2016 (5) TMI 1266 - HC - Income Tax

Estimation of gross receipts - Held that - In the present case, the gross receipts, no doubt, are far in excess of ₹ 40 lakhs and, as such, Section 44AD of the Act is not attracted. The Tribunal, however, held that Section 44AD of the Act serves as a guidance in estimating net profit even in cases where the gross receipts exceed ₹ 40 lakhs also. The Tribunal has referred to the earlier orders passed in several other cases where profits were estimated at 8% of the gross receipts for the main contract, and at between 5% to 7% for sub-contracts. As has been rightly held by the Tribunal, estimation of profits would depend on several factors, and would vary from one case to another. As the manner in which profits are to be estimated would depend on the facts of a given case, no question of law arises on such estimation either by the Commissioner of Income Tax (Appeals) or by the Tribunal, unless such an estimation is perverse. In the present case, we are satisfied that the order of the Tribunal does not suffer from any such infirmity

Summary

Issues:
- Appeal against the common order passed by the Income Tax Appellate Tribunal for assessment years 2003-04 and 2004-05.
- Rejection of books of accounts by Assessing Officer and estimation of profit.
- Application of Section 44AD of the Income Tax Act for estimating net profit.
- Consideration of profit ratio in cases where books of accounts are rejected.
- Variation in profit estimation based on different factors.
- Applicability of Section 44AD even when gross receipts exceed Rs. 40 lakhs.
- Justification of estimation of profit at 8% for main contract and 5% for sub-contract.
- Determination of profits based on factual situation and absence of legal question unless estimation is perverse.
- Support from previous orders and dismissal of appeals.

Analysis:
The judgment pertains to appeals against the common order of the Income Tax Appellate Tribunal for the assessment years 2003-04 and 2004-05. The Assessing Officer had rejected the books of accounts of the assessee and estimated the profit at 12.5% of the gross receipts. However, the Commissioner of Income Tax (Appeals) considered a net profit estimation of 8% as reasonable, in line with Section 44AD of the Act, which provides guidance for applying a particular net profit rate for civil contractors. The Tribunal affirmed this decision, emphasizing that profit estimation should vary based on factors such as location, raw materials, and funds availability. The Tribunal noted that the profit ratio for main contracts ranged between 8% to 12.5% and for sub-contracts between 5% to 7%, depending on the factual situation.

Regarding the applicability of Section 44AD, which deems 8% of total turnover as profits for eligible businesses, the Tribunal held that this provision can serve as a guideline even when gross receipts exceed Rs. 40 lakhs. The Tribunal referred to past cases where profits were estimated at 8% for main contracts and between 5% to 7% for sub-contracts, supporting the approach of varying profit estimations based on different scenarios.

The judgment emphasized that profit estimation is case-specific and should consider various factors, with no legal question arising unless the estimation is deemed perverse. The court found the Tribunal's order to be sound, citing a previous Division Bench ruling to support its decision. Consequently, the appeals were dismissed, and any related pending petitions were also rejected, with no costs awarded. The judgment underscores the importance of a flexible approach to profit estimation in tax matters, guided by factual circumstances and legal provisions.