2015 (2) TMI 906 - HC - Income Tax

High Court affirms ITAT decision on profit margin determination for assessment year 2009-10

The High Court upheld the ITAT's decision to delete the AO's findings regarding the profit margin determination based on scrap value for the assessment ... Net profit addition - AO proceeded to work out 'after rejection of the assessee's books of account' the gross profit rate at 5.35% and on that basis, determined the net profit to be 1.96% - based upon the previous year's assessments - Held that:- AO did not apply his mind to the circumstances of the case, considering that the assessee had urged, during the course of the proceedings, that the cost of raw material had increased. Likewise, the rate of interest payable had increased, considering that it had borrowed amounts in the routine course of its business. That explanation, was furnished to argue that the rate of net profit was 1.04%, as opposed to the rate of the previous years i.e. 1.96%. By all accounts, the explanation of the assessee was reasonable as was held by the CIT(Appeals) and the ITAT. No reason to interfere with the concurrent findings. - Decided in favour of assessee. Issues:1. Correctness of the AO's determination of profit margin based on scrap value.2. Justification of the deletion of findings by the Appellate Commissioner.3. Consideration of the assessee's explanation regarding increased raw material costs and interest rates.Analysis:1. The appeal before the High Court concerned the correctness of the Assessing Officer's (AO) determination of the profit margin of the assessee for the assessment year 2009-10. The AO calculated the profit margin at 1.96% based on the value of scrap generated by the assessee. The assessee contended that the comparison made by the AO with an unrelated concern led to an unjustified determination. The Appellate Commissioner had directed the deletion of the AO's findings, which was confirmed by the Income Tax Appellate Tribunal (ITAT). The ITAT noted that the rate applied by the AO was not correct as it was based on incomparable instances, and the assessee's actual rate of scrap sale was better than previous years. The High Court upheld the ITAT's findings, emphasizing the lack of fault in the Appellate Commissioner's decision to delete the addition based on the scrap value.2. The Appellate Commissioner's decision to delete the AO's findings was justified as per the ITAT's analysis. The ITAT highlighted the differences in the nature of scrap generated by the assessee compared to the cases cited by the AO for comparison. The ITAT noted that the assessee's scrap sale rate was better than previous years, and no adverse inference was drawn in earlier assessments. The High Court concurred with the ITAT's reasoning, emphasizing the importance of considering the specific circumstances of the case before making determinations related to profit margins based on scrap value.3. The High Court also considered the assessee's explanation regarding increased raw material costs and interest rates, which impacted the net profit margin. The assessee argued that these factors led to a lower net profit margin of 1.04% compared to the AO's determined 1.96%. The CIT(Appeals) and the ITAT found the assessee's explanation reasonable, leading to the deletion of the addition by the Appellate Commissioner. The High Court agreed with the concurrent findings, stating that no substantial question of law arose from the case. Consequently, the appeal was dismissed, affirming the decision to delete the AO's findings and uphold the assessee's explanation for the net profit margin discrepancy.