2017 (2) TMI 507 - AT - Income Tax

Rejection of books of account - fall in the G.P rate - Held that - The assessee has given proper reason for the fall in the G.P rate, i.e., there was increase in the raw material cost and the assessee could not make corresponding increase in the selling price due to acute competition. The above said submission of the assessee is corroborated by the fact that the sales turnover of the assessee has increased by about 40% during the year under consideration. We notice that the assessee has given detailed notes to the AO explaining the reasons for the fall in the G.P rate. We notice that the assessee has also substantiated the explanations by furnishing the copies of purchase invoices to prove that the raw material cost has increased during the year under consideration vis- -vis in the immediately preceding year. The assessee has given an additional Note on Gross profit before the AO which show that the average cost of raw material has increased from ₹ 40,932/- per MT to ₹ 56,535/- per MT resulting in an average net increase of ₹ 15,603/- per MT. However, the average selling price has increased from ₹ 52,960/- per MT to ₹ 67,153/- per MT resulting in a net increase of ₹ 14,192/- per MT. Thus there is mismatch of ₹ 1,411/- (Rs.15603/- less ₹ 14,192/-) between the net increase in purchase rate and selling rate. This difference of ₹ 1,411/- on the purchase of 1,04,952 MT of raw material has dented the Gross profit by ₹ 14.80 crores. The assessee has further submitted that other direct costs and depreciation have also increased during the year to the tune of ₹ 1.96 crores. Thus, we notice that the assessee has reconciled the fall in gross profit rate with facts and figures. However, we notice that the AO has simply rejected the same without finding fault with the explanations so given by the assessee. Thus CIT(A) was justified in holding that the AO has not made out a proper case for rejecting the books of accounts. On the contrary, we notice that the assessee has convincingly explained the reasons for the fall in G.P rate. Accordingly we uphold the order of Ld CIT(A) in setting aside the order of rejection of books of account. - Decided in favour of assessee

Summary

Issues Involved:
1. Rejection of books of account by the Assessing Officer (AO).
2. Estimation of Gross Profit (GP) rate by the AO.
3. Lump sum addition by the Commissioner of Income Tax (Appeals) [CIT(A)].

Detailed Analysis:

1. Rejection of Books of Account by the Assessing Officer (AO):
The AO rejected the books of account maintained by the assessee on the grounds that the GP rate had fallen from 10% in the previous year to 6.80% in the year under consideration. The AO also noted that the assessee did not maintain quantity details relating to inter-process manufacturing. However, the CIT(A) disagreed with the AO, stating that the mere fall in GP rate cannot be a ground for rejection of books of account, especially when the assessee provided a reasonable explanation for the decline. The assessee explained that the cost of raw materials had increased significantly without a corresponding increase in the selling price due to market competition. The CIT(A) found that the assessee's explanation was supported by factual data and that no defects were found in the books of account, stock register, or excise records. Consequently, the CIT(A) set aside the AO's rejection of the books of account.

2. Estimation of Gross Profit (GP) Rate by the AO:
The AO estimated the GP rate at 9% of the sales turnover, resulting in an addition of ?15.99 crores to the total income of the assessee. The CIT(A) did not agree with this estimation, noting that the GP rate varied in previous years and that the assessee had provided a detailed explanation for the fall in GP rate. The CIT(A) highlighted that the assessee's records were consistent with past practices and were accepted by the AO in earlier years. The CIT(A) concluded that the AO's estimation of the GP rate was not justified and deleted the addition made by the AO.

3. Lump Sum Addition by the CIT(A):
Despite setting aside the AO's rejection of the books of account and the estimation of the GP rate, the CIT(A) made a lump sum addition of ?1 crore to account for any potential non-correlation between the consumption of input and output material and any leakages. The assessee was aggrieved by this addition and argued that it was made on an ad hoc basis without any concrete basis or reason. The ITAT found that the assessee had convincingly explained the reasons for the fall in the GP rate and had maintained consistent records. The ITAT also noted that the assessee had reconciled the quantity details of raw materials and finished goods. Therefore, the ITAT held that the CIT(A) was not justified in making the ad hoc addition of ?1 crore and set aside this part of the CIT(A)'s order.

Conclusion:
The ITAT upheld the CIT(A)'s decision to set aside the AO's rejection of the books of account and the estimation of the GP rate. However, the ITAT disagreed with the CIT(A)'s lump sum addition of ?1 crore and deleted it. As a result, the appeal filed by the assessee was allowed, and the appeal of the revenue was dismissed.