2002 (5) TMI 198 - AT - Income Tax

Summary

Issues Involved:
1. Alleged bogus purchases and labour payments.
2. Application of net profit rate.
3. Allowance of depreciation.
4. Allowance of interest paid to third parties.

Summary:

1. Alleged Bogus Purchases and Labour Payments:
The assessee contested the disallowance of Rs. 18,56,140 for raw material purchases and Rs. 2,61,565 for labour payments. The AO had issued letters u/s 133(6) to verify the purchases, but many returned unserved. The AO concluded that transactions with nine parties were not genuine, supported by a forensic expert's report. The CIT(A) found no proof of bogus purchases and noted that the road construction met specifications, thus rejecting the AO's additions but applied a net profit rate instead.

2. Application of Net Profit Rate:
The CIT(A) applied a net profit rate of 10% on gross contract receipts, rejecting the assessee's audited accounts. The assessee argued that the rate was excessive compared to the 8% applied in previous years. The Tribunal noted the past application of 8% to 8.25% net profit rates and decided that an 8% rate was reasonable, modifying the CIT(A)'s application of a 10% rate.

3. Allowance of Depreciation:
The AO allowed depreciation, which the CIT(A) upheld. The Revenue contested this, citing the Allahabad High Court's decision in Saraya Engineering Works vs. CIT. However, the Tribunal referred to a subsequent Allahabad High Court decision in CIT vs. Bishambhar Dayal & Co., which allowed depreciation even when net profit rates were applied. The Tribunal upheld the CIT(A)'s decision to allow depreciation after applying the net profit rate.

4. Allowance of Interest Paid to Third Parties:
The Tribunal noted that the interest paid to third parties was mentioned in the balance sheet but not specifically addressed by the CIT(A). Following the precedent set by the Tribunal, Jodhpur Bench, the Tribunal directed the AO to verify and allow the interest paid to third parties after applying the net profit rate.

Conclusion:
The Tribunal partly allowed the assessee's appeal by applying an 8% net profit rate and upheld the allowance of depreciation and interest paid to third parties. The Revenue's appeal was dismissed.