The officer rejected my books and applied a flat net profit rate. Can I still claim my freight and other expenses separately?
No. Once the books are rejected and income is estimated by applying a net profit rate, that rate is taken to have already absorbed every deduction that would otherwise be computed under sections 30 to 43A. You cannot have the estimate and the expenses too.
Decided by the High Court (Ajay Kumar Mittal J (the retrieved text names only the author of the judgment)) on 2007-11-06, reported as (2008) 214 CTR (P&H) 149 (citation as shown in the source page header); reference under s.256(1) arising out of the Tribunal's order dated 10 June 1994 in ITA No. 965/Chd/1988. It bears on section 145, section 144, section 29, section 44AD of the Income Tax Act 1961, in Presumptive Taxation & Audit and Assessment & Scrutiny matters.
This is the standard answer to the most common argument made after a best judgment assessment — that the estimated rate should be applied to receipts net of some large expense head. The Punjab and Haryana High Court explains why that is wrong in principle, and adds that section 44AD only made explicit what was already implicit. It cuts both ways: it also stops the Assessing Officer from rejecting the books and then adding back a specific item from those same books.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee was a firm of labour contractors doing loading and unloading of gunny bags between mandi, godowns and railway station. It received Rs. 25,40,127 from the Food Corporation of India and paid freight to a truck operators' union of Rs. 11,45,650 by cheque and Rs. 8,66,130 in cash. The Income-tax Officer examined the evidence, rejected the books of account, applied a profit rate of 8 per cent to gross receipts of Rs. 25,40,127 and estimated income from contract work at Rs. 2,03,000 as against Rs. 24,895 declared; he also disallowed expenditure of Rs. 5,05,453 for want of vouchers. The Commissioner (Appeals) allowed the payments to the truck operators' union as a deduction but sustained the other disallowance. On the Revenue's appeal the Tribunal, by order dated 10 June 1994, upheld the application of the 8 per cent rate to the balance amount of Rs. 5,28,347. At the Revenue's instance the Tribunal referred to the High Court the question whether it was right in upholding a net profit rate of 8 per cent and then allowing deduction of the freight paid to the truck operators' union from gross receipts. No one appeared for the assessee; Mr. Sanjay Bansal, senior advocate, assisted the Court as amicus curiae (paras 1 to 3).
The question was answered in favour of the Revenue and against the assessee, with no order as to costs (para 14). Where books of account are rejected and income is estimated to the best of the officer's judgment by fixing a net profit rate, that rate is applied after taking all factors into account and is deemed to include every deduction referred to in section 29; a separate deduction for freight charges from gross receipts cannot also be allowed (paras 7 and 8).
The Court read sections 29, 144 and 145 as they stood at the relevant time (para 6). Section 29 requires business income to be computed under sections 30 to 43A, and section 145 requires that computation to be made on the books and method of accounting regularly employed; where the officer is not satisfied about the correctness or completeness of the books he may reject them and estimate income to the best of his judgment under section 144. An estimate so made substitutes the computation that would otherwise be made under section 29, so the assessee's claim for expenses cannot be said to have been ignored — the rate accounts for all the section 29 deductions (para 7). The Court added two practical reasons: accepting the assessee's contention would reduce the effective rate on gross receipts to under 1 per cent, which is not practical; and once books are rejected they cannot be treated as good for one purpose and bad for another, so no separate freight deduction can be allowed (para 8). It drew support from the Andhra Pradesh High Court in Indwell Constructions v. CIT, where separate additions for interest and remuneration to partners after rejection of books were held impermissible (para 9). The Tribunal had relied on the Madras High Court in CIT v. K.S. Guruswami Gounder & K.S. Krishnaraju (Contractors), but that case concerned the value of materials supplied by the Government to a contractor, on which no profit motive existed; freight is not a capital cost of that kind and the Tribunal was wrong to rely on it (paras 10 and 11). Section 44AD, inserted by the Finance Act 1994 with effect from 1 April 1994, was referred to in argument; though not directly applicable to assessment year 1983-84, the Court observed that its sub-section (2) — deeming deductions under sections 30 to 38 to have been given full effect with no further deduction allowed — made explicit what was implicit earlier (para 12). The depreciation cases relied on (CIT v. Chopra Bros. India (P) Ltd., Girdhari Lal v. CIT, CIT v. Jain Construction Co.) turned on a Board circular binding on the Revenue and were distinguishable (para 13).
The net profit rate is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under Section 29 and are deemed to have been taken into consideration while making such an estimate.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. Once the books are rejected and income is estimated by applying a net profit rate, that rate is taken to have already absorbed every deduction that would otherwise be computed under sections 30 to 43A. You cannot have the estimate and the expenses too. This was decided by the High Court (Ajay Kumar Mittal J (the retrieved text names only the author of the judgment)) and bears on section 145, section 144, section 29, section 44AD of the Income Tax Act 1961. It is reported as (2008) 214 CTR (P&H) 149 (citation as shown in the source page header); reference under s.256(1) arising out of the Tribunal's order dated 10 June 1994 in ITA No. 965/Chd/1988. This is the standard answer to the most common argument made after a best judgment assessment — that the estimated rate should be applied to receipts net of some large expense head. The Punjab and Haryana High Court explains why that is wrong in principle, and adds that section 44AD only made explicit what was already implicit. It cuts both ways: it also stops the Assessing Officer from rejecting the books and then adding back a specific item from those same books. If it applies to you, the first step is this: If the officer has estimated income by a net profit rate, do not argue for a further deduction of a specific expense head — argue instead that the rate itself is too high on the facts.
The assessee was a firm of labour contractors doing loading and unloading of gunny bags between mandi, godowns and railway station. It received Rs. 25,40,127 from the Food Corporation of India and paid freight to a truck operators' union of Rs. 11,45,650 by cheque and Rs. 8,66,130 in cash. The Income-tax Officer examined the evidence, rejected the books of account, applied a profit rate of 8 per cent to gross receipts of Rs. 25,40,127 and estimated income from contract work at Rs. 2,03,000 as against Rs. 24,895 declared; he also disallowed expenditure of Rs. 5,05,453 for want of vouchers. The Commissioner (Appeals) allowed the payments to the truck operators' union as a deduction but sustained the other disallowance. On the Revenue's appeal the Tribunal, by order dated 10 June 1994, upheld the application of the 8 per cent rate to the balance amount of Rs. 5,28,347. At the Revenue's instance the Tribunal referred to the High Court the question whether it was right in upholding a net profit rate of 8 per cent and then allowing deduction of the freight paid to the truck operators' union from gross receipts. No one appeared for the assessee; Mr. Sanjay Bansal, senior advocate, assisted the Court as amicus curiae (paras 1 to 3). The matter was decided on 2007-11-06 by the High Court (Ajay Kumar Mittal J (the retrieved text names only the author of the judgment)). On those facts the High Court held as follows. The question was answered in favour of the Revenue and against the assessee, with no order as to costs (para 14). Where books of account are rejected and income is estimated to the best of the officer's judgment by fixing a net profit rate, that rate is applied after taking all factors into account and is deemed to include every deduction referred to in section 29; a separate deduction for freight charges from gross receipts cannot also be allowed (paras 7 and 8).
The Court read sections 29, 144 and 145 as they stood at the relevant time (para 6). Section 29 requires business income to be computed under sections 30 to 43A, and section 145 requires that computation to be made on the books and method of accounting regularly employed; where the officer is not satisfied about the correctness or completeness of the books he may reject them and estimate income to the best of his judgment under section 144. An estimate so made substitutes the computation that would otherwise be made under section 29, so the assessee's claim for expenses cannot be said to have been ignored — the rate accounts for all the section 29 deductions (para 7). The Court added two practical reasons: accepting the assessee's contention would reduce the effective rate on gross receipts to under 1 per cent, which is not practical; and once books are rejected they cannot be treated as good for one purpose and bad for another, so no separate freight deduction can be allowed (para 8). It drew support from the Andhra Pradesh High Court in Indwell Constructions v. CIT, where separate additions for interest and remuneration to partners after rejection of books were held impermissible (para 9). The Tribunal had relied on the Madras High Court in CIT v. K.S. Guruswami Gounder & K.S. Krishnaraju (Contractors), but that case concerned the value of materials supplied by the Government to a contractor, on which no profit motive existed; freight is not a capital cost of that kind and the Tribunal was wrong to rely on it (paras 10 and 11). Section 44AD, inserted by the Finance Act 1994 with effect from 1 April 1994, was referred to in argument; though not directly applicable to assessment year 1983-84, the Court observed that its sub-section (2) — deeming deductions under sections 30 to 38 to have been given full effect with no further deduction allowed — made explicit what was implicit earlier (para 12). The depreciation cases relied on (CIT v. Chopra Bros. India (P) Ltd., Girdhari Lal v. CIT, CIT v. Jain Construction Co.) turned on a Board circular binding on the Revenue and were distinguishable (para 13). In the words reproduced by the source cited on this page: "The net profit rate is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under Section 29 and are deemed to have been taken into consideration while making such an estimate." The decision followed or applied Indwell Constructions v. CIT (Andhra Pradesh High Court) — relied on, para 9; CIT v. K.S. Guruswami Gounder & K.S. Krishnaraju (Contractors) (Madras High Court) — distinguished, paras 10 and 11; CIT v. Chopra Bros. India (P) Ltd.; Girdhari Lal v. CIT; CIT v. Jain Construction Co. — distinguished as depreciation cases decided on a binding Board circular, para 13.
It was decided by the High Court on 2007-11-06 and is reported as (2008) 214 CTR (P&H) 149 (citation as shown in the source page header); reference under s.256(1) arising out of the Tribunal's order dated 10 June 1994 in ITA No. 965/Chd/1988. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 145, section 144, section 29, section 44AD, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question was answered in favour of the Revenue and against the assessee, with no order as to costs (para 14). Where books of account are rejected and income is estimated to the best of the officer's judgment by fixing a net profit rate, that rate is applied after taking all factors into account and is deemed to include every deduction referred to in section 29; a separate deduction for freight charges from gross receipts cannot also be allowed (paras 7 and 8). It arises in Presumptive Taxation & Audit and Assessment & Scrutiny matters, on section 145, section 144, section 29, section 44AD of the Income Tax Act 1961, and was decided by Ajay Kumar Mittal J (the retrieved text names only the author of the judgment). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Use the other edge of the same rule: once the books stand rejected, the officer cannot rely on those books to make a separate addition of a particular entry. Keep depreciation separate in your mind. The Court records at para 13 that the depreciation cases turned on a binding Board circular and are distinguishable; it did not decide that depreciation is subsumed. Do not carry the section 44AD discussion at para 12 into a current year without checking the present text — that section was wholly substituted with effect from assessment year 2011-12 and no longer reads as it did.
Still good law. The judgment continues to be cited by benches of the Tribunal and by the Punjab and Haryana High Court itself; no decision doubting or overruling it has been located, though no full citator check has been made. Note separately that section 44AD, discussed at para 12 in its Finance Act 1994 form (8 per cent of gross receipts of a civil construction business), was wholly substituted by the Finance (No.2) Act 2009 with effect from assessment year 2011-12 and has been amended repeatedly since; the ratio of this judgment rests on sections 144 and 145, not on section 44AD, and is unaffected by those changes. Three qualifications belong with that status. It is a High Court decision, so a bench outside Punjab and Haryana is persuaded rather than bound, and the point is one on which Tribunals have sometimes allowed a specific deduction where the rate was shown to have been fixed without regard to it. The proposition is about what a net profit rate absorbs, so it bites only where the books have in fact been rejected and the income estimated; where the assessment proceeds on the books, the deductions that section 29 brings in are computed in the ordinary way. And the judgment does not say that whatever rate the officer picks is safe. The rate must still rest on material and on a comparison the assessee has had a chance to meet, and an estimate made without that foundation is open to challenge on the assessee's side of the same reasoning. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two points for anyone citing this. First, the report is internally inconsistent on the year: para 1 records the reference as being for assessment year 1987-88, while para 2 and para 12 both proceed on assessment year 1983-84. The reasoning turns on 1983-84. Second, para 9 is a block extract from the Andhra Pradesh High Court's judgment in Indwell Constructions v. CIT, not this Court's own words — the passage beginning 'The pattern of assessment under the IT Act, 1961 is given by Section 29' belongs to Indwell and should not be attributed to the Punjab and Haryana High Court. Third, the key quote has been confined to the second of the two sentences originally taken from para 7. The sentence immediately before it — 'Once best judgment assessment is made by fixing a rate of net profit, the assessee's claim for deduction on account of expenses cannot be deemed to have been ignored.' — is printed inside quotation marks in the source. Para 7 opens 'After carefully analysing the aforesaid provisions, the legal position that emerges may be summarized thus', so the paragraph as a whole is the Court's own summary and the marks may be no more than the reporter's emphasis; but a sentence sitting inside quotation marks is not presented in this library as the deciding forum's unattributed own words. The proposition it states is in any event carried by the sentence quoted and by the account of para 7 in the reasoning above. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in favour of the Revenue and against the assessee, with no order as to costs (para 14). Where books of account are rejected and income is estimated to the best of the officer's judgment by fixing a net profit rate, that rate is applied after taking all factors into account and is deemed to include every deduction referred to in section 29; a separate deduction for freight charges from gross receipts cannot also be allowed (paras 7 and 8).
TaxSphere, “CIT v Gian Chand Labour Contractors”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-gian-chand-labour-contractors/ (validity last checked 2026-09-07)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
My employee embezzled money from the business bank account. Can I write that off for tax?
I did not claim depreciation in my return because it suits me not to. Can the assessing officer force it on me anyway?
