2014 (7) TMI 1333 - AT - Income Tax

Estimation of income - Rejection of books of accounts - AO directing to apply net profit rate of 8.48% before allowing claim for depreciation, interest remuneration to partners and interest paid to third parties as against net profit rate applied by the A.O. at 10.5% subject to depreciation and interest and remuneration paid to the partners when provisions of sec. 145 - HELD THAT - Assessee is a partnership firm deriving its income from execution of contract work undertaken from Government department. The books of account were rejected u/s 145(3) and net profit rate was applied. The Tribunal has also confirmed the application of provisions of section 145(3) of the Act but the assessee had claimed interest paid to third parties while estimating profit under this section. This issue was stated to be covered by the decision of this very Bench rendered in the case of M/s Ganesh Garhia Construction Co. Vs. ACIT 2014 (5) TMI 1202 - ITAT JODHPUR - The issue of payment of interest to third parties being clearly covered by the Tribunal order and their consistent view, we modify the order accordingly by making observation that after invoking provisions of section 145(3) of the Act in this case, interest paid to third parties is also allowable.

Summary

Issues:
- Application of net profit rate and deductions in income calculation under section 145(3) of the Income-tax Act, 1961.

Analysis:
The appeal in this case was directed against the order of the ld. CIT(A), Bikaner, where the main ground raised was regarding the application of the net profit rate before allowing deductions for depreciation, interest, remuneration to partners, and interest paid to third parties. The Tribunal confirmed the application of section 145(3) of the Act, which allows for the rejection of books of account and the application of a net profit rate. However, the assessee claimed that interest paid to third parties should be considered while estimating profits under this section. The Tribunal referred to a previous decision in the case of M/s Ganesh Garhia Construction Co. and held that interest paid to third parties is allowable after invoking the provisions of section 145(3) of the Act.

The Tribunal recalled and modified its previous order to include the allowance of interest paid to third parties in the income calculation. The decision was based on the consistent view of the Tribunal on this issue. Consequently, the appeal was partly allowed, with the result of the appeal remaining the same. The order was pronounced on 15th July 2014.