2015 (8) TMI 81 - AT - Income Tax

Rejection of books result - estimation of NP @5% of gross contractual receipts - in A.Ys. 07-08, 08-09 and 09-10 that the A.O. estimated the N.P at 5% by rejecting the book result without allowing depreciation, interest and salary paid to partners - Held that - In the instant case, we find that the assessee has submitted the audited financial statements in which assessee has basically claimed depreciation and also details of fixed assets mentioning in the balance sheet. The details of depreciation, interest and remuneration paid to partners all are accounted in the books of account and same also claimed in the I.T Returns. We also find that the assessee claimed interest and remuneration to partners as per partnership deed. Therefore, relying upon on the documents, said CBDT Circular no.029D(XIX)-14) dated 31st August, 1965 and the decision and finding in the case of CIT Vs. M/s. Jain Construction Co.& Ors reported in (1999 (9) TMI 26 - RAJASTHAN High Court) we hold that the assessee firm is entitled for separate deduction of depreciation, interest and salary payment to partners. The A.O. is directed to allow the same and then estimate the net profit/income of the assessee after deducting the separate depreciation, partners salary and interest as shown by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
- Dispute over estimating assessed income at 5% of gross contractual receipts without allowing further deductions.
- Application of net profit rate without considering past history and relevant deductions.
- Acceptance of various ITAT judgments in similar cases.
- Rejection of books result and estimation of net profit by AO.
- Dismissal of appeals by CIT(A).
- Appeal before the tribunal challenging the CIT(A) order.
- Arguments presented by both the appellant and respondent.
- Interpretation of relevant CBDT Circular and judgments by the tribunal.

Analysis:
1. The appeals were filed against the order of the CIT(A) for three assessment years. The appellant contested the estimation of assessed income at 5% of gross contractual receipts without allowing further deductions like depreciation, interest, and salary paid to partners under the IT Act, 1961. The appellant argued that the CIT(A) erred in not considering past history and relevant deductions, citing discrepancies in the AO's approach compared to previous assessment years.

2. The appellant further contended that the CIT(A) did not accept various ITAT judgments favoring the estimation of net profit at a reasonable percentage of gross contract receipts with deductions for third party interest, depreciation, and partner payments. The AO, after conducting a search & seizure operation, rejected the books result and applied a 5% net profit rate without considering the appellant's claims for deductions.

3. The tribunal analyzed the case, noting the search operation and the subsequent assessment process by the AO. The tribunal considered the appellant's submissions regarding the CBDT Circular and the decision of the Hon'ble Rajasthan High Court, emphasizing the entitlement to separate deductions for depreciation, interest, and partner payments. The tribunal held in favor of the appellant, directing the AO to allow the deductions and recalculate the net profit/income accordingly.

4. Ultimately, the tribunal allowed the appeal, citing the appellant's compliance with accounting standards, submission of audited financial statements, and adherence to partnership deed provisions. Relying on the CBDT Circular and the judicial precedent, the tribunal upheld the appellant's right to claim separate deductions, overturning the CIT(A)'s decision and directing the AO to adjust the net profit calculation accordingly.

5. The tribunal's detailed analysis of the legal provisions, circulars, and precedents demonstrates a thorough consideration of the appellant's arguments and the AO's actions. By emphasizing the importance of allowing relevant deductions and following established guidelines, the tribunal provided a comprehensive resolution to the dispute, ensuring fairness and adherence to legal principles in the assessment process.