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TMI Blog2017 (6) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... rties amounting to Rs. 24,10,948/- out of the estimated net profit. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the said deduction of interest paid to third parties amounting to Rs. 24,10,948/-." 2. Firstly, we refer to order the ld. CIT(A) wherein the findings which are under challenge before us reads as under:- "4.3 I have carefully considered the findings of the A.O. as also the submission of the appellant. It may be noted that while filing the appeal the appellant has disputed rejection of books of accounts by applying provisions of sec. 145(3) of IT Act, inclusion of closing stock in the total turnover and estimating the profit by applying higher N.P. rate of 13% ignoring the past history as also not allowing the claim of interest payment to the third parties amounting to Rs. 24,10,948/-. However, during the appellate proceedings the appellant has not pressed the rejection of books of accounts and application of provisions of sec. 145(3). In this matter the effective issues disputed by the appellant and to be adjudicated remain as under:- i) Inclusion of closing stock in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the opening stock in the immediately succeeding year. The appellant also stated that as per accounting standard the closing stock cannot be part of the receipts. As regards estimation of profit by applying N.P. rate of 13%, the appellant has submitted that in the assessment year under consideration on total turnover of Rs. 175713711/- the net profit was shown for Rs. 20101939/- subject to allowability of partners remuneration, interest to partners, depreciation claim and interest to bank and that the N.P rate was arrived at 11.44% as against N.P rate of 10.40% in the immediately preceding year. The exact calculation of such N.P/N.P rate is as under: Particulars AY 2010-11 AY 2009-10 Net Profit Declared (computation) 74,56,090 1,44,43,738 Partners Remuneration 12,00,000 10,80,000 Interest to Partners 7,73,921 8,38,226 Interest to Bank 24,10,948 33,34,816 Depreciation claimed 82,60,980 82,56,853 Total Net Profit 2,01,01,939 2,79,53,633 Turnover 17,57,13,711 26,88,37,074 Percentage 11.44% 10.40% It is stated that the assessee intended to declare exact profit without any attempt to show a fix rate of profit. The appellant also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and closing stock was never made part of the contract receipts. Therefore even the past history does not suggests inclusion of closing stock in the contract receipts. Moreover, the closing stock is the inventory available with the assessee which will be opening stock in the next year and will be forming part of the contract work in the next year. Therefore the action of the A.O. of inclusion of closing stock in the contract receipts cannot be approved. Accordingly the profit is to be determined on the contract receipts including other income of Rs. 2867299/- (3306619-439320) shown by the assessee amounting to Rs. 175713711/- (172846412+2867299) excluding the closing stock of Rs. 1670300/-. The next issue is to be decided is as to what basis the profit is to be determined after rejection of books of accounts. On consideration of relevant facts as regards estimation of profit, after invoking the provisions of sec. 145 (3) of IT Act, it may be stated that it is a settled law that even after invoking the provisions of sec. 145 (3), the AO is not empowered to assess the income at whatever figures he wants and the AO is supposed to make an honest estimation either based on the past ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT has directed to recompute the profit by applying N.P. rate 11.50% as against N.P. rate of 10.07% shown by the assessee. It is further noted that in A.Y. 2007-08 on gross contract receipts of Rs. 168406532/-, N.P. before depreciation, payment to partners and interest to partners was for Rs. 16867510/- and accordingly N.P. was shown at 10.02% against which the Tribunal directed to apply N.P. rate of 11.50%. These facts will indicate that the past history of the assessee is to apply N.P. rate of 11.50% subject to claim of depreciation and interest/remuneration to partners. The above facts will also indicate that as per the decision of Hon'ble ITAT, interest to third parties was not to be allowed. It may also be mentioned that as per the past history of the case the N.P. was to be determined with reference to the contract receipts and there is no such findings or the directions of the Hon'ble ITAT that the N.P. rate is to be reduced/increased on the basis of increase/decrease of depreciation claim and interest/remuneration to the partners as held by the A.O. Moreover, the claim of depreciation and interest/remuneration to partners is his statutory claim and it has to be allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 7 of the assessment order: "The ld. ARs argument that interest to third parties was allowed during the previous assessment proceedings is not acceptable as each assessment proceeding is a new proceedings..." 3.3 It was submitted that the ld. CIT (A) misread the order of the Hon'ble ITAT in the AY 2007-08 and therefore upheld the order of the ld. AO on this issue. Ld. CIT (A) also misinterpreted the orders of jurisdictional High court while observing as under at page 20, last para of his order:- "...As regards reliance on various case laws, by the appellant, for allowing of interest to third parties, it may be stated that decision of the Hon'ble courts for allowing of third partied interest are case specific and it is not the settled law that in each and every case of contractor, third party interest is to be allowed..." 3.4 The ld AR submitted that estimation of net profit for construction activitycan be with respect to operations of the business. Various components of direct costs can be estimated i.e. material, labour and overheads. However, financing pattern is case specific i.e. one may do business with his own capital not having any expenditure, whereas, som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order, it would not be at all appropriate to allow the position to be changed in a subsequent year...." Futher, Hon'ble Jurisdictional High Court in the case of Bhawan Va Path Nirman (Bohra) & Co. [2003] 130 TAXMAN 361 (RAJ.), under identical set of facts, observed that AO did not allow deduction for interest to third parties from the Net Profit estimated, for the year under appeal, even though the same was allowed in the preceding years. Hon'ble Jurisdictional High Court, allowed deduction of such interest and held that: "........Consequently, the trading result obtained by applying such net profit rate needed further appropriation towards allowable depreciation and interest on borrowings. There is no doubt about the fact that both expenses, on account of depreciation and interest on borrowings are allowable expenses and without taking into account such expenses net taxable income cannot be determined. In fact there is no dispute about appropriation towards depreciation, notwithstanding the assessing authority has applied net profit rate excluding appropriation towards any allowable expenditure. We are in agreement with the Tribunal for modifying the order passed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No. 40/JP/2012 has mentioned is that adding words to an order may amount to review of an order. The Hon'ble Bench in very clear words has concurred with the below mentioned argument, put-forth by the ld. DR: "........ This is a possible intention of ITAT but it cannot be held to be the mistake apparent from record ....." In view of the above, the order of the Hon'ble ITAT Jaipur Bench in ITA No. 1177/JP/2012 stands as it is. Reading the order as a whole, on account of references of the earlier orders of the ITAT itself, leads to conclusion that 11.50%. Net Profit Rate is subject to further allowances of Depreciation, Interest and Remuneration to Partners. 3.8 Without prejudice to above, it is submitted the order of Hon'ble ITAT, Jaipur Bench for AY 2007-08 is dated 31.05.2011 whereas the order for AY 2008-09 is dated 25.05.2012. Thus, the subsequent order, which explicitly provides for Net Profit Rate of 11.50% subject to Depreciation, Interest and Remuneration to Partners has to be followed as a precedence. Otherwise also, ld. CIT(A) has held that 11.50% is subject to Depreciation, Interest And Remuneration To Partners except Interest To Third Parties. To this extent, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. In light of that, what is relevant to examine is the past position adopted by the AO and whether the same has been challenged and the outcome of appeal before the appellate authorities. 8. Firstly, we look at the position for AY 2007-08. In that year, the AO had made various disallowances of expenses, addition of outstanding wages and capital introduced by the partners, however, there is no disallowance of interest paid to third parties. The ld CIT(A) confirmed the order of the AO. On appeal, the Tribunal found the contention of the ld AR reasonable that instead of disallowing expenses head-wise, a reasonable N.P rate should be applied and directed to apply net profit rate of 11.5% as against net profit rate of 10.07% shown by the assessee. Before us, the ld AR has contended that net profit rate of 10.07% computed by the assessee and as compared by the Tribunal while directing net profit rate of 11.5% was before depreciation, remuneration and interest payment to partners and interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against net profit of 9.96% shown by the assessee which is claimed to be before interest payment to third party. 10. If we look at the above past history of the assessee for last two assessment years where the matter has reached the Tribunal, it is clear that the AO has disallowed various expenses after rejection of the books of accounts. At the same time, there has been no disallowance of third party interest by the AO in any of these years. Thereafter, instead of specific disallowances, the ld CIT(A) as well as Tribunal have considered the position of net profit rate offered by the assessee and have thereafter directed to apply net profit rate of 11.5%. As we have held above, keeping the past history of the assessee into account, the net profit rate of 11.5% is upheld for the impunged assessment year. Further, the past history of the assessee doesn't suggest disallowance of third party interest either by the AO or by the Coordinate Benches. The Coordinate Benches have compared net profit rate as offered by the assessee which is claimed to be before depreciation, remuneration and interest payment to partners as well as interest to third parties and thereafter, directed to apply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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