1978 (8) TMI 96 - AT - Income Tax

Summary

Issues:
1. Dispute over low net profit rate shown by the assessee.
2. Application of Section 145 for estimating profits.
3. Appeal against addition of income by the ITO.
4. Justification of the AAC's decision to delete the addition.

Analysis:

The case involved a dispute regarding the low net profit rate shown by the assessee firm in its income tax return for the assessment year 1974-75. The Income Tax Officer (ITO) found the net profit rate of 6.8% to be low compared to the industry standard of around 12%. Consequently, the ITO asked the assessee to explain the reasons for the low profit rate. The assessee attributed the low profit to factors such as the steep rise in prices of building materials and labor, as well as the procurement of material at higher costs due to market conditions. The ITO, however, estimated the net profit at 10% of total gross receipts, resulting in an addition of Rs. 56,674 to the total income.

The assessee appealed against the addition made by the ITO, and the Appellate Assistant Commissioner (AAC) allowed the appeal, deleting the addition. The AAC considered the explanations provided by the assessee regarding the increase in material costs and competitive pricing in the industry. The Revenue, dissatisfied with the AAC's decision, appealed to the Appellate Tribunal.

During the appeal before the Tribunal, the Departmental Representative argued that the AAC erred in deleting the addition of Rs. 56,674, relying on the ITO's order. On the other hand, the counsel for the assessee contended that the AAC's decision was justified and should not be interfered with. After hearing the arguments and examining the records, the Tribunal found that the assessee's explanations regarding the rise in material costs and competitive pricing were satisfactory.

The Tribunal also noted that the Revenue had accepted lower profit rates in comparable cases presented by the assessee, indicating inconsistency in applying the 10% profit rate in this case. Additionally, the Tribunal highlighted the lack of concrete evidence or material brought by the Revenue to support the 10% profit rate estimation by the ITO. Therefore, the Tribunal upheld the AAC's decision, concluding that the net profit rate of 6.8% shown by the assessee was reasonable, and the addition made by the ITO was unjustified.

In light of the above analysis and considering the totality of facts and circumstances, the Tribunal dismissed the appeal, affirming the AAC's decision to delete the addition of Rs. 56,674 to the assessee's income.