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Issues: (i) Whether the amount deducted towards security deposit from contract receipts could be excluded while computing the assessee's taxable income. (ii) Whether the application of a net profit rate of 7.5% on the contract receipts was justified.
Issue (i): Whether the amount deducted towards security deposit from contract receipts could be excluded while computing the assessee's taxable income.
Analysis: The deductions were made from the gross receipts accruing during the relevant previous years, and the material before the authorities did not establish any accounting basis for treating such amounts as deductible in computing income. On the facts available, the deduction was treated as an application of income and not as a reduction from the receipts forming the basis of computation.
Conclusion: The exclusion of the security deposit from gross receipts was disallowed and the Revenue succeeded on this issue.
Issue (ii): Whether the application of a net profit rate of 7.5% on the contract receipts was justified.
Analysis: In the absence of material from either side to justify a different estimate, the first appellate authority's estimate of profit was accepted. The estimate was upheld as a reasonable basis for computing income on the contract receipts.
Conclusion: The application of a net profit rate of 7.5% was upheld and the Revenue failed on this issue.
Final Conclusion: The common order was partly reversed to the extent that gross receipts were directed to be taken without deduction of the security deposit, while the estimate of net profit at 7.5% was sustained.
Ratio Decidendi: Amounts deducted from contract receipts and forming part of the gross accruals cannot be excluded in computing taxable income merely on the footing that they represent security deposits, and in the absence of contrary material, a reasonable estimate of net profit may be upheld.
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