2016 (4) TMI 1180 - HC - Income Tax

Estimation of net profit in a Government contract - @ 10 per cent. as against 6 per cent. upheld by it in a large number of identical matters relating to Government contract - Held that - We may ignore the assessment figures for the subsequent assessment years as placed before us by the appellant although they would also go to show that regular assessment of the assessee has been made. This figure of 4.46 per cent. was definitely a relevant material to have been taken into consideration by the Assessing Officer and the appellate authorities up to the Tribunal while considering the figure of 10 per cent. simply introduced on his say so by the Assessing Officer. Tribunal has given a complete go-by to several decisions of the Tribunal itself fixing the final net profit rate of 6 per cent. in the case of other similarly situated assessees who were also in civil contract works of the Government. Taking the same into consideration, it can be said that no reasonable man would have put a figure of net profit at more than 8 per cent. of the estimated income received from the civil contract by the assessee. In the present matter even after the deduction on account of partner salary, interest and depreciation, it still has led to a final net profit rate of approximately 7.9 per cent. which is much above the net profit rate as it has been found after regular assessment made of the same assessee. The said figure is also not in accord with the other decision of the Tribunal in the case of similarly situated contractor. Thus, on a consideration of the above circumstances, although there has been a concurrent finding of the authorities before us but the said finding is certainly not based upon any evidence and without taking into account relevant materials and thus it has to be held to be perverse. - Decided in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Justification of the 10% net profit estimate by the Assessing Officer.
2. Consideration of previous assessment years and similar cases.
3. Rationality and reasonableness in best judgment assessment.

Detailed Analysis:

1. Justification of the 10% Net Profit Estimate by the Assessing Officer:
The primary issue revolves around whether the Tribunal was justified in affirming the estimate of net profit at 10% as against 6% upheld in similar matters. The assessee argued that the 10% estimate was arbitrary and lacked supporting evidence. The Tribunal accepted the Assessing Officer's statement that the rate of profit in government contracts is generally 10%, without substantial evidence to support this claim. The court emphasized that while best judgment assessments involve some guesswork, they must be based on rational and reasonable estimates, not arbitrary figures.

2. Consideration of Previous Assessment Years and Similar Cases:
The assessee presented evidence from previous assessment years showing significantly lower net profit rates, such as 2.69% for 2002-03 and 4.46% for 2003-04. The court noted that these figures were relevant and should have been considered by the Assessing Officer and the appellate authorities. Additionally, the assessee cited various Tribunal judgments where a 6% net profit rate was accepted for similar government contracts. The court found that the Tribunal's dismissal of these precedents was unjustified.

3. Rationality and Reasonableness in Best Judgment Assessment:
The court reiterated that best judgment assessments must be rational and reasonable, with a reasonable nexus to available material and circumstances. The court criticized the Assessing Officer's failure to consider relevant materials, such as previous assessment figures, and the arbitrary fixation of a 10% net profit rate. The court cited several judgments, including State of Kerala v. C. Velukutty and CIT v. Rajinder Parshad Jain, to support the principle that best judgment assessments should not be capricious and must consider all relevant materials.

Conclusion:
The court concluded that the concurrent findings of the authorities were not based on any substantial evidence and failed to consider relevant materials, rendering the findings perverse. The substantial question of law was answered in favor of the assessee, and the appeal was allowed. The matter was remanded to the Tribunal to re-decide the appeal in accordance with the court's observations and directions.