2014 (5) TMI 1026 - AT - Income Tax

Determination of net profit rate - Rejection of books of accounts - Held that - Authorities below have applied excessive net profit rate of 6.5% against total receipts before allowing interest and salary to the partners. History of the assessee clearly suggests that the assessee has reasonably declared profit rate of 2.49% as against 2.66% of the preceding assessment year. The total receipts of the assessee have admittedly exceeded very high as against the receipts declared in the last year. Therefore, when the receipts have exceeded, there is bound to be fall in the net profit. The explanation of the assessee also suggests that labour/wages paid was a necessary component for the purpose of executing the contract. Profit rate applied by the authorities below at 6.5% is very excessive and unreasonable. The assessee has agreed for application of net profit rate of 4% of the gross receipts before salary and interest to the partners before the AO, which in our view is most reasonable and appropriate considering the previous history of the assessee and facts and circumstances of the case. Therefore, to meet the ends of justice, we modify the orders of the authorities below and direct the AO to apply net profit rate of 4% of the gross receipts before salary and interest to the partners for the purpose of estimating business income of the assessee - Decided partly in favour of assessee.

Summary

Issues:
Challenging estimate of income by applying NP rate of 6.5%.

Analysis:
The appeal was against the order of the ld. CIT(A), Gwalior, challenging the application of a 6.5% net profit rate. The assessee, a partnership firm deriving income from civil contract business, declared total sales of Rs. 8.89 crores with a net profit rate of 2.49%. The AO noted discrepancies in wage claims and found the declared net profit rate low at 2.49%. The AO asked why the book results should not be rejected and a higher profit rate of 8% applied. The assessee explained discrepancies, attributing the low profit rate to increased labor charges due to different work types and lack of sufficient capital. The AO rejected the book results and applied a 6.5% profit rate, adding Rs. 35,63,557. The ld. CIT(A) upheld this decision, leading to the appeal.

The assessee argued that historical profit rates of 2.66% and 3.05% in previous years should be considered if books are rejected. Citing relevant case law, the assessee suggested a 4% profit rate was more appropriate than the 6.5% applied. The Tribunal agreed that historical profit rates and the nature of the work supported a lower profit rate. Considering the history and circumstances, a 4% profit rate was deemed reasonable. Consequently, the AO was directed to apply a 4% profit rate on gross receipts before salary and partner interest, partially allowing the appeal.

In conclusion, the Tribunal found the 6.5% profit rate excessive and unreasonable, opting for a 4% rate based on historical data and the nature of the business. The appeal was partly allowed, modifying the profit rate for estimating the business income.