2017 (9) TMI 184 - AT - Income Tax

Rejection of books of accounts - Estimation of GP ratio on basis of average of three years - fall in Sales over three preceding years - Held that - There is no finding that there is sale outside books of account or that a part of sale proceed has not entered in the books of account. The submissions before the ld. CIT(A) that the turnover has drastically come down for assessment year 2010-11 as compared to assessment years 2008-09 and 2009-10 also could not be controverted by the ld. DR. A perusal of the various details furnished by the assessee shows that during assessment year 2008-09 the sale was ₹ 7.18 crores and in 2009-10 the sale was ₹ 10.30 crores where as during assessment year 2010-11 turnover had come down to ₹ 1.38 crores. The Director s report mentions that the company had to suspend its business activity during the financial year 2010-11. Assessee had furnished item wise quantity and value details of stock, purchase and sale.We find that Assessing Officer has overlooked the loss on various items suffered by the assessee and had only gone for items on which the assessee had made profit. He has not pointed any other mistake in the books of account which were duly audited and produced before him. We, therefore, find merit in the argument for the assessee that merely because there is fall in the GP ratio, the Assessing Officer cannot reject the books of account and go for estimation of profit. - Decided against revenue

Issues Involved:
1. Whether the CIT(A) erred in deleting the addition of ?41,47,663/- made by the AO by estimating gross profit (GP) rate.

Detailed Analysis:

1. Background and Assessing Officer's (AO) Findings:
The assessee, a company engaged in tele-shopping, filed its return of income for the assessment year 2010-11 declaring a loss of ?2,12,93,974/-. The AO observed a significant drop in the GP ratio from 36.02% in the preceding year to 0.06% in the current year. The AO compared the GP ratios of the preceding three years, which averaged 30%, and found that the GP for selected items was 39.29%. The AO rejected the book results under Section 145 of the Income Tax Act and estimated a 30% GP rate, resulting in an addition of ?41,47,663/- to the total income.

2. Assessee's Explanation:
The assessee attributed the decrease in GP to factors such as high procurement costs, stiff market competition, and the obsolescence of products. The company maintained that its books of account were audited and no defects were found. The assessee provided detailed stock records and argued that the AO's selective sampling of high-profit items was incorrect and did not represent the overall business performance.

3. CIT(A)'s Observations:
The CIT(A) deleted the addition made by the AO, noting that the AO had not pointed out any specific defects or discrepancies in the audited books of account. The CIT(A) criticized the AO's approach of extrapolating profit margins from a few samples to the entire sales, emphasizing that profit margins vary across different items. The CIT(A) also highlighted that the AO did not categorically reject the books of account under Section 145 before estimating the profit.

4. Revenue's Appeal:
The Revenue argued that the CIT(A) did not properly consider the AO's findings and requested the reversal of the CIT(A)'s order or a remand for fresh adjudication.

5. Tribunal's Findings:
The Tribunal upheld the CIT(A)'s decision, noting that the AO had not found any defects in the audited books of account and had selectively considered high-profit items while ignoring loss-making ones. The Tribunal emphasized that the assessee provided comprehensive details of sales and purchases, and the AO's estimation of a 30% GP rate was unjustified. The Tribunal found no evidence of sales outside the books or unaccounted sales proceeds. The significant drop in turnover for the assessment year 2010-11, as compared to previous years, was also acknowledged.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order and concluding that the AO's rejection of the book results and estimation of profit was not warranted. The Tribunal found no infirmity in the CIT(A)'s reasoning and upheld the deletion of the addition of ?41,47,663/-.

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