2015 (3) TMI 1179 - AT - Income Tax

Rejection of books of accounts - estimation of net profit - Held that - As already noted that assessee did not file even the return unless the same was detected during search made in the case of M/s Talwar Group. Anyway the most relevant factor in the case before us was that assessee is engaged in the business of construction of house for private parties. It is a common knowledge that rate of profit in construction of a private houses is much higher than in comparison to the mass construction contracts for government or other government authorities. This is so because the construction of a private house involves superior quality of work, fancy items for which generally the contractor charges higher rate of margin. Further, it is to be noted that assessee had huge amount of sundry creditors amounting to ₹ 75,69,505/- for which no confirmation has been filed. Even the names of the sundry debtors are not disclosed in the balance sheet. Normally, the Chandigarh Bench of the Tribunal has estimated the rate of profit in the case of construction firms at 8%. But considering the above facts, we are of the opinion that estimate of profit at the rate of 9% would meet the ends of justice in this case and, therefore, we set aside the order of Ld. CIT(A) and estimate the net profit at 9%.

Summary

Issues Involved:
1. Contravention of provisions of Section 250(6) of the Income Tax Act, 1961.
2. Application of a net profit rate of 10% on the appellant's turnover.
3. Justification for the high profit rate in the civil contract business.

Detailed Analysis:

1. Contravention of Provisions of Section 250(6) of the Income Tax Act, 1961:
The appellant contended that the CIT(A) erred in passing the order dated 10.12.2014, contravening Section 250(6) of the Income Tax Act, 1961. However, this issue was not elaborated upon in the judgment, suggesting it was not a significant point of contention in the appeal's outcome.

2. Application of Net Profit Rate of 10% on Turnover:
The primary issue centered around the Assessing Officer (AO) applying a net profit rate of 10% on the appellant's turnover. The appellant argued that the AO applied this rate without rejecting the books of accounts, which was deemed unjustified. The AO's decision was based on several discrepancies:
- Failure to produce supporting vouchers for expenses exceeding Rs. 25,000.
- Non-submission of partners' bank account copies.
- Incomplete details of purchases.
- Lack of confirmation from sundry creditors and debtors.

The AO concluded that various expenses could not be verified, leading to the application of a 10% net profit rate on the receipts. The CIT(A) upheld this decision, referencing the case of CIT v. Prabhat Kumar (323 ITR 675), where a net profit rate of 12% was applied and confirmed by the High Court. The CIT(A) reasoned that the estimation of profit should be based on the facts of each case and found the 10% rate appropriate under the circumstances.

3. Justification for High Profit Rate in Civil Contract Business:
The appellant argued that the 10% profit rate was excessively high and arbitrary. The Tribunal noted that the appellant did not file a return despite having taxable income, and several details necessary for verification were not provided. The Tribunal emphasized that the rejection of books and estimation of profit should be based on a rational analysis of facts. They referenced the case of Telelinks v. CIT, which highlighted that the estimation of net profit should be guided by reason and relevant factors, such as past tax history, nature of business, and prevailing economic conditions.

The Tribunal acknowledged that the construction of private houses generally involves a higher profit margin compared to mass construction contracts for government entities. Given the appellant's failure to file confirmations for sundry creditors amounting to Rs. 75,69,505 and the absence of sundry debtors' names in the balance sheet, the Tribunal deemed a 9% net profit rate more appropriate than the 10% initially applied by the AO. Consequently, the Tribunal partially allowed the appeal, reducing the net profit rate to 9%.

Conclusion:
The Tribunal's judgment addressed the appellant's concerns by reducing the net profit rate from 10% to 9%, considering the specific circumstances and nature of the appellant's business. The decision balanced the need for a reasonable profit estimation with the appellant's failure to provide adequate documentation and verification for various expenses and creditors.