Ramesh Metals, Vijayawada V. THE ACIT, Vijayawada

ITA 244/VIZ/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94081 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 10 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 16-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LUCAS PETER D MANOJ KUMAR
• Keywords: Depreciation; Assessment record; Unabsorbed depreciation
• Section: 44AD; 143(3); 37; 263; 28

Judgement Text

ITA NO.521/VIZAG/2014 M/S. SRI SIVANI EDUCATIONAL SOCIETY, SRIKAKULAM IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI J. SUDHAKAR REDDY , ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NOS. 244 & 245/VIZAG/2014 ASSESSMENT YEARS : 2009-10 & 2010-11 RAMESH METALS, VIJAYAWADA PAN AAJFR 7702F VS. ASST. COMMISSIONER OF INCOME-TAX, RANGE 2, VIJAYAWADA. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI G.V.N. HARI, ADVOCATE REVENUE BY: SH RI LUCAS PETER/ D. MANOJ KUMAR DATE OF HEARING : 05.03.2015 DATE OF PRONOUNCEMENT : 15.04.2015 ORDER PER SAKTIJIT DEY, JUDICIAL MEMBER:- THESE TWO APPEALS BY ASSESSEE ARE DIRECTED AGAINS T SIMILAR, BUT, SEPARATE ORDERS, BOTH DATED 19/03/2014, OF LD. CIT, VIJAYAWADA PASSED U/S 263 OF THE ACT, PERTAINING TO AYS 2009-1 0 AND 2010-11. 2. AS THE FACTS AND ISSUES INVOLVED IN BOTH THE APP EALS ARE COMMON AND IDENTICAL, FOR THE SAKE OF CONVENIENCE W E PROPOSE TO REFER TO THE FACTS AS INVOLVED IN AY 2009-10. 3. BRIEFLY THE FACTS ARE, ASSESSEE A PARTNERSHIP FI RM IS ENGAGED IN THE BUSINESS OF EXECUTING CIVIL CONTRACT WORK. F OR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF INCOME ON 28/09/2009 DECLARING TOTAL INCOME OF RS. 1,84,34,180. IN COURS E OF ASSESSMENT PROCEEDING, AO AFTER VERIFICATION OF BOOKS OF ACCOU NT AND BILLS & VOUCHERS WAS OF THE VIEW THAT THE EXPENDITURE CLAIM ED BY ASSESSEE, BEING NOT FULLY SUPPORTED BY AUTHENTIC BILLS AND VO UCHERS, ARE NOT VERIFIABLE. THEREFORE, AO OPINED THAT BOOKS OF ACC OUNT OF ASSESSEE ITA NOS.244 & 245/VIZAG/2014 RAMESH METALS 2 COULD NOT BE RELIED UPON AND HAVE TO BE REJECTED . AFTER REJECTING THE BOOKS OF ACCOUNT, AO PROCEEDED TO ESTIMATE THE PROF IT BY APPLYING THE RATE OF 12.5% ON MAIN CONTRACT WORK AND 8% ON S UB-CONTRACT WORK. FURTHER, AO ALSO NOTICED THAT DURING THE YEAR , ASSESSEE HAS ALSO SUB-CONTRACTED A PORTION OF THE WORK TO THIRD PARTIES. AO, THEREFORE, ESTIMATED INCOME ON SUCH SUB-CONTRACTED WORK AT 3% OF THE TURNOVER. IN THIS PROCESS, INCOME WAS DETERMIN ED ON ESTIMATE BASIS AT RS. 3,26,30,512. AFTER ESTIMATING THE INCO ME AS AFORESAID, AO ALLOWED FURTHER DEDUCTION TOWARDS DEPRECIATION A MOUNTING TO RS. 1,28,36,934 AND INTEREST AND REMUNERATION TO PARTNE RS FOR AN AMOUNT OF RS. 7,20,000. THUS, FINALLY TOTAL TAXABLE INCOME WAS DETERMINED AT RS. 1,95,40,720 AS PER THE ASSESSMENT ORDER DATED 18/10/2011 PASSED U/S 143(3) OF THE ACT. ASSESSMENT ON IDENTICAL MANNER WAS ALSO COMPLETED FOR AY 2010-11. 4. LD. CIT IN EXERCISE OF POWER U/S 263 OF THE ACT CALLED FOR THE ASSESSMENT RECORD OF THE ASSESSEE FOR CONCERNED AY AND AFTER EXAMINING THEM WAS OF THE VIEW THAT ASSESSMENT ORDE R PASSED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE AS AO AFTER ESTIMATING THE PROFIT HAS ALLOWED FURTHER DEDUCTION TOWARDS DEPRECIATION, INTEREST ON PARTNERS CAPITAL AND REMU NERATION TO PARTNERS WHICH IS CONTRARY TO THE VIEW EXPRESSED BY THE HONBLE AP HIGH COURT IN CASE OF M/S INDWELL CONSTRUCTIONS, 23 2 ITR 776 AND THE ITAT, HYDERABAD IN CASE OF M/S KNR CONSTRUCTION S LTD. ACCORDINGLY, HE ISSUED A SHOW CAUSE NOTICE TO ASSES SEE CALLING UPON IT TO EXPLAIN AS TO WHY ASSESSMENT ORDER SHALL NOT BE REVISED, AS ACCORDING TO LD. CIT, ASSESSMENT ORDER PASSED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE. THOUGH ASS ESSEE OBJECTED TO THE INITIATION OF PROCEEDING U/S 263 OF THE ACT, BU T, LD. CIT REJECTING ALL SUBMISSIONS OF ASSESSEE PASSED THE IMPUGNED ORD ER SETTING ASIDE THE ASSESSMENT ORDER AND DIRECTING THE AO TO ADD DEPRECIATION OF RS. 1,28,36,934 TO THE TOTAL INCOME DETERMINED BY HIM FOR THE AY 2009-10. SIMILAR DIRECTION WAS ALSO ISSUED BY LD. CIT TO ADD AN AMOUNT OF RS. 1,17,72,890 BEING THE DEPRE CIATION ALLOWED ITA NOS.244 & 245/VIZAG/2014 RAMESH METALS 3 BY AO FOR THE AY 2010-11. BEING AGGRIEVED OF SUCH D IRECTIONS OF LD. CIT, ASSESSEE IS BEFORE US. 5. LD. AR SUBMITTED BEFORE US, AO HAVING ALLOWED DE PRECIATION CLAIMED BY ASSESSEE AFTER MAKING NECESSARY ENQUIRY AND PROPER APPLICATION OF MIND, LD. CIT WAS NOT JUSTIFIED IN R EVISING SUCH ASSESSMENT ORDER BY INVOKING HIS POWER U/S 263 OF T HE ACT. LD. AR SUBMITTED, EVEN, IN A CASE WHERE INCOME IS ESTIMATE D AFTER REJECTING BOOKS OF ACCOUNT, DEDUCTION TOWARDS DEPRECIATION AN D INTEREST & REMUNERATION TO PARTNERS IS STILL ALLOWABLE. IN THI S CONTEXT, HE PLACED RELIANCE UPON DECISIONS OF THE HONBLE JURISDICTIO NAL HIGH COURT IN THE FOLLOWING CASES: 1. CIT VS. VSY RAMACHANDRA REDDY, ITTA 48 OF 2002, JUDGEMENT DATED 30/07/2014. 2. CIT VS. SRI VENKATESWARA SWAMY LORRY SERVICES, I TTA NO. 82 OF 2013, DATED 25/06/2013. 6. THE LD. DR, ON THE OTHER HAND, STRONGLY SUPPORTI NG THE IMPUGNED ORDER OF LD. CIT SUBMITTED THAT ONCE PROFI T IS ESTIMATED AFTER REJECTION OF BOOKS OF ACCOUNT, NO FURTHER DED UCTION AS ENVISAGED U/S 28 TO 38 CAN BE ALLOWED. IN SUPPORT O F SUCH CONTENTION, HE RELIED UPON THE DECISION OF THE HON BLE AP HIGH COURT IN CASE OF M/S INDWELL CONSTRUCTIONS VS. CIT (SUPRA ). 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL A S OTHER MATERIALS ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DEC ISIONS RELIED UPON BY THE PARTIES. AS CAN BE SEEN, LD. CIT HAS CO NSIDERED THE ASSESSMENT ORDER PASSED TO BE ERRONEOUS AND PREJUDI CIAL TO THE INTERESTS OF REVENUE SOLELY FOR THE REASON THAT ONC E PROFIT IS ESTIMATED NO FURTHER DEDUCTION TOWARDS DEPRECIATION IS ALLOWABLE IN VIEW OF THE DECISIONS OF THE HONBLE AP HIGH COURT IN CASE OF M/S INDWELL CONSTRUCTIONS VS. CIT (SUPRA) AND THE DECIS ION OF THE ITAT IN CASE OF SRI P.V. SITARAMASWAMY VS. ADDL.CIT IN ITA NO. 264/HYD/12 DATED 09/01/13. LD. CIT OBSERVED THAT ON CE INCOME IS ITA NOS.244 & 245/VIZAG/2014 RAMESH METALS 4 ESTIMATED ALL RELATED EXPENSES AND OTHER ELIGIBLE D EDUCTIONS IS DEEMED TO HAVE BEEN TAKEN CARE OF AND THERE IS NO S COPE FOR ALLOWING FURTHER DEDUCTIONS. HOWEVER, AS CAN BE SE EN, IN THE PRESENT CASE, THE PROVISIONS OF SECTION 44AD ARE NO T APPLICABLE AS RECEIPTS FROM CONTRACT BUSINESS IS MUCH MORE THAN T HE PRESCRIBED LIMIT. MOREOVER, AO WHILE ESTIMATING THE PROFIT FRO M CONTRACT BUSINESS HAS APPLIED A MUCH HIGHER RATE THAN THE RA TE PRESCRIBED U/S 44AD. IN THESE CIRCUMSTANCES, IT CANNOT BE SAID THAT ONCE PROFIT IS ESTIMATED NO FURTHER DEDUCTION IS ALLOWABLE BECA USE SECTION 44AD PROVIDES THAT ONCE INCOME IS ESTIMATED, DEDUCTION A VAILABLE U/S 30 TO 38 SHALL BE DEEMED TO HAVE BEEN GIVEN FULL EFFEC T. THE HONBLE JURISDICTIONAL HIGH COURT IN CASE OF CIT VS. V.S.Y. RAMACHANDRA REDDY (SUPRA) WHILE CONSIDERING IDENTICAL ISSUE OF ALLOWANCE OF DEPRECIATION AND REMUNERATION AND INTEREST PAYMENT TO PARTNERS IN CASE OF ESTIMATION OF PROFIT ON CONTRACT BUSINESS H ELD IN THE FOLLOWING MANNER: FOR EXAMPLE, SECTION 44AD OF THE ACT PROVIDES FOR DETERMINATION OF THE INCOME OF AN ASSESSEE FROM THE BUSINESS AT 8% O F THE TOTAL TURNOVER OR THE GROSS RECEIPTS OF THE PREVIOUS YEAR UNDER CERTAIN CIRCUMSTANCES. SUB-SECTION (2) IS TO THE EFFECT THA T IF ANY DEDUCTION ALLOWABLE UNDER SECTIONS 30 TO 38, WHICH TAKES IN I TS FOLD THE DEDUCTION SUCH AS DEPRECIATION AND INTEREST, SHALL BE DEEMED TO HAVE BEEN EFFECTED. THE PROCEDURE UNDER THAT SECTION, HOWEVER , APPLIES ONLY WHEN THE TURNOVER IS BELOW A PARTICULAR FIGURE WHIC H AT THE RELEVANT POINT OF TIME WAS RS.40,00,000/-. AS OF NOW, IT IS RS.1 CRORE. IN THE INSTANT CASE, SECTION 44AD OF THE ACT DOES NOT APPL Y BECAUSE THE TURNOVER WAS ABOVE THE STIPULATED AMOUNT. THEREFORE , THE FEASIBILITY OF DEDUCTION OF TURNOVER AND INTEREST CANNOT BE SAID T O HAVE BEEN TAKEN AWAY. THE LEARNED COUNSEL FOR THE APPELLANT IS NOT ABLE T O POINT OUT ANY PROVISION OF LAW IN THE ACT OR RULES MADE THEREUNDE R, WHICH RESTRICTS THE ALLOWANCE OF THE DEPRECIATION AND INTEREST. ON THE OTHER HAND, THE FACILITY CREATED UNDER THE ACT IS SO FIRM AND STRON G THAT IF FOR ANY REASON IT BECOMES IMPERMISSIBLE OR UNNECESSARY FOR AN ASSE SSEE TO SEEK THE ALLOWANCE OF DEPRECIATION FOR A PARTICULAR ASSESSME NT YEAR, HE IS ENTITLED TO CARRY IT FORWARD, FOR THE SUBSEQUENT YE ARS. IN SUCH AN EVENT, IT ASSUMES THE CHARACTER OF UNABSORBED DEPRECIATION . IN THIS VERY CASE, THE ASSESSING OFFICER PERMITTED THE ALLOWANCE OF UN ABSORBED DEPRECIATION TO THE RESPONDENT. HOWEVER, HE DENIED THE BENEFIT OF THE ALLOWANCE OF CURRENT DEPRECIATION AND INTEREST. NO REFERENCE IS MADE TO ANY PROVISION OF LAW TO MAKE SUCH DISTINCTION. HIS UNDERSTANDING OF THE MATTER IS THAT SECTION 44AD OF THE ACT, THAT PROVID ES FOR A ITA NOS.244 & 245/VIZAG/2014 RAMESH METALS 5 COMPREHENSIVE FORMULA OF DETERMINING NET PROFIT DER IVED BY A CIVIL CONTRACT OR AT 8%, TAKES IN ITS FOLD, ALLOWANCE OF DEPRECIATION, INTEREST AND OTHER BENEFITS. THE FACT, HOWEVER, REMAINS THAT SUCH A PROVISION WAS NOT IN EXERCISE IN THE ASSESSMENT YEAR 1994-95. IF AN ASSESSEE IS ENTITLED TO CLAIM DEDUCTION OF IN TEREST, BE IT UNDER SECTION 36(1)(III) OF THE ACT OR ANY OTHER RELEVANT PROVISION AND OF DEPRECIATION UNDER SECTION 37 OF THE ACT, IN THE OR DINARY COURSE OF ASSESSMENT, THERE IS NO REASON WHY THE SAME FACILIT IES BE NOT EXTENDED TO HIM, MERELY BECAUSE THE PROFIT IS DETER MINED ON THE BASIS OF ESTIMATION AS WAS DONE IN THE INSTANT CASE. WE A RE OF THE VIEW THAT DEPRECIATION AND INTEREST, WHICH ARE OTHERWISE DEDU CTABLE IN THE ORDINARY COURSE OF ASSESSMENT, REMAIN THE SAME LEGA L CHARACTER, EVEN WHERE THE PROFIT OF ASSESSEE IS DETERMINED ON PERCE NTAGE BASIS. THE CONCLUSIONS ARRIVED AT BY US, GET SUPPORT FROM THE CIRCULAR DATED 31.08.1965 ISSUED BY THE CENTRAL BOARD OF DIRECT TA XES. THOUGH THE CIRCULAR WAS WITH REFERENCE TO THE 1922 ACT, IT HOL DS GOOD FOR THE ANALOGOUS PROVISIONS UNDER THE 1961 ACT. THE LEARNED COUNSEL FOR THE APPELLANT RELIED ON A J UDGMENT OF THIS COURT IN INDWELL CONSTRUCTIONS V. COMMISSIONER OF INCOME TAX . THAT WAS A CASE IN WHICH THIS COURT TOOK THE VIEW THAT O NCE THE BOOKS OF ACCOUNT ARE DISBELIEVED FOR A PARTICULAR PURPOSE, T HEY CANNOT BE RELIED UPON IN THE CONTEXT OF INTEREST. IN THE INSTANT CAS E, WE ARE CONCERNED WITH THE DEPRECIATION. THE OCCASION TO DENY THE DED UCTION OF DEPRECIATION OR INTEREST WOULD ARISE IF ONLY THE MA TERIAL PLACED BEFORE THE ASSESSING AUTHORITY IN PROOF OF PURCHASE OF MAC HINERY AND OTHER ITEMS AND PAYMENT OF INTEREST IS DISBELIEVED. NO FI NDING OF THAT NATURE WAS RECORDED BY THE ASSESSING OFFICER. AS CAN BE SEEN FROM THE AFORESAID EXTRACTED PORTION , HONBLE HIGH COURT AFTER TAKING NOTE OF THE DECISION OF THE SAME HIGH COURT IN CASE OF M/S INDWELL CONSTRUCTIONS VS. CIT (SUPRA) H ELD THAT EVEN IN CASE OF ESTIMATION OF PROFIT ON CONTRACT BUSINESS, DEDUCTION TOWARDS DEPRECIATION AND INTEREST IS ALLOWABLE AS THERE IS NO PROVISION UNDER THE ACT RESTRICTING SUCH ALLOWANCE. THE HONBLE JUR ISDICTIONAL HIGH COURT IN CASE OF CIT VS. SRI VENKATESWARA SWAMY LOR RY SERVICE(SUPRA) WHILE DISMISSING THE APPEAL OF THE R EVENUE AGAIN HELD THAT IN CASE OF ESTIMATION OF INCOME AFTER REJ ECTING THE BOOKS OF ACCOUNT FURTHER DEDUCTION TOWARDS DEPRECIATION AND INTEREST AND REMUNERATION PAYMENT TO PARTNERS IS STILL ALLOWABLE . THEREFORE, RESPECTFULLY FOLLOWING THE VIEW EXPRESSED BY HONBL E JURISDICTIONAL HIGH COURT AS AFORESAID, WE HOLD THAT EXERCISE OF P OWER U/S 263 OF ITA NOS.244 & 245/VIZAG/2014 RAMESH METALS 6 THE ACT AND THE CONSEQUENT ORDER PASSED BY LD. CIT DIRECTING AO TO DISALLOW DEPRECIATION IS NOT VALID. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDER OF LD. CIT FOR BOTH THE ASSESSMENT Y EARS AND RESTORE THE ASSESSMENT ORDERS PASSED BY AO. 8. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON 15 TH APRIL, 2015. SD/- SD/- (J. SUDHAKAR REDDY) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 15 TH APRIL, 2015. COPY TO 1 M/S RAMESH METALS, D.NO. 40-4-11, #103, SUJATGA C ITADEL, J.V. RATNAM STREET, LABBIPET, VIJAYAWADA 2 ADDL. CIT, RANGE 2, VIJAYAWADA 3 THE CIT, VIJAYAWADA 4 THE DR, ITAT, VISAKHAPATNAM. 5 GUARD FILE.