Estimating higher gross profit rate without rejecting books of account or pointing out any defects or discrepancies in the audited books of accounts not permissible
ABCAUS Case Law Citation:
ABCAUS 3765 (2023) (06) ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the gross profit addition made by the Assessing Officer (AO) on the grounds that books were not rejected by the AO.
The Assessing Officer noted that during the year the assessee earned business income from whole sale trading of gold & silver bullion, manufacturing and sale of gold ornaments, income from business and income from other source.
The AO observed that there was a significant rise in the turnover of the jewellery segment of the business, but, there was a substantial reduction in the Gross Profit rate of the assessee which was very abnormal in the normal course of jewellery business.
The AO also noted that in the similar trade with almost same turnover; other traders in the market generally had GP which was double the GP of the assessee which clearly showed leakage of revenue in the business of the assessee from the tax angle. Therefore, the AO applied the GP rate of 1% to the turnover of the assessee.
However, the CIT(A) has granted relief to the assessee by deleting the Gross Profit addition.
The Tribunal observed that the CIT(A) observed that the assessee explained the reason for steep fall in the GP rate being a business strategy of appellant to increase turnover by reducing the margin so that the total net profit could be increased.
The Tribunal further observed that the CIT(A) noted that the Assessing Officer was not justified in ignoring the gross profit declared by the appellant without doubting the correctness, completeness & fairness of the books of accounts of appellant by finding any defects/discrepancies in the submissions made by the assessee.
The CIT(A) had categorically noted that it was not the case of the Assessing Officer that the assessee has not maintained books of accounts or there were discrepancies and error in the books of accounts and due to which completeness and correctness of the books of accounts was in doubt.
The Tribunal noted that the Assessing Officer had not disputed the financial statements and books of accounts of assessee which were duly audited by the competent auditor and there is no finding in the assessment order that the appellant has failed to submitted requisition documentary evidences and explanation with respect to claims made in the return of income arising from books of accounts maintained by him.
The Tribunal further noted that the accounts of assessee were duly audited and copy of audit report in Form 3CD was furnished during assessment proceedings which were taken on record. There were no findings of the Assessing Officer regarding raising any doubt on the completeness or correctness of the books of accounts of assessee or pointing out any defects or discrepancies therein and the Assessing Officer had not invoked provisions of section 145(3) of the Act to reject books of accounts of assessee.
The Tribunal stated 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.
The Tribunal opined that the Assessing Officer 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.
The ITAT held that the CIT(A) was right in deleting addition made by the Assessing Officer without any justified reasoning and cogent basis.
Accordingly, the appeal of the Revenue was dismissed.
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