2014 (1) TMI 832 - AT - Income Tax

Error in directing AO for estimation of the income Held that - As decided in assessee s own case in the previous years, the ITAT has estimated the profits of the Assessee @ 9% on own contract works, 8% on contracts taken by assessee on subcontracts and @ 5% on contracts given by the assessee to 3rd party on subcontracts - This estimate according to ITAT is before allowing remuneration, interest on capital and depreciation and hence ITAT directed that these amounts should be reduced out of the estimated income - Estimate of income may vary from case to case - The estimate may be gross profits after which other expenditure may be allowed or the estimate may of the net income after all the expenditure - their estimate of income as a percentage of Gross receipts is prior to allowance of depreciation, interest on capital and remuneration. The circumstances this year being identical as the earlier year and as Department has not brought anything on record to persuade us to take a different view - the order of the CIT(A) upheld regarding the rate of profits to be adopted on the gross receipts and a further allowance of remuneration, interest on capital and depreciation Decided against Revenue. Depreciation u/s 32 of the Act Held that - It falls under the provision of section 30 to 38 and be deemed to have been already given full effect while estimating the income of the assessee - thus, with respect to depreciation, the ground of appeal raised by the Revenue is allowed Decided partly in favour of Revenue. Deletion made appearing as liability Held that - The expenditure were of the nature claimed by the Assessee has been kept in mind for determining the estimated profits from business, none of the individual expenditure can be considered as having been allowed in computing the taxable income - In fact the books of the Assessee has been rejected and the profits have been estimated as a percentage of the gross receipts - the basic precondition for application of sec 41(1), allowance of the expenditure/ liability has been made in the assessment any previous year is not satisfied - This being the case the CIT(A) has correctly held that the addition appearing as liability in the books of account of the Assessee as profits u/s 41(1) is not sustainable the order of the CIT(A) deleting the addition upheld appearing as liability in the books of the Assessee and confirm the deletion of these amounts Decided partly in favour of Revenue.

Issues Involved:
1. Rejection of books of accounts and estimation of profits.
2. Addition of liability under Section 41(1) of the IT Act.
3. Treatment of insurance claim as income from other sources.
4. Addition of outstanding sundry creditors as income.
5. Allowance of remuneration, interest, and depreciation from estimated income.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Profits:
The Assessing Officer (AO) rejected the books of accounts of the assessee, a civil contractor, due to incomplete vouchers and unsupported expenses. The AO estimated the profits at 10% of the gross contract receipts. The CIT(A) referred to past years' assessments and the Hon'ble ITAT's directions, which suggested estimating profits at 9% for own contracts, 8% for subcontracts taken, and 5% for subcontracts given to third parties. The CIT(A) upheld this estimation and allowed depreciation, remuneration, and interest to partners. The ITAT confirmed this approach, noting the consistency with past assessments and the absence of new evidence from the Revenue to warrant a different view.

2. Addition of Liability under Section 41(1) of the IT Act:
The AO added Rs. 47,47,442/- and Rs. 1,36,89,357/- as liabilities under Section 41(1), arguing that these were old and unverified. The CIT(A) found that these liabilities were part of the estimated income and had not ceased. The AO had not provided any evidence that these liabilities were paid in earlier years. The ITAT upheld the CIT(A)'s decision, stating that the basic precondition for applying Section 41(1) was not met as the liabilities were not allowed as deductions in previous assessments due to the rejection of books and estimation of profits.

3. Treatment of Insurance Claim as Income from Other Sources:
The AO treated an insurance claim of Rs. 5,11,453/- as income from other sources since the book results were rejected, and income was estimated. This specific issue was not contested further in the appeal.

4. Addition of Outstanding Sundry Creditors as Income:
The AO added Rs. 1,36,89,357/- shown as outstanding sundry creditors, arguing that the assessee failed to provide specific details and proof of payments. The CIT(A) deleted this addition, noting that the AO had not verified the payments and had no evidence that the liabilities were discharged in the earlier year. The ITAT upheld the CIT(A)'s decision, emphasizing that the liabilities were part of the estimated income and the AO had not established them as bogus.

5. Allowance of Remuneration, Interest, and Depreciation from Estimated Income:
The CIT(A) directed the AO to allow remuneration, interest, and depreciation from the estimated income, following the ITAT's previous year's order. The Revenue argued that these should be deemed included in the estimated income. The ITAT dismissed the Revenue's appeal on this issue, maintaining that the estimate of income was before these allowances, consistent with the earlier year's decision.

Conclusion:
The ITAT upheld the CIT(A)'s order regarding the estimation of profits and the allowance of depreciation, remuneration, and interest. It also confirmed the deletion of additions made under Section 41(1) for liabilities and outstanding sundry creditors, as the AO had not substantiated these additions with evidence. The appeal of the Revenue was partly allowed, specifically concerning the treatment of depreciation.

← Previous Next →