2013 (10) TMI 216 - HC - Income Tax

Rejection of books of accounts - estimation of income - Computation of net profit - Held that - Assessing Officer assessed the net profit at the rate of 13%, which the Commissioner of Income Tax (Appeals) reduced to 8%. Such rate of profit has been affirmed by the Tribunal. It would be a pure finding of fact that what should be net rate of profit from the work of a civil contract. In Parbhat Kumar s case (2008 (11) TMI 356 - PUNJAB & HARYANA HIGH COURT), it was the revenue appeal, which was dismissed holding that net profit rate in proceedings of best judgment assessment after rejecting the account books would be question of fact when the findings recorded can be proved to be arbitrary and perverse. In the aforesaid case, 12% was applied as net profit rate in the case of civil contractor. We do not find that applying 8% as net profit rate is so arbitrary or perverse, so as to warrant any interference in the facts of the present case - Decided against Revenue.

Summary

Issues involved:
1. Interpretation of net profit rate in assessment for a civil contractor.
2. Application of best judgment assessment principles.
3. Comparison of net profit rates in different cases.
4. Consideration of arbitrariness in assessing net profit rate.

Analysis:

The case involved a petition under Section 260-A of the Income Tax Act arising from an order by the Income Tax Appellate Tribunal regarding the assessment year 2006-07. The main issue was the justification of applying a net profit rate in the assessment for a civil contractor. Initially, the Assessing Officer applied a 13% net profit rate, which was later reduced to 8% by the Commissioner of Income Tax (Appeals) and affirmed by the Tribunal.

The appellant argued that the net profit rate applied was arbitrary and unjustified, citing precedents such as the judgment in CIT v. Parbhat Kumar and Kachwala Gems v. Jt. CIT. However, the court disagreed with the appellant's argument, emphasizing that in best judgment assessments, there is always an element of estimation involved. The court noted that while authorities should aim for a fair estimate, some degree of guesswork is inevitable, especially if the taxpayer fails to provide proper accounts.

The court further analyzed the comparison with the Parbhat Kumar case, where a 12% net profit rate was applied for a civil contractor. In the present case, the court found that applying an 8% net profit rate was not arbitrary or perverse, thus not warranting any interference. The court concluded that determining the net profit rate for a civil contract is a factual matter, and in this instance, the 8% rate was deemed acceptable.

In the final judgment, the court dismissed the appeal, stating that no substantial question of law arose for consideration. The decision was based on the reasoning that the 8% net profit rate was not found to be arbitrary or unjustified in the context of the assessment for the civil contractor.

Overall, the judgment provided clarity on the application of net profit rates in assessments for civil contractors, emphasizing the need for a fair estimate while acknowledging the inherent guesswork involved in best judgment assessments.