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2023 (6) TMI 224 - AT - Income TaxAddition on account of low GP rate - GP rate in year under consideration 2015 - 16 was 0.41% as compared to GP rate of 8.59% in A. Y. 2014 - 15 - sole ground/allegation taken by AO for enhancing GP rate from 0.41% to 1% of turnover is that there was significant rise in the turnover of jewellery segment but the GP rate was reduced abnormally - HELD THAT - It is a well accepted principle tax jurisprudence that the Assessing Officer cannot sit on the arm chair of a businessman assessee to replace his business strategy by his own whims and fancies. When the assessee took decision to reduce GP rate with an intention to fetch high turnover resulting into increase in the total net profit and under this strategy the assessee under took turnover of 34 times in comparison to the immediately preceding year taking sky high increase in the turnover which resulted into reduction of GP rate to 0.41%. From the copy of the three years comparative chart with breakup of jewellery segment, bullion segment and Job work segment it is clear that when the turnover of assessee was less than the GP rate was 8.59% and when the assessee under business strategy increase the turnover to 34 times to Rs 292.13 crore then the GP rate was reduce to 0.41% the GP rate of other segments such as artificial jewellery, semi precious stones and job work also faced marginal changes but the AO only noted abnormal fall in GP rate of jewellery without pointing out any defects or discrepancies in the audited books of accounts of assessee and this approach without any other positive material or evidence, only on standalone basis is not correct and justified. CIT(A) was right in deleting addition made by the Assessing Officer without any justified reasoning and cogent basis - Decided against revenue.
Issues:
The issues involved in the judgment are the deletion of addition on account of low GP rate, application of best judgment assessment, and the justification for estimating GP rate at 1%. Deletion of Addition on Account of Low GP Rate: The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 1,72,35,965/- due to a low GP rate of 0.41% in the year under consideration compared to 8.59% in the previous year. The Senior DR argued that the significant reduction in GP rate was abnormal in the jewelry business, indicating a revenue leakage. The Counsel for the Assessee argued that the AO did not comply with the requirements of section 145(3) of the Act and estimated income under best judgment assessment without a valid basis. The CIT(A) found that the AO did not point out any discrepancies in the books of accounts or provide concrete reasons for estimating the GP rate at 1%. Consequently, the CIT(A) held that the addition made by the AO was not sustainable and directed its deletion. Application of Best Judgment Assessment: The AO, dissatisfied with the GP rate declared by the Assessee, estimated the GP rate for the jewelry segment at 1% of turnover instead of the declared 0.41%. The CIT(A) observed that the AO did not comply with the conditions of section 145(3) of the Act and failed to provide a valid basis for his estimation. The CIT(A) noted that the AO did not find any defects or discrepancies in the submissions made by the Assessee, and the audit report confirmed the accuracy of the books of accounts. The CIT(A) concluded that the AO's estimation of the GP rate without concrete evidence was unjustified, leading to the deletion of the addition. Justification for Estimating GP Rate at 1%: The AO justified estimating the GP rate at 1% for the jewelry segment due to a significant reduction in the GP rate compared to the previous year. However, the CIT(A) found that the Assessee's increase in turnover and strategy to reduce margins to boost net profit were valid reasons for the lower GP rate. The CIT(A) emphasized that the AO did not question the accuracy or completeness of the books of accounts and failed to provide substantial grounds for rejecting the declared GP rate. The Tribunal upheld the CIT(A)'s decision, stating that the AO's action lacked justification and valid reasoning, leading to the dismissal of the Revenue's appeal.
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