Net profit rate may not have variation commensurate to increase of turnover

Net profit rate may not per se experience variation commensurate to the increase of turnover.

In a recent judgment, Allahabad High Court has held that net profit rate may not per se experience variation commensurate to the increase of turnover. No principle in law is available to necessarily seek such enhancement.

ABCAUS Case Law Citation:
4978 (2026) (01) abcaus.in HC

In the instant case, the revenue had challenged the order passed by the ITAT in inter alia confirming the net profit rate adopted by the AO.

The Assessing Officer (AO) had inter alia applied/assessed net profit rate of 8% on the assessee’s total contract receipts, as reduced by the contractee’s deductions followed by various other statutory deduction.

The PCIT thereafter issued his section 263 show-cause notice inter alia alleging that estimation of net profits could not be accepted in the assessee’s favour.

The PCIT exercised his section 263 revision jurisdiction holding the Assessing Officer’s regular assessment framed was erroneous one causing prejudice to the interest of the revenue.

The Tribunal observed that the Co-ordinate Bench in an earlier case of the assessee had inter alia accepted net profit rate of 4.5% only. This was coupled with the fact that the co-ordinate bench’s order had further included interest on the assessee’s FDRs as liable to be assessed as business income.

The Revenue argued that the assessee had been wrongly allowed deduction of partnership remuneration and depreciation etc. in the course of assessment even after his estimation of net profits @ 8%.

The Tribunal opined that all claims regarding remuneration and depreciation were statutory deductions than that those based on mere estimation which could not be denied in these peculiar facts and circumstances.

Accordingly the Tribunal reversed the PCIT’s impugned revision directions as the Assessing Officer’s regular assessment herein could neither be held as erroneous nor the one causing prejudice to the interest of the Revenue in very terms.

Not satisfied, the Revenue challenged the order of the Tribunal before the Hon’ble High Court.

The Hon’ble High Court observed that Tribunal had reached a conclusion that the source of receipts that became subject matter of dispute between the parties was the same as in the earlier years. Consistently, the same had been taxed as business income. Applying to that consistent approach of the revenue authorities and in absence of any change of fact or circumstance shown to exist, the Tribunal had disapproved the approach of the PCIT taking a different view as about the nature of receipts.

With respect to the net profit rate, the Revenue argued that in the year in issue, the total turnover had increased substantially and the estimation of net profit at a lower rate was not commensurate with it.

However, the Hon’ble High Court opined that the net profit rate may not per se experience variation commensurate to the increase of turnover. No principle in law is available to the revenue to necessarily seek such enhancement.

Accordingly, the appeal was dismissed.

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