Net Profit rate of 8% not applicable for audit case. Net Profit rate of 6% is reasonable for business of civil construction – ITAT
In a recent judgment, the ITAT Patna has held that though in the non-audit case, Net Profit rate of 8% is considered as fair but the same is not applicable for the assessee having huge turnover, which is much above the tax audit limits.
ABCAUS Case Law Citation:
ABCAUS 4063 (2024) (06) ITAT
Important Case Laws relied upon:
Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC)
Max India Limited as reported in 295 ITR 0282
CIT vs. Associated Food Products (P) Ltd 280 ITR 0377
CIT vs. Nirav Modi, [2016] 71 taxmann.com 272 (Bombay)
Shri Prakash Bhagchand Khatri
CIT vs. Anil Kumar reported in 335 ITR 83
Khatiza S. Oomerbhoy vs. ITO 101 TTJ 1095
ITO vs. D.G. Housing Projects Ltd. [2012] 343 ITR 329 (Delhi)
In the instant case, the assessee had challenged the revisionary order passed by the Pr.CIT u/s 263 of the Income Tax Act, 1961 (the Act) directing the Assessing Officer to pass fresh assessment order.
The appellant assessee was a partnership firm engaged in the business of Civil Contractor & Sub-contractor and involved in the infrastructure development and maintenance such as roads, bridges, railways tunnels, etc.
The return of the assessee was processed under section 143(1) of the Act. During the year under consideration, survey proceedings under section 133A were carried out. Thus, the assessee’s case was selected for compulsory scrutiny followed by service of notice under sections 143(2) and 142(1) of the Act.
Detailed questionnaires issued under section 142(1) of the Act to which necessary submissions/ details/information/documents were furnished. The Assessing Officer after examining these details and after calling for more information and considering the Net Profit rate trend, which was on higher side accepted the returned income.
Thereafter Pr. CIT called for the assessment records and observed that on one hand, the assessee paid a large amount of the advance tax but after claiming TDS and TCS, had claimed a net refund of nearly double amount. PCIT also noted that the trade payables were almost 35% of the total turnover. The PCIT also examined the details of sundry creditors exceeding Rs.5,00,000/- each and noted that the Assessing Officer had failed to carry out necessary inquiry/verification about the creditworthiness and genuineness of the expenditure.
Accordingly show-cause notice under section 263 of the Act was issued.
Not satisfying with the reply of the assessee to the show-cause notice, PCIT, held that the order of Assessing Officer was not only as erroneous but also prejudicial to the interest of revenue and directed the Assessing Officer to pass fresh assessment order.
Aggrieved, the assessee before the Tribunal challenged the assumption of jurisdiction under section 263 of the Act and correctness of the Revisionary proceedings.
The Tribunal noted that in the light of the provisions of section 263 of the Act and a settled position of law, powers u/s 263 of the Act can be exercised by the Pr. Commissioner/Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and also prejudicial to the interest of the Revenue. By ‘erroneous’ is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry.
The Tribunal observed that in the instant case, the assessee was subjected to survey proceedings and the case of the assessee was selected for compulsory scrutiny. Certainly, it was not a normal scrutiny case but a special scrutiny where all the details in the course of survey as well as statements recorded in the survey proceedings had to be examined at length by the Assessing Officer and even immediate Senior Officer to Assessing Officer had also to be updated about such proceedings.
The Tribunal further noted that after selecting the case for scrutiny, the Assessing Officer had issued detailed questionnaires including queries on justification of large refund claim, comparison of sales/turnover, gross profit, net profit, GP ratio, NP ratio for the year under consideration and previous two years etc.
The Tribunal noted that as per the reply submitted by the assessee it was stated that the survey team considered various advances received and VAT/GST as part of the turnover and insisted on payment of advance tax and they had to pay the advance tax to honour the request of the jurisdictional commission of income tax.
The Tribunal further observed that after conducting the first round of inquiry the AO called for further more information. In the said notice, the assessee was asked to produce books of account, reply to the various Bank accounts, which were inventorised during the survey proceedings, brief note about the business activity of the firm, details of ongoing projects, year-wise and project-wise investment, computation of Work-in-Progress, reply of the statement on oath recorded during survey proceedings, name, complete address, PAN of all the sundry creditors/debtors/Loan/Advances and copy of ledgers in books of accounts in case of sundry creditors etc.
The Tribunal observed that in the second round of enquiry, the AO had specifically asked the assessee details of creditors/debtors, loan/advances and in compliance thereto, the assessee furnished each and every information called for.
The Tribunal opined that detailed inquiry had been initiated by the Assessing Officer calling various information to which necessary compliance was made. The Assessing Officer again inquired certain more issues including the issue referred to by the PCIT in the impugned order and again there was a detailed reply filed by the assessee. It clearly showed that adequate inquiry had been conducted to examine the business transaction including genuineness and creditworthiness of sundry creditors.
The Tribunal opined that it was neither a case of inadequate inquiry or incomplete enquiry, but it was purely a case of extensive inquiry where Assessing Officer has made proper application of mind and examined each and every aspect of the transactions and after being satisfied with the correctness, genuineness of these details taken one of the legally permissible view. Therefore, since adequate inquiry has been conducted on the issue raised by the Pr. CIT in the impugned order, there remained no scope for PCIT to assume jurisdiction under section 263 of the Act and therefore, the impugned proceedings deserve to be quashed on account of wrong assumption of revisionary powers u/s. 263 of the Act.
Even on merit of the case, the Tribunal noticed that PCIT had only looked into the sundry creditors’ side but completely overlooked the sundry debtors’ side. The assessee was mainly a Government Contractor and revenue during the year had not been disputed at any stage. Admittedly when the contracts are executed, at the close of year, there is huge outstanding amount of sundry debtors and similarly there are outstanding amount of sundry creditors. It is practically impossible that the assessee makes the payments to all the sundry creditors and waits for the funds to be realised from the sundry debtors. In such kind of business, there is a time gap in realising the sales and also to make the payments of sundry creditors.
Further, the Tribunal observed that the turnover had substantially increased and Net Profit rate had also been offered at 6.66%. Though in the non-audit case, Net Profit rate of 8% is considered as fair but the same is not applicable for the assessee having huge turnover, which is much above the tax audit limits. Hon’ble Jurisdictional High Court had also found the Net Profit rate of 6% to be reasonable in the business of civil construction. Thus, even for the sake of arguments, even if the book result has not accepted and the best judgment assessment is to be framed, then also, no addition in the hands of assessee be made in the given circumstances since Net Profit rate of 6.66% has already been offered to tax.
Accordingly, the Tribunal held that the impugned revisionary proceedings u/s 263 of the Act were bad in law and illegal and thus quashed the impugned order u/s 263 of the Act and restored the assessment order.
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