2014 (1) TMI 936 - AT - Income Tax

Tribunal decides on income estimation for contracting business, upholding 8% rate under Section 44AD.

The Tribunal partially allowed the assessee's appeal and dismissed the Revenue's appeal regarding the determination of the assessee's income from the ... Determination of assessee's income from the business of contracting – Applicability of section 44AD of the Act – Held that:- There is no hard and fast rule for estimating income from the business of civil constructing - So, however, Section 44AD of the Act prescribes estimation from contract business in cases specified there at the rate of 8% of gross receipts - Section 44AD covers cases of civil construction where the gross receipts from contract business do not exceed Rs. 40 lacs - the assessee before us does not fall within the prescription of Section 44AD of the Act as its contract receipts exceed Rs. 40 lacs - the presumptive rate of net profit of 8% incorporated in Section 44AD reflects a legislative approved rate of net profit, which can be considered as fair and reasonable to estimate income from contract business in cases like that of the present assessee where the books of account are not found reliable by the Assessing Officer - the determination of income from contracting business is also proximate to the rate of net profit of 8% contained in Section 44AD of the Act - the income from contracting business of the assessee be estimated at 8% of the gross receipts and the addition be worked out – Decided partly in favour of Assessee. Section 44AD of the Act did not apply to the assessee before it, however, considering that the presumptive net profit rate of 8% incorporated under Section 44AD of the Act which represented a just, fair and equitable rate of net profit, it would be fit to apply the same rate to calculate income from contract business of the assessee who was otherwise not covered by the provisions of Section 44AD of the Act – Relying upon EASTERN CONSTRUCTION COMPANY. Versus INCOME TAX OFFICER [1997 (8) TMI 106 - ITAT DELHI-D ] - the income from the contracting business of the assessee be determined by applying net profit ratio of 8% of the gross contract receipts – Decided partly in favour of Assessee and against Revenue. Issues:1. Determination of assessee's income from the business of contracting for the assessment year 2007-08.Analysis:The judgment pertains to cross-appeals by the assessee and the Revenue regarding the determination of the assessee's income from the business of contracting for the assessment year 2007-08. The Assessing Officer rejected the book results and estimated the net profit ratio at 15% of gross receipts, resulting in an addition to the assessed income. The CIT(A) scaled down the net profit ratio to 12% but the assessee challenged this decision. The assessee argued for a net profit ratio of 8% based on legislative-approved rates and previous assessments. The Departmental Representative defended the 15% estimation based on discrepancies noticed. The Tribunal considered the arguments and found that the legislative-approved rate of 8% for civil construction businesses under Section 44AD of the Act was fair and reasonable. Therefore, the Tribunal estimated the income from contracting business at 8% of gross receipts, partially allowing the assessee's appeal.The Tribunal referenced a previous decision by the Delhi Bench of the Tribunal and clarified that the legislative-approved rate of 8% from Section 44AD was applicable even if the assessee's contract receipts exceeded Rs. 40 lacs. The Tribunal found the CIT(A)'s distinction of the previous case to be misplaced and held that the net profit ratio of 8% was just and equitable for estimating income from the contracting business. Ultimately, the Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. The judgment was pronounced on 15th July 2013.