2024 (10) TMI 583 - AT - Income Tax

Rejection of books of accounts - trading account - application of section 145(3) - HELD THAT - It is apparent that the gross profit and net profit of the assessee is improving. A comparative chart of net profit and gross profit shown by the assessee CIT(A) also shows that the gross profit and net profit shown by the assessee is comparative. AO has not given any comparable instance of a contractor of similar size which earns profit rate of 8% after granting of deduction of interest expenditure. According to us, when contractor is working on borrowed funds from the Bank, interest thereon should be granted to the assessee as deduction. Therefore, on the basis of the facts and circumstances and comparative history of the assessee for earlier years, we direct the AO to compute the net profit of the assessee @ 8% of the gross receipt and then grant deduction of depreciation allowance, interest paid to banks and other parties, partners and remuneration to the partners. Disallowance u/s. 40A(3) - This issue is covered in favour of the assessee by the decision of Hindustan Equipments Pvt. Ltd 2013 (3) TMI 221 - MADHYA PRADESH HIGH COURT wherein it is held that once net profit rate is applied to compute the income there is no scope of disallowance u/s. 40A(3) - In the present case, undisputedly, profit is estimated @ 8% subject to adjustment. Therefore, respectfully following the above decision, we delete the disallowance made u/s. 40A(3). Deduction on interest expenditure paid to bank other party - A.Y. 2017-18 - We find that the facts /issues are similar as supra wherein the lAO is directed to grant deduction of interest expenditure paid to 3rd party and banks after the profit determination of 8% along with the interest and remuneration to the partners and depreciation allowance. Therefore, the assessee should be allowed deduction interest expenditure also.

Summary

Issues:
Appeal against assessment orders for A.Ys. 2017-18 & 2018-19, rejection of books of account, addition of Rs. 89,02,077/- in trading account, application of section 145(3) of the Act, denial of deduction of interest paid to third parties, disallowance under Section 40A(3) of the Act.

Analysis:
1. The appellant, a contractor, challenged the rejection of books of account and additions made by the Assessing Officer. The AO estimated net profit at 8% of gross receipts, disallowed interest paid to third parties, and invoked Section 145(3) of the Act. The CIT(A) upheld the AO's actions. The appellant contended that interest payments should be deductible when estimating profit. The ITAT directed the AO to compute net profit at 8% of gross receipts and allow deductions for interest payments, depreciation, and remuneration to partners. Ground No. 6 allowed.

2. Regarding disallowance under Section 40A(3) of the Act, the ITAT held that once net profit is estimated, further disallowances are unnecessary. Citing a Madhya Pradesh High Court decision, the ITAT deleted the disallowance of Rs. 3,75,000. Ground No. 9 allowed.

3. In a similar case for A.Y. 2018-19, the AO estimated income at 10% of net profit, later reduced to 8% by the CIT(A). The appellant sought deduction for interest expenditure paid to banks and third parties. The ITAT, following the decision in A.Y. 2017-18, directed the AO to allow deductions for interest expenditure post-profit estimation. Ground No. 6 allowed.

4. Both appeals were partly allowed, with the ITAT directing adjustments in profit computation and disallowance under Section 40A(3) of the Act. The judgments were pronounced on 26/09/2024.