2014 (2) TMI 604 - HC - Income Tax

Assessee prevails in tax dispute over gross profit rate, court stresses need for substantial evidence

M/s. GVDI. & Company, Peelamedu, Coimbatore Versus The Deputy Commissioner of Income Tax

The case involved discrepancies in the assessee's declared gross profit rate for the assessment year, with the Assessing Officer questioning the lack of ... Explanation for fall in GP rate – Held that:- The assessee pointed out that when the price of the kappas had increased, there was no corresponding increase in the price of cotton - there was a mix up of different variety of cotton too - The First Appellate Authority rightly came to the conclusion that the allegation made by the Assessing Officer for rejecting the books were too general in nature - the Assessing Officer had not stated that the purchases had not been made nor had rejected the accounts - Relying upon R.M.P.Perianna Pillai & Co., vs. Commissioner of Income Tax [1961 (1) TMI 69 - MADRAS HIGH COURT] - the system of accounting adopted by an assessee could not be rejected - the assessee did not maintain all through the year a separate variety-wise stock account either on the basis of counts of yarn, or prices or classes of goods - the absence of such stock books did not prevent the acceptance of the book results in the previous assessment years - no attempt was made to verify the particulars given by the assessee by way of statements and the only ground on which the book results were rejected was that the gross profits were low – thus, the Department had not proved the case by any substantive materials – Decided in favour of Assessee. Issues:1. Discrepancy in gross profit rate declared by the assessee for the assessment year.2. Assessment of income by the Assessing Officer based on inventory and lack of day-to-day stock account.3. Appeal before the Commissioner of Income Tax (Appeals) and subsequent appeal before the Income Tax Appellate Tribunal.4. Burden of proof on the assessee to explain the fall in gross profit rate.5. Comparison of gross profit rates for consecutive assessment years.6. Rejection of the assessee's explanation by the Income Tax Appellate Tribunal.7. Application of legal precedent in determining the acceptability of the assessee's accounting system.Analysis:The case involved an appeal by the assessee against the Income Tax Appellate Tribunal's decision regarding the declared gross profit rate for the assessment year. The assessee attributed the drop in margin to various factors such as price variations and mix-ups in cotton quality. The Assessing Officer raised concerns about the lack of day-to-day stock accounts and verifiability of purchases, leading to a discrepancy in the gross profit rate calculation.The Commissioner of Income Tax (Appeals) accepted the assessee's explanation, highlighting the general nature of the Assessing Officer's contentions. However, the Income Tax Appellate Tribunal overturned this decision, emphasizing the inadequacy of the assessee's reasoning for the fall in gross profit rate.During the proceedings, the assessee argued that the rejection of the disclosed gross profit lacked substantiation, pointing out the absence of material supporting the Revenue's case. The Tribunal's decision was challenged based on the failure to consider prevailing market rates and conduct a thorough enquiry into the assessee's claims.Legal precedent was cited to support the assessee's position, emphasizing the need for substantial evidence to reject an accounting system solely based on low gross profits. The Court scrutinized the Assessing Officer's grounds for rejecting the books of accounts and found them lacking in specific material to justify the decision.Ultimately, the Court relied on the legal precedent to rule in favor of the assessee, highlighting the Revenue's failure to provide concrete evidence to dispute the disclosed gross profit. The Tribunal's decision was set aside, emphasizing the importance of thorough verification before rejecting the assessee's explanations.In a related assessment year for the same assessee, similar issues arose regarding the gross profit rate, leading to the Court's decision to overturn the Tribunal's order based on the same principles applied in the previous case.