2018 (10) TMI 1637 - AT - Income Tax

Tribunal Rejects Revenue's Appeal, Allows Assessee's Claim, Emphasizes Error in Gross Profit Estimation

ACIT-Circle 6 (3) (2), Mumbai Versus M/s Kamani Oil Industries Ltd And M/s Kamani Oil Industries Ltd Versus Dy. CIT Mumbai

ACIT-Circle 6 (3) (2), Mumbai Versus M/s Kamani Oil Industries Ltd And M/s Kamani Oil Industries Ltd Versus Dy. CIT Mumbai - TMI Issues Involved:1. Deletion of addition on account of gross profit estimation and rejection of books under Section 145.2. Adhoc disallowance of Rs. 1,00,00,000.Detailed Analysis:1. Deletion of Addition on Account of Gross Profit Estimation and Rejection of Books Under Section 145:The revenue appealed against the deletion of the addition made by the Assessing Officer (AO) on account of estimating the gross profit at 9% and rejecting the books under Section 145 of the Income-tax Act, 1961. The AO had noticed a significant decline in the gross profit ratio from the previous year and found the assessee's explanations unsatisfactory. As a result, the AO rejected the books of account and estimated the gross profit at 9%, leading to an addition of Rs. 48,97,12,103.The assessee contended that the decline in gross profit was due to an increase in raw material costs and reclassification of certain expenses from selling and distribution to manufacturing costs. The CIT(A) partly allowed the appeal by sustaining a lump sum addition of Rs. 1 crore and deleting the rest.The Tribunal found that the AO's rejection of the books was not justified as the assessee had provided plausible reasons for the decline in gross profit, supported by evidence. The Tribunal noted that similar issues had been addressed in the assessee's favor in the previous assessment year (AY 2011-12) by the ITAT, where the addition made by the AO was deleted. The Tribunal upheld the CIT(A)’s decision to delete the majority of the addition and directed the AO to delete the entire addition made towards gross profit estimation.2. Adhoc Disallowance of Rs. 1,00,00,000:The assessee appealed against the CIT(A)’s decision to sustain an adhoc disallowance of Rs. 1 crore. The CIT(A) had followed his predecessor's order without assigning specific reasons for the disallowance.The Tribunal observed that the AO had not made any adverse comments on the books of account maintained by the assessee and had ignored the detailed explanations and evidence provided. The Tribunal found that the CIT(A) had accepted the assessee's contentions regarding the reasons for the decline in gross profit but had still sustained the adhoc disallowance without proper justification.The Tribunal referred to its decision in the assessee's own case for AY 2011-12, where a similar adhoc addition was deleted. Consistent with this view, the Tribunal set aside the CIT(A)'s order confirming the adhoc addition of Rs. 1 crore and directed the AO to delete the addition entirely.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, directing the deletion of the entire addition made towards gross profit estimation and the adhoc disallowance of Rs. 1 crore. The Tribunal emphasized that the AO had erred in rejecting the books of account and estimating the gross profit without proper justification, and the CIT(A) had wrongly sustained the adhoc disallowance. The Tribunal's decision was pronounced in the open court on 10th October 2018.