2015 (6) TMI 644 - AT - Income Tax

Addition on fall in G.P. rate - CIT(A) deleetd the addition - Held that - Working of gross profit must necessarily take into account the opening and closing stock, and direct expenses, and not only be based on comparison of purchase prices of raw material and sale prices of finished products. That the Assessing Officer has based the addition of ₹ 4,31.41,035/- entirely on the fall in gross profit rate, without bringing any other material on record, and without disputing the results. It is established law that fall in gross profit alone, without pointing out defects in the books of account, is not an adequate basis for making additions. Additions to the profits of the assessee made solely on the ground that it was low without giving a specific finding that the accounts of the assessee were not correct and complete, or that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. We find considerable cogency in the finding of the Ld. CIT(A) in the impugned order that the mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not by itself be sufficient to justify the addition. See Aluminium Industries (P) Ltd. Vs. CIT (1995 (2) TMI 437 - GAUHATI HIGH COURT). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 4,31,41,035/- made by the Assessing Officer (AO).
2. Validity of estimating Gross Profit (G.P.) rate by the AO.
3. Justification for the gross loss declared by the assessee.
4. Rejection of books of accounts by the AO.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 4,31,41,035/- Made by the AO:
The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] who deleted the addition of Rs. 4,31,41,035/- made by the AO. The AO had disallowed the claim of gross loss of Rs. 2,15,80,361/- and estimated the gross profit at 3.65% for the assessment year 2009-10, resulting in an addition of Rs. 2,15,60,678/-. The CIT(A) deleted this addition after considering the explanations and evidence provided by the assessee regarding the fall in copper prices and the losses incurred on forward contracts.

2. Validity of Estimating Gross Profit (G.P.) Rate by the AO:
The AO estimated the gross profit rate at 3.65%, which was 2/3rd of the previous year's gross profit rate of 5.48%. The AO's estimation was based on the observation that the sale price was lower than the purchase price only in two months (November and December 2008) and suspected the possibility of income diversion to sister concerns. However, the CIT(A) found that the AO made the addition arbitrarily without rejecting the books of accounts or pointing out any discrepancies in the records maintained by the assessee.

3. Justification for the Gross Loss Declared by the Assessee:
The assessee justified the gross loss by explaining the continuous fall in copper prices from Rs. 445 per kg at the beginning of the year to Rs. 233 per kg at the end of the year. The assessee also demonstrated losses incurred on forward contracts and increased direct expenses. The CIT(A) verified these claims with documentary evidence, including purchase bills and records of forward contracts, and found them to be credible. The CIT(A) noted that the AO did not dispute the quantitative tally of raw material consumption and finished goods production.

4. Rejection of Books of Accounts by the AO:
The AO did not reject the books of accounts maintained by the assessee, which were duly audited under section 44AB of the Income Tax Act. The CIT(A) observed that no discrepancies were found in the books of accounts, purchase and sales records, or valuation of opening and closing stock. The AO's addition was solely based on the fall in gross profit rate without any specific findings of incorrect or incomplete accounts. The CIT(A) cited various case laws supporting the position that a fall in gross profit rate alone is not sufficient grounds for making additions without rejecting the books of accounts.

Conclusion:
The CIT(A) provided a detailed and cogent explanation for deleting the addition made by the AO, emphasizing that the mere decline in gross profit rate does not justify additions in the absence of defects in the books of accounts. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and affirming that the addition of Rs. 4,31,41,035/- was not warranted. The decision was based on the principles established in various judicial precedents, reinforcing that proper maintenance and auditing of books of accounts should be respected unless specific discrepancies are identified.