2016 (7) TMI 444 - AT - Income Tax

G.P. addition - addition on fall in the gross profit ratio - Held that - The assessee is maintaining books of accounts which are audited. The assessee has duly met all the adverse reservations of the AO in remand report/appellate proceedings before learned CIT(A) as set out above. No cogent material has been brought on record to prove that the assessee has manipulated its accounts to suppress profits. Therefore, there are no reasons or justification in law to reject the explanation given by the assessee to support its contentions. Mere fall in the gross profit ratio , in the absence of any cogent reasons could not be a ground to hold that the proper income could not be deduced from the audited accounts maintained by the assessee and the book results ought to be rejected, and consequently gross profit margin rate of preceding years be applied to the sales of the instant assessment year under appeal. There is no averments that there is an deliberate attempt to inflate cost of material or other expenses on the part of the assessee or to suppress sale price of products sold by the assessee. The allegations of the AO were duly met by the assessee in remand report/appellate proceedings as set out above. The Revenue is not in appeal before the Tribunal with respect to the relief s granted by the learned CIT(A). Our view is consistent with the decision of Hon ble Delhi High Court in the case of CIT v. Smt Poonam Rani (2010 (5) TMI 57 - DELHI HIGH COURT ). In our considered view, the additions made by the learned AO as sustained/confirmed by the learned CIT(A) to the tune of ₹ 1,38,47,120/- is not sustainable in law and we order deletion of the same. - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of ?1,38,47,120/- (estimating gross profit of 11.06%) against the addition of ?3,45,63,127/- made by the Assessing Officer.
2. Rejection of book results by the Assessing Officer.
3. Allegation of manipulated sales prices to sister concern.
4. Claim of ?99 lacs towards sales commission as bogus.

Detailed Analysis:

1. Addition of ?1,38,47,120/- (Estimating Gross Profit of 11.06%) Against Addition of ?3,45,63,127/- Made by the Assessing Officer:
The assessee company, engaged in manufacturing equipment for pharmaceuticals, reported a significant drop in gross profit ratio from 31.82% in AY 2007-08 to 13.67% in AY 2008-09. The AO observed discrepancies in sales to a sister concern and outside parties, leading to a gross profit addition of ?3,45,63,127/- based on the previous year's gross profit ratio. Upon appeal, the learned CIT(A) recalculated the gross profit margin, excluding transfers to the sister concern, resulting in a revised addition of ?1,38,47,120/- based on a gross profit margin difference of 11.06%.

2. Rejection of Book Results by the Assessing Officer:
The AO rejected the book results, citing that they did not reflect the true profitability due to manipulated sales prices and discrepancies in the stock register. The assessee argued that the book results were audited and maintained correctly, and the AO's calculations did not include manufacturing costs like labor and power. The learned CIT(A) called for a remand report, which confirmed the assessee's contentions about the inclusion of excise duty and sales tax in sales invoices to outsiders but not to the sister concern.

3. Allegation of Manipulated Sales Prices to Sister Concern:
The AO alleged that the assessee sold items to its sister concern at a 30-50% discount compared to outside parties, manipulating sales prices to nullify profits. The assessee contended that sales to the sister concern were at lower prices due to the exclusion of excise duty and sales tax, as they were meant for export. The remand report confirmed this, and the learned CIT(A) accepted the explanation, adjusting the gross profit margin accordingly.

4. Claim of ?99 Lacs Towards Sales Commission as Bogus:
The AO claimed that the sales commission of ?99 lacs was bogus, as it was disproportionately higher than the previous year's commission of ?1.08 lacs. The learned CIT(A) deleted this addition after the remand report verified the commission expenses. The Tribunal noted that the Revenue did not appeal against this relief granted by the learned CIT(A).

Tribunal’s Decision:
The Tribunal observed that the AO did not point out specific defects in the audited books of accounts and accepted the assessee's explanations during the remand report proceedings. The Tribunal held that mere fall in the gross profit ratio is not sufficient ground for additions without cogent reasons or evidence of manipulation. The Tribunal ordered the deletion of the sustained addition of ?1,38,47,120/- and allowed the appeal filed by the assessee.

Conclusion:
The appeal filed by the assessee for AY 2008-09 was allowed, and the addition of ?1,38,47,120/- was deleted. The Tribunal emphasized the importance of specific evidence and proper justification for rejecting audited book results and making additions based on gross profit ratios.