2016 (7) TMI 1283 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - estimating the net profit of 12.5% on direct works and 8% on sub contract works by AO - Held that - A.O. has relied upon certain judicial precedents to estimate the net profit, wherein the net profit of 12.5% and 8% in respect of main contracts and sub contracts are upheld. The A.O. has given his own reasons for adopting particular rate of net profit. The assessee has relied upon certain judicial precedents, wherein the net profit of 8% and 5% is upheld. The assessee has given his own reasons for reporting low net profit. However, both the sides failed to justify how a particular case is fit in to the facts of this case for adopting particular rate of net profit. There is no straight jacket formula for estimation of net profit. Before estimation of net profit, the facts and circumstances of case should be considered. But, one common understanding is that, the moment an entity reaches break-even level, its profit would be high, because of fixed overheads. In the present case on hand, on perusal of the facts available on record, we find that the assessee is a large contractor having turnover of more than ₹ 100 crores. Therefore, keeping in view of facts & circumstances of this case, we are of the view that to meet the ends of justice, we direct the A.O. to adopt a net profit of 10% on direct works contracts and 6% net profit on sub contract works. - Decided partly in favour of revenue

Summary

Issues:
Assessment of income based on rejected books of accounts under section 145(3) of the Income Tax Act, 1961; Estimation of net profit on works contracts; Discrepancies in supporting bills and vouchers for expenditures; Comparison of net profit rates with judicial precedents.

Assessment of Income Based on Rejected Books of Accounts:
The case involved a partnership firm engaged in civil contracts, which filed its income tax return for the assessment year 2011-12. The assessing officer (A.O.) rejected the books of accounts under section 145(3) of the Act due to unverifiable nature and lack of supporting bills for expenditures. The A.O. estimated net profit based on incomplete documentation and inconsistencies in the books.

Estimation of Net Profit on Works Contracts:
The A.O. estimated net profit at 12.5% on direct works contracts and 8% on sub contract works, relying on a jurisdictional ITAT decision. The firm contended that the estimated profits were high considering the nature of works in remote areas. The CIT(A) directed to estimate net profit at 8% for main contracts and 6% for sub contracts, upholding 5% for sub contracts given to others.

Discrepancies in Supporting Bills and Vouchers:
The firm argued that most expenditures were supported by self-made vouchers due to cash transactions in remote areas. The A.O. and revenue contended that lack of proper bills and vouchers made verification difficult, justifying the estimation of net profit.

Comparison of Net Profit Rates with Judicial Precedents:
The A.O. relied on precedents for net profit rates, while the firm cited different cases for lower profit percentages. The Tribunal noted that each case's facts and circumstances determine the appropriate profit rate. Considering the large turnover of the firm and lack of verifiable documentation, the Tribunal directed to adopt 10% net profit on direct works contracts and 6% on sub contract works.

The Tribunal partly allowed the revenue's appeal, emphasizing the need to consider case-specific factors for estimating net profit.