the use of hired vehicles. This decision was based on the Tribunal's earlier rulings, which suggested that a 3% profit estimation was more appropriate for businesses with similar operational structures and financial records.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to estimate the profit at 3% of gross receipts, net of all expenses, and denied the allowability of depreciation separately. Both the Revenue and the assessee's appeals were dismissed, confirming the CIT(A)'s order in toto. The judgment reinforced the importance of consistency in applying judicial precedents and the necessity of considering the specific facts and circumstances of each case in profit estimation.