2011 (11) TMI 701 - AT - Income Tax

NP determination - Held that - Net profit rate of 1.08% was applied by the Tribunal (supra). There is requirement to apply suitable net profit rate in order to determine the income for the year. The net profit rate of 1.08% has been accepted in Assessment Year 2005-06 where the assessee was maintaining its books of account in due course. The assessee had declared NP ratio of 1.20% during the year. The basis for computing the income for the year under consideration by the Assessing Officer was the net profit rate applied in assessment year 2005-06. The said basis has been modified by the order of the Tribunal under which net profit rate declared by the assessee at 1.08% has been accepted. Following the parity of reasoning we direct the Assessing Officer to adopt the net profit rate @ 1.2% to the gross receipts as declared by the assessee. In view thereof we reverse the order of the CIT (A) and allow the grounds of appeal raised by the assessee.

Summary

Issues Involved:
1. Rejection of books of account under section 145(3) of the Income Tax Act.
2. Application of flat rate of net profit at 6.5% and comparison with previous judgments.

Issue 1: Rejection of Books of Account under section 145(3) of the Income Tax Act:
The appellant, a government contractor for road construction, declared gross receipts of Rs. 3.22 crores with a net profit ratio of 1.2%. The Assessing Officer rejected the NP ratio, applying 6.5% due to discrepancies in the books of account and lack of stock register maintenance. The CIT (A) upheld this rejection citing incomplete books and reliance on a High Court judgment. The appellant argued that the rejection was unjustified, presenting explanations for the alleged defects. The Tribunal noted similarities with a previous case where the rejection was deemed unwarranted, as complete details were provided. The Tribunal found no merit in invoking section 145(3) due to explanations provided by the appellant, similar to the previous year's case.

Issue 2: Application of Flat Rate of Net Profit at 6.5% and Comparison with Previous Judgments:
The second issue revolved around the application of a flat net profit rate. The Tribunal in a previous case directed a net profit rate of 1.08%, contrary to the Assessing Officer's 6.5%. The CIT (A) upheld the 6.5% rate based on a High Court judgment applying a 12% rate to another contractor. However, the Tribunal differentiated the appellant as a road contractor, not a civil one as in the cited case. The Tribunal highlighted the unverifiability of wages as the reason for the High Court's decision. It was argued that a higher rate for all contractors is not justified. Referring to another High Court judgment, a 10% net profit rate was upheld. The Tribunal reversed the CIT (A) decision, applying a 1.2% net profit rate based on the appellant's declaration and the previous year's Tribunal order, emphasizing the subjectivity in flat rate estimations.

In conclusion, the Tribunal allowed the appeal, rejecting the 6.5% net profit rate and directing the application of a 1.2% rate to the gross receipts. The judgment highlighted the importance of complete details in maintaining books of account and the need for a suitable net profit rate determination, emphasizing fairness and consistency in such assessments.