The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
No. Once the books are rejected and the profit is estimated, the estimate stands in substitution for a computation under s.29, and every deduction that s.29 brings in is deemed to have been taken into account in arriving at it. The Court added that the embargo in s.40 is taken into account in the same way. To add back one specific item out of the profit and loss account is to rely on the very books that have been rejected, which the officer cannot do. The separate addition of Rs 63,859 for interest and remuneration paid to partners was held not permissible, and the reference was answered in the negative and in favour of the assessee. Read the reasoning carefully before relying on it, because it cuts both ways: the same sentence that stops the Revenue adding an item back is the sentence the Revenue uses to resist a further deduction claimed on top of an estimate.
Decided by the High Court (Andhra Pradesh High Court; T.N.C. Rangarajan J (as printed on the source consulted)) on 1998-03-12, reported as [1998] 232 ITR 776 (AP). It bears on section 145, section 40(b), section 29, section 263 of the Income Tax Act 1961, in Presumptive Taxation & Audit and Assessment & Scrutiny matters.
This is the oldest and most cited answer to the double count that follows a rejection of books in a firm's case: an estimated profit, and then a disallowance under s.40(b) of the partner remuneration and interest already debited in the rejected accounts. The point is short, it is jurisdictional in flavour rather than factual, and it disposes of the addition rather than reducing it. Practitioners should also know how the decision is used against them. Because the Court said all s.29 deductions and the s.40 embargo alike are absorbed into the estimate, assessing officers cite Indwell to refuse a claim for partner salary and interest on top of an estimated figure. Both uses come out of the same paragraph, so it matters a great deal whether your case is an add-back or a fresh claim.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a registered firm carrying on engineering contract business, executing the work through sub-contractors. For assessment year 1981-82 it showed gross contract receipts of Rs 27,20,083 and a net income of Rs 1,24,830. The Income-tax Officer rejected the books of account and estimated the income at Rs 2,50,000 under s.145. The Commissioner then acted under s.263 and added a further Rs 63,859, representing interest and remuneration paid to the partners, relying on a Special Bench decision of the Tribunal in Rama Krishna Contractors, Tadepalligudem. The Appellate Tribunal upheld that addition. The question referred to the High Court was 'Whether, on the facts and in the circumstances of the case, it is correct in law to make a separate addition of Rs. 63,859 representing the interest and remuneration paid to partners, to the income already estimated and assessed from contracts?'
The reference was answered in the negative and in favour of the assessee. Where the books are rejected and the income is estimated, a separate addition of interest and remuneration paid to partners cannot be made on top of the estimate (paras 4 to 6).
The Court reasoned that an estimate made after rejecting the books is in substitution of the income that would otherwise be computed under s.29, so that all the deductions s.29 refers to are deemed to have been taken into account in making the estimate. It went on to say that s.40 provides for certain disallowances notwithstanding that the amounts are allowed generally under other sections, and that the estimate must be taken to have accounted for the embargo in s.40 as well. The officer's difficulty was one of evidence as much as of principle: in proposing to add back an exact item out of the profit and loss account he was relying on the books he had already rejected, which the Bench of the same Court in Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 had held he could not do (para 5).
When such an estimate is made it is in substitution of the income that is to be computed under Section 29. In other words, all the deductions which are referred to under Section 29 are deemed to have been taken into account while making such an estimate.
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Handle my notice → Ask a CA on WhatsAppNo. Once the books are rejected and the profit is estimated, the estimate stands in substitution for a computation under s.29, and every deduction that s.29 brings in is deemed to have been taken into account in arriving at it. The Court added that the embargo in s.40 is taken into account in the same way. To add back one specific item out of the profit and loss account is to rely on the very books that have been rejected, which the officer cannot do. The separate addition of Rs 63,859 for interest and remuneration paid to partners was held not permissible, and the reference was answered in the negative and in favour of the assessee. Read the reasoning carefully before relying on it, because it cuts both ways: the same sentence that stops the Revenue adding an item back is the sentence the Revenue uses to resist a further deduction claimed on top of an estimate. This was decided by the High Court (Andhra Pradesh High Court; T.N.C. Rangarajan J (as printed on the source consulted)) and bears on section 145, section 40(b), section 29, section 263 of the Income Tax Act 1961. It is reported as [1998] 232 ITR 776 (AP). This is the oldest and most cited answer to the double count that follows a rejection of books in a firm's case: an estimated profit, and then a disallowance under s.40(b) of the partner remuneration and interest already debited in the rejected accounts. The point is short, it is jurisdictional in flavour rather than factual, and it disposes of the addition rather than reducing it. Practitioners should also know how the decision is used against them. Because the Court said all s.29 deductions and the s.40 embargo alike are absorbed into the estimate, assessing officers cite Indwell to refuse a claim for partner salary and interest on top of an estimated figure. Both uses come out of the same paragraph, so it matters a great deal whether your case is an add-back or a fresh claim. If it applies to you, the first step is this: Establish first, from the assessment order itself, that the officer rejected the books and estimated the profit. Indwell only applies once that has happened.
The assessee was a registered firm carrying on engineering contract business, executing the work through sub-contractors. For assessment year 1981-82 it showed gross contract receipts of Rs 27,20,083 and a net income of Rs 1,24,830. The Income-tax Officer rejected the books of account and estimated the income at Rs 2,50,000 under s.145. The Commissioner then acted under s.263 and added a further Rs 63,859, representing interest and remuneration paid to the partners, relying on a Special Bench decision of the Tribunal in Rama Krishna Contractors, Tadepalligudem. The Appellate Tribunal upheld that addition. The question referred to the High Court was 'Whether, on the facts and in the circumstances of the case, it is correct in law to make a separate addition of Rs. 63,859 representing the interest and remuneration paid to partners, to the income already estimated and assessed from contracts?' The matter was decided on 1998-03-12 by the High Court (Andhra Pradesh High Court; T.N.C. Rangarajan J (as printed on the source consulted)). On those facts the High Court held as follows. The reference was answered in the negative and in favour of the assessee. Where the books are rejected and the income is estimated, a separate addition of interest and remuneration paid to partners cannot be made on top of the estimate (paras 4 to 6).
The Court reasoned that an estimate made after rejecting the books is in substitution of the income that would otherwise be computed under s.29, so that all the deductions s.29 refers to are deemed to have been taken into account in making the estimate. It went on to say that s.40 provides for certain disallowances notwithstanding that the amounts are allowed generally under other sections, and that the estimate must be taken to have accounted for the embargo in s.40 as well. The officer's difficulty was one of evidence as much as of principle: in proposing to add back an exact item out of the profit and loss account he was relying on the books he had already rejected, which the Bench of the same Court in Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 had held he could not do (para 5). In the words reproduced by the source cited on this page: "When such an estimate is made it is in substitution of the income that is to be computed under Section 29. In other words, all the deductions which are referred to under Section 29 are deemed to have been taken into account while making such an estimate." The decision followed or applied Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 (AP) — relied on.
It was decided by the High Court on 1998-03-12 and is reported as [1998] 232 ITR 776 (AP). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 145, section 40(b), section 29, section 263, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The reference was answered in the negative and in favour of the assessee. Where the books are rejected and the income is estimated, a separate addition of interest and remuneration paid to partners cannot be made on top of the estimate (paras 4 to 6). It arises in Presumptive Taxation & Audit and Assessment & Scrutiny matters, on section 145, section 40(b), section 29, section 263 of the Income Tax Act 1961, and was decided by Andhra Pradesh High Court; T.N.C. Rangarajan J (as printed on the source consulted). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the addition is an add-back of interest or remuneration that was already debited in the rejected accounts, take Indwell as your ground: the officer cannot use the rejected books to isolate one item. If instead you are claiming a further deduction on top of the estimate, expect the officer to cite Indwell against you. That is the harder case, and you will need to argue it separately. Keep the two arguments distinct in your submissions. Running them together invites the officer to answer the one you did not make. Note the year: this concerns an estimate under s.145, not a return filed under s.44AD. Where income is actually returned under s.44AD, s.44AD(2) expressly deems the deductions under ss.30 to 38 to have been allowed, and since assessment year 2017-18 there is no longer any proviso permitting a further deduction of partner salary and interest.
Still good law. No decision doubting or overruling it was located. It is, however, cited in opposite directions. The Income Tax Appellate Tribunal, Hyderabad, in C. Eswara Reddy & Co. (order dated 31 January 2011) distinguished it and allowed partner salary and interest as a further deduction from an estimated profit, holding that Indwell concerned assessment year 1981-82 and that the High Court had had no occasion to consider s.44AD. The Andhra Pradesh High Court itself in CIT v. Y. Ramachandra Reddy (judgment dated 30 July 2014) allowed depreciation and interest from a profit estimated on a percentage basis. Practitioners should therefore treat Indwell as settled on the question of an add-back and contested on the question of a further deduction. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The source consulted prints a single judge, T.N.C. Rangarajan J, but the operative sentence reads 'In our considered opinion', which is the usual plural form of a Division Bench answering a reference. The bench composition should be checked against the ITR report before the entry is relied on for that detail. Nothing in the holding turns on it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The reference was answered in the negative and in favour of the assessee. Where the books are rejected and the income is estimated, a separate addition of interest and remuneration paid to partners cannot be made on top of the estimate (paras 4 to 6).
TaxSphere, “Indwell Constructions v CIT”, https://taxnotice.vittsphere.com/caselaw/case/indwell-constructions-v-cit-estimate-partner-interest/ (validity last checked 2026-09-07)
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