2017 (1) TMI 1194 - AT - Income Tax

Rejection of books of accounts - estimated net profit of 8% on gross contract receipts net of all deductions - Held that - Admittedly, the A.O. had rejected books of accounts for the reason that the assessee has failed to produce supporting bills and vouchers in respect of expenditures. It is also an admitted fact that the assessee himself has admitted about 8% net profit in the earlier period net of all deductions including depreciation. Therefore, considering the overall facts and circumstances of the case, we are of the view that the rate of net profit adopted by the A.O. appears to be fair and reasonable. Hence, we uphold estimation of net profit of 8% on total receipts net of all deductions including depreciation. In so far as separate deductions towards depreciation is concerned since, the A.O. has adopted reasonable rate of 8% on gross contract receipts, further deductions towards depreciation will result into determination of total income below the income returned by the assessee in his return of income. Therefore, we are of the view that the A.O. was right in estimating net profit of 8% on gross receipts net of all deductions including depreciation, and hence, the assessee is not eligible for separate deduction for depreciation. In so far as separate additions towards interest on fixed deposits under the head income from other sources, we find merits in the findings of the A.O. for the reason that there is no nexus between interest receipts and works contracts executed by the assessee. Just because fixed deposits are kept as security for obtaining works contracts, it does not alter the character of income. Interest on fixed deposits are assessable under the head income from other sources. Therefore, we are of the view that the A.O. was rightly made additions towards interest income under the head income from other sources. The CIT(A) after considering the relevant facts has rightly upheld the order of the A.O. We do not see any error or infirmity in the order of the CIT(A), hence, we inclined to uphold the CIT(A) order and reject ground raised by the assessee.

Summary

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Estimation of net profit at 8% on gross contract receipts.
3. Separate deductions towards depreciation.
4. Separate additions towards interest on fixed deposits under the head 'income from other sources'.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The Assessing Officer (A.O.) rejected the assessee's books of accounts under section 145(3) of the Income Tax Act, citing that most expenditures related to labor charges, work expenses, and other indirect expenses were not supported by proper bills and vouchers, relying heavily on self-made vouchers. The A.O. concluded that the books were not amenable for verification and thus did not reflect true and correct profit. The assessee contested this, arguing that the A.O. did not point out specific defects and that the nature of expenses necessitated self-made vouchers. However, the tribunal upheld the A.O.'s decision, noting the failure of the assessee to substantiate claims with necessary evidence, thus validating the rejection of the books of accounts.

2. Estimation of Net Profit at 8% on Gross Contract Receipts:
The A.O. estimated the net profit at 8% on gross contract receipts, a decision upheld by the CIT(A) based on the assessee's historical net profit rates of 6.73% to 7.44% and the acceptance of an 8% estimation in a prior year (2007-08). The tribunal agreed with this estimation, referencing Section 44AD of the Act, which suggests an 8% net profit rate as a legislative benchmark for similar businesses. The tribunal concluded that the A.O.'s estimation was fair and reasonable given the circumstances.

3. Separate Deductions towards Depreciation:
The assessee argued for separate deductions for depreciation, citing a precedent where such deductions were allowed despite an 8% net profit estimation. However, the tribunal distinguished the current case from the cited one, noting that the assessee was involved in main contract works, which typically yield higher profits than sub-contracts. It was determined that allowing separate deductions for depreciation would result in the total income falling below the returned income, which was not permissible. Thus, the tribunal upheld the A.O.'s decision to include depreciation within the 8% net profit estimation.

4. Separate Additions towards Interest on Fixed Deposits:
The A.O. treated interest earned on fixed deposits as 'income from other sources', separate from business receipts, despite the assessee's claim that these deposits were necessary for securing contracts. The tribunal supported the A.O.'s view, emphasizing that the nature of the deposits did not alter the character of the interest income, which is taxable under 'income from other sources'. The tribunal found no nexus between the interest income and the business activities, thus affirming the A.O.'s and CIT(A)'s decisions.

Conclusion:
The tribunal dismissed the appeal, upholding the A.O.'s rejection of the books of accounts, the 8% net profit estimation, the inclusion of depreciation within this estimation, and the treatment of interest on fixed deposits as income from other sources. The judgment reinforced the importance of proper documentation and the legislative benchmarks for profit estimation in similar business contexts.