Tribunal orders deletion of ad hoc disallowance, emphasizes reasonable profit rate

The Tribunal allowed the appeal of the assessee, directing the A.O. to delete the ad hoc disallowance of Rs. 10.00 lacs upheld by the CIT(A). The Tribunal emphasized the reasonableness of the declared net profit rate and the proper maintenance of books of account, which did not justify any further trading additions.

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Issues Involved:
1. Ad hoc disallowance of Rs. 10.00 lacs out of contract expenses.
2. Justification for the rejection of books of account.
3. Estimation of net profit rate.
4. Comparison with previous assessment years and other similar cases.
5. Validity of the lump sum disallowance by the Assessing Officer (A.O.).

Issue-wise Detailed Analysis:

1. Ad hoc Disallowance of Rs. 10.00 lacs:
The primary grievance of the assessee was the upholding of an ad hoc disallowance of Rs. 10.00 lacs out of contract expenses by the CIT(A). The assessee argued that the net profit rate declared was 10.41% of gross contract receipts, which was higher than the 8% benchmark often accepted by the Tribunal and the Rajasthan High Court. The Tribunal noted that the net profit rate for the year under consideration was reasonable and directed the A.O. to delete the disallowance upheld by the CIT(A).

2. Justification for the Rejection of Books of Account:
The Tribunal observed that the books of account were properly maintained and audited. The A.O. did not reject the books of account or apply the provisions of Section 145(3) of the Income Tax Act, 1961. Despite this, the A.O. made a lump sum disallowance of expenses without specific justification. The Tribunal found this approach to be unjustified given the proper maintenance of books and higher declared net profit rate.

3. Estimation of Net Profit Rate:
The Tribunal highlighted that the net profit rate declared by the assessee was 10.41%, which was higher than the 8% rate generally accepted by the Tribunal and the Rajasthan High Court. The Tribunal referred to past decisions, including the assessee’s own case for A.Y. 2013-14, where a net profit rate of 8.09% was accepted. Given the higher net profit rate declared for the current year, the Tribunal found no basis for further trading additions.

4. Comparison with Previous Assessment Years and Other Similar Cases:
The Tribunal compared the net profit rates and gross receipts of the assessee for the current and previous assessment years. It noted that the net profit rate for the year under consideration was better than the preceding years. The Tribunal also referred to the Rajasthan High Court’s decision in CIT Vs Jain Construction Co. & Ors., which supported the reasonableness of an 8% net profit rate subject to depreciation and interest deductions.

5. Validity of the Lump Sum Disallowance by the A.O.:
The Tribunal found that the A.O.’s lump sum disallowance of Rs. 37.35 lacs, later reduced to Rs. 10.00 lacs by the CIT(A), was not justified. The A.O. made general remarks and disallowed expenses without rejecting the books of account or providing specific reasons. The Tribunal concluded that given the higher net profit rate declared and the proper maintenance of books, no further disallowance was warranted.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the A.O. to delete the ad hoc disallowance of Rs. 10.00 lacs upheld by the CIT(A). The Tribunal emphasized the reasonableness of the declared net profit rate and the proper maintenance of books of account, which did not justify any further trading additions. The decision was pronounced in the open court on 18th August 2020.

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