Higher GP rate adoption for mere fall in rate from preceding year. It cannot be a sole reason for choosing higher rate as per Assessing Officers convenience

Higher GP rate adoption for mere fall in rate from preceding year. It cannot be a sole reason for choosing higher rate as per Assessing Officers convenience – ITAT

ABCAUS Case Law Citation:
1002 2016 (08) ITAT
Assessment Year: 2010-11
Date/Month of Judgment: July 2016

Brief Facts of the Case:
The respondent assessee was engaged in manufacturing of precision turned parts mainly used in automobiles industry, generator sets and other allied industries and goods were  manufactured as per the specification given by the purchasers.

During the assessment proceedings u/s 142(1)/143(2) the Assessing Officer (AO) noticed that for the year under assessment, gross profit of the assessee declined to 18.46% against the GP rate of 19.59% in the immediately preceeding previous year.

The GP rate in the case of the assessee from Assessment Year 2006-07 to 2010-11 were as under:

The assessee explained the decline in GP rate stating that in his line of trade, there is a variation in GP rate and it varied from item to item and no fix GP could be achieved by any businessman. He explianed that for the year, the main reason for fall in GP rate was increase in sale which in fact increased to over Rs. 88 crores from Rs. 65 crores in the immediately preceding previous year. He further submitted that as a businessman he was more concerned with the amount of gross profit and not with the percentage of GP rate. According to him, the GP during the year under assessment was Rs. 14,33,32,729.78 as compared to Rs. 11,00,58,078.02 in the immediately preceding previous year. Similarly, the Net Profit was also increased during the year under assessment to Rs. 7,67,93,526.96 as against Rs. 5,74,17,589.32 in the immediately preceding previous year.

However, the Assessing Officer rejected the books of account/trading results by invoking the provisions of Section 145(3) of the Income-tax Act, 1961 and adopted a GP rate of 19.59% of the Assessment Year 2009-10 and accordingly made an addition of Rs.99,44,401/-.

The assessee filed appeal before the CIT(A). The CIT (A) allowed the appeal of the assessee.

Aggrieved by the order of CIT(A), the Revenue went in appeal before the Tribunal which is the subject matter of the present case.

Observations made by the ITAT:
The Tribunal observed that the variation in GP rate in a particular assessment year from its immediate preceding year was not a new situation in the assessee’s case. In fact, there was fall of almost 1 % in 2008-09 from the earlier preceding year 2007-08 and the same was accepted by the Department.

The ITAT opined that the CIT(A) was correct in holding that the addition following the rejections of the books of accounts by the assessee and invoking the provisions of Section 145(3) of the Act was made without looking at the facts of the case.

The ITAT noted that the assessee had clearly stated that the ratio of GP was affected due to substantial increase in sales from Rs.65 crores in the previous year to Rs.88 crores in the present assessment year. The assessee also explained before the authorities that another reason for this fall was increase of purchase of semi-finished items from other manufacturers as appeared in the previous year to increase the sales. The assessee had submitted all the relevant details before the authorities. Books of accounts with all vouchers were produced along with written submissions before the Assessing Officer.

According to the Tribunal, the Assessing Officer had not questioned or doubted the accounts. Therefore, rejection of books of accounts was not justified as there was no defective pointed out by the AO in the assessment order.

Accordingly the appeal of the Revenue was dismissed.