2017 (6) TMI 1032 - AT - Income Tax

N.P. determination - the defects pointed out for invoking the provisions of section 145(3) are in respect to the job work only and no doubts were created in respect to sales made. - Held that - The assessee has carried out sales activity which has been shown and reflected separately in the profit/loss account as an independent stream of purchase and sale activity and corresponding revenues have been offered as sales receipts. Regarding the observations of the ld CIT(A) that the expenses relating to the business of supply of material (relating to sales) and contract receipts cannot be bifurcated and the expenses relating to job work expenses and labour charges would pertain to both the revenue streams, the ld AR has submitted that the said observation of the ld CIT(A) is not correct as the same is not arising out of facts on record. Thus the estimation of net profit of 7% should be restricted to the contract activity only. At the same time, given that there are no segmental profit/loss account in respect of contract activity and trading activity available on record, the matter is set-aside to the file of the AO to apply net profit rate of 7% in respect of contract activity only after examining the segmental profit/loss account.

Summary

Issues:
1. Rejection of books of accounts and invoking section 145(3) of the Act.
2. Treatment of vehicle hiring income as a separate revenue stream.
3. Application of profit rate on total receipts for assessment years 2010-11 & 2011-12.

Issue 1: Rejection of books of accounts and invoking section 145(3) of the Act:
The assessee appealed against the rejection of books of accounts and invoking section 145(3) of the Act for assessment years 2010-11 & 2011-12. The appellant decided not to press this ground during the hearing for both years. Consequently, the ground was dismissed. The AO estimated the net profit rate at 11.5% for AY 2010-11 and 7% for AY 2011-12 under section 145(3). The CIT(A) upheld the rejection of books of accounts and applied a net profit rate of 7% based on past history. The appellant argued that the net profit should be restricted to contract activity only, as sales were new and separate from job work. The Tribunal set aside the matter to the AO to apply the 7% net profit rate only to contract activity after examining segmental profit/loss accounts.

Issue 2: Treatment of vehicle hiring income as a separate revenue stream:
The appellant challenged the treatment of vehicle hiring income as a distinct revenue stream. However, during the hearing, the appellant chose not to press this ground for both years, leading to its dismissal. The issue was not pursued further.

Issue 3: Application of profit rate on total receipts for AY 2010-11 & 2011-12:
The primary ground of appeal was the application of a 7% profit rate on the total receipt of ?11,38,03,135 for AY 2010-11. The appellant argued that the profit rate should be based on the declared rate and not arbitrarily set at 7%. The AO and CIT(A) did not find any discrepancies in sales but focused on job work expenses. The Tribunal noted a progressive increase in gross profit in trading activity and directed the 7% profit rate to be applied only to contract activity, setting aside the matter for further examination of segmental profit/loss accounts. The appeals were partly allowed for statistical purposes.

In summary, the Tribunal addressed the issues of rejection of books of accounts, treatment of vehicle hiring income, and the application of profit rates for the assessment years 2010-11 & 2011-12. The appellant's contentions regarding the profit rate application and segregation of revenue streams were considered, leading to the partial allowance of the appeals. The Tribunal emphasized the need for a reasonable nexus between the estimation of profit and the defects identified in the contract activity, setting guidelines for the application of the 7% profit rate.