Genuineness of sub-contract agreement accepted; profit estimation reduced to 4 per cent of gross receipts

The sub-contract agreement was treated as genuine because the contractor's limited means and lack of proved experience created suspicion only, not positive evidence to disprove the arrangement. The record also showed no prior call for further evidence of work executed, and the Department's acceptance of the same agreement in connected proceedings supported consistency in treatment. On those facts, rejection of the agreement and estimation of net profit at 8 to 10 per cent was unjustified, and income was directed to be assessed at 4 per cent of gross receipts.

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Issues: Whether the sub-contract agreement dated 17 April 1976 was fictitious and whether the assessee's income from the contract business could be estimated at 10 per cent instead of 4 per cent of the gross receipts.

Analysis: The authorities below treated the agreement as fictitious mainly because the sub-contractor had limited means and no proved business experience. That circumstance, by itself, created only suspicion and did not amount to positive evidence disproving the arrangement. The record also did not show that the assessee had been called upon to produce further evidence about the work executed by the sub-contractor. The fact that the Department itself had accepted the same agreement in connected proceedings and had worked out the sub-contractor's share on that basis weighed against taking inconsistent stands. On these facts, the rejection of the agreement and the adoption of 8 to 10 per cent net profit was not justified.

Conclusion: The assessee's claim regarding the genuineness of the sub-contract was accepted and the net income was directed to be estimated at 4 per cent of the gross receipts, resulting in relief to the assessee.

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