2012 (12) TMI 718 - AT - Income Tax

Jurisdiction u/s 263 - assessee engaged in Civil Contract work u/s 44AD directing AO to estimate the profit @ 8% on gross receipts as against the net receipts in the assessment Held that - Though the sub-contract agreement provides for recovery of materials and consumables, but the claim of such recovery has to be supported by necessary evidence and it was incumbent on the part of the AO to verify the claim of the assessee by enquiring the same. As the assessee has shown gross receipt of Rs.5,00,14,972 in Profit & Loss A/c the assessment order does not reveal that the AO has made any such enquiry before accepting the claim of the assessee. As the assessment order is very cryptic and there is nothing in it to show that the AO has verified the correctness of the claim of the assessee towards the recoveries made by the principal contractor or for supply of materials or other recoveries from gross receipts the CIT was correct in exercising his jurisdiction u/s 263 in setting aside the order of assessment CIT was not correct in directing the AO to estimate profit at 8% on the gross receipts simply on the view that the assessee is a sub-contractor to the main contractor and supply of materials or recoveries are not properly verifiable and therefore, an element of profit cannot be ruled out. When no enquiry has been made by the AO regarding the claim of the assessee, the CIT was not justified in coming to a conclusion that the supply of materials, consumables are not properly verifiable. When the sub-contract agreement expressly provides for deduction from the gross amount towards materials and consumables and other recoveries, it cannot be said that such income has accrued to the assessee without bringing sufficient material on record to that extent - direct the AO to make proper enquiry regarding the claim of the assessee - partly in favour of assessee.

Summary

Issues:
1. Jurisdiction of CIT under section 263 of the Income Tax Act regarding assessment year 2006-07.
2. Correctness of estimating profit at 8% on gross receipts by AO instead of net receipts.
3. Applicability of CBDT Circular No. 684 of 1994 in the assessment.

Analysis:

Issue 1: Jurisdiction of CIT under section 263
The appeal challenged the order passed by the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act for the assessment year 2006-07. The CIT exercised his jurisdiction based on the belief that the assessment order was erroneous and prejudicial to the interests of revenue. The CIT found that the AO had not verified the claim of the assessee properly, leading to the setting aside of the assessment order.

Issue 2: Estimation of profit at 8% on gross receipts
The AO had estimated the profit at 8% on the net receipts instead of the gross receipts, which led to the CIT directing the AO to estimate the profit at 8% on the gross receipts. The contention was that the assessee, being a sub-contractor, did not have verifiable supply of materials, leading to a potential element of profit. However, the Tribunal found that the AO did not make any inquiry into the claim of the assessee regarding the recoveries made by the principal contractor, leading to the setting aside of the assessment order.

Issue 3: Applicability of CBDT Circular No. 684 of 1994
The assessee relied on CBDT Circular No. 684 of 1994, which pertains to the exclusion of the value of materials supplied by the contractee while estimating net profit under section 44AD of the Act. The CIT observed that the circular was not applicable to the assessee as its gross receipts exceeded Rs. 40 lakhs. However, the Tribunal acknowledged the persuasive value of the circular for other assesses.

In conclusion, while the CIT's jurisdiction under section 263 was upheld, the direction to estimate profit at 8% on gross receipts without proper verification was deemed unjustified. The Tribunal directed the AO to conduct a thorough inquiry into the claim of the assessee regarding recoveries made from gross receipts and to allow deductions accordingly, setting aside the CIT's order and allowing the appeal for statistical purposes.