Gross Profit rate can not be same each year. AO could not step into the shoes of businessman to determine sale price. Addition made for low GP deleted by ITAT
ABCAUS Case Law Citation:
ABCAUS 1157 (2017) (03) ITAT
Assessment Year : 2008-09
Date/Month of Pronouncement: March-2017
Important Case Laws Cited/relied upon:
M/s Amarnath & Sons Vs ITO
Brief Facts of the Case:
The assessee derived income from the business of a rice sheller and trading of rice. During the relevant assessment year, the assessee declared gross profit rate of 7.76% at total turnover of Rs. 6.16 Cr as compared to gross profit rate of 8.43% declared last year on the total turnover of Rs. 4.15 cr. T
The assessee explained to Assessing Officer (‘AO’) that it is wide accepted principle that with the increase in sales, gross profit rate goes down. Since there was additional sale of Rs. 2 crores, the gross profit rate came down. Thus, total GP rate reduced was marginal due to increase in sales.
The AO noted that assessee also sold part of the paddy at average sale price per quintal which was lesser than the average purchase price. Similar position was noted with respect to rice where purchase price was higher and sale was lower. According to the AO, there was no reason for assessee to sell the paddy/rice at a rate much lower than the purchase price/rate of production. The Assessing Officer, therefore, noted that there is no solid reason for decline in gross profit rate. However, considering there was a substantial increase in the turnover from 4.15 to 6.16 Cr, applied average gross profit rate @ 8.09% and made addition of Rs. 2 lacs.
The CIT(Appeals) on the same reasoning, confirmed the addition.
Observations made by the Tribunal:
The Tribunal opined that there was no justification to sustain the addition.
The Tribunal noted that it was clear that the assessee produced the evidence before Assessing Officer and the AO had not pointed out any specific defects in maintenance of the books of account by the assessee and even the book results had not been rejected under section 145(3) of the Income Tax Act, 1961 (‘the Act’).
It was observed that the AO merely finding that Gross Profit (GP) rate had declined and found that the sale price could not be less than the purchase price of various items as well as of the production, applied the higher gross profit rate.
The Tribunal opined that merely because there was low GP in the year under consideration, by itself was no ground to make the addition by applying higher gross profit rate unless specific defects had been pointed out in maintenance of the books of account by the assessee.
It was observed that the GP can never be static in each year. The assessee ultimately had shown income, therefore, the issue involved should be considered from point of view of the assessee i.e. the businessman. The AO could not step into the shoes of businessman to determine sale rate of the assessee. Since no specific defects in the maintenance of the books of account had been pointed out and books of account of the assessee had not been rejected, therefore, AO was not justified in making adhoc addition of Rs. 2 lacs to the profit of the assessee.
Held:
The order was set aside and the addition was deleted.
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