2016 (10) TMI 556 - AT - Income Tax

Estimation of income - Deduction of expenditures from estimated income - Held that - Estimation of income at 9% in respect of the contracts taken by the assessee itself and executed by it; at 8% in respect of receipts from sub-contract works taken from others and executed by the assessee; and 4% of the gross receipts in respect of contracts given by the assessee to third parties on sub-contract basis, as reasonable. In consonance with the view taken in similar cases, also considering the fact that the assessee is dealing with construction as well as development activities, we set aside the impugned order of the CIT(A) and direct the Assessing Officer to recompute the income of the assessee at 9% of the gross receipts in respect of contracts taken on its own for construction and additional 2% for the development activities. In total, the income should be estimated @ 11% of the gross receipts. Allowability of depreciation out of estimated income is concerned, we find that this Tribunal in similar matters, as in the case of M/s. Teja Constructions, Secunderabad, 2014 (1) TMI 832 - ITAT HYDERABAD has been consistently holding that depreciation being an allowable deduction under S.32 of the Act, and since all out goings falling under S.30 to 38 are deemed to have been allowed while estimating the income, no separate deduction is allowable in respect of the same out of the estimated income in this respect. Depreciation should be excluded but the interest and remuneration to working partners are allowable as deduction as it does not fall under section 30 to 38 of the Act. Accordingly, Assessing Officer is directed to estimate the income @ 11% on gross receipts and to give deduction of interest and remuneration to partners.

Summary

Issues:
1. Estimation of income based on construction projects for AYs 2004-05 and 2005-06.
2. Rejection of books of account by Assessing Officer.
3. Discrepancies in vouchers and bills.
4. Application of Accounting Standard-7 for profit computation.
5. Estimation of profits for specific projects - Banjara Hills, Gandhi Nagar, and LB Nagar.
6. Allowability of depreciation and remuneration to partners.
7. Discrepancies in CIT(A) directions for Gandhi Nagar project.
8. Fairness of CIT(A) estimation at 12.5% of gross receipts.

Analysis:

1. The judgment involves appeals by the assessee against the Commissioner of Income-tax(A) - IV, Hyderabad for AYs 2004-05 and 2005-06 concerning income estimation from construction projects. The Assessing Officer rejected the books of account and estimated profits at 15% of gross receipts, leading to an appeal by the assessee.

2. The Assessing Officer's rejection of books was based on discrepancies in vouchers and bills, with self-made vouchers lacking verification. The AO estimated profits at 15% due to the absence of a reliable basis, citing legal precedents.

3. The CIT(A) directed the AO to compute profits using the percentage completion method under Accounting Standard-7, with specific directions for projects like Banjara Hills, Gandhi Nagar, and LB Nagar. The CIT(A) found discrepancies in the AO's estimation and provided detailed guidelines for profit computation.

4. The judgment addressed the application of depreciation and remuneration to partners, with the CIT(A) directing the estimation of income at 12.5% of gross receipts, net of deductions. The Tribunal set aside the CIT(A)'s order and directed income estimation at 11% of gross receipts, considering the nature of construction and development activities.

5. The Tribunal clarified that depreciation should be excluded from estimated income, while interest and remuneration to partners are allowable deductions. The judgment highlighted consistent Tribunal decisions on income estimation and deduction allowance.

6. The judgment concluded by partially allowing the appeals, emphasizing the re-computation of income at 11% of gross receipts and the allowance of interest and remuneration to partners. The decision aimed to ensure fairness and accuracy in income estimation for the construction projects under review.