2020 (9) TMI 765 - AT - Income Tax

Gross profit addition - non rejection of books of accounts - Assessee accepting gross profit @ 56% as per the order of Settlement Commission for immediately preceding seven assessment years - CIT-A granted part relief to the assessee in a non-maintainable appeal - HELD THAT - Assessee, before the AO during the assessment proceedings, agreed to estimation of gross profit @ 56% of sales/turnover and this act of the assessee obviously stopped the AO from making further enquiry or observations and going deep into the books of account of the assessee and to take recourse of procedure mandated in section 145(3) - assessee cannot be held as aggrieved from such addition which has been made on the voluntary consent of the assessee before the AO during assessment proceedings in the line of the Income Tax Settlement Commission. We safely presume that the appeal of the assessee was neither maintainable before the CIT (A) nor before this Tribunal in view of the various decisions, as relied in the case of Vamadevan Bhanu 2009 (12) TMI 591 - KERALA HIGH COURT Therefore, in our considered opinion, firstly, ld CIT(A) has admitted and adjudicated the appeal which was not maintainable as per provisions of section 246A r.w. 250 of the Act. CIT(A) held that the action of the AO in estimating the gross profit margin at the figure higher of 56% of sales/turnover than the reported value of 53.88% is not entirely unjustified and same is upheld. Thereafter, the ld CIT(A) after noting the arguments of the assessee recorded hypothetical observation without any basis only based on surmises and conjunctures and without referring to the financial results of the assessee, without referring to ITSC order and voluntary consent of assessee for estimating GP rate @ 56% of sales/turnover and reduced the GPM from 56% to 55% ignoring vital facts supporting the action of the AO. Therefore, in our opinion, ld CIT(A), first of all, admitted and adjudicated the non-maintainable appeal and, therefore, gave relief to the assessee without any justified reason and legal basis tenable under provisions of the Act. AO was right in making addition on the consent of the assessee and keeping in view the order of ITSC for immediately previous seven assessment years by estimating G.P @ 56% of sales/turnover. We also hold that the ld CIT(A) has granted part relief to the assessee in a nonmaintainable appeal without any valid basis, thus, same is not sustainable and thus, we set aside the same.

Summary

Issues Involved:
1. Legality of the estimation of gross profit rate by the Assessing Officer.
2. Maintainability of the appeal by the assessee against the addition agreed upon during assessment proceedings.
3. Justification for the reduction of gross profit rate by the CIT(A).

Detailed Analysis:

1. Legality of the Estimation of Gross Profit Rate by the Assessing Officer:
The primary issue revolves around the estimation of the gross profit rate by the Assessing Officer (AO). The AO estimated the gross profit at 56% of the total sales/turnover, based on the assessee's agreement before the Settlement Commission for the preceding seven assessment years (2004-05 to 2010-2011). The AO noted that the assessee had voluntarily agreed to this estimation during the assessment proceedings, which justified the AO's decision to adopt the 56% gross profit rate without further inquiry or rejection of the books of accounts.

2. Maintainability of the Appeal by the Assessee:
The legal contention raised by the Department was that the appeal by the assessee was not maintainable since the addition was made on an agreed basis. As per Section 246A of the Income Tax Act, an appeal can be filed by an assessee aggrieved by an assessment order. However, various High Court decisions, including those cited by the CIT DR, indicate that an appeal is not maintainable if the assessment was made based on the assessee's agreement. The Tribunal upheld this view, noting that the assessee had agreed to the 56% gross profit rate during the assessment proceedings, thereby stopping the AO from conducting further inquiries. Consequently, the appeal by the assessee was deemed non-maintainable.

3. Justification for the Reduction of Gross Profit Rate by the CIT(A):
The CIT(A) reduced the gross profit rate from 56% to 55%, granting part relief to the assessee. The CIT(A) justified this reduction by considering statistical variations and business dynamics, estimating a 1% variation. However, the Tribunal found this reduction to be based on hypothetical observations without any factual matrix, surmises, and conjectures. The Tribunal noted that the CIT(A) upheld the AO's action of estimating a higher gross profit margin but then reduced it without any substantial basis. The Tribunal concluded that the CIT(A)'s order was not sustainable as it lacked a justified reason and legal basis.

Conclusion:
The Tribunal dismissed the appeal by the assessee and allowed the appeal by the Department. It held that the AO was correct in making the addition based on the assessee's voluntary consent and the Settlement Commission's order for the preceding assessment years. The Tribunal also found that the CIT(A) had erred in granting part relief to the assessee in a non-maintainable appeal. Thus, the Tribunal set aside the CIT(A)'s order and upheld the AO's estimation of the gross profit rate at 56%.