AADITYA CONSTRUCTION,KORBA vs. INCOME TAX OFFICER-I KORBA, KORBA

3 Aaditya Construction vs. I.T.O.-1, Korba The assessee has prepared mostly self prepared vouchers which are nothing but a self serving piece of evidence and far away from the truth and reality and not amenable to verification along with preparation of consolidated books prepared for whole of the contract which are not at all open to verification at all.”

3.1 Based on the above observation and some more similar observations as mentioned in the assessment order, the Ld. AO rejected the books of accounts of the assessee under section 145(3) of the Act and applied Net Profit (‘NP’) rate of 12.50% before the claim of deduction of interest, depreciation and remuneration to partners. Accordingly, the Ld. AO worked out the income at Rs.2,02,93,357/- against returned income of Rs.11,89,140/-. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who reduced the Net Profit rate from 12.5% to 0.70/- after the claim of deduction of interest, depreciation and remuneration to partners. The Ld. CIT(A), further held that the Ld. AO was not justified in rejecting the books of account without bringing any cogent material on the record. Further, the CIT(A) had also held that the Ld. AO had not brought any materials on the record including any comparable case and ignoring the preceding years’ financial details of the assessee, which might show that the NP rate of 12.5% was justified. The relevant part of the order of Ld. CIT(A) reads as under: “During the course of appeal proceedings, I have carefully gone through the fact and findings of the assessment order and also perused the reply submitted by the assessee. The Id AO erred in rejecting the books of accounts without proper basis and without providing any opportunity to the assessee to explain the discrepancies. The Id. AO also erred in estimating the net profit rate without considering the past records and comparable cases. The Id. AO's estimation of net profit rate at 12.50% is arbitrary and excessive 4 Aaditya Construction vs. I.T.O.-1, Korba The assessee has provided a detailed reply to the Id. AO's order, which highlights the defects in the Id. AO's estimation. The assessee has submitted that the Id. AO's estimation lacks a clear basis and fails to consider the past records and comparable cases.

I noted that the assessee's business theory of lowering prices to surge turnover and the abnormal rise in prices of essential commodities like diesel, petrol, oil, lubricants, and construction material justified the decline in profit margin. I further observed that the Id AO's expectation of a higher net profit rate based on the government's typical 10% net profit rate in its BSR and the assessee's established reputation, plant, and machinery was not supported by concrete evidence.

The Id. AO's observations regarding the benefits of owning plant and machinery, established relationships with laborers, and deep knowledge of suppliers, held that these factors do not necessarily translate to super profits or profit margins exceeding 12.50% to 15%. I noted that while the assessee's experience, economies of scale, and efficient management are advantages, they do not guarantee higher profit margins in the face of changing market conditions. increased costs, and other factors.

I noted that the assessee's books and records may have had defects, but the Id. AO's estimation should be based on reasonable and credible evidence. I held that the Id. AO's estimation of net profit rate should be based on a thorough analysis of the assessee's financials and industry norms and not on assumptions only.

The assessee's cash expenditure is minimal, amounting to only 40.44 lakhs out of a total expenditure of 2186.56 lakhs, which is just 1.89%. Given this low level of cash expenditure, it is implausible that the assessee could significantly impact its profitability by splitting transactions to avoid Section 40A(3). The Id. AO's suggestion that the assessee's profitability was affected by such splitting is not supported by the facts, and it is unreasonable to assume that the assessee's profit would be substantially impacted by such a small proportion of cash expenditure.

The assessee had produced copies of bills raised by subcontractors and made payments via banking channels with due tax deduction demonstrating compliance with relevant laws The absence of a written agreement with subcontractors is a common trade practice, especially with petty contractors and does not necessarily imply any discrepancy or suspicious 5 Aaditya Construction vs. I.T.O.-1, Korba transaction. The Id AO's emphasis on the lack of a written agreement appears to be an overly technical approach, rather than a genuine discrepancy, and it is reasonable to conclude that the transactions with subcontractors are genuine and in line with industry norms.

The Id AO's observations regarding the contractor's business appear to be based on assumptions and imagination rather than reality. The mere fact that the assessee is an old and reputed firm does not automatically imply super profitability or immunity from fluctuations. The Id. AO's order is self- contradictory, as it acknowledges the changed times, increased responsibilities of contractors, and reduction in foul play, yet still assumes an increase in profit margin without concrete evidence.

The Id. AO rejected the books of accounts due to defects, including self- prepared vouchers, lack of verification, and incomplete records. However, the assessee has submitted that the Id AO's rejection of books is not justified and the defects pointed out by the Id. AO are not significant enough to warrant rejection. I agree with the assessee's submission that the Id AO's rejection of books is not justified.

The Id AO's order is based on assumptions and lacks a clear basis. The Id AO failed to provide any evidence or basis for estimating the net profit rate at 12.50%. I agree with the assessee's submission that the Id. AO's estimation is based on assumptions and not supported by any material evidence.

[2022] 140 (Kolkata Trib.)[23-12-2021] has held that where revenue authorities in assessee's own case in earlier year had estimated net profit below rate of 1 per cent, there being no change of business during relevant assessment years, estimating net profit at rate of 8 per cent could not be justified.

From the above discussion, I am of the view that the Id. AO's estimation of net profit rate is not justified. The Id. AO's estimation of net profit rate at 12 50% is not supported by any cogent evidence or material on record. Upon reviewing the past records of the assessee, I find that the net profit rate declared by the assessee in the past three years is lower than the estimated rate of 12.50%. The net profit after interest, depreciation and remuneration earned by the appellant firm in the past years under consideration and subsequent years is a crucial factor in determining the reasonable net profit rate. Specifically, the firm's net profit rate after interest, depreciation and remuneration has been 0.61% in FY 2011-12, 0 70% in FY 2012- 13, and 0.54% in F.Y. 2013-14. The highest net profit rate among the 6 Aaditya Construction vs. I.T.O.-1, Korba aforementioned three years is 0.70%, which can be considered a reasonable benchmark for estimating the firm's net profit rate after interest depreciation and taking into industry's performance and the firm's own historical data. Thus, the highest of net profit after interest depreciation and remuneration of above three years is 0.70%. In the absence of any evidence to the contrary, I deem it fit to estimate the net profit rate after interest, depreciation and remuneration at 0.70%, which is the higher net profit rate of the past three years. I have considered the submissions made by the assessee and the Id AO's order, and I am of the view that the estimated net profit rate after interest. depreciation and remuneration of 0.70% is reasonable and justified in the facts and circumstances of the case”

[Emphasis supplied.]

5. We have heard the Ld. Sr. DR at length and have perused the materials available on the record. The issue which requires adjudication at our level is that whether the estimation of NP rate of 0.70% by the Ld. CIT(A) is justified particularly when he has taken highest NP rate out of three preceding years and has considered the average profitability in the said business. The impugned order, as reproduced above, clearly demonstrates that the Ld. CIT(A) has appreciated the facts of the case in entirety and has considered not only the submissions of the appellant assessee but also the average profitability of the assessee and similar contractors as a whole. Thereafter, the Ld. CIT(A) applied the NP rate of 0.70% in the present case. The impugned order is found well-reasoned. Thus, we do not see any merit in Ground Nos. 1 and 2 that the Ld. CIT(A) has not considered the material available on the record and has passed the order without adjudicating the case on merit.

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