2014 (12) TMI 479 - HC - Income Tax

Applicability of section 44AD - Assessee s turnover in excess of 40 lacs and justification of addition made u/s 40A(3) - Whether the addition to declared income is adequate or a higher addition would be justified Held that - The AO did not conduct any inquiry and ascertain the net profit rate of other comparable contractors and disallowed expenditure resulting in abnormal gross profit rate of 59.60% which should not be accepted - The effect thereof was that 70% of the expenditure on account of purchases worth 10.61 crores out of total purchases of 14 crores was disallowed - as the books of accounts had not been produced and were not regularly maintained the book results should be rejected - as far as total turnover is concerned the appellate authorities are right in holding that the figure of 18.43 crores cannot be disputed as the assessee was only doing development work for the Greater Noida Authority - The total turnover is also supported by the tax at source certificate - The quantum of turnover was not adversely commented upon by the AO - counsel for the assessee had earlier produced a copy of the assessment order relating to AY 2010-11 wherein the AO himself had applied net profit rate of 8% on contractual receipt of 6.66 crores and net profit rate of 3% on supply receipts of 7.21 crores - revenue has not been able to point out or state that the other contractors have a higher profit rate than the net profit rate of 8% as held by the appellate authorities thus the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Disallowance of expenditure under Section 40A(3)
2. Application of net profit rate for income estimation
3. Rejection of Section 44AD applicability
4. Adequacy of income addition to declared income
5. Verification of net profit rates of other contractors
6. Acceptance of net profit rate by appellate authorities

Analysis:

1. The Assessing Officer disallowed expenditure of Rs. 10,61,49,773 under Section 40A(3) during scrutiny assessment. The Commissioner of Income Tax (Appeals) found the disallowance illogical, leading to an abnormal net profit rate. He partially accepted the assessee's explanation under Rule 6DD(g) and estimated income at 8% net profit rate on total turnover, resulting in an addition of Rs. 1,13,22,344 to the declared income.

2. The Tribunal disagreed with the Revenue's appeal, upholding the Commissioner's estimation of income at 8% net profit rate. They found no infirmity in this estimation, considering the exceptional circumstances and lack of verifiable details due to stolen books of accounts. The Tribunal also noted the undisputed total turnover and quantum of work done by the assessee.

3. The Revenue argued against the application of Section 44AD due to the turnover exceeding Rs. 40 lacs. However, the appellate authorities did not find any basis to estimate income other than applying the 8% net profit rate. They highlighted the absence of data to ascertain a reasonable net profit rate, leading to the use of the Section 44AD rate for estimation.

4. The adequacy of the addition of Rs. 1,13,22,344 to the declared income was questioned by the Revenue, suggesting a higher addition. The Court noted the undisputed total turnover and rejected the Revenue's request for remand, as the net profit rate applied by the appellate authorities was consistent with subsequent years' assessments.

5. The Court requested the Revenue to verify net profit rates of other contractors engaged in similar work to determine the appropriateness of the 8% rate applied. However, the Revenue failed to provide such information, leading the Court to uphold the appellate authorities' decision based on the available data and lack of evidence supporting a higher net profit rate.

6. Considering the factual position and consistency in applying the 8% net profit rate, the Court dismissed the appeal, finding no reason to interfere with the impugned order. The decision was based on the lack of evidence supporting a higher net profit rate for estimation and the adequacy of the income addition to the declared income.