2014 (11) TMI 812 - HC - Income Tax

Estimation of GP @ 12.5% or 1.03% - Whether the Tribunal was right in estimating the gross profit of 12.5% against the gross profit of 1.03% shown by the assessee without recording any cogent and convincing reasons in support Held that - The average profit which has been considered for this industry is around 3 to 7% - The Tribunal has directed addition at the rate of 12.5% which is on the higher side assessee has fairly conceded that excess 7% is on higher side and that at the most 3% may be applied - maximum and minimum of the profit rate to be 5% - the AO is directed to apply 5% G.P rate as the rate of 12.5 % is drastically higher and 1.03% is drastically lower - Gross profit rate of 5% is the average rate of the industry - Gross profit rate of 5% be applied and income of the assessee be estimated - decided partly in favour of assessee.

Summary

Issues:
Estimation of gross profit rate by the Tribunal without cogent reasons.

Analysis:
The case involved an appeal by the revenue against the Income Tax Appellate Tribunal's order estimating the gross profit of an assessee company at 12.5% for the assessment year 1997-98, compared to the 1.03% shown by the company. The company, engaged in trading polished diamonds, had its turnover and gross profit figures scrutinized during assessment proceedings. The Assessment Officer concluded that purchases amounting to a significant sum were bogus, leading to an addition in the income computation. The company's appeal before the CIT(Appeals) was dismissed, prompting a further appeal to the Tribunal. The Tribunal partially allowed the appeal by directing an addition of a lesser amount at a 12.5% rate of gross profit. The revenue challenged this decision.

The appellant contended that the Tribunal erred in rejecting the 1.03% gross profit shown by the company, arguing that the accounts were audited and closed. Reference was made to a similar Tribunal decision where a lower net profit rate was deemed unjustified without specific defects in expense claims. The appellant asserted that the 12.5% rate applied by the Tribunal was excessive. On the other hand, the respondent supported the Tribunal's decision, highlighting the company's alleged siphoning off of funds through fictitious means.

Upon review, the High Court noted that the industry average profit rate ranged between 3 to 7%. The Court found the 12.5% rate applied by the Tribunal to be high, suggesting that a mean of 5% would be more appropriate based on the peculiar facts of the case. Consequently, the Court directed the Assessing Officer to use a 5% gross profit rate for estimation, considering it a fair balance between the extremes of 12.5% and 1.03%. The Court ruled in favor of the assessee, modifying the Tribunal's judgment to reflect the 5% gross profit rate in the income estimation, thereby allowing the appeal to that extent.