2016 (4) TMI 696 - AT - Income Tax

Additions towards income from other sources - estimation of net profit - claim of depreciation - Held that - Once assessee himself has credited the income under the head Income from other sources , there is no merit in the assessee arguments that these items should be considered under block concept for claiming depreciation and to arrive at Written down Value as per section 50 of the Act. We further noticed that the assessee claims to have incurred a sum towards repair of the damaged excavator. Though assessee claims that it has incurred substantial amount for repair of the damaged excavator, the A.O. as well as the CIT(A) have failed to consider the fact that whether the said expenditure has been claimed as revenue in nature and debited to profit & loss account or capital in nature and added to the cost of the asset to claim depreciation. If the amount incurred towards repair of the vehicle is forming part of cost of the asset, then the assessee should have deducted the insurance claim from the block of asset. In this case, on verification of the depreciation schedule filed along with the return of income, we noticed that the assessee has not credited any amount in the depreciation schedule. At the same time, from the records, it cannot be ascertained that whether the expenditure is debited as a revenue expenditure or capital expenditure. Primafacia, from the entries in the financial statements, it appears that assessee has chooses to debit the relevant expenditure incurred towards repair of damaged Excavator to profit & loss account and credited the insurance claim into profit & loss account. However, in the absence of specific details and also the fact that both the authorities have failed to show any light on this aspect, we are of the opinion that the issue needs to be re-examined by the A.O. in the light of the above discussions. Hence, we set aside the issue to the file of the A.O. and direct the A.O. to verify the issue in the light of above discussion and pass fresh order after affording an opportunity of hearing to the assessee.

Summary

Issues:
1. Estimation of net profit from business activities.
2. Treatment of income from other sources including insurance claim and profit on sale of assets.

Estimation of Net Profit:
The case involved cross appeals by the assessee and Revenue against the Commissioner of Income Tax's order for the assessment year 2009-10. The assessee, engaged in various businesses, filed returns showing a total income. During scrutiny, the Assessing Officer (A.O.) found discrepancies in the books of accounts and estimated net profit at 6% on contract receipts. The assessee appealed, arguing for a lower net profit rate based on sub contract works. The CIT(A) directed to reduce the net profit estimation to 4.5% for contract receipts and 3% for hiring machinery. The assessee contested the additions made by the A.O. for income from other sources, but the CIT(A) upheld them. The Tribunal set aside the CIT(A)'s order on net profit estimation, directing the A.O. to re-examine the issue considering the nature of expenses and receipts.

Treatment of Income from Other Sources:
The A.O. had added income from insurance claim and profit on sale of assets as separate items under "Income from other sources." The assessee argued that the insurance claim should be part of the block of assets for depreciation calculation. However, the Tribunal noted that the assessee had treated these receipts as income from other sources in the financial statements. The Tribunal found discrepancies in the treatment of repair expenses related to the damaged excavator and directed the A.O. to re-evaluate the issue, emphasizing the need for clarity on the nature of expenses and their treatment in the accounts. The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal due to the tax effect being below a specified limit.

In a separate judgment, the Tribunal dismissed the Cross Objection filed by the assessee as it supported the CIT(A)'s order. The Tribunal emphasized the non-maintainability of the Revenue's appeal based on a CBDT circular.