Profit Capped at 7% Because Search Confession Could Not Be Applied to Past Years

Rakesh Kumar Pandey Vs ACIT (ITAT Lucknow)

7% Is Reasonable, 11% Is Wishful: ITAT Reins in Profit Estimation in Contractor’s Case- When Books Are Estimated, Disallowances Die: ITAT’s Clean Sweep in Search Assessment- Search Confession Can’t Rewrite Past: ITAT Caps NP at 7% & Deletes Pre-Search Additions

Issue 1: Estimation of Net Profit after Search (AY 2014-15 to AY 2020-21)

• Search u/s 132 conducted on 05.02.2022 in the case of proprietary concern M/s Alok Construction.
• AO rejected books u/s 145(3) mainly relying on:
  • General remarks of tax auditor in Form 3CB
  • Statement u/s 132(4) where Assessee admitted ~10% NP for AYs 2021-22 & 2022-23 to cover deficiencies
• AO applied 11% NP rate for earlier years (AY 2014-15 to 2020-21) also.
• ITAT held:
  • For pre-search years, no addition can be made without incriminating material found during search.
  • Statement u/s 132(4) for later years cannot be extrapolated backwards.
  • Reliance placed on PCIT vs Abhisar Buildwell (SC).
• Result: NP enhancement for AYs 2014-15 to 2020-21 deleted & Revenue appeals dismissed on this issue.

Issue 2: Reasonableness of NP Rate – 11% vs 7%

• CIT(A) restricted NP to 7% based on:
  • Past history of Assessee
  • Comparable cases of government contractors
  • Scale of turnover & consistency
• Revenue challenged reduction from 11% to 7%.
• ITAT held:
  • Estimation must be reasonable & guided by past accepted results.
  • 7% NP is fair & justified in construction contracts.
• Result: 7% NP upheld, Revenue appeal dismissed.

Issue 3: Separate Disallowances after Estimated Income (AY 2021-22)