2016 (1) TMI 1413 - AT - Income Tax

Net profit estimation - CIT-A estimating the net profit @ 2.5% of contract receipts of the assessee as against 8% adopted by the Learned AO - accounts of the assessee were duly subjected to tax audit u/s 44AB -HELD THAT - Depreciation and interest is allowable as deduction from the estimated net profit of 8% by the Learned AO and the resultant profit figure was 2.1% of contract receipts and further hold that the Learned CIT(A) had rightly estimated the net profit @ 2.5% of contract receipts to meet the ends of justice. Hence we don t find any infirmity in the order of the CIT(A). Accordingly the grounds raised by the revenue are dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) was correct in estimating the net profit at 2.5% of contract receipts instead of 8% as adopted by the AO.
2. Whether the CIT(A) erred in deducting bank interest, bank charges, and depreciation from the profit worked out under Section 44AD of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Estimation of Net Profit:
The central issue in this appeal is whether the CIT(A) was justified in estimating the net profit at 2.5% of the contract receipts as opposed to the 8% adopted by the AO. The assessee, a company engaged in civil construction contracts, declared a taxable income of Rs. 18,63,450/- with a net profit of 2.03% of net contract receipts. The AO rejected the books of accounts under Section 145 of the Income Tax Act, 1961, and estimated the net profit at 8% of total contract receipts, adding Rs. 55,72,100/- to the income. The CIT(A) found that if bank interest, bank charges, and depreciation were deducted from the estimated profit of 8%, the resultant profit would be 2.1%. Therefore, to meet the ends of justice, the CIT(A) estimated the net profit at 2.5% of contract receipts, resulting in a business income of Rs. 22,93,668/-, providing relief of Rs. 51,41,882/- to the assessee.

2. Deduction of Bank Interest, Bank Charges, and Depreciation:
The CIT(A) allowed deductions for bank interest, bank charges, and depreciation from the estimated profit, which was contested by the revenue. The CIT(A) cited several judicial precedents and a CBDT circular to support the decision. The CBDT circular no. 290 and various High Court rulings, including CIT v. Friends Corporation and CIT v. Y. Ramachandra Reddy, were referenced to justify that depreciation and interest should be allowed as deductions even in cases of best judgment assessment. The CIT(A) also referred to the Third Member ITAT Chandigarh decision in Income-tax Officer v. Nikka Ram Sanjeev Kumar, which held that all expenses, including interest, should be allowed as deductions when estimating income.

The tribunal found that the AO's estimation of 8% was not supported by the provisions of the Act, as Section 44AD was not applicable due to the contract receipts exceeding Rs. 40 lakhs. The tribunal agreed with the CIT(A) that the net profit should be estimated at 2.5% of the contract receipts after allowing for the deductions of bank interest, bank charges, and depreciation.

Conclusion:
The tribunal upheld the CIT(A)'s order, concluding that the estimation of net profit at 2.5% of contract receipts was justified and that the deductions for bank interest, bank charges, and depreciation were correctly allowed. The appeal of the revenue was dismissed.

Final Judgment:
In the result, the appeal of the revenue is dismissed. The order was pronounced in open court on 20-01-2016.