Margin of profits in Arhat business is not comparable with previous years

Margin of profits in Arhat business is not strictly comparable with previous years unlike other business ventures. It depends upon agricultural produce which overwhelmingly depends upon vagaries of climate variability and also demand and supply.

ABCAUS Case Law Citation:
ABCAUS 3797 (2023) (09) ITAT

In the instant case, the assessee had challenged the revisional order of the Principal Commissioner of Income Tax (PrCIT) wherein order passed by the Assessing Officer (AO) under Section 143(3) of of the Income Tax Act, 1961 (the Act) was held to be erroneous in so far as prejudicial to the interest of the revenue within the meaning of Section 263 of the Act.

The assessee was in the business of arhat and e-filed his income tax return for the Assessment Year in question. The return filed was subjected to scrutiny assessment under Section 143(3) of the Act whereby the returned income was assessed without any modification. As per the assessment order, the return of assessee was selected under complete scrutiny with verification of cash deposits during demonetization period as central issue.


After the completion of the assessment, in exercise of the powers conferred under Section 263 of the Act, the case records were examined. As per Show cause notice issued by PrCIT, the Assessing Officer inter alia failed to objectively enquire into reasons for fall in Gross Profit (GP) ratio and the correctness of book results.

The assessee filed its response before the Pr.CIT to the revisional action and objected to the exercise of revisional jurisdiction. The Pr.CIT however ultimately set aside the assessment order and directed the Assessing Officer to conduct necessary inquiries on the aforesaid points in the case and frame fresh assessment order in terms of the directions of the revisional order.

The ITAT observed that with respect to reasons for falling GP ratio, a specific notice under Section 142(1) was issued by the AO seeking details indicating the sales, GP ratio, NP ratio along with comparative figures and also the reason for increase/decrease in the GP ratio and NP ratio. In response to the inquiry, the assessee had provided explanation that his nature of business was arhat which depends on agricultural produce. If agricultural produce is more than the supply is more and if the agricultural produce is less than the supply is less hence market price depends on supply basis. It was further submitted that the entire purchases and sales were verifiable from the books of accounts which were producing for verification. The assessee also produced opening and closing stock and all other details along with books of account.

The Tribunal opined that it is common knowledge that the business of Arhat in food grains etc totally depends upon agricultural produce which is in turn overwhelmingly depends upon vagaries of climate variability and also demand and supply. The margin of profits, at times, varies drastically and comparison of GP, NP ratio qua other financial years may not necessarily be strictly comparable unlike other business ventures.

The Tribunal stated that the Assessing Officer, in its wisdom, after verification of the records had agreed with the explanation offered towards fall in the ratio. The substitution of opinion of Pr.CIT in the circumstances in the name of inadequacy in enquiry on the point is thus a far cry and  allegation that the action of the Assessing Officer on the point was erroneous was quite hollow.

Accordingly, the ITAT held that the supervisory jurisdiction exercised under Section 263 of the Act was not sustainable in law. Consequently, the revisional order was set aside and quashed.

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