The Delhi High Court in Commissioner of Income Tax-II (Appellant)  vs Subodh Gupta (Respondent) ITA-80/2014 has ruled that application of a presumptive tax rate of 8% as stipulated in section 44AD was rightly made by the Commission (Appeals) even in a case covered under Tax Audit u/s 44AB in view of non availability of books of accounts, turnover figure being not disputed, no comparison done with other contractors and Assessing Officer in subsequent years has himself accepted the figure of eight percent net profit.

Facts of the case:

The return of Income for AY 2009-10 was filed by the assessee (respondent) declaring the income of Rs. 3521970/- The Assessing Officer under section 40A(3) disallowed expenditures amounting to Rs. 10,61,49,773/-. AO rejected the contention of the assessee that work undertaken was in rural or sub rural area and the villagers to whom payments were made did not have benefit of banking facility and payments are covered under clause (g) to Rule 6DD.

The Assessing Officer, also made adhoc disallowance of 20% on expenditures related to depreciation, car running and maintenance expenditure, telephone expenses, staff welfare expenses etc. On the ground that the assessee had not produced the books of accounts on the plea that books had been stolen.

Later, The Commissioner of Income Tax (Appeals) considered the disallowance of Rs.10.61 crores as resulting in an abnormal conclusion. After the disallowances, the net profit rate had gone to a whopping 59.60% on the total turnover of Rs.18.43 crores. CIT (Appeals) considered as illogical and not acceptable. Accordingly, Commissioner of Income Tax (Appeals) applied net profit rate of 8% on total turnover referring to the net profit rate mentioned in Section 44AD of the Act. He also observed that Section 44AD was not applicable because the turnover of the assessee was more than Rs.40 lacs and the assessee was covered under the provisions of section 44AB related to Tax Audit, but the application of presumptive net profit rate of 8% could be reasonably taken for estimation.

The Tribunal also agreed with the CIT(Appeals) and held that disallowances of Rs.10.98 crores giving rise to an abnormal profit rate of 59.60% on the total turnover of Rs.18.43 crores is not just and would be illusory and illogical. The Tribunal also agreed that Section 44AD would not be applicable but there was no other material or basis to reasonably estimate income of the assessee.

The Delhi High Court observed that the Assessing Officer did not conduct any inquiry and ascertain the net profit rate of other comparable contractors. The Hon’ble Court agreed that the assertion that the books of accounts were stolen had a hidden motive and was rather unbelievable. However, the revenue could not produce any material to ascertain the gross profit or net profit rates declared and accepted by the Assessing Officer in case of other contractors engaged in similar work. On the other hand, for the assessment year 2010-11, the Assessing Officer himself had applied net profit rate of 8% on contractual receipts of Rs. 6.66 crores.

Accordingly the Court dismissed the appeal filed by the revenue.

The relevant excerpts of the judgment are as under:

........In the case in hand, the appellate authorities have not applied Section 44AD as such. Difficulty arose as they had to estimate reasonable rate of net profit. In the absence of any data and details, they applied the net profit rate as mentioned in Section 44AD. As recorded above, we had asked counsel for the Revenue to ascertain whether similar contractors have declared a higher profit rate. Counsel for the Revenue has not been able to point out or state that the other contractors have a higher profit rate, than the net profit rate of 8% as held by the appellate authorities. The said rate was also applied in the assessment year 2010-11.

“In view of the aforesaid factual position, we do not see any reason to interfere with the impugned order and the appeal is dismissed.”

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