2015 (3) TMI 1318 - AT - Income Tax

Rate of estimation of income in the hands of the firm - estimation of income at 8% - allowance of deduction towards interest and remuneration paid to partners u/s.40(b) - Held that - As seen from assessee s P&L A/c assessee s sales stood at ₹ 2.71 Crores, whereas its closing stock was at ₹ 2.88 Crores. Construction cost during the year is about ₹ 3.81 Crores. This indicate that the project has not yet been completed or partly completed. However, as seen from the P&L A/c placed on record which was basis for the Assessing Officer to make disallowances, assessee has earned gross profit at 15% and Net Profit 5.4%. Assessee has major liability in the form of interest on term loans for reduction in profit from 15% gross to 5% net. Keeping these factors and also the fact that assessee paid ₹ 14,51,871/- as interest on the term loans, apart from other expenditure to indicate that estimation by the CIT(A) at 8% on the gross receipts is reasonable. Revenue has not brought on record anything to counter how this estimation is less on the given set of facts. In view of this, we uphold the estimation at 8%. Statutory allowance of deduction u/s.40(b)- Allowance of interest on partners capitals and partners remunerations - Held that - All firms are uniformly assessable as firms only and there is no difference in tax rates. The profit derived from the partnership firm is exempt in the assessment of the partners as the same is being taxed at normal rates in the assessment of the partnership firm itself. Only salary or interest paid to the partners is subject to tax in the assessment of the partners as the same is excluded from the assessment of the partnership firm. Provisions of Section 40(b) allows interest paid to partners and remuneration paid to the partners as an allowable deduction, subject to certain conditions mentioned in Section 40(b) of the Act. Therefore, there is a change in the provisions itself from a disallowance provisions to allowance provisions subject to restrictions. Thus, w.e.f. 1993-94, Section 40(b) is enabling a deduction towards interest and remuneration paid to the partners by way of statutory deduction. Therefore, jurisdictional High Court judgment given for AY.1981-82 in the context of the provisions then existing is no longer applicable to the revised assessment procedure. This same view was held by various co-ordinate Benches - Decided against revenue

Summary

Issues Involved:
1. Rate of estimation of income in the hands of the firm.
2. Allowance of deduction towards interest and remuneration paid to partners under Section 40(b) of the Income Tax Act.

Detailed Analysis:

1. Rate of Estimation of Income:
The primary issue in this appeal is the rate of estimation of income in the hands of the firm. The Assessing Officer (AO) had initially disallowed 10% of the cost of construction claimed as possible inflation, 5% of the closing stock towards estimated suppression, certain payments through bearer cheques under Section 40A(3), amounts paid towards work contracts due to non-deduction of TDS under Section 40(a)(ia), and partly disallowed depreciation. This resulted in a total income determination of Rs. 96,21,910/- against the returned income of Rs. 6,36,055/-.

The Commissioner of Income Tax (Appeals) [CIT(A)], however, rejected the Books of Accounts and estimated the income at 8% of the turnover, allowing interest on partners' capital and remuneration paid to partners. The Revenue contested this estimation, arguing that 8% was very low and cited the decision of the Hon'ble High Court in the case of Indwell Constructions (232 ITR 776), which suggested that deduction towards interest and remuneration cannot be allowed.

The Tribunal considered the issue and noted that there is no hard and fast rule for fixing a ratio in estimating profits, which can vary from 8% to 12.5% depending on the factual situation. The Tribunal upheld the CIT(A)'s estimation at 8%, considering the factual matrix, including the firm's sales, closing stock, construction cost, and liabilities such as interest on term loans. The Tribunal found the 8% estimation reasonable and noted that the Revenue did not provide evidence to counter this estimation.

2. Allowance of Deduction Towards Interest and Remuneration Paid to Partners under Section 40(b):
The second issue revolved around the allowance of deduction towards interest and remuneration paid to partners. The AO had disallowed these deductions based on the decision in Indwell Constructions, arguing that once the Books of Accounts are rejected and profit is estimated, all expenditures are deemed to have been allowed, negating the need for separate deductions.

The Tribunal, however, noted that the provisions of Section 40(b) had undergone significant changes since the assessment year 1981-82, the period relevant to the Indwell Constructions case. From the assessment year 1993-94 onwards, firms are uniformly assessable, and the profit derived from the partnership firm is exempt in the assessment of the partners, with only salary or interest paid to partners being taxable in their hands. The Tribunal cited several co-ordinate Bench decisions and High Court judgments, including those of the Allahabad High Court in CIT Vs. Vijay Constructions [213 CTR 105] and the Punjab & Haryana High Court in CIT Vs. Supreme Builders [303 ITR 1 (P&H)], which supported the allowance of such statutory deductions even when the Books of Accounts are rejected.

The Tribunal concluded that the CIT(A)'s order allowing the deduction of interest and remuneration paid to partners under Section 40(b) was consistent with the revised provisions and the views expressed by co-ordinate Benches. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal upheld the CIT(A)'s estimation of income at 8% of the turnover and the allowance of deductions towards interest and remuneration paid to partners under Section 40(b), dismissing the Revenue's appeal. The judgment emphasized the evolving nature of tax provisions and the necessity of considering the factual matrix and legislative changes in tax assessments.