Itta/287/2003 Of Commissioner Of Income Tax v. M/S Inter Continental Constructions

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 287 OF 2003 11-12-2014 BETWEEN Commissioner of Income Tax-I, Visakhapatnam …Appellant And M/s. Inter Continental Constructions, 49-28-5/1, Madhuranagar,Visakhapatnam …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 287 OF 2003 JUDGMENT:(per the Hon'ble Sri Justice L. Narasimha Reddy) Order dated 08-04-2003 passed by the VisakhapatnamBench of the Income Tax Appellate Tribunal (for short, ‘theTribunal’) in I.T.A No.921/H/97 referable to the assessment year1994-95 is under challenge in this appeal filed by the Revenueunder Section 260A of the Income Tax Act, 1961 (for short, ‘theAct’). The following questions are raised: “(a) Whether on the facts and circumstances of thecase the Appellate Tribunal is justified in estimating the NetProfit at 11.5% as against 12.5% as determined byAssessing Officer and whether such a deduction is basedon material on record? (b) Whether the Appellate Tribunal is justified indirecting grant of deduction on account of partner’s capitaland salary to partner’s and also interest and financialcharges?” The respondent is a civil contractor. In its returns for theassessment year 1994-95, it has shown receipt of Rs.96,81,456from the contracts and a sum of Rs.2,63,680/- in the form of lorryhire charges. The assessing officer did not believe the figures,particularly those in relation to the civil contracts. He has chosento invoke Section 145 of the Act and estimated net profit at 12.5%on the net contract receipts. Depreciation was allowed from theestimated net profit but deduction of interest on capital and salarypaid to the partners was disallowed. The respondent carried the matter in appeal to theCommissioner of Income Tax (Appeals), Visakhapatnam. TheCommissioner directed the assessing officer to take the estimatednet profit at 11.5% as against 12.5%. He has also alloweddeduction of interest on capital arranged by the partners andamount paid as salaries to the partners. Deduction of interest onloans was disallowed. Therefore, the respondent carried thematter in further appeal to the Tribunal. Following the orderpassed by the Hyderabad Bench in I.T.A No.1057/Hyd/1988, theTribunal allowed deduction of interest on other loans also. Hence,this appeal by the Revenue. Sri S.R. Ashok, learned Senior Standing Counsel for theRevenue submits that once the assessment is shown underSection 145 of the Act, it is deemed to be comprehensive and noother deductions are permissible. He submits that Section 145 of the Act is a typical provision which can be pressedinto service, where the assessing officer is not satisfied about thefacts and figures furnished by the assessee and the figure thatemerges out of such exercise is so comprehensive that it does notpermit of any other and usual deductions. He contends that theexercise is akin to the one under Section 44AD of the Act, underwhich separate deductions provided for under Sections 30 to 38 ofthe Act are impermissible and in fact, are deemed to have beeneffected. Sri Ch. Pushyam Kiran, learned counsel for the respondent,on the other hand, submits that Section 145 of the Act provides anoption to an assessee in cash or mercantile system of accountingand gives an option to the assessing officer to take recourse to thebest judgment assessment under Section 144 of the Act andbeyond that, it does not prohibit the ordinary exercise to beundertaken vis-à-vis a return directly or indirectly. He submits that theTribunal has taken the correct view of the matter and the orderdoes not warrant interference. The factual background of the case has already beenfurnished in the preceding paragraphs. The respondent posted two Sri Ch. Pushyam Kiran, learned counsel for the respondent,on the other hand, submits that Section 145 of the Act provides anoption to an assessee in cash or mercantile system of accountingand gives an option to the assessing officer to take recourse to thebest judgment assessment under Section 144 of the Act andbeyond that, it does not prohibit the ordinary exercise to beundertaken vis-à-vis a return directly or indirectly. He submits that theTribunal has taken the correct view of the matter and the orderdoes not warrant interference. The factual background of the case has already beenfurnished in the preceding paragraphs. The respondent posted two items of income, one in the form of receipt from civil contracts andthe other in the form of hire of vehicles. The assessing officer didnot believe the figures pertaining to the first item of the income. Obviously, by taking recourse to Section 145 of the Act andthereby to Section 144 of the Act, he assessed the income at12.5% on the total receipts from that source. It is important tonote that he allowed depreciation from the estimated net profit, butdisallowed the deduction of interest on capital and salaries paid tothe partners. In the appeal preferred by the respondent, theCommissioner granted relief to the extent of reducing theestimated net profit by 1% and allowed deduction of (a) interest oncapital arranged by partners and (b) salaries paid to the partners. He disallowed interest on other loans. The Tribunal granted thatpart of the relief also. The entire controversy turns around the question as towhether in an assessment made by an assessing officer underSections 145 and 144 of the Act, deductions provided for underSections 30 to 38 of the Act are permissible. It has already beenmentioned that the learned Senior Standing Counsel for thedepartment pleaded that the assessment of that category iscomprehensive and ordinary deductions are deemed to have beenmade. There is evidence to show that the assessing officer himselfwas not consistent. If in fact, the exercise undertaken underSections 145 and 144 of the Act is so comprehensive, there wasno occasion to allow any deduction at all. However, depreciation under Section 32 was allowed by him, in the order of assessmentitself. Secondly, none of those two sections contain any provisionto the effect that the deductions under Section 32 to 38 of the Actare deemed to have been made. It is important to take note of Section 44AD of the Act for comparison. Sub-section (2) therein reads as under: “Any deduction allowable under the provisions ofsections 30 to 38 shall, for the purposes of sub-section(1), be deemed to have been already given full effect toand no further deduction under those sections shall beallowed: Provided that where the eligible assessee is a firm, thesalary and interest paid to its partners shall be deductedfrom the income computed under sub-section (1) subjectto the conditions and limits specified in clause (b) ofsection 40.” Once a provision of that nature is not incorporated underSections 144 and 145 of the Act, the contention of the departmentin this behalf cannot be accepted. The first question is answeredin the affirmative. Answer to the second question, would in fact depend uponthe answer of the first question. Once we hold that even wherethe assessment is done under Section 145 of the Act, normaldeductions are to be allowed, there is no way that the assessingofficer could have denied deduction of the salaries to the partnersand interest on financial charges. It is not even mentioned that theclaims are not factually correct. We, therefore, answer thesecond question also against the Revenue and in favour of theassessee. The Tribunal has taken the correct view of the matter. We,therefore, dismiss the appeal. There shall be no order as to costs. ___________________________ L. NARASIMHA REDDY, J 11-12-2014ksNote:LR Copy to be marked. B/O ks ____________________________ CHALLA KODANDA RAM, J