THE COMMISSIONER INCOME TAX PKL vs. M/S CREATIVE ENGINEERS AND CONSTRU PKL

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 29.10.2002 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “A”, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 93/CHANDI/97, for the assessment year 1993-94, claiming following substantial question of law:- “Whether on the facts and in the circumstances of the case, the Ld. ITAT, Chandigarh Bench 'A', Chandigarh has erred in accepting that the net profit rate disclosed by the assessee as 7%, whereas, the net profit rate (shown at 1.86%) after considering -2- depreciation, interest and salary paid to the partners, works out to 3.4% only. The order of the Ld. ITAT is, thus, perverse?”

Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is a civil contractor and filed return of income for the assessment year 1993-94 declaring an income of Rs.2,17,410/-. The Assessing Officer rejected the books of accounts and framed assessment at total income of Rs.11,66,590/-. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] who upheld the order of the Assessing Officer applying 10% of net profit rate. Against the order of the CIT(A), assessee filed further appeal to the Tribunal. The Tribunal vide order dated 29.10.2002 treated the profit disclosed by the assessee to be reasonable and acceptable. Hence, the present appeal by the revenue.

We have heard learned counsel for the appellant.

The issue for determination in this appeal is as to what is the appropriate net profit rate in the facts and circumstances to be adopted in the case of the assessee.

The Assessing Officer had adopted net profit rate of 10% to be appropriate with the following observations:- “Shri Atul Jain argued that if a net rate of 10% is applied to the net contract receipts the addition to the returned income will be much higher than the amount of fresh cash credits introduced during the year under consideration. These credits should be considered to -3- be covered in that addition. Therefore, no separate cognizance needs to be taken. The introduction of cash credits is part of income earned by the assessee as sought to be determined by application of a flat rate of 10% by the Assessing Officer, Shri Atul Jain, CA, contended.”

The CIT(A) on appeal by the assessee had affirmed the said net profit rate while observing as under:- “2.4 The contention of the assessee appears to be reasonable in as much as the unexplained cash credits are nothing but the manifestation of unexplained income earned by the assessee during the year which is sought to be determined by applying a net rate of profit of 10% to the net contractual receipts of the assessee as under:- Net payments received 11665879/- Net profit @ 10% as discussed above 1166590/-

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However, on appeal to the Tribunal, the Tribunal had reduced the same by holding that net profit rate of 10% in the case of the assessee as applied by the CIT(A) and the Assessing Officer in the assessment order would not be appropriate.

Learned counsel for the revenue submitted that the -4- assessee had disclosed net profit of Rs.2,17,417/- in relation to contractual receipts of Rs.1,16,65,879/- and the gross profit thus works out to be 1.86%. He further submitted that after taking into consideration the depreciation, interest and salary paid to the partners which has been debited to the profit and loss account, the net profit rate would work out to 3.4% only. The Tribunal, however, has observed that the net profit rate disclosed by the assessee is 7% which is not correct. It was also urged that if the material at site valuing Rs.16,09,189/- shown in profit and loss account is taken into consideration, the net profit rate would be below 3.4%. He, on the strength of above submissions, stressed that the Tribunal while accepting the plea of the assessee had not referred or discussed any material in this regard. He submitted that the order of the Tribunal is patently unsustainable.

The assessee has been served by way of affixation as per the report of Shri Suresh Bhardwaj, Inspector. No one has chosen to appear to contest the appeal.

We have given our thoughtful consideration to the submission of learned counsel for the revenue and find merit in the same. As noticed above, the Assessing Officer and the CIT (A) while adopting the net profit rate of 10% had kept in mind that this included the cash credits which had not been disclosed in the books of accounts and this was as per submission of counsel for the assessee. However, the Tribunal failed to advert to the aforesaid aspect and, therefore, the order stands vitiated.

In view of the above, the substantial question of law is answered in favour of the revenue. The present appeal is allowed and -5- the order of the Tribunal is set aside. The matter is remitted to the Tribunal for afresh decision, in accordance with law. (AJAY KUMAR MITTAL) JUDGE February 3, 2011 (ADARSH KUMAR GOEL) gbs JUDGE