TaxTMI 
TaxTMI 
1980 (11) TMI 172
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....ct, 1961 ('the Act'), where a net profit rate was estimated, should go before a Special Bench as there was an apparent conflict in views between the decisions in Sri Srinivas Construction Co. v. ITO [IT Appeal No. 475 (Hyd.) of 1975-76, dated 1-4-1976] and the decisions in Sri Venkateswara Construction Co. v. ITO [IT Appeal No. 1649 (Hyd.) of 1977-78, dated 9-2-1979]. The papers were, therefore, directed to be placed before the President who constituted the present Special Bench for hearing the case. We have accordingly heard the present appeal. 2. The assessee is a registered firm which carries on the business of contracts. The accounting period is the financial year 1-4-1974 to 31-3-1975 for the assessment year 1975-76. Originally, the....
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.... The ITO considered that the income shown was too low. He emphasised that the assessee had estimated net income at 12 per cent, but this was on the net bills. According to the assessee, no net profit could be estimated on the value of material supplied by the department as there was no element of profit, but this was negatived by the ITO stating that had the assessee purchased material in the open market, it would have to pay higher rate for the material used. The ITO, therefore, proposed to estimate the net profit at 12½ per cent but on the gross amount of bills as also on the element of work in progress. Apart from the net incomes so arrived at, he added interest payment to partners of Rs. 659 relating to the first period 1-4-197....
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....terial was supplied at fixed rates by Government to the contractor solely for being used in the works and on the terms that the material would remain the property of the Government and surplus should be returned to the Government then, there would be no element of profit involved in the value of the material received. As pointed out by the learned departmental representative, this decision of the Supreme Court was not available when the ITO made the assessment on 30-3-1978, nor even when the AAC decided the appeal on 9-5-1978. We, therefore, agree with the learned departmental representative that the case has to be examined from the aforesaid angle before a decision can be arrived at whether the profit rate is to be applied only on the net ....
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....ress had been evaluated by the assessee, etc. We, therefore, uphold the finding of the AAC that the value of work in progress has to be excluded for the purpose of determining the net profit. 10. This brings us to the last point, viz., whether a separate add-back of interest had to be resorted to, with reference to the provisions of section 40(b). We have perused the orders in which there was an apparent conflict on this point. We have also had the benefit of the arguments of the learned counsel for the assessee and the learned departmental representative. 11. Section 40(b ) reads as under : "40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income ....
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....leteness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in section 144." Normally, therefore, the income chargeable under the head 'Profits and gains of business or profession' has to be computed in accordance with the method of accounting regularly employed by the assessee, i.e., we have to start with the net income as per profit and loss account and make specific add-backs. However, where accounts are correct and complete but the method employed is such that income cannot properly be deducted therefrom, the computation of income is to be made on such basis and in such manner as the ITO may determine. Wher....