2017 (9) TMI 1464 - AT - Income Tax

Addition on account of Gross Profit ratio - G.P. rate determination - Held that - It is an admitted fact that the AO worked out the average GP rate of the comparable units which were working in the same line and vicinity at 10.58%, and after considering this fact that the assessee incurred more expenses of ₹ 20/- to ₹ 30 per quintal higher than the purchases shown by the other similar units of the same vicinity. He, therefore, allowed a leverage of 1.58% to the assessee and applied the GP rate of 9%. CIT(A) also accepted this contention of the assessee that the trading account of the units with whom the AO had compared assessee s account did not include certain expenses such as bardana, Jhonk, Mandi Fees and Purchase tax etc. Thus the action of the ld. CIT(A) for adopting the average GP rate of 10.58% shown by the comparable cases was not justified, particularly when, he had not also given any reason for not accepting the GP rate applied by the AO at 9%. Therefore, we modify the order of the ld. CIT(A) and direct the AO to apply the GP rate of 9% instead of 10.58% applied by the ld. CIT(A) and work out the addition, if any.

Summary

Issues:
Appeal against CIT(A)'s order confirming addition on account of Gross Profit ratio and enhancing the G.P. rate.

Analysis:

1. The AO applied a gross profit rate of 9% after rejecting the books of accounts due to inflated purchases and bogus expenses, making an addition of ?22,32,133. The CIT(A) enhanced the addition to ?9,01,043 by considering comparable units' GP rates. The appellant argued that certain expenses were not included by the comparable cases, justifying the AO's 9% rate application.

2. The appellant submitted past history and GP rates for various assessment years to support their case. However, the CIT(A) disagreed with the appellant's submission, stating that the AO's comparison with directly comparable cases in the same vicinity was more accurate. The CIT(A) directed the AO to calculate the GP at 10.58% instead of 9% and adjust for additional expenses not considered by other units.

3. The ITAT found that the AO and CIT(A) considered the comparable units' average GP rate of 10.58% but failed to justify not accepting the AO's 9% rate. The ITAT modified the CIT(A)'s order, directing the AO to apply the GP rate of 9% instead of 10.58% and work out any necessary additions accordingly.

In conclusion, the ITAT partially allowed the appeal, emphasizing the need for justification in applying GP rates and considering all relevant factors in determining additions based on Gross Profit ratio.