Debdeep Commercial Pvt. Ltd. Vs ITO (ITAT Kolkata)
Profit Cannot Be Picked at Will: ITAT Rejects Ad Hoc Estimate in Road Contract Case
No Defective Books, No Comparables, No Basis for Higher Profit
The Kolkata Bench of the Income Tax Appellate Tribunal, in Debdeep Commercial Pvt. Ltd. v. ITO, deleted an addition arising from an estimated profit rate, holding that the tax authorities had neither identified defects in the books nor supported their estimate with comparable cases.
The assessee had declared a margin of 5.44% on a road construction contract subcontracted to an associated entity. The Assessing Officer estimated gross profit at 12%, resulting in an addition of ₹2,29,48,530. The CIT(A) reduced the estimated rate to 10%, but the Tribunal found that even the reduced rate lacked a factual foundation.
The appeal was allowed in ITA No. 1386/Kol/2026, concerning Assessment Year 2023-24, by an order pronounced on 30 September 2026. viewOrder-23
Road Construction Contract Passed on Back to Back
The assessee, a private limited company, obtained a contract from Ashoka Building Limited for construction of a road in Bihar.
According to the submissions before the Tribunal, the entire work was subcontracted on a back-to-back basis to its associated entity, Bharat Vanijya Eastern Pvt. Ltd. The assessee retained a margin of 5.44% of the gross receipts.
The dispute arose when the Assessing Officer substituted this disclosed margin with an estimated gross profit rate of 12% of turnover. In the assessment order dated 26 March 2025, this exercise produced an addition of approximately ₹2.29 crore to the returned income.
The issue was therefore whether the disclosed business results could be replaced by a higher percentage without establishing why those results were unreliable. viewOrder-23
CIT(A) Reduced the Rate but Retained the Estimate
The assessee challenged the addition before the CIT(A), who directed the Assessing Officer to restrict the profit estimate to 10% of gross receipts and recompute the total income accordingly.
An important feature of the appellate proceedings was the finding that Section 40A(2)(b) had no relevance to the assessee’s case.
The assessee argued before the Tribunal that, having reached that conclusion, the CIT(A) had no justification for continuing with an estimated profit rate. Reducing the percentage from 12% to 10% did not, according to the assessee, address the absence of a valid basis for disregarding the books.
The assessee consequently sought deletion of the addition rather than a further reduction in the estimated rate. viewOrder-23
Assessee Challenged the Departure From Book Results
The assessee’s principal submission was that the Assessing Officer had found no specific defect in the books of account. It argued that verified book results could not be displaced through an ad hoc percentage estimate.
Counsel also relied on Tapi JWIL JV v. ITO, a decision of the Delhi Bench, and referred to several other authorities in support of the challenge to estimation without rejection of the books.
These included PCIT v. R. G. Buildwell Engineers Ltd., Swadeshi Commercial Co. Ltd. v. CIT, Rakhi Mondal v. Assessment Unit, Ajay Kumar Hazra v. ITO and Hitesh Trading Company v. ITO.
The present order records these authorities as part of the assessee’s submissions. Its operative reasoning, however, rests directly on the factual deficiencies in the assessment and appellate orders. The Revenue supported the CIT(A)’s decision. viewOrder-23 viewOrder-23
Tribunal Finds Two Fundamental Gaps
The Tribunal first noted that the Assessing Officer had neither found any defect in the books nor rejected them for any reason.
It also took account of the CIT(A)’s finding that the invocation of Section 40A(2)(b) was irrelevant. In those circumstances, the Tribunal held that estimation of income was unjustified.
The second deficiency was the absence of comparable cases. Neither the Assessing Officer nor the CIT(A) had referred to a comparable business or transaction to support the substituted profit rate.
Accordingly, the Tribunal found that the 10% estimate had no basis. It directed the Assessing Officer to delete the impugned addition and allowed the assessee’s appeal.
This was a deletion on the issue decided, rather than a remand for another estimation exercise. The ₹2,29,48,530 figure represents the addition originally made using the Assessing Officer’s 12% rate; the CIT(A) had subsequently reduced that rate before the matter reached the Tribunal. viewOrder-23
Author’s Comments
The decision demonstrates that reducing an arbitrary estimate does not supply the missing justification for it. A 10% rate requires a factual foundation just as much as a 12% rate.
The back-to-back subcontracting arrangement also matters. The assessee retained a margin while another entity executed the work. The Tribunal’s reasoning indicates that the disclosed result could not be replaced merely by selecting a higher percentage, particularly when the books remained unrejected and no comparable cases were identified.
At the same time, the order should not be read as prescribing 5.44% as an acceptable margin for every subcontracting arrangement, or as granting blanket protection to payments made to associated entities. The finding concerning Section 40A(2)(b) was specific to this case.
The practical lesson is that an addition must rest on identified defects, relevant evidence and a reasoned computation. Here, the authorities had not established those foundations, and the estimated addition consequently failed.
Cases Discussed
1. Tapi JWIL JV Vs ITO (ITAT Delhi)
2. PCIT Vs R. G. Buildwell Engineers Ltd., (2018) 259 Taxman 370 (SC)
3. Swadeshi Commercial Co. Ltd. Vs CIT, ITA No. 219 of 2001, dated 18.12.2008 (Calcutta High Court)
4. Rakhi Mondal Vs Assessment Unit (ITAT Kolkata), ITA No. 2151/Kol/2025
5. Ajay Kumar Hazra Vs ITO, Ward-39(2), Midnapore (ITAT Kolkata), ITA No. 2385/Kol/2017
6. Hitesh Trading Company Vs ITO (ITAT Kolkata), ITA No. 908/Kol/2025
FULL TEXT OF THE ORDER OF ITAT KOLKATA
1. This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)- NFAC, Delhi (hereinafter referred to as the “Ld. CIT(A)”] passed u/s 250 of the Act dated 10.02.2026 in appeal no. NFAC/2022-23/10487896 for the AY 2023-24.
2. Brief facts of the case of the assessee is that the Assessing Officer vide its order dated 26.03.2025 made an addition of Rs. 2,29,48,530/- to the returned income by way of estimation of gross profit at 12% of the turnover as against 5.44% declared by the assessee.
3. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who directed the Assessing Officer to restrict the profit at 10% of the gross receipts and to be computed the total income accordingly.
4. Against the said decision, the assessee is in appeal before us.
5. The Ld. AR represented that the assessee is a private limited company and got a contract from Ashoka Building Limited for construction of road in the State of Bihar, that the entire work has been sub-contracted on back to back basis to its associated entity M/s Bharat Vanijya Eastern Pvt. Ltd. after retaining decent profit of 5.44% of the gross receipts. It was argued that the Ld. CIT(A) found that the provision of Section 40A(2)(b) has no relevance to the assessee’s case. Having taken the said decision, the Ld. CIT(A) is not justified in giving the impugned direction to estimate the profit at 10% of turnover. The Ld. AR relied on the judgment of Co-ordinate Bench of Delhi in the case of Tapi JWIL JV vs. ITO. The Ld. AR also submitted written submission arguing that the Assessing Officer did not find any specific defect in the books of account and therefore, the Assessing Officer was at fault in disregarding the verified book result and to make ad hoc percentage addition on estimation basis. The Ld. AR relied on various judgments holding that ad hoc estimation is bad in law without rejecting the books of account which is as follows:
i) PCIT vs. R. G. Buildwell Engineers Ltd. (SC)( 2018) 259 Taxman 370
ii) Swadeshi Commercial Co. Ltd. vs. CIT (ITA No. 219 of 2001 dt. 18.12.2008 (Cal)
iii) Rakhi Mondal vs. Assessment Unit (ITAT Kolkata) ITA No. 2151/Kol/2025
iv) Ajay Kumar Hazra vs. ITO, Ward- 39(2), Midnapore (ITAT Kolkata) ITA No. 2385/Kol/2017
v) Hitesh Trading Company vs. ITO, Ward- 34(3), Kolkata (ITAT Kolkata) ITA No. 908/Kol/2025.
Thus, it was prayed that the impugned addition may be deleted.
6. On the other hand, the Ld. DR vehemently supported the order of Ld. CIT(A).
7. We have considered the rival contentions and perused the material available on record. We note that the Assessing Officer has not found any defect in the books of account, nor rejected it for any reasons. The Ld CIT(A) found that the invocation of sec. 40A(2)(b) has no relevance. In the circumstances, we are of the view that the Assessing Officer is not justified in estimating the income. Besides, the Assessing Officer/Ld. CIT(A) failed to refer to any comparable case, and therefore the estimation at 10% has no basis. In the circumstances, we direct the Assessing Officer to delete the impugned addition.
8. In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 30th September, 2026
