2014 (12) TMI 847 - HC - Income Tax

Estimation of NP @ 11.5% against 12.5% - Grant of deduction on account of partners capital and salary to partners and also interest and financial charges Whether in an assessment made by an AO u/s 145 and 144, deductions provided for u/s 30 to 38 of the Act are permissible - Held that - There is evidence to show that the AO himself was not consistent - If in fact, the exercise undertaken u/s 145 and 144 of the Act is so comprehensive, there was no occasion to allow any deduction at all - depreciation u/s 32 was allowed by him, in the order of assessment itself - Secondly, none of those two sections contain any provision to the effect that the deductions u/s 32 to 38 are deemed to have been made - once a provision of that nature is not incorporated u/s 144 and 145 of the Act, the contention of the revenue cannot be accepted - once it was held that even where the assessment is done u/s 145 of the Act, normal deductions are to be allowed, there is no way that the AO could have denied deduction of the salaries to the partners and interest on financial charges - It is not even mentioned that the claims are not factually correct thus, the order of the Tribunal is upheld - Decided against revenue.

Summary

Issues:
1. Estimation of net profit by the Appellate Tribunal.
2. Deduction of interest on capital, salary to partners, and financial charges.

Estimation of Net Profit:
The High Court addressed the challenge to an order passed by the Income Tax Appellate Tribunal regarding the estimation of net profit for the assessment year 1994-95. The assessing officer initially estimated the net profit at 12.5% on the net contract receipts, disallowing deductions for interest on capital and salaries paid to partners. The Commissioner of Income Tax (Appeals) later directed the net profit to be estimated at 11.5% and allowed deductions for interest on capital and salaries paid to partners. The Tribunal, following a precedent, allowed deduction of interest on other loans as well. The Revenue contended that once an assessment is done under Section 145 of the Income Tax Act, no other deductions are permissible, akin to the provisions of Section 44AD. However, the respondent argued that Section 145 does not prohibit ordinary deductions beyond the best judgment assessment under Section 144. The High Court held that deductions under Sections 30 to 38 of the Act are permissible even in assessments under Sections 145 and 144, rejecting the Revenue's contention.

Deduction of Interest and Salary:
The second issue revolved around the deduction of interest on capital, salaries to partners, and financial charges. The High Court noted that if normal deductions are allowed even in assessments under Section 145, the assessing officer could not have denied deductions for salaries to partners and interest on financial charges without factual discrepancies being mentioned. The Court found in favor of the assessee, stating that the assessing officer's denial of these deductions was not justified. The Court upheld the Tribunal's decision, dismissing the appeal by the Revenue and ruling in favor of the assessee. No costs were awarded in the judgment.

In conclusion, the High Court addressed the challenges raised regarding the estimation of net profit and the deduction of interest on capital, salaries to partners, and financial charges. The Court clarified that deductions under Sections 30 to 38 of the Income Tax Act are permissible even in assessments under Sections 145 and 144, rejecting the Revenue's argument to the contrary. The Court also found that the assessing officer's denial of deductions for salaries to partners and interest on financial charges was unjustified, ruling in favor of the assessee.