2014 (12) TMI 570 - HC - Income Tax

Rejection of books of accounts - Determination of NP @ 12% or 6% - CIT(A) allowed the claim of assessee and reduced the same to 6% whereas the Tribunal accepting the claim of revenue set aside the order of the Tribunal Nature of the power exercised while determining a net profit rate Held that - Where books of accounts are rejected or not produced, the AO would be well within the limits of his jurisdiction to assess income by applying a fictional net profit rate - The power conferred is quasi-judicial and not unbridled as it must be guided by reason and though it may involve a degree of guesswork, must be based upon a rational analysis of facts. Factors required to be taken into consideration while applying a net profit rate Held that - On the same set of facts the AO, the CIT and the Tribunal have applied different rates of net profit - The discretion to determine an adequate net profit rate vests with authorities under the Act but the discretion is neither unbridled nor unguided as it must be guided by reason i.e. should be preceded by reasons which, in turn, should be preceded by a perceptible process of reasoning based upon due consideration of all relevant facts - the word similar is not synonymous with the word identical relying upon Dhakeswari Cotton Mills Ltd. Vs. CIT 1954 (10) TMI 12 - SUPREME Court - the discretion to determine net profit rate vests in the authorities but discretion shall not be arbitrary and should have a reasonable nexus to the available material and the circumstances of the case, followed by reasons that appear to be legal and valid. Whether a net profit rate determined without assigning any reasons is not perverse and arbitrary Held that - The authorities under the Act apparently misread the judgment in Commissioner of income-tax Versus Parbhat Kumar 2008 (11) TMI 356 - PUNJAB & HARYANA HIGH COURT and ignored that while dismissing the appeal filed by the revenue, it was held that applying net profit rate on the basis of best judgment assessment in a given situation will be a question of fact unless such assessment is shown to be arbitrary or perverse, thereby clearly setting out that if the net profit rate is not perverse and arbitrarily, it shall only be a question of fact - The judgment cannot be read as a precedent for a conclusion that in each and every case of a contractor, the AO would be legally obliged to apply a net profit rate of 12% de hors, the facts of the case and even where the net profit rate discloses an arbitrary and perverse consideration, it would be a question of fact - if consideration leading to a net profit rate is perverse and or arbitrary, the finding so rendered shall be illegal and shall not be a question of fact thus, the order of the Tribunal in the matter is set aside and the matter is remitted back to the re-determine the net profit rate Decided in favour of assessee.

Issues Involved:
1. Assessment of income based on net profit rate for building contractors.
2. Determining substantial questions of law arising from the assessment orders.
3. Nature of power exercised while determining net profit rate.
4. Factors required to be considered while determining net profit rate.
5. Whether a net profit rate determined without assigning reasons is arbitrary.

Analysis:

Issue 1: Assessment of income based on net profit rate for building contractors:
The judgment dealt with two cases involving building contractors whose account books were rejected, leading to the application of a net profit rate by the Assessing Officer. Discrepancies in the applied rates by different authorities were noted, with the ITAT and CIT(A) either reducing or restoring the rates applied by the Assessing Officer.

Issue 2: Determining substantial questions of law:
The substantial questions of law identified for adjudication included the nature of power exercised while determining the net profit rate, factors to consider during this determination, and whether a net profit rate determined without reasons is arbitrary. The judgment analyzed these questions thoroughly.

Issue 3: Nature of power exercised while determining net profit rate:
The judgment clarified that when account books are rejected or not produced, the Assessing Officer has the authority to assess income by applying a fictional net profit rate. This power is quasi-judicial and must be guided by reason, based on a rational analysis of facts.

Issue 4: Factors required to be considered while determining net profit rate:
It was emphasized that the discretion to determine a net profit rate should be guided by relevant factors such as past tax history, nature of business, economic conditions, and more. The judgment highlighted that this discretion should not be arbitrary but based on a rational analysis of all relevant facts.

Issue 5: Net profit rate determined without assigning reasons:
The judgment addressed the concern of whether a net profit rate determined without reasons is arbitrary. It clarified that if the consideration leading to a net profit rate is found to be arbitrary or perverse, the finding would be illegal and not merely a question of fact. The judgment emphasized the importance of a rational process of reasoning based on relevant factors.

In conclusion, the orders passed by the authorities were set aside, and the matters were restored for redetermination of the net profit rate by considering relevant factors. The judgment highlighted the significance of a reasoned approach in determining the net profit rate for building contractors, ensuring a fair and lawful assessment process.

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