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2016 (8) TMI 1409 - AT - Income TaxNet profit rate at 7% on the gross receipts - Held that - The assessee is a civil contractor and the total receipts amounting to ₹ 9,96,62,747/- were shown during the year under consideration thereby showing the rate of profit @ 4.61%. AO took the net profit at ₹ 99,66,275/- after applying 10% rate to the total receipts. Against this the salary to partners was allowed and the net income was determined at ₹ 79,66,275/-. Against the said addition the assessee went in appeal before the ld. CIT(A) and the ld. CIT(A) applied a net profit at 7% on the gross receipts declared by the assessee. It was also held that the deprecation as claimed at ₹ 2,13,22,380/- may be allowed. While allowing the depreciation the CIT(A) relied upon the decision in the case of Lali Construction Co. vs. ACIT 2014 (9) TMI 500 - PUNJAB & HARYANA HIGH COURT in which, it was observed that the depreciation allowable from net profit even if the total income is computed by applying net profit rate. Several other Courts have also held the same view. Provisions of section 40a(ia) are not applicable as this amount has been shown in the hands of the receipt ant and which has suffered tax. As such the disallowance is not called for and the department has got no justification for coming in appeal before the Tribunal.
Issues Involved:
1. Application of net profit rate and separate deduction of depreciation. 2. Disallowance of depreciation on assets not in the firm's name. 3. Disallowance of interest paid without deduction of tax. Issue-wise Detailed Analysis: 1. Application of Net Profit Rate and Separate Deduction of Depreciation: The Revenue challenged the CIT(A)'s decision to apply a net profit rate of 7% and allow a separate deduction of depreciation after rejecting the books of account under section 145(3). The assessee, a civil contractor, declared total receipts of ?9,96,62,747/- with a net profit rate of 4.61%. The AO applied a 10% net profit rate, resulting in a net income of ?79,66,275/- after allowing salary to partners. The CIT(A) reduced the net profit rate to 7% and allowed depreciation of ?2,13,22,380/-. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) provided a well-reasoned and detailed order, considering all aspects, including the fact that the assessee was a sub-contractor, not the main contractor. The Tribunal also noted that the AO failed to justify the application of a 10% net profit rate based on comparable facts. 2. Disallowance of Depreciation on Assets Not in the Firm's Name: The AO disallowed depreciation of ?67,40,170/- on assets not in the firm's name, arguing that the assets should be owned by the assessee to claim depreciation. The assessee contended that the assets were used for business purposes, regardless of being in the partner's name, and relied on several judicial precedents supporting this view. The CIT(A) allowed the depreciation, emphasizing that the assets were indeed used for business purposes and not for personal use of the partners. The Tribunal agreed with the CIT(A), referencing the decision of the Punjab & Haryana High Court in Lali Construction Co vs. ACIT, which supports the allowance of depreciation from net profits even if the total income is computed by applying a net profit rate. 3. Disallowance of Interest Paid Without Deduction of Tax: The AO disallowed interest payments totaling ?58,76,454/- to various NBFCs under section 40(a)(ia) for not deducting tax at source. The assessee argued that the interest had already been subjected to tax in the hands of the recipients and that no further disallowance was warranted once the net profit rate was applied. The CIT(A) agreed, citing precedents where courts held that applying a net profit rate negates the need for further disallowances. The Tribunal upheld this view, referencing multiple judicial decisions, including the Andhra Pradesh High Court in Maddi Sudarsanam Oil Mills vs. CIT and the Allahabad High Court in CIT vs. Banwarilal Bansidhar, which support the non-applicability of section 40(a)(ia) disallowances when a net profit rate is applied. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s application of a 7% net profit rate, allowance of depreciation on assets used for business purposes, and deletion of disallowance of interest paid without tax deduction. The Tribunal found no infirmity in the CIT(A)'s detailed and well-reasoned order.
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