2014 (3) TMI 1121 - AT - Income Tax

Revision u/s 263 - assessing officer has estimated the net profit at 9% of the gross contract receipts without causing necessary enquiry with regard to the adopting low profit and without applying mind - Held that - The facts are materially the same as in the assessment year under consideration also. Therefore following the aforesaid decision of the Tribunal we hold that the CIT was not justified in revising the assessment order. It further needs to be mentioned that the CIT without himself deciding what should be the net profit rate has again left it to the discretion of the AO. This shows that the CIT himself was not sure about the rate of profit to be adopted. We set aside the order of the CIT and restore that of the assessing officer. Estimation of profit at 12.5% of the gross contract receipts - Held that - Estimation of net profit at 12.5% of the gross contract receipts is high and excessive. The ITAT Visakhapatnam bench as well as the ITAT Hyderabad benches have been consistently adopting the profit rate of 8 to 9% net of depreciation in case of assessees engaged in contract works and from profit so estimated further deduction towards remuneration and interest payment to the partners u/s 40(b) is allowed. Therefore in tune with the consistent view of the Tribunal we direct the assessing officer to estimate the profit at 9% on gross contract receipts net of depreciation and thereafter allow deduction u/s 40(b) of the Act towards interest and remuneration payment to the partners. The AO must see to it that income so computed should not go below the returned income. Accordingly assessee s appeal is partly allowed.

Summary

Issues:
1. Assessment order passed u/s 263 of the Act for the assessment year 2007-08.
2. Order of the CIT(A) for the assessment year 2009-10.

Assessment Year 2007-08:
The ITAT Visakhapatnam dealt with two appeals by the assessee, one against an order passed u/s 263 of the Act for the assessment year 2007-08 and the other against the CIT(A) order for the assessment year 2009-10. The issues being common, both appeals were clubbed together. The assessing officer estimated the net profit at 9% on gross contract receipts without thorough inquiry, leading the CIT to issue a show cause notice. The CIT, based on ITAT Hyderabad bench decisions, found the estimation erroneous and prejudicial to revenue, setting aside the assessment order for a fresh assessment. The ITAT, considering a similar issue in the assessment year 2006-07, held that the CIT's revision was unjustified as the assessing officer had applied his mind to make estimations. Following the Tribunal's decision, the ITAT set aside the CIT's order and restored that of the assessing officer.

Assessment Year 2009-10:
In the appeal against the CIT(A)'s order for the assessment year 2009-10, the assessing officer estimated the profit at 12.5% of gross contract receipts due to unverifiable expenses debited to the profit and loss account. The ITAT found the estimation excessive, noting that previous benches adopted a profit rate of 8 to 9% net of depreciation for contract works. The ITAT directed the assessing officer to estimate the profit at 9% on gross contract receipts, allowing deductions under section 40(b) and ensuring the computed income does not fall below the returned income. Consequently, the assessee's appeal for the assessment year 2007-08 was allowed, and the appeal for the assessment year 2009-10 was partly allowed.

This judgment emphasizes the importance of thorough inquiry and proper estimation in assessing profits for contract works, highlighting the need for assessments to be based on relevant legal precedents and factual considerations to prevent errors and ensure fairness in revenue determination.