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TMI Blog2013 (11) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present appeal is the invocation of section 145(3) of the Act, and the estimation of the income consequent thereto. It will be relevant to recount the facts of the case. The assessee, a partnership firm, is a civil contractor, executing contracts for labour as well as on labour plus material basis. For the year under consideration, the assessee's accounts revealed a net profit of Rs. 54.47 lakh on a gross receipt of Rs. 443.87 lakh, including Rs. 82.95 lakh against labour contract/s. The assessee was observed in the assessment proceeding to be not maintaining any stock register, though had shown opening stock (of materials) at nil and closing stock at Rs 87596/-. There was as such no record or manner to verify or ascertain the consump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase; that for March, 2006 being at Rs.16.90 lakh. Excluding the value of the stock as disclosed, the difference in closing stock was calculated by him at Rs.16.02 lakh plus VAT (@ 4.52%). The gross addition made was for Rs.74,25,295/-, which, being arithmetically incorrect, was subsequently rectified in pursuance to a rectification moved by the assessee to that effect. The same did not favour with the ld. CIT(A) in appeal. The A.O. had ignored the overall book results and proceeded on the basis of an irrelevant classification, i.e., Period 1 and Period 2; applying a 3-month ratio (Period 1) to the nine-month ratio (Period 2). It could well, i.e., with equal justification, be the opposite, so that the ratio of Period 2 could be applied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method' of writing off its purchases for the year to the operating statement, treating the same as 'consumed'. Now there is no basis to state that the material is actually consumed as soon as it is purchased, or that the assessee maintains no inventory thereof. The accounts as maintained are thus admittedly inconsistent with the actual, obtaining state of affairs, which the books of account of any entity or enterprise are supposed to reflect. There is no basis whatsoever, either in law or in accountancy; the law only upholding the accepted principles of commercial accounting, for the said concocted and/or arbitrary method of accounting being followed by the assessee. That the method has been followed from year to year, does not in any manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, if it could be validly so done, the same ought to have been recast by the first appellate authority himself. There is again no merit in the argument qua a comparison with the assessee's book results for the other years. This is for two reasons. The said books, similarly maintained, i.e., as for the current year, are equally unreliable. Secondly, a significant proportion of the assessee's profit for the year comes from labour contract receipt; the ratio of which would vary from year to year. To give a broad and proximate view, assuming the labour to constitute 25% of total output value, the work corresponding to the labour receipt would be Rs. 332 lakh, as against Rs. 361 lakh in respect of labour plus material contract/s, i.e., almost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in the case of civil contractors is section 44AD, which provides for a net profit rate of 8%. The matter is purely factual, though the prescribed presumptive statutory rate, applicable for assessees with a turnover of up to Rs. 40 lakh, without doubt provides a good guideline. The Apex Court in Brij Bushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC), approved a profit rate of 10%. The Tribunal has in such cases upheld profit rates varying from 8% upwards to as much as 20%, or even higher. In our view, a net profit rate of 10% on the assessee's contract receipt of Rs.360.86 lakh, i.e., involving material consumption, would be a reasonable estimate. Qua its labour receipt of Rs. 82.95 lakh, we consider a net profit rate of 20% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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