2012 (2) TMI 562 - AT - Income Tax

N.P.determination - Held that - The application of net profit rate of 12% in all the cases of civil contractors is thus unwarranted as the Hon ble Punjab & Haryana High Court itself in different set of facts had applied a net profit rate of 10%. In view thereof, we hold that in the present set of facts and circumstances where the assessee was engaged in petty civil construction work, where even cement and steel was supplied by the University of Kurukshetra, there is no merit in applying net profit rate of 12% to determine the income of the assessee for the year under appeal. The assessee had declared net profit rate of 4.5% for the year under appeal. We direct the Assessing Officer to apply the net profit rate of 6% to work out the income of the assessee. Accordingly, upholding the rejection of books of account, we direct the Assessing Officer to recompute the income in the hands of the assessee.

Summary

Issues:
1. Rejection of books of account under section 145(3) of the Income Tax Act and application of net profit rate at 12%.
2. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Analysis:

Issue 1: Rejection of books of account and application of net profit rate at 12%
The case involved an appeal against the rejection of books of account and the application of a net profit rate of 12% by the Assessing Officer. The assessee, a civil contractor, had declared a net profit rate of 4.5% for the relevant year. The Assessing Officer, noting the absence of a stock register and muster rolls, show caused the assessee under section 145(3) of the Act. The Commissioner of Income Tax (Appeals) upheld the decision based on a precedent set by the Jurisdictional High Court. However, the Appellate Tribunal found the application of a 12% net profit rate unwarranted, citing a similar case where a net profit rate of 10% was applied by the High Court. The Tribunal directed the Assessing Officer to use a net profit rate of 6% instead, considering the nature of the construction work and the circumstances of the case. The rejection of books of account was upheld, but the net profit rate was adjusted.

Issue 2: Initiation of penalty proceedings under section 271(1)(c)
The second ground of appeal raised by the assessee related to the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal deemed these proceedings premature and dismissed the issue, focusing on the primary matter concerning the rejection of books of account and the adjustment of the net profit rate.

In conclusion, the appeal was partly allowed, with the Tribunal directing the Assessing Officer to recompute the income using a net profit rate of 6% instead of the initially applied 12%. The premature initiation of penalty proceedings was dismissed. The judgment highlighted the importance of considering the specific circumstances of the case and the nature of the business while determining the appropriate net profit rate for tax assessment purposes.