Contractor wins appeal as tribunal sets 8% profit rate on gross receipts, deletes section 40A(3) disallowance

ITAT Jodhpur allowed the appeal, directing AO to compute net profit at 8% of gross receipts for the contractor-assessee. The tribunal noted improving gross and net profit trends and found AO failed to provide comparable instances of similar contractors earning 8% profit rate. After applying 8% profit rate, deductions for depreciation, interest paid to banks/parties, and partner remuneration were allowed. Disallowance under section 40A(3) was deleted following HC precedent that such disallowances cannot apply when net profit rates are used for income computation.

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Issues:
Appeal against assessment orders for A.Ys. 2017-18 & 2018-19, rejection of books of account, addition of Rs. 89,02,077/- in trading account, application of section 145(3) of the Act, denial of deduction of interest paid to third parties, disallowance under Section 40A(3) of the Act.

Analysis:
1. The appellant, a contractor, challenged the rejection of books of account and additions made by the Assessing Officer. The AO estimated net profit at 8% of gross receipts, disallowed interest paid to third parties, and invoked Section 145(3) of the Act. The CIT(A) upheld the AO's actions. The appellant contended that interest payments should be deductible when estimating profit. The ITAT directed the AO to compute net profit at 8% of gross receipts and allow deductions for interest payments, depreciation, and remuneration to partners. Ground No. 6 allowed.

2. Regarding disallowance under Section 40A(3) of the Act, the ITAT held that once net profit is estimated, further disallowances are unnecessary. Citing a Madhya Pradesh High Court decision, the ITAT deleted the disallowance of Rs. 3,75,000. Ground No. 9 allowed.

3. In a similar case for A.Y. 2018-19, the AO estimated income at 10% of net profit, later reduced to 8% by the CIT(A). The appellant sought deduction for interest expenditure paid to banks and third parties. The ITAT, following the decision in A.Y. 2017-18, directed the AO to allow deductions for interest expenditure post-profit estimation. Ground No. 6 allowed.

4. Both appeals were partly allowed, with the ITAT directing adjustments in profit computation and disallowance under Section 40A(3) of the Act. The judgments were pronounced on 26/09/2024.

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