Net Profit rate of about 40% not possible in contract work especially when assessee does contract work for government department – ITAT
In a recent judgment, ITAT Pune upheld estimating net profit @ 8% against addition on account of alleged payments to bogus sub contractors made by the AO as it gave a profit percentage of about 40% which is not possible in contract work especially when assessee does contract work for government department.
ABCAUS Case Law Citation:
4394 (2025) (01) abcaus.in ITAT
In the instant case, the Income Tax Department had challenged the order passed by the CIT(A), NFAC in directing the Assessing Officer (AO) to estimate the profit at 8% of the gross contract receipts.
The respondent assessee was an individual and engaged in the business as government contractor. His case was selected for limited scrutiny assessment under the E-assessment Scheme, 2019 on the issue of verification of genuineness of expenses.
During the course of assessment proceedings, the Assessing Officer noted that the books of account of the assessee were audited as per the provisions of section 44AB of the Act. On further perusal of Form 3CD report he noted that the auditors had mentioned that the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB. The auditor had also mentioned that the assessee had not furnished the statement of tax deducted or tax collected within the prescribed time, etc. However, from the verification of the TDS details as submitted by the assessee, he noted that the assessee had shown large payments as contract payments to persons who had not filed the return of income for the relevant assessment year.
From the various details furnished by the assessee, the Assessing Officer noted that the assessee had paid huge amount of sub-contract work. To verify the genuineness of the aforesaid sub-contract payments, the Assessing Officer asked the assessee to furnish the copies of contract agreements, copies of R.A. bills / vouchers submitted by the sub-contractor and copy of TDS certificates.
From the various details furnished by the assessee, the Assessing Officer noted that the assessee has not submitted the sub-contract agreements with the sub-contractors except in the case of one party. Similarly, he noted that none of the sub-contractors except only one sub-contractor was registered under the GST Act and did not have GST number. He also noted that although the assessee had claimed that the payment to the sub-contractors was finalized after submitting the RA bills to government department and after verification of the work done by the government authorities, however, the RA bills and verification report of work completed was not submitted. Also, the assessee had filed the TDS details and deposited the TDS late.
The AO also noted certain discrepancies such as in the case of one sub-contractor, the sub-contractor had raised the bill for work done on a date before the contract was awarded by the government department to the assessee; Similarly, in respect of another sub-contractor, the payments made were prior to submission of bill. In view of the above and in absence of non-furnishing of supporting documents to prove the genuineness of contractual payments, the Assessing Officer held that such sub-contract payments were non-genuine and bogus. He, therefore, confronted the same to the assessee. Rejecting the various explanations given by the assessee, the Assessing Officer made addition of the sub-contract payments to the total income of the assessee.
Before CIT(A), the asessee inter alia submitted that if the addition made by the AO is sustained, it will give an absurd result of about 40% profit which is not possible in this line of business. The assessee also gave comparable profit in the range of 4 to five per cent shown by the contractors in similar line of business in the same vicinity.
The assessee requested CIT(A) to estimate the profit reasonably at 6% of the turnover. Few cases were also cited where profit rate had been estimated at 5%. Based on the arguments advanced by the assessee, the CIT(A) directed the Assessing Officer to estimate the profit at 8% of the gross contract receipts.
The Tribunal observed that the net profit ratio declared by the assessee for seven assessment years, gave average net profit rate at 5.37%. Similarly, various contractors operating near the place of the assessee and engaged in similar line of business were also showing the profit rates ranging from 4% to 8% and in one case such profit rate has been shown at 10.24%.
Further, the Tribunal observed that the provisions of section 44AD of the Act prescribe profit rate of 8% for civil contractors in unaudited cases where the turnover is less than the prescribed limit. Although in the case of the assessee, the turnover was above the prescribed limit as per the provisions of section 44AD and the accounts are audited, still the provisions of section 44AD can be taken as a parameter for estimating the income.
The Tribunal further observed that addition made by the AO will give a profit percentage of about 40% which is not possible in such type of activities especially when the assessee is doing contract work for government department.
Under these circumstances and considering the totality of the facts of the case and considering the fact that the average net profit ratio for the last four years was 5.37%, the Tribunal opined that the order of CIT(A) / NFAC directing the Assessing Officer to estimate the profit at 8% was justified under the facts and circumstances of the case.
Accordingly, the Tribunal upheld the order of the CIT(A) / NFAC and the grounds raised by the Revenue were dismissed.
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