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TMI Blog1980 (11) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ( the Act ), where a net profit rate was estimated, should go before a Special Bench as there was an apparent conflict in views between the decisions in Sri Srinivas Construction Co. v. ITO [IT Appeal No. 475 (Hyd.) of 1975-76, dated 1-4-1976] and the decisions in Sri Venkateswara Construction Co. v. ITO [IT Appeal No. 1649 (Hyd.) of 1977-78, dated 9-2-1979]. The papers were, therefore, directed to be placed before the President who constituted the present Special Bench for hearing the case. We have accordingly heard the present appeal. 2. The assessee is a registered firm which carries on the business of contracts. The accounting period is the financial year 1-4-1974 to 31-3-1975 for the assessment year 1975-76. Originally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,81,712.74 11,80,234.55 Deduct Bills collected corresponding to work in progress for the first period 1-4-1974 to 24-7-1974 as this is considered in the first period 1,42,000.00 Total : 10,38,234.55 Total bills received and work in progress : ₹ 10,38,234.55 + ₹ 1,81,712.74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. 6. The assessee challenged before the AAC the inclusions of the value of work in progress on which also a net profit rate was applied. The AAC agreed with the assessee that a profit rate was to be applied only on the net receipts excluding work in progress. 7. The assessee had also contested the separate addition of interest paid to partners under section 40(b). The AAC directed deletion of the separate addition of interest paid to partners. 8. The revenue is in appeal and the first ground is against the direction of the AAC that the cost of material supplied had to be excluded before applying a net profit rate. We now have the decision of the Supreme Court in the case of Brij Bhushan Lal P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next point urged is that the AAC erred in deleting the addition made on account of the profit relating to the value of work in progress. The learned departmental representative submitted that the method of accounting of the assessee was mercantile and, therefore, estimation of element of profit on work in progress was in order. The learned counsel for the assessee opposed this plea. This is not a case where the assessee s accounts have been accepted. As a matter of fact, the accounts have been discarded and a net profit rate is sought to be applied. In such a case, really, the ITO has not proceeded with reference to any trading account as such in working out the income. We are of the view that in such a case the question of estimating profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t outgoings. But for this specific provision in the Income-tax Act, interest outgoings of all types in respect of borrowings of business would be admissible deductions. 12. The provisions of section 145 of the Act read as under : 145. (1) Income chargeable under the head profits and gains of business or profession or Income from other sources shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deducted therefrom, then th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies as in this case a rate of profit. By applying this rate of profit, he, therefore, comes to be true commercial income. 13. Where a certain assessee does business with own capital and does not pay any interest, there will be no outgoing of interest and, therefore, the net profit would be higher than in a case of an assessee similarly placed who has to work on borrowed capital and there is outgoing of interest. The payments of interest wound, therefore, affect the rate of net profit to be applied. 14. In the present case, the ITO has taken a net profit rate of 12 per cent. Generally, in the case of contractors, this is a normal rate of profit unless special circumstances are shown and there are no such circ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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