2016 (11) TMI 1641 - HC - Income Tax

Addition on account of higher rate of profit - both the authorities have increased the net profit rate from 10% to 11.5% - HELD THAT - Taking into account the previous year the assessee's assessment was accepted at 10% G.P. No reasons are adopted by the Tribunal raise the net profit from 10% to 11.5%. In that view of the matter, the first issue is answered in favour of the assessee. Tribunal holding that while arriving at net profit rate, salary paid to Managing Director would not be allowed as a deduction to the appellant - HELD THAT - The Tribunal has considered the application of net profit rate as 11.5% and not 10%, in our opinion the net profit rate has to be assessed at 10%. No other expenses are allowed.

Summary

Issues:
Challenge to Tribunal's judgment and order allowing appeals by both assessee and department. Substantial questions of law framed for consideration: 1) Justification of sustaining additions on higher profit rate without material, 2) Basis of applying net profit rate on contract receipts, 3) Allowability of Managing Director's salary as deduction.

Analysis:
1. The appellant challenged the Tribunal's judgment increasing the net profit rate from 10% to 11.5% without any basis. The Tribunal held that Section 145 provisions were applicable as no stock register was maintained. The Tribunal directed the AO to allow depreciation and stated that deductions for interest and salaries to partners are allowable. The appellant contended that the expenses claimed were excessive, but the Tribunal found weight in the Department's contention regarding unverifiable expenses and increased turnover. The Tribunal upheld the 11.5% net profit rate, rejecting the appellant's plea to allow the Managing Director's salary as a deduction.

2. The Court noted that the Tribunal did not provide reasons for raising the net profit rate to 11.5% from the accepted 10%. Citing a previous decision, the Court emphasized that reliance on rejected books of accounts for additions other than the estimated income by the AO is inappropriate. Consequently, the Court favored the appellant, directing the net profit rate to be assessed at 10% and disallowing other expenses. The decision in Malpani House of Stones vs. CIT supported this approach.

3. The Court's ruling favored the appellant on the first and second issues, directing the net profit rate to be maintained at 10% and disallowing additional expenses. However, the Court ruled in favor of the Department on the third issue, rejecting the appellant's plea to allow the Managing Director's salary as a deduction. Ultimately, the appeal was partly allowed based on these findings.