2019 (5) TMI 1210 - HC - Income Tax

Addition on account of decline in GP /NP Ratio u/s 145 - AO rejected the explanation offered by the assessee stating that it maintained excise records and that the note of the auditor was only in respect of valuation - invoking Section 145, the AO applied the net profit ratio of the earlier AY and confirmed by CIT - ITAT deleted addition - HELD THAT - ITAT having perused the auditor s report noticed that a company s inventory was valued at lower cost or net reliable value and included cost of bringing the goods in the present location and other conditions. The Auditor had stated that the valuation adopted that is based on the retail method could be used when the actual cost of production was approximated. With the nature of business activity carried on by the Assessee, it was not possible to keep the production cost of each and every finished product, it could be, therefore, on an approximate basis, it could be spread over the goods produced. ITAT has also referred to the accounting standards and come to the conclusion that there was a valid explanation for the drop in the net profit ratio. Having perused the impugned order of the ITAT, the Court finds that it deals essentially with the factual aspects after having perused the Auditor s report. No substantial question of law.

Summary

Issues:
1. Whether the ITAT erred in deleting the additions made by the AO on account of alleged decline in gross profit/net profit under Section 145 of the Income Tax Act, 1961.

Analysis:
The judgment pertains to an appeal against an order passed by the Income Tax Appellate Tribunal (ITAT) concerning the assessment years 2010-11 and 2011-12. The Revenue questioned whether the ITAT was wrong in deleting the additions made by the Assessing Officer (AO) due to a purported decrease in gross profit/net profit under Section 145 of the Income Tax Act, 1961. The Assessee, involved in the manufacturing and sale of processed food products, had its return of income processed under Section 143(1) of the Act and was later scrutinized by the AO. The AO, after perusing the auditor's report, found discrepancies in the valuation of inventories and a decline in the net profit ratio compared to the previous assessment year.

Subsequently, the AO rejected the Assessee's explanation, invoking Section 145 of the Act to apply the net profit ratio from the earlier year and made the contested additions. Despite the Commissioner of Income Tax CIT (A) upholding the AO's decision, the Assessee appealed to the ITAT. The ITAT, upon reviewing the auditor's report, noted the valuation methods used and the challenges in accurately determining production costs for each finished product due to the nature of the Assessee's business activities. The ITAT also considered relevant accounting standards and found a valid explanation for the decrease in the net profit ratio.

Upon examining the ITAT's order, the Court concluded that the matter primarily dealt with factual aspects based on the auditor's report and did not raise any substantial legal questions. Consequently, the appeal was dismissed, along with the pending applications.