2015 (12) TMI 697 - AT - Income Tax

Rejection of books of accounts - estimation of net profit from civil contract receipts - inclusion or exclusion of work in progress for determining the gross turnover - Held that - It is an admitted fact that the work in progress is not a turnover but it is a cost of material and other charges incurred on unbilled works. The assessee contended that the work in progress is carried over to subsequent year and recognized the income, therefore it cannot be taken into turnover for the current year. We find force in the arguments of the assessee for the reason that the assessee did not received any amount towards this work in progress. Though the income should be recognized on percentage completion method or completion contract method in civil contract works, the A.O. necessarily has to follow the method of accounting followed by the assessee from the earlier years. The assessee contended that it is recognizing its income only on completion contract method. When the assesse is following a particular method, of accounting, which was accepted by the department in earlier years, cannot disputed now. Therefore, we are of the opinion that the A.O. is not correct in including the work in progress for the purpose of determining the gross receipts for estimation of net profit. The CIT(A), rightly excluded the work in progress from the contract receipts. We do not find any error or infirmity in the order of CIT(A). Therefore, we direct the A.O. to exclude the work in progress from the gross turnover. The co-ordinate bench of this Tribunal in the case of ACIT Vs. Teja Constructions 2014 (1) TMI 832 - ITAT HYDERABAD has upheld the estimation of net profit at 9% from main contract works. Thus the CIT(A) has rightly estimated the net profit of 9% on the total turnover, excluding work in progress. - Decided against revenue

Summary

Issues:
1. Rejection of books of accounts and estimation of net profit by assessing officer.
2. Discrepancy in turnover declaration and reworking of turnover based on form no.26AS.
3. Appeal before CIT(A) challenging rejection of books of accounts and high net profit estimation.
4. Grounds raised by revenue against CIT(A) order.
5. Dispute over estimation of net profit and inclusion of work in progress in gross turnover.

Analysis:
1. The assessing officer rejected the books of accounts due to deficiencies in vouchers and estimated net profit at 12.5%. CIT(A) reduced net profit estimation to 9% for main contract works, directing exclusion of work in progress from gross turnover. The department's argument for 12.5% net profit was based on lack of proper documentation.

2. Discrepancy in turnover led to reworking based on form no.26AS, resulting in higher gross contract receipts determination. Assessee explained the difference due to mobilization advance and errors in form 26AS. AO recalculated net profit percentages, leading to the dispute over estimation method.

3. Assessee appealed before CIT(A) against rejection of books of accounts and high net profit estimation. CIT(A) considered explanations and past cases to adjust net profit estimation to 9%, excluding work in progress from gross turnover. Reference to ITAT Hyderabad bench decision was crucial in determining net profit.

4. Revenue raised grounds against CIT(A) order, arguing for 12.5% net profit estimation and inclusion of work in progress in gross receipts. CIT(A) justified the adjustments based on case laws and industry practices, emphasizing the need for accurate estimation methods.

5. The Tribunal analyzed past cases and industry practices to determine the appropriate net profit percentage. Excluding work in progress from gross turnover was deemed necessary for accurate profit estimation. The decision upheld CIT(A)'s order of 9% net profit estimation and exclusion of work in progress, dismissing the revenue's appeal. The judgment highlighted the importance of consistent estimation methods and proper accounting practices in civil construction businesses.