2016 (2) TMI 129 - HC - Income Tax

Profit estimation - ITAT reducing the profit estimated from 16% to 8% - Held that - The entire examination was on the basis of evidence on record and would not call for any question of law. It is true that the provisions of section 44AD of the Act would not ipso facto apply to every acts of the Tribunal merely adopting a yardstick in absence of any other concrete evidence to enable itself to estimate the true profit of the assessee. With respect to further additions, the Tribunal correctly dismissed the revenue appeal on the ground that the CIT (A) had adopted a gross profit rate methodology, new additions would, therefore, be not called for.

Summary

Issues:
1. Reduction of gross profit rate by CIT (A) from 16% to 8%.
2. Disallowance made under section 40A(3) of the Income Tax Act.

Analysis:

Issue 1: Reduction of gross profit rate by CIT (A) from 16% to 8%
The central issue in this case revolved around the reduction of the gross profit rate by the CIT (A) from 16% to 8%. The CIT (A) determined that the accounts of the assessee were unreliable after rejecting the book results and proceeded to make additions based on the gross profit rate. The CIT (A) concluded, through a detailed judgment, that the net profit of the assessee should be estimated at a rate of 16% of the contract receipts for all assessment years.

The assessee, dissatisfied with the CIT (A)'s decision, appealed to the Tribunal. The Tribunal, in its order, reduced the gross profit rate to 8%. The Tribunal found that there was no basis for estimating the net income at 16% and considered various factors such as the nature of work undertaken by the assessee. It was observed that the net profit declared by the assessee in the preceding year could not be applied to the current year due to differences in the nature of work. The Tribunal also referred to section 44AD of the Income Tax Act and determined that estimating the net profit at 8% of the turnover would be more appropriate, considering the circumstances of the case.

The Tribunal's decision was based on the evidence on record, which indicated that a 16% gross profit rate was excessive. By applying the 8% rate prescribed in section 44AD of the Act, the Tribunal justified the reduction in profit estimation. The Court agreed with the Tribunal's assessment, stating that the examination was evidence-based and did not raise any legal questions. It was acknowledged that while section 44AD may not directly apply in this case, the Tribunal's decision to estimate the net profit at 8% was reasonable given the lack of concrete evidence to determine the true profit of the assessee.

Issue 2: Disallowance made under section 40A(3) of the Income Tax Act
The revenue raised a question regarding the disallowance made under section 40A(3) of the Income Tax Act. However, the Tribunal dismissed the revenue's appeal, noting that since the CIT (A) had employed a gross profit rate methodology, further additions were unwarranted. The Tribunal's decision was based on the understanding that once a gross profit rate methodology was applied, additional disallowances were not necessary.

In conclusion, the tax appeals were dismissed by the Court, upholding the Tribunal's decision to reduce the gross profit rate and rejecting the need for further additions based on a gross profit rate methodology.