2016 (5) TMI 1013 - AT - Income Tax

Estimation of net profit from the contract receipts - Held that - The assessee declared a net profit of 9.12% for the previous financial year. The A.O. has estimated net profit of 10% on gross contract receipts. The CIT(A) has scaled down the net profit to 8%. The CIT(A) after considering the facts and circumstances of the case, rightly scaled down the net profit to 8%. There is no error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the order passed by the CIT(A) and reject the ground raised by the revenue. - Decided against revenue. Separate additions towards Income from Other Sources being interest on fixed deposits and other miscellaneous receipts - Held that - No merits in the arguments of the assessee for the reason that interest received from bank deposits cannot be considered as business receipts received on account of carrying out the business activity of the assessee. The assessee earned interest from bank deposits which are kept as margin money for obtaining bank guarantees. Though these bank guarantees are furnished for obtaining contract works, the interest earned from these deposits cannot be at any stretch of imagination considered as business receipts for the purpose of estimation of net profit. There is no direct nexus between the earning of interest and works contract, except for the fact that it is kept in bank for obtaining bank guarantee. There should be direct nexus between business activity and earning of income so as to treat the receipt earned from the business. If these interest receipts arise from the works contract, then definitely the interest forms part of contract receipts. But, in the present case on hand, interest earned on fixed deposits is having no direct nexus between the business activities of the assessee. Just because, the bank deposits are kept as margin money towards obtaining bank guarantee, interest earned on such deposits would not alter the characteristics of income. Therefore, we are of the opinion that the A.O. has rightly assessed the interest earned on fixed deposits and other miscellaneous receipts under the head Income from Other Sources . The CIT(A) has rightly upheld the additions made by the A.O.- Decided against assessee. Deductions towards interest on capital and remuneration to partners - Held that - Interest on partner s capital account and remuneration to partners is allowable deductions even after estimation of net profit from the contract receipts. The CIT(A) after considering the facts and circumstances of the case, has rightly directed the A.O. to allow remuneration to partners and interest on partner s capital account. We do not see any error in the CIT(A) order, hence, we inclined to uphold the order of the CIT(A) - Decided against revenue. Additions towards receipts from arbitration award and miscellaneous income under the head income from other sources - contention of the assessee that these receipts are forms part of contract receipts, therefore, should be considered for the purpose of estimation of net profit from the business - Held that - We find force in the arguments of the assessee for the reason that the arbitration amount received from the clients towards works contracts. The arbitration amount received from clients towards contract works is certainly a business receipt which cannot be assessed under the head income from other sources. However, the assessee has failed to furnish any details with regard to the amount received from arbitration and also miscellaneous receipts received from Jagadalpur works. Therefore, we are of the opinion that this issue needs to be re-examined by the A.O. to ascertain whether arbitration amount and miscellaneous receipts from Jagadalpur works is towards works contracts or not. Therefore, we set aside the issue to the file of the A.O. and direct the A.O. to verify whether the arbitration award received by the assessee is towards execution of works contract or not. In case the arbitration award is received towards execution of works contract, the same should be considered as part of gross receipts for the purpose of estimation of net profit. Hence, we set aside the issue to the file of the A.O. and direct him to examine the issue in the light of the discussions above. Additions towards chit dividend - A.O. made separate additions towards chit dividend under the head Income from Other Sources - assessee contended that chit dividend should be considered as part of gross contract receipts for the purpose of estimation of net profit - Held that - We do not find any merits in the arguments of the assessee for the reason that there is no direct nexus between contribution to chit and business activity of the assessee. The dividend received from chits cannot be considered as part of business receipts for the purpose of estimation of profit. Therefore, we are of the opinion that the A.O. has rightly assessed the chit dividend under the head Income from Other Sources . - Decided against assessee

Summary

Issues Involved:
1. Estimation of net profit from contract receipts.
2. Separate additions towards 'Income from Other Sources' being interest on fixed deposits and other miscellaneous receipts.
3. Deductions towards interest on capital and remuneration to partners.
4. Separate additions towards receipts from arbitration award and miscellaneous income.
5. Additions towards chit dividend.

Detailed Analysis:

1. Estimation of Net Profit from Contract Receipts:
The assessee, a partnership firm engaged in civil contract works, had its books of accounts rejected by the A.O. under section 145(3) of the Income Tax Act due to the non-availability of vouchers for labor charges, leading to an estimation of net profit at 10% on gross receipts. The CIT(A) scaled down this estimation to 8% after considering the nature of the contracts and the assessee's explanations. The ITAT upheld the CIT(A)'s decision, citing consistency with previous cases where net profit margins for similar businesses ranged from 8% to 12.5%. The ITAT also referenced the case of Arihant Builders Pvt. Ltd., which justified an 8% net profit margin for civil contracts.

2. Separate Additions towards 'Income from Other Sources':
The A.O. made separate additions for interest on fixed deposits and other miscellaneous receipts under 'Income from Other Sources,' arguing that these incomes were not related to the business activities of the assessee. The CIT(A) upheld this view, and the ITAT agreed, stating that interest earned on fixed deposits, even if kept as security for bank guarantees, does not have a direct nexus with the business activities and should be assessed separately.

3. Deductions towards Interest on Capital and Remuneration to Partners:
The A.O. did not allow deductions for interest on partners' capital and remuneration to partners after estimating the net profit. The CIT(A) directed the A.O. to allow these deductions, aligning with section 44AD of the Act, which permits such deductions even after profit estimation. The ITAT supported the CIT(A)'s decision, referencing the coordinate bench's rulings in similar cases, such as Srivalli Shipping & Transports and M/s. K. Venkata Raju, Rajahmundry.

4. Separate Additions towards Receipts from Arbitration Award and Miscellaneous Income:
The A.O. made separate additions for arbitration awards and miscellaneous receipts under 'Income from Other Sources.' The assessee argued that these should be considered part of business receipts. The ITAT found merit in the assessee's argument but noted the need for verification of whether the arbitration awards were related to contract works. The issue was remanded to the A.O. for further examination to determine the nature of these receipts.

5. Additions towards Chit Dividend:
The A.O. assessed chit dividends under 'Income from Other Sources,' which the assessee contested, claiming it should be part of gross contract receipts. The ITAT rejected the assessee's claim, stating there was no direct nexus between the chit contributions and the business activities, thus upholding the A.O.'s assessment.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on most issues, including the estimation of net profit at 8%, separate additions for interest on fixed deposits, and the allowance of deductions for interest on partners' capital and remuneration to partners. The issue of arbitration awards was remanded for further verification, while the addition of chit dividends under 'Income from Other Sources' was upheld. The appeals by the assessee were partly allowed for statistical purposes, and the appeals by the revenue were dismissed.