The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) recently held that the scraps generated in the normal course of business must be treated as part of business income under the Income Tax Act, 1961.
In the instant case, the assessee is a private limited company engaged in the business of execution of civil construction works. The case was selected for scrutiny through CASS and as there was no compliance from assessee, A.O completed assessment under section 144 of the Act. On observation of P&L account, the assessee had shown gross contract receipts under head income from other sources. The assessee had declared income at 6%. But, the A.O estimated income @8% of gross sub contract receipts as business income and sale of scrap was assessed to tax under the head income from other sources. Aggrieved by the order of A.O, assessee preferred appeal before the CIT(A). The CIT(A) observed that the assessee had executed all his work in the capacity of subcontractor and his declaration of 6% profit was held to be reasonable. The CIT(A) directed A.O to reduce estimation of profit at 6% as against 8%. With regard to taxing of sale of scraps separately, the CIT(A) held that scraps gets generated from the civil works executed and no separate addition can be called for once the net profit/income is estimated. Aggrieved by the order of CIT(A), the revenue appeal before ITAT.
The bench noted that the assessee is a sub-contractor. It relied on the decision of ITAT Hyderabad that main contract business incomes are estimated at 8% and sub-contracts are estimated at 5%. Assessee had filed return declaring income at 6%. Dismissing the ground raised by revenue, ITAT directed the A.O to accept the income returned by the assessee. ITAT added that income from scrap sale should be treated as additional income. ITAT held that scraps are generated in the normal course of business and it should be treated as part of business income only.