Facts of the Case

The assessee, a civil contractor engaged in road construction work for NHAI and other authorities, filed returns for AYs 2011-12 and 2012-13 declaring income from contract receipts. During assessment proceedings, the assessee failed to produce complete books of account and supporting vouchers.

The Assessing Officer rejected the books under section 145(3) and estimated income by applying a net profit rate of 8% on gross contract receipts, resulting in substantial additions for both years. The CIT(A) deleted or substantially reduced the additions based on the assessee’s past assessment history, leading to appeals by the Revenue before the Tribunal.

Issues Involved

  1. Whether rejection of books automatically justifies application of a fixed net profit rate.
  2. Whether estimation of income must consider past history of the assessee.
  3. Whether arbitrary profit estimation without comparable cases is sustainable.
  4. Whether the CIT(A) was justified in relying on earlier appellate orders in the assessee’s own case.

Petitioner’s Arguments (Revenue)

The Revenue contended that once the books of account were rejected and not challenged by the assessee, estimation of profit at 8% of gross receipts was justified. It argued that each assessment year is independent and past results cannot be the sole basis for determining income in subsequent years.

Reliance was also placed on judicial precedents where higher profit rates had been upheld in contractor cases.

Respondent’s Arguments (Assessee)

The assessee submitted that he had been engaged in the same line of business since AY 2001-02 and that in multiple earlier assessments, including appellate proceedings up to the High Court, profit rates around 6.5% gross profit had been accepted.

It was argued that the current year’s results showed even better performance than earlier years, and therefore no justification existed for applying a higher arbitrary rate. The principle of consistency required that past accepted results guide estimation.

Court Order / Findings (ITAT Allahabad)

The Tribunal acknowledged that the Assessing Officer was justified in rejecting the books due to non-production of records. However, rejection of books does not permit arbitrary estimation of income.

On Estimation of Profit

  • Past history of the assessee
  • Comparable cases
  • Available evidence
  • Circumstances of the business

In this case, the Assessing Officer applied an 8% net profit rate without citing any comparable cases or conducting a proper analysis. Such estimation was held to be

On Reliance on Past History

The Tribunal observed that in several earlier years, appellate authorities had accepted profit rates around 6.5% gross profit in the assessee’s own case. Since the nature of business remained unchanged and the current year’s results were comparable or better, deviation without justification was unwarranted.

On CIT(A)’s Relief

For AY 2011-12, the CIT(A) deleted the addition entirely because the declared profit rate exceeded earlier accepted rates.

For AY 2012-13, the CIT(A) estimated income at 2.5% net profit on gross receipts, granting substantial relief.

The Tribunal found these conclusions reasonable and supported by past judicial findings in the assessee’s own case.

Final Decision

Holding that the Assessing Officer’s estimation was arbitrary and unsupported by evidence, the Tribunal upheld the orders of the CIT(A) and dismissed the Revenue’s appeals for both assessment years.

Important Clarification

The Tribunal clarified that rejection of books under section 145(3) does not give unfettered discretion to estimate income at any rate. Best-judgment assessment must be based on rational criteria, and past accepted results of the assessee constitute a crucial guiding factor unless significant changes in facts are demonstrated.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771065645_DCITSULTANPURVS.SHRISHAKEELHAIDERAMETHI.pdf

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