2015 (5) TMI 1038 - HC - Income Tax

Determination of net profitability rate - assessee declared a net profit rate of 3.5% - AO applied the rate of 12% - CIT applied the rate of 5% - ITAT @ 8% - Held that - As held by a Division Bench of this Court in Telelinks Vs. Commissioner of Income Tax, Bathinda (2014 (12) TMI 570 - PUNJAB & HARYANA HIGH COURT) the discretion to determine an adequate net profit rate is neither unbridled nor unguided and must be guided by reason i.e. it should be preceded by a perceptible process of reasoning, based upon due consideration of all relevant facts. It was observed that the authorities under the Act appear to construe their jurisdiction as a discretion to apply a thumb rule dependent almost entirely upon the whims of a particular Officer. The Tribunal has merely applied the rate of 8%, without indicating any reason whatsoever, for having done so. The matter is, therefore, identical to the one dealt with by the Division Bench, in the above judgment.The order dated 15.07.2014 (Annexure A-9), passed by the Tribunal, is set aside and the matter is restored, to pass a fresh order, in accordance with law - Decided in favour of assessee

Summary

Issues:
1. Appeal against the order of the Income Tax Appellate Tribunal regarding the net profit rate applied to determine the income of the appellant/assessee, a civil contractor.
2. Question of law regarding the sustainability of the Tribunal's order and the reasonableness of the findings in determining the 'net profitability rate.'

Analysis:
1. The High Court addressed the appeal against the Income Tax Appellate Tribunal's order, which had applied a net profit rate of 8% for the appellant/assessee, a civil contractor. The appellant had declared a net profit rate of 3.5%, while the Assessing Authority (AO) and the Commissioner of Income Tax (CIT) had applied rates of 12% and 5% respectively. The High Court emphasized the importance of arriving at the rate in a proper and judicious manner, citing a previous judgment that highlighted the need for a reasoned decision based on relevant facts. The discretion to determine the net profit rate should not be arbitrary but guided by reason and a thorough consideration of all pertinent factors.

2. The Court noted that the Tribunal had simply applied a rate of 8% without providing any reasoning for its decision. This lack of justification rendered the Tribunal's approach similar to a previous case dealt with by the Court. Consequently, the High Court allowed the appeal, finding in favor of the appellant/assessee. The Tribunal's order was set aside, and the matter was remanded for a fresh decision in accordance with the law. The Court emphasized that the Tribunal could further remand the matter to the CIT or the AO for proper consideration.

This detailed analysis of the judgment highlights the key issues raised in the appeal and the Court's thorough examination of the legal principles involved in determining the net profit rate for the appellant/assessee.