DCIT Vs USK Constructions Co. DP (ITAT Bangalore)
ITAT Bangalore: Profit Estimation in Search Case—10% Rejected; Reasonable Rate to Be Applied Considering Sub-Contracts
The Income Tax Appellate Tribunal partly allowed the Revenue’s appeal for AY 2019-20 in the case of USK Constructions Co., holding that while estimation of profits was justified in a search case involving inflated expenses, the blanket adoption of 10% net profit by the Assessing Officer was excessive and unsustainable.
The assessee, a partnership firm engaged in civil construction, was subjected to a search under section 132, during which evidence was found indicating inflation of expenses through bogus sub-contract payments, including routing funds through employees and associates. The AO rejected the books and estimated business income at 10% of turnover, leading to an addition of ₹5.48 crore.
The CIT(A) deleted the addition, observing that the assessee had already declared a net profit of about 7.75% and that the AO failed to bring any comparable cases to justify the 10% rate.
On further appeal, the Tribunal held that:
- This was a search case with serious discrepancies, hence simple reliance on normal civil-contract profit precedents (like Lakshmanan v. ITO) was misplaced.
- At the same time, the CIT(A) erred in fully ignoring the sub-contract component and other income streams while computing net profit.
- GST components had to be excluded, and profit attribution on sub-contract work (especially to the main partner, Uday Shetty) could not be ignored, particularly when a 2% profit-sharing arrangement existed.
Balancing both sides, the ITAT directed that:
