2015 (1) TMI 689 - AT - Income Tax

Reduction of rate of gross profit from 20.89% adopted in assessment to 8.15% of turnover - Best judgment assessment - Held that - In the grounds raised the revenue has agitated the ld. CIT(A) has erred in reducing the gross profit from 20.89% to adopted in assessment to 8.15% is factually incorrect as it is the assessee which has disclosed the turn over of gross profit at 8.15% and the ld. CIT(A) had reduced the estimate of gross profit from 20.89% adopted by the AO to 10%. It is a submission of the assessee that because of the hugely competitive market the assessee had to resort to under cutting in sale price as a result of this the assessee was able to increase the turn over from ₹ 13,02,13,946/- in the preceding assessment year to ₹ 34,63,55,301/- in the current assessment year. The gross profit in absolute terms had increased to ₹ 2,56,14,905 from ₹ 2,41,92,857 and the net profit in absolute terms had increased from ₹ 1,76,60,614 to ₹ 2,04,11,863. Thus by lowering its rate the assessee was able to substantially increase the turn over which also resulted in increase in gross profit. In this view of the matter also the gross profit disclosed by the assessee cannot be said to be unacceptable. In this regard it is also to be noted that despite its efforts the assessee could not repay its lenders and ultimately had become defunct and the unit was taken over by the bank. In the background and aforesaid discussion in our considered opinion the estimation of gross profit by the AO @ 20.89% of the turn over was not at all justified. Hence the ld. CIT(A) s rejection of the assessment made by the AO is fully justified. Non production of books of accounts was beyond the control of the assessee. The reason for decrease in gross profit rates has been duly explained by the assessee. There has been substantial increase in the profits in absolute terms as compared to preceding assessment year. In this view of the matter the result declared by the assessee can be accepted subject to minor adjustment. Accordingly we hold that gross profits declared by the assessee should be taken at 8.50% which would meet the ends of justice. - Decided against revenue and cross objection filed by the assessee stand partly allowed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in reducing the rate of gross profit from 20.89% to 8.15% of turnover.
2. Whether the CIT(A) erred in upholding the estimate on account of gross profit to the extent of 10%.

Detailed Analysis:

1. Reduction of Gross Profit Rate by CIT(A):
The Revenue's appeal contended that the CIT(A) erred in reducing the gross profit rate from 20.89% to 8.15%. The assessee, a private limited company engaged in rice milling, was assessed u/s 144 due to non-availability of books of accounts, which were under the possession of Punjab National Bank due to the company's defunct status. The AO estimated the gross profit at 20.89% based on the previous year's rate, resulting in an addition of Rs. 4,40,94,444/-.

The CIT(A) observed that the AO did not dispute the turnover or the incidental expenditure but only the gross profit rate. The CIT(A) noted that the turnover for the assessment year was significantly higher (Rs. 34,63,55,301/-) compared to the previous year (Rs. 13,02,12,946/-), and it is a recognized principle that higher turnover often results in a lower gross profit rate. The CIT(A) found the AO's estimate of 20.89% to be without rationale and reduced it to 10%, considering the circumstances and the lack of comparable cases presented by the AO.

2. Upheld Estimate of Gross Profit at 10% by CIT(A):
The Cross Objection by the assessee challenged the CIT(A)'s decision to uphold the gross profit estimate at 10%. The assessee argued that the non-production of books of accounts was beyond their control as the unit was under the possession of the lending bank. The assessee's return and profit were supported by audited accounts, and the auditors did not raise any adverse remarks.

The Tribunal noted that the AO was aware of the situation and had issued a summons u/s 131 to the lending bank, which did not produce the books of accounts. The Tribunal referred to the decision of the Hon'ble Delhi High Court in Addl. CIT vs Jay Engineering Works Ltd., which held that in the absence of books of accounts, audited reports could be relied upon. The Tribunal also considered industry norms and a report from the Ministry of Small Scale Industry, which estimated the gross profit for rice milling units at 7.5%.

The Tribunal found that the gross profit declared by the assessee at 8.15% was reasonable and supported by industry standards. The Tribunal further noted that despite the competitive market and increased turnover, the assessee's gross profit in absolute terms had increased. The Tribunal concluded that the AO's estimate of 20.89% was unjustified and that the CIT(A)'s estimate of 10% was also without basis.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's Cross Objection. The Tribunal held that the gross profit should be taken at 8.50%, which would meet the ends of justice. The order was pronounced on 01/01/2015.