There is no hard and fast rule of earning same net profit rate over different years

There is no hard and fast rule of earning same net profit rate over different years. Additions made without any plausible reason or rejecting books of accounts bad – ITAT

In a recent judgment, ITAT has held that there is no hard and fast rule of earning same net profit rate over different years. Additions made without any plausible reason or rejecting books of accounts bad – ITAT

ABCAUS Case Law Citation:
ABCAUS 1008 2016 (09) ITAT

Brief Facts of the Case:

The appellant assessee was engaged in the business of advertisement, brand promotion and other related activities . The assessee declared profit before tax amounting to Rs.12.11 crore and odd on its turnover of Rs.34.70 crore and odd, giving net profit rate of 35% on the turnover. The Assessing Officer (AO) observed that in the immediately preceding assessment year, the assessee had declared net profit at Rs. 10.47 crore on its turnover of Rs.27.57 crore, giving NP rate of 38%. Considering the fall of about 3% in the net profit rate, the AO made addition of Rs.1,04,10,944/- by applying 38% net profit rate to the turnover of Rs. 34.70 crores. The CIT(A) also sustained the addition. Aggrieved, the assessee approached ITAT against the sustenance of the addition. 

Observations made by the Tribunal:

The Tribunal observed that  the only basis for making and sustaining the addition was the application of higher net profit rate of the immediately preceding year.

The AO had recorded that the assessee did not furnish any justification for fall in net profit rate. Whereas the assessee had stated that due to expansion plans, the operating and other administrative expenses increased marginally resulting into reduction in net profit rate.

The assessee had filed a chart before the AO giving net profit rate of earlier years, viz., 38% for the AY 2009-10 and 24.80% for AY 2008- 09. It was pointed out that the lower net profit rate of 24.80% was accepted by the AO in the scrutiny assessment made for the AY 2008- 09. The Tribunal noted that the net profit rate in the assessee’s line of business was not consistent over the years.

Since the AO himself had accepted NP rate of 24.80% for the AY 2008-09, there can be no reason to make addition @ 3% on account of net profit rate for the year under consideration simply on the ground that such profit rate was less than 38% for the immediately preceding assessment year.

The AO had only mentioned that there was major increase in various heads of expenses, but, he had not pointed out as to how such increase was not commensurate with the business or was not properly justified.

Held:

The Tribunal concluded that there cannot be any hard and fast rule of incurring similar amount of expenses or earning a similar net profit rate over the years. There should be some plausible reasons for making addition on account of profit rate. Since the AO did not reject the books of the assessee and gave unsustainable reasons for making addition @ 3% of turnover, it was not justified.

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