2023 (11) TMI 980 - AT - Income Tax

Allowing depreciation after estimation of income - AO did not allow any depreciation claimed by the assessee, stating that such a claim for depreciation was taken care by the lower percentage of estimation - HELD THAT - While dealing with this issue for the assessment year 2013-14, learned CIT(A) referred to the decision of the Third Member in assessee s own case for the assessment year 1991-92 and 1992-93 wherein it was held that depreciation was allowable as a deduction after estimation is resorted to. He also referred to the Circular No. 29-D/XIX-14 in F.No. 45/239/65-ITJ dt 31/08/1965 issued by the CBDT. Learned CIT(A), then, followed the binding precedent of the Hon'ble jurisdictional High Court in the case of Y. Ramachandra Reddy 2014 (9) TMI 205 - ANDHRA PRADESH HIGH COURT and granted relief to the assessee allowing depreciation after rejection of books of accounts and estimating the income. For this year, learned CIT(A) followed this view taken for the assessment year 2013-14 by his predecessor and allowed depreciation to the assessee. We, therefore, do not find anything illegality or irregularity in the order of the learned CIT(A), granting depreciation to the assessee by following the binding precedent. We, therefore, uphold the findings of the learned CIT(A) and dismiss this ground of appeal for all these years. Deduction u/s 80-IA - AO recorded that the assessee did not fulfil the essential conditions to be a developer like investment, entrepreneurial risk and using of facility and, therefore, the assessee is only a work contractor - HELD THAT - Tribunal in 2012 (5) TMI 181 - ITAT HYDERABAD , discussed the facts at length in the light of the case law available on this issue and reached to a conclusion that even where the assessee had carried out the development of infrastructure work in consortium or jointly with any other agency and not as a sub-contractor still the assessee is entitled for deduction under section 80-IA of the Act. Decided against revenue. Estimation of income - Receipts relating to the FMS as income from other sources - as contended by the assessee before the learned CIT(A) that the assessee had to incur expenditure for deriving such an income and when the income earned from other projects was estimated, the income from FMS also needs to be estimated - CIT(A) held that expenditure in this service constitutes 90% and income is only at 10%, learned CIT(A) estimated the income from FMS at 15% - HELD THAT - Though the Revenue challenged this estimate very vehemently, contending that the assessee did not incur any expenditure to render this service, we cannot accept the same because no service earning revenues could be rendered without expenditure. At the same time, no material is placed before us to show as to how this estimate went wrong. Hence, we find it difficult to hold that the estimate made by the learned CIT(A) suffers no infirmity. Exclusion of works allotted to subcontractors and other project works while estimating the income on contracts - HELD THAT - There is no denial of the fact that in assessee s own case for the earlier assessment years, AO and FAA held that the gross receipts shall be reduced by the recoveries were to be considered for estimation and also the works allotted to the subcontractors in respect of the SPVs. CIT(A) recorded as a matter of fact, on perusal of the orders of the assessment for the earlier assessment years for this purpose, that the Department is consistently adopting this procedure and there is no reason for deviating from the same. Since the CIT(A) followed the consistent view adopted by the Revenue for the earlier assessment years and also the binding precedent of the decision of Brij Bhushan Lal 1978 (10) TMI 2 - SUPREME COURT we do not find anything illegality or irregularity in the findings returned by the learned CIT(A) and, accordingly, uphold the same. Adoption of profit rate of 12.5% on contract receipts and to tax the interest income as income from other sources - HELD THAT - As Profit percentage of an assessee with high financial charges cannot be compared with that of an assessee having zero financial charges or very less/negligible financial charges. Since in the case on hand, the finance charges have drastically gone up from 3.78% in assessment year 2007-08 to 19.72% in assessment year 2014-15, therefore, estimation of profit @ 11.5% as against 12.5% directed by CIT (A) for these years will be fair and reasonable estimation. We, therefore, modify the order of the learned CIT (A) accordingly and direct ao to estimate the profit @ 11.5% before depreciation on contract work executed by the assessee itself. Grounds raised by the assessee are accordingly allowed in part. Taxability of interest income as income from other sources - HELD THAT - As relying on own case 2013 (12) TMI 19 - ITAT HYDERABAD uphold the order of the learned CIT(A) confirming the action of the learned Assessing Officer in treating the interest income from Fixed Deposits as income from other sources . The ground raised by the assessee on this issue is dismissed.

Summary

Issues Involved:
1. Allowance of depreciation after estimation of income.
2. Allowance of deduction under section 80-IA of the Income Tax Act.
3. Estimation of Facility Management Services (FMS) income.
4. Exclusion of works allotted to sub-contractors.
5. Adoption of profit rate on contract receipts.
6. Taxability of interest income as 'income from other sources'.

Summary:

1. Allowance of Depreciation After Estimation of Income:
The learned Assessing Officer (AO) did not allow depreciation after estimating the income of the assessee at 8% on works executed by the assessee and 5% on works executed by sub-contractors, arguing that the lower percentage of estimation accounted for depreciation. However, the learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed depreciation based on the precedent set by the ITAT and the jurisdictional High Court in the case of CIT vs. Y. Ramachandra Reddy. The Tribunal upheld the CIT(A)'s decision, noting that depreciation should be allowed even after income estimation.

2. Allowance of Deduction Under Section 80-IA:
The AO denied the deduction under section 80-IA, stating that the assessee did not meet the conditions to be considered a developer. CIT(A) allowed the deduction based on the CBDT Circular No. 4/2010 and the Tribunal's findings in the assessee's earlier assessment years. The Tribunal upheld CIT(A)'s decision, noting that the facts of the case remained unchanged from previous years where the deduction was allowed.

3. Estimation of FMS Income:
For the assessment years 2012-13 and 2014-15, the AO added the entire receipts from FMS as 'income from other sources.' CIT(A) estimated the income component at 15% of the receipts, considering the assessee's claim that 90% of the receipts constituted expenditure. The Tribunal upheld this estimation, agreeing that the entire receipt could not be considered income and that some expenditure was inevitable.

4. Exclusion of Works Allotted to Sub-Contractors:
For the assessment year 2012-13, the AO estimated the income at 12.5% of the turnover without considering depreciation and departmental recoveries. CIT(A) directed the AO to exclude the works allotted to sub-contractors and estimate the income at 8% for such works. The Tribunal upheld CIT(A)'s decision, noting that this method was consistent with the approach adopted in previous years.

5. Adoption of Profit Rate on Contract Receipts:
The AO estimated the income at 8% on works executed by the assessee and 5% on works executed through sub-contractors. CIT(A) directed the AO to estimate the income at 12.5% on own contract works and 5% on sub-contracts, allowing depreciation thereafter. The Tribunal modified this to 11.5%, considering the significant increase in financial charges in the relevant years.

6. Taxability of Interest Income as 'Income from Other Sources':
The AO treated the interest income on Fixed Deposits as 'income from other sources.' CIT(A) upheld this, following the precedent set in earlier years. The Tribunal confirmed this treatment, referencing the Supreme Court decisions in Tuticorin Alkali Chemicals & Fertilisers Ltd. and Pandian Chemicals vs. CIT, which established that such interest income should be assessed under 'income from other sources.'

Conclusion:
All the Revenue appeals were dismissed, and the assessee's appeals were partly allowed. The Tribunal upheld the CIT(A)'s decisions on depreciation, section 80-IA deduction, FMS income estimation, and exclusion of works allotted to sub-contractors. However, it modified the profit rate on contract receipts to 11.5% and upheld the treatment of interest income as 'income from other sources.'