2000 (2) TMI 202 - AT - Income Tax

Summary

Issues Involved:
1. Sustaining the addition of Rs. 7,07,336 to the declared income by applying a net profit rate of 10% on the contract receipt.
2. Allowing depreciation to the assessee despite the AO's application of a net profit rate inclusive of depreciation.

Issue-wise Detailed Analysis:

1. Sustaining the Addition of Rs. 7,07,336:
The assessee contested the addition of Rs. 7,07,336 to their declared income by applying a net profit rate of 10% on the contract receipt from MES amounting to Rs. 72,14,922. The assessee argued that the net profit was reduced due to unpaid claims of Rs. 6,67,260 for extra work executed on oral instructions from MES authorities. The expenditure for this extra work was incurred and completely vouched, and the non-payment reduced the profit rate. The AO rejected the books of account due to certain expenses not being supported by proper vouchers and applied a net profit rate of 10%.

The Tribunal considered the submissions and noted that the assessee maintained proper books of account and followed a hybrid system of accounting, where expenditure is accounted for on an accrual basis while contract receipts are accounted for on a receipt basis. The Tribunal found that the assessee's claim for extra work was real and substantial, supported by the appointment of an arbitrator to resolve the dispute. The Tribunal held that the assessee was not liable to account for the unpaid amount of Rs. 6,67,260 as income in the year under consideration, given the hybrid accounting system. The Tribunal directed the AO to accept the declared income from the contract business, noting that the decline in net profit was adequately explained by the unpaid claim.

2. Allowing Depreciation:
The Revenue contested the CIT(A)'s decision to allow depreciation to the assessee, arguing that the AO applied a net profit rate of 10% inclusive of depreciation. The Tribunal noted that the issue was covered against the Department by the Rajasthan High Court's decision in CIT vs. Jain Construction Co., which held that beneficial circulars issued by the Board are binding on Departmental authorities. The Tribunal cited the circular dated 31st August 1965, which clarified that depreciation allowance should be separately worked out and deducted from the estimated net profit. The Tribunal upheld the CIT(A)'s decision to allow depreciation, finding no merit in the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The Tribunal directed the AO to accept the declared income from the contract business, considering the unpaid claim for extra work and the hybrid accounting system followed by the assessee. The Tribunal also upheld the CIT(A)'s decision to allow depreciation, in line with the Rajasthan High Court's judgment and the relevant circular.