2022 (4) TMI 960 - AT - Income Tax

Allowability of depreciation from the estimation of income - Depreciation from the net profit estimated from contractual receipt - HELD THAT - All deductions are referred to under section 29 are deemed to have been taken into account while making such an estimate. This means that the allowability of expenditure as specified in section 28 to 44 are deemed to have been allowed and no further deductions shall be allowed when the incomes are estimated. We also note that the Ld.CIT(A) has adopted net profit of 8% on gross contract receipts, which is reasonable. CIT(A) after considering the facts and circumstances of the case rightly estimated the net profit at 8% on gross contract receipts. CIT(A) has erred in allowing further deduction such as interest / remuneration to partners and depreciation. Respectfully following the decision of Indwell Constructions 1998 (3) TMI 121 - ANDHRA PRADESH HIGH COURT and the decision laid down in G.Raja Gopala Rao 2017 (1) TMI 1194 - ITAT VISAKHAPATNAM we are inclined to set aside the directions of the Ld.CIT(A) w.r.t allowing further deduction such as interest / remuneration to partners and depreciation from the estimated income, and allow the appeal of the revenue.

Summary

Issues Involved:
Allowability of depreciation from the estimation of income in an appeal filed by the revenue against the order of Commissioner of Income Tax (Appeals) for the Assessment Year 2008-09.

Analysis:

Condonation of Delay:
The appeal was filed by the revenue against the order of CIT(A) with a delay of 4 days. The revenue sought condonation of delay, attributing it to unforeseen circumstances beyond their control. The Tribunal, after reviewing the condonation petition, found sufficient cause for the delay and admitted the appeal.

Grounds of Appeal Raised by Revenue:
The revenue raised several grounds of appeal challenging the CIT(A)'s order. These grounds included contentions related to the erroneous nature of the CIT(A)'s decision, direction on allowing depreciation from net profit, and failure to follow precedents regarding depreciation deductions.

Factual Background:
The assessee firm, engaged in civil contracts, faced scrutiny for the A.Y. 2008-09. Due to pending insurance claims, the books of accounts were not readily available, leading to discrepancies in the assessment. The AO estimated the net income based on these discrepancies, which the assessee later agreed to.

CIT(A) Decision and Subsequent Appeal:
The CIT(A) estimated the income at different rates compared to the AO, based on the assessee's submissions and previous tribunal decisions. The revenue, aggrieved by this decision, appealed before the ITAT, arguing for upholding the AO's estimation.

Arguments Before ITAT:
During the hearing, the revenue relied on legal precedents and contended that the AO's estimation should be upheld. The assessee, on the other hand, emphasized the allowability of depreciation from the estimated income.

ITAT Decision:
The ITAT analyzed the provisions of the Income Tax Act and legal precedents cited by both parties. While acknowledging the reasonableness of the CIT(A)'s estimation of net profit, the ITAT found error in allowing further deductions like interest, remuneration to partners, and depreciation. Citing relevant case laws, the ITAT set aside the CIT(A)'s directions on these deductions and allowed the revenue's appeal.

Cross Objections by Assessee:
The assessee filed cross objections, which were dismissed as the ITAT upheld the revenue's appeal. The grounds related to depreciation, partners' remuneration, and interest on capital were also dismissed.

Final Decision:
The ITAT allowed the revenue's appeal and dismissed the cross objections of the assessee, pronouncing the order in open court on 07th April 2022.

This detailed analysis covers the issues related to the allowability of depreciation from the estimation of income in the context of the legal judgment delivered by the ITAT Visakhapatnam.