1998 (8) TMI 111 - AT - Income Tax

Method Of Accounting Estimation Of Profits Reasonable Estimate Net Profit Rate Civil Contract

Summary

Issues Involved:
1. Application of net profit rate and its implications.
2. Allowance of depreciation and interest after applying the net profit rate.
3. Applicability of the proviso to section 145(1).
4. Consideration of past assessment years and adherence to CBDT circulars.

Summary:

1. Application of Net Profit Rate:
The appellant, a MES Contractor, had various defects in the maintenance of accounts, leading the Assessing Officer (AO) to invoke the proviso to section 145(1) and apply a net profit rate of 10%. The CIT(A) upheld this rate for Building Contractors, considering it fair and reasonable based on past assessments.

2. Allowance of Depreciation and Interest:
The CIT(A) allowed the claim for depreciation and interest, referencing the CBDT Circular dated 31-8-1995. The circular states that if net profit is estimated, it should be subject to the allowance of depreciation, provided the required particulars are furnished. The CIT(A) found no new factors for disallowance of depreciation and interest, which were allowed in earlier years.

3. Proviso to Section 145(1):
The AO's invocation of the proviso to section 145(1) was justified due to defects in the appellant's accounts. The AO applied a net profit rate of 10%, excluding depreciation and interest, which was deemed reasonable and logical for civil contract cases. The CIT(A)'s decision to allow these claims resulted in an abnormally low net profit rate of approximately 3.5%.

4. Past Assessment Years and CBDT Circulars:
The CIT(A) referenced past assessments where a 10% net profit rate was applied, and depreciation and interest were allowed. However, the Tribunal noted that the principle of res judicata does not strictly apply to income-tax proceedings. The AO's method of excluding depreciation and interest was supported by the Supreme Court's ruling in the case of British Paints India Ltd., emphasizing the duty of the AO to adopt a method that reveals the true income.

Conclusion:
The Tribunal found no infirmity in the AO's method of excluding depreciation and interest while applying a net profit rate of 10%. The order of the CIT(A) was reversed, and the AO's order was maintained. The revenue's appeal was accepted.