2020 (7) TMI 172 - AT - Income Tax

Rejection of books of accounts - estimation of gross profit - AO proceeded to estimate the gross profit of the assessee at 12.78% as against actual gross profit ratio of 11% claimed by the assessee in its books of account - HELD THAT - Earning of GP/NP ratio at any business house is not a mechanical process to be consistent in all the years as it depends upon numerous factors prevailing during the particular assessment year. When we examine net profit ratio earned by the assessee during the AYs 2007-08 to 2011-12 as depicted in table in preceding para no.5 of this order, it has never been consistent and is at variance. Even during the year under assessment, assessee s turnover has gone up and has shown GP ratio of 11% as against 8.22% of AY 2010-11. In case, we follow the decision rendered by coordinate Bench of the Tribunal in assessee s own case for AY 2010-11 by taking average of current year and two consecutive years in order to estimate the net profit ratio, assessee s own results would have come down. So action of AO/CIT(A) rejecting the books of account u/s 145 (3) is upheld. We are of the further considered view that GP ratio is required to be estimated keeping in view the historical background from AYs 2007-08 to 2011-12. So, we deem it fit to adopt the net gross profit ratio for the year under assessment by taking average of the current year as well as four preceding assessment years i.e. AYs 2007-08, 2008- 09, 2009-10 2010-11 which comes to 11.31%. AO is to quantify the gross profit ratio accordingly and to recompute the addition to be made in this case. We are of the considered view that since the Bench has preferred to proceed with GP addition on the basis of average of the current year and four earlier assessment years, the remaining other additions made by AO/confirmed by the ld. CIT (A) on account of disallowance of commission, on account of fines penalties and on account of interest on FDR respectively do not call for any separate addition, hence deleted. - Appeal filed by the assessee is allowed.

Summary

Issues:
1. Rejection of books of accounts by the Assessing Officer.
2. Addition of amount on account of low gross profit rate.
3. Disallowance of commission expenses.
4. Disallowance of fines and penalties.
5. Addition of interest on FDR.

Analysis:

1. The appellant, a trading and installation firm, contested the order passed by the Commissioner of Income-tax (Appeals) for the assessment year 2011-12, challenging the rejection of books of accounts by the Assessing Officer. The appellant argued that the books were maintained properly as per the law, but the AO estimated the gross profit at 12.78%, leading to an addition of ?41,70,135 due to the difference in declared gross profit. The AO also disallowed commission expenses, fines and penalties, and interest on FDR, resulting in a total income assessment of ?1,39,93,740.

2. The appellant appealed to the Tribunal after the CIT (A) partially allowed the matter. The Tribunal considered the historical background of the appellant's business and noted fluctuations in the net profit ratio over the years. Referring to a previous decision, the Tribunal upheld the rejection of books of accounts by the AO and directed the estimation of gross profit based on the average of the current year and preceding years, arriving at a gross profit ratio of 11.31%.

3. The Tribunal emphasized that the GP/NP ratio in a business is not static and can vary based on various factors each year. Considering the increase in turnover and the GP ratio of 11% for the year under assessment, the Tribunal adopted the net gross profit ratio of 11.31% by averaging the current year and four preceding years. Consequently, the Tribunal allowed the appeal, deleting the additions made by the AO and confirmed by the CIT (A) on commission expenses, fines and penalties, and interest on FDR.

4. The Tribunal's decision highlighted the importance of assessing the gross profit ratio based on the historical background of the business and the specific circumstances of each assessment year. By considering the fluctuations in the net profit ratio and the turnover, the Tribunal justified the adoption of a net gross profit ratio of 11.31% for the appellant, leading to the allowance of the appeal and the deletion of additional amounts imposed by the AO and CIT (A).