In a recent case, the Calcutta High Court Upheld the ITAT order which held that the application of a net profit rate of 8% on gross receipts under contract is valid unless illegality is proven.
The revenue/appellant submitted that certain purchases disclosed by the assessee, Sikaria Infraprojects Pvt Ltd were found not variable and therefore the additions were lawfully made by the assessing officer. Therefore, there was no occasion for Commissioner of Income Tax Appeals [CIT(A)] to apply a net profit rate based on the net profit disclosed by others in the same line of trade. He, therefore, submitted that the appeal deserves to be allowed and the substantial question of law deserves to be answered in favour of the revenue.
The respondent-assesse, Sivakariya is a private limited company engaged in the business of civil contract. During the assessment year 2009-10 the assessee executed two projects as ‘subcontractor’ on behalf of M/s. Hindustan Steel Works Ltd. and M/s. Engineering Projects of India Ltd. for construction of road under ‘Prime Minister Gramin Sadak Yojana and construction of central jail at Vishalgarh, Tripura’.
During the assessment year in question, the assessee had made purchases of Rs.13,85,34,422/- from various parties which were claimed as deductions in its profit and loss account. The details of the parties were furnished during the assessment proceedings. The assessing officer issued notice under Section 133(6) of the Income Tax Act, 1961 to the parties for verification of the transaction with the assessee.
The assessing officer found a certain mismatch in the figure of purchase disclosed by the assessee from the parties and the reply received from the parties in response to notices under Section 133(6) of the Income tax legislation. It was also found that several parties had not responded to the notices under Section 133(6) of the Act.. Under the circumstances, the assessing officer rejected the books of accounts and the disclosed profit and determined total income at Rs.10,14,99,264/- as against the disclosed total income of Rs.85,49,460/-.
The income tax appeals commissioner disposed of the appeal by a detailed order while determining the total income at Rs.1,79,98,687/- by appellant and net profit rate of 8% on the contract received of Rs.22,49,83,589/.Considering all, particularly considering the facts that the appellant failed to furnish necessary evidence, for purchase and other expenses before the Assessing Officer and also considering the facts that there are many defects in the books of accounts as pointed out by the Assessing Officer and purchases could not be verified but without material the appellant could not have executed Civil Contract Works and further because the net profit of the appellant’s contract business for the year was only 3.8%.
It was viewed that estimating the profit from the Civil Contract Business of the appellant @ 8% of the gross contract receipts would be fair and reasonable and the appellant has also accepted the same to be fair, reasonable and appropriate. In these facts and circumstances after rejecting the books of accounts due to defects the income of the appellant is assessed taking net profit @ 8% on contract receipts of Rs. 22,49,83,589/- amounting to Rs. 1,79,98,687/- subject to no depreciation allowance.
The income tax assessing officer held that the assessee carried civil work and in view thereof he received a certain amount as consideration. The materials in the execution of contract have not been disbelieved by the assessing officer. In the regard, the CIT(A) and ITAT have also recorded findings of fact.
The Income Tax Appellate Tribunal has also noticed net profit rate of last seven years which ranged from 0.45% to 3.84%. The tax tribunal has also noticed net profit rate determined in matters of others in the same line of trade, to be about 4%. The assessee himself has agreed before the CIT(A) for net profit at the rate of 8% on the gross receipts under the contract.
Counsel for the appellant could not place any material before us based on which determination of net profit at the rate of 8% in the line of trade of the respondent/assessee can be said to be perverse or insufficient under the facts and circumstances of the present case
A division bench of High Court Justices Surya Prakash Kesarwani and Rajarshi Bharadwaj did not find any illegality in the impugned order of the ITAT. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal filed by the revenue is hereby dismissed.
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