2017 (6) TMI 1033 - AT - Income Tax

Incorrect estimation of profit - Held that - The argument that estimated profits should be considered for the whole of the contract cannot be accepted and accordingly, the order of the AO and CIT(A) on this issue are approved. Computing the percentage of work sub-contracted by assessee - Held that - During the year, on standalone basis, the subcontract works of assessee out of the total cost of contract comes to 95.21%. There is no dispute on that, as AO also accepts that statement working out the ratios. However, what AO has done is taking the total sub-contract works over a period of five year contract which comes to ₹ 88.27%. Since the estimation is only pertaining to the year under consideration, the AO should have determined the sub-contract receipts pertaining to this year only on standalone basis, instead of the whole contract period. As assessee s contention of estimating the profits for the whole contract and adjusting the profits declared in other years is not accepted the contention that the sub-contract percentage should be worked out on standalone basis on the receipts of this year alone has to be accepted. Therefore, modifying the order of AO, the profit should be estimated on receipts during the year- at 95.21% of the receipts at 5% being sub-contracted work and balance at 8% being contract work on own basis. Non-granting of credit of taxes paid - Held that - It was the contention that AO has erred in not granting the credit of taxes of ₹ 21,30,490/- being refund granted to assessee in AY. 2005-06, which has been adjusted against the tax demand of AY. 2004-05. This contention requires examination by the AO of the record for AY. 2004-05 and 2005-06. In case, such refund was already granted to assessee and adjusted to the demand in this year, necessary credit should be given. AO is directed to examine the record and do accordingly after giving due opportunity to assessee.

Summary

Issues Involved:
1. Incorrect estimation of profit
2. Non-granting of credit of taxes paid

Incorrect estimation of profit:
The appeal was against the Assessing Officer's (AO) order determining income following the ITAT's directions. The AO rejected the books of account due to missing vouchers and estimated income at 12.5% of gross receipts. The CIT(A) upheld the rejection but limited net profit estimation to 8%. The ITAT directed profit estimation at different rates for main contractor, sub-contractor, and works by subcontractors. The AO then calculated taxable income based on these rates. The appellant objected, stating the estimation should consider the entire contract duration, not just the year. The ITAT rejected this argument, emphasizing the focus on the year under appeal. The AO's method of calculating subcontracted work percentage over the entire contract period was also challenged. The ITAT ruled in favor of assessing subcontracted work percentage based on the year alone, modifying the AO's order accordingly.

Non-granting of credit of taxes paid:
The appellant contested the AO's failure to credit taxes refunded in a prior assessment year against the current tax demand. The ITAT directed the AO to review records from the relevant years and provide the necessary credit if the refund adjustment had occurred. The appeal was partly allowed for statistical purposes, with the AO instructed to address the tax credit issue after due examination.

This judgment highlights the importance of accurate profit estimation in line with ITAT directions and the need for proper crediting of taxes paid in previous years. The ITAT's decision clarified the scope of estimation for the year under appeal and emphasized adherence to specific contract details for accurate income determination.