2011 (2) TMI 234 - HC - Income Tax

Net profit rate - Contractual receipts - Revenue submitted that the assessee had disclosed net profit of Rs.2,17,417/- in relation to contractual receipts of Rs.1,16,65,879/- and the gross profit thus works out to be 1.86% - Further submitted that after taking into consideration the depreciation, interest and salary paid to the partners which has been debited to the profit and loss account, the net profit rate would work out to 3.4% only - The Tribunal, however, has observed that the net profit rate disclosed by the assessee is 7% which is not correct - It was also urged that if the material at site valuing Rs.16,09,189/- shown in profit and loss account is taken into consideration, the net profit rate would be below 3.4%. He, on the strength of above submissions, stressed that the Tribunal while accepting the plea of the assessee had not referred or discussed any material in this regard - He submitted that the order of the Tribunal is patently unsustainable - Appeal is allowed by way of remand

Summary

Issues:
Determining appropriate net profit rate for the assessee for the assessment year 1993-94.

Analysis:
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961 against the order passed by the Income Tax Appellate Tribunal, Chandigarh Bench. The primary question raised was whether the Tribunal erred in accepting the net profit rate disclosed by the assessee as 7% when, after considering depreciation, interest, and partner salaries, the actual net profit rate was calculated to be 3.4%. The Assessing Officer initially adopted a net profit rate of 10%, which was later affirmed by the Commissioner of Income Tax (Appeals). However, the Tribunal disagreed with this rate and reduced it. The revenue contended that the actual net profit rate should be 3.4% based on specific financial considerations, which the Tribunal did not adequately address in its decision.

The crucial issue in this appeal was to determine the appropriate net profit rate to be applied in the case of the assessee. The Assessing Officer had initially set the rate at 10%, considering certain unexplained cash credits as part of the income earned by the assessee. The Commissioner of Income Tax (Appeals) upheld this rate, emphasizing the manifestation of unexplained income through cash credits. However, the Tribunal later reduced the net profit rate, disagreeing with the previous assessments. The revenue argued that the actual net profit rate should be 3.4% after factoring in depreciation, interest, and partner salaries, which the Tribunal failed to adequately address in its decision.

The High Court, after considering the submissions, found merit in the revenue's argument. It noted that both the Assessing Officer and the Commissioner of Income Tax (Appeals) had taken into account the unexplained cash credits while determining the net profit rate at 10%. However, the Tribunal did not adequately consider this aspect, leading to a flawed decision. As a result, the Court answered the substantial question of law in favor of the revenue, allowed the appeal, set aside the Tribunal's order, and remitted the matter back to the Tribunal for a fresh decision in accordance with the law.