2017 (5) TMI 1566 - AT - Income Tax

Estimation of profit - gross receipts from contract work - Held that - As the department has accepted the estimation of net profit @ 8% in the preceding year on set of facts in the absence of books of account we hold that the net profit @ 8% is reasonable for the assessment year under consideration on the gross contract receipts as against 10% of net profits determined by the CIT(A).

Summary

Issues:
- Disallowance of expenses claimed by the assessee
- Estimation of profit from gross contract receipts
- Application of Section 44AD for profit determination

Disallowed Expenses:
The case involved an appeal by the revenue and a cross objection by the assessee against the CIT(A)'s order for the assessment year 2011-2012. The Assessing Officer disallowed various expenses claimed by the assessee, such as labor charges, material consumed in contract works, other expenses, and carriage for material and labor, due to lack of supporting documents like bills and vouchers. The CIT(A) called for a remand report and, after considering submissions and the report, deleted the additions made by the Assessing Officer but estimated 10% of the gross contract receipts as assessable profit due to insufficient documentation provided by the assessee.

Estimation of Profit:
The CIT(A) based the estimation of profit on the lack of reliable books of account and the substantial expenses claimed without proper documentation. The CIT(A) rejected the books of account and estimated the profit at 10% of the gross contract receipts, citing the need to prevent inflated expenses. The CIT(A) emphasized the importance of proper documentation and compared the case to a previous year's assessment where a similar estimation was accepted. The CIT(A) directed the Assessing Officer to delete the disallowed additions and assess the total income by including the estimated profit from the gross contract receipts.

Application of Section 44AD:
In the cross objection, the assessee argued that the CIT(A)'s estimation of profit at 10% of the gross receipts from contract work was unjustified, as Section 44AD mandates a profit determination of 8% in no account cases. The Tribunal agreed with the assessee, noting that the net profit at 8% of the gross contract receipts was reasonable based on the previous year's assessment and the lack of reliable books of account. Consequently, the appeal by the revenue was dismissed, and the cross objection of the assessee was allowed.

This detailed analysis of the judgment highlights the disallowance of expenses, the estimation of profit from gross contract receipts, and the application of Section 44AD for profit determination in the context of the appeal and cross objection before the ITAT Ranchi.