ITAT Kolkata Deletes Ad Hoc Profit Addition in Road Construction Contract: Debdeep Commercial Pvt. Ltd. Vs ITO

Overview of the Case

The Kolkata Bench of the Income Tax Appellate Tribunal rendered a significant ruling in Debdeep Commercial Pvt. Ltd. Vs ITO (ITA No. 1386/Kol/2026), concerning Assessment Year 2023-24, by an order pronounced on 30 September 2026. The Tribunal set aside an addition that had been sustained — though at a reduced rate — by the first appellate authority, holding that profit estimation without identifying book defects or referencing comparable transactions is legally untenable. The order illustrates that arithmetically softening an arbitrary estimate does not rehabilitate the underlying estimation exercise.

Background and Business Arrangement

Debdeep Commercial Pvt. Ltd., a private limited company, was awarded a road construction contract by Ashoka Building Limited for work to be executed in the State of Bihar. The entire scope of work under this contract was passed on to an associated entity, M/s Bharat Vanijya Eastern Pvt. Ltd., on a back-to-back basis. The assessee retained a commission-style margin of 5.44% of gross receipts and declared this as its profit from the arrangement.

This structure — where a principal contractor subcontracts all substantive work to a related party and retains only a thin spread — is commercially recognized, particularly in infrastructure and civil construction sectors. The question before the revenue authorities and subsequently the Tribunal was whether this declared margin could be substituted with a higher figure chosen by the Assessing Officer.

Assessment and Addition Made by the Assessing Officer

Through an assessment order dated 26 March 2025, the Assessing Officer declined to accept the book profit of 5.44% and instead applied an estimated gross profit rate of 12% of turnover. The mathematical consequence of this substitution was an addition of ₹2,29,48,530/- to the income returned by the assessee.

The assessment order did not record any specific defect identified in the books of account maintained by the assessee. The choice of 12% appears to have been an exercise of estimation discretion rather than a conclusion grounded in any detected irregularity in the underlying financial records or a comparison with industry benchmarks derived from comparable businesses.

First Appeal: CIT(A) Reduces Rate but Preserves Estimation

The assessee challenged this addition before the Commissioner of Income Tax (Appeals) – NFAC, Delhi, in appeal proceedings under Section 250 of the Income Tax Act, 1961. The CIT(A), by an order dated 10 February 2026, did not accept the 12% rate applied by the Assessing Officer but also did not delete the addition entirely. Instead, the CIT(A) directed the Assessing Officer to recompute income by restricting the estimated profit rate to 10% of gross receipts.

A notable aspect of the CIT(A)'s order was an express finding that the provisions of Section 40A(2)(b) of the Income Tax Act, 1961 — which relate to disallowances on payments to related parties — had no relevance to the facts of the assessee's case.

Dissatisfied with this outcome, the assessee filed a further appeal before the Tribunal, seeking complete deletion of the impugned addition rather than acceptance of a reduced estimation rate.

Submissions Before the Tribunal

Assessee's Arguments

The authorised representative advanced a two-pronged argument before the Tribunal: