ITAT affirms 8% Profit Rate Estimation for Government Contractor [Read Order]
The tribunal upheld the decision of CIT(A), affirming an 8% profit rate estimation for the assessee, a government contractor, dismissing the Revenue’s appeal
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The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] in estimating the profit at 8% of the gross contract receipts. Sharad Anandrao Deore (assessee), a government contractor engaged in construction work, had filed an Income Tax Return (ITR) declaring a total income of Rs. 49,61,890. The case was selected...
The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] in estimating the profit at 8% of the gross contract receipts.
Sharad Anandrao Deore (assessee), a government contractor engaged in construction work, had filed an Income Tax Return (ITR) declaring a total income of Rs. 49,61,890. The case was selected for limited scrutiny, focusing on verifying the genuineness of expenses.
The Assessing Officer (AO) observed that the assessee had paid significant amounts to various subcontractors, many of whom had not filed their income tax returns. The AO also found discrepancies in subcontract agreements, TDS payments, and the absence of GST registration for most subcontractors.
The AO treated the sub-contract payments of Rs. 3,16,96,450 as non-genuine and added this amount to the taxable income, assessing a total income of Rs. 3,66,58,340.
Aggrieved by the order, the assessee filed an appeal before CIT(A). Before the CIT(A), the assessee argued that such an addition would result in an high profit margin of approximately 40%, which is impractical in government contracting.
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The assessee also presented profit margins of similar contractors, which showed an average profit rate of 5% to 6%. Based on this, CIT(A) determined that estimating the profit at 8% of gross contract receipts was fair and reasonable.
Aggrieved by CIT(A)’s order, the Revenue filed an appeal before ITAT. The counsel for the Revenue argued that the entire sub-contract expense should be disallowed. The counsel also objected to the order of CIT(A) directing the AO to estimate the profit at 8%.
The counsel for the assessee relied on the order of the CIT(A). The counsel also argued that the payments from the government departments were released after due verification of the work. Therefore, the counsel also argued that it cannot be said that the assessee made payments to bogus sub-contractors.
The two-member bench comprising R.K. Panda (Vice President) and Vinay Bhamore (Judicial Member) Observed that the average net profit rate for the assessee from AY 2015-16 to 2021-22 was 5.37%, and other contractors in the same business reported profit margins ranging from 4% to 8%.
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The Tribunal also observed Section 44AD of the Income Tax Act, which prescribes an 8% profit rate for civil contractors in unaudited cases where turnover is below the prescribed limit. The tribunal observed that 40% profit margin is unrealistic for a government contractor, making an 8% estimation reasonable.
Therefore, the tribunal upheld the order of CIT(A) directing the AO to estimate the Profit at 8% was justified. Thereby the appeal of the Revenue was dismissed.
To Read the full text of the Order CLICK HERE
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