2019 (1) TMI 461 - AT - Income Tax

Addition on the basis of lower gross profit margin - Held that - What has been stated to be reason for Gross Profit addition is fall in the Gross Profit rate vis-a-vis previous year without any other specific reasons. The very approach so adopted by the Assessing Officer is devoid of legally sustainable basis. The business has been never so static so as to ensure same G.P. rate from year to year particularly when the assessee is dealing in such products as electric goods where Gross Profit margin not only varies from item to item but from season to season. The impugned addition thus not deserves to be sustained on merits. As regards the stand of the DR that the assessee himself has agreed to the impugned addition and thus prevented the Assessing Officer from further enquiries, no merit in this plea either. The mere fact that the assessee has agreed to the suggestion of the Assessing Officer cannot constitute estoppel against his rights to challenge the same on merits. In any case, the amount involved being small and in view of this discussion and bearing in mind entirety of the case, fit and proper to delete the impugned addition in respect of low Gross Profit margin. Disallowing various expenses - Held that - It is sufficient to take note of the fact that the impugned disallowance has been made out of several expenses such as telephone expenses, vehicle expenses misc. expenses and office expenses. After some discussions, for the assessee fairly submitted that he does not wish to pursue this issue further but prayed that this fact should not be put against him in the penalty proceedings or in the subsequent proceedings.

Summary

Issues:
1. Addition of ?3,61,005 based on lower gross profit margin.
2. Disallowance of various expenses amounting to ?1,19,275.

Analysis:
1. Issue 1 - Addition of ?3,61,005 based on lower gross profit margin:
- The Assessing Officer (A.O.) noted a decrease in the Gross Profit margin of the assessee's business during the current year. The A.O. rejected the book results under section 145 of the Income Tax Act, estimating the Gross Profit margin at 4.22% compared to the 3.9% disclosed by the assessee.
- The assessee argued that the fall in Gross Profit margin was marginal and should not be a reason to reject the books of accounts. The assessee also highlighted that the A.O. did not specify any mistakes in the stock register maintenance, and after several hearings, the A.O. offered to accept the Gross Profit difference without further penalties.
- The CIT(A) upheld the addition, stating that the voluntary acceptance of the addition by the assessee precluded further appeal. However, the Tribunal found merit in the assessee's contention, noting that the A.O. did not provide specific defects in the books of account and the reason for the addition was solely the decrease in Gross Profit rate.
- The Tribunal ruled in favor of the assessee, stating that the A.O.'s approach lacked a legally sustainable basis, especially considering the dynamic nature of the business where Gross Profit margins can vary due to various factors.
- The Tribunal also dismissed the argument that the assessee's agreement with the A.O. prevented further challenges, emphasizing that the agreement did not waive the right to challenge the addition on merit. Consequently, the Tribunal deleted the addition of ?3,61,005 related to the low Gross Profit margin.

2. Issue 2 - Disallowance of various expenses amounting to ?1,19,275:
- The disallowance of expenses, including telephone, vehicle, miscellaneous, and office expenses, was challenged by the assessee. However, during the proceedings, the assessee's counsel decided not to pursue this issue further.
- The Tribunal acknowledged the counsel's decision and did not delve into the matter on its merits. Consequently, the second ground of appeal regarding the disallowance of expenses was dismissed as not pressed.

In conclusion, the Tribunal partially allowed the appeal, deleting the addition related to the low Gross Profit margin while dismissing the issue of disallowance of various expenses as the assessee chose not to pursue it further. The judgment emphasized the importance of providing specific reasons for additions in assessments and upheld the assessee's right to challenge such additions despite prior agreements with tax authorities.