2016 (11) TMI 437 - AT - Income Tax

Tribunal upholds CIT(A) decision on low GP & dollar fluctuation, disallows interest expenses

ACIT - 17 (2), Mumbai Versus Smt. Varsha P. Shah

The Tribunal dismissed the Revenue's appeal for A.Y. 2009-10, upholding the CIT(A)'s decision to delete the additions on account of low GP and dollar ... Addition on low G.P. - non rejection of books of account - Held that:- No defect has been pointed out by the AO in the books of account of the assessee which had been audited as per the provisions of section 44AB of the Act, nor have the same been rejected and therefore in our view the AO could not have disturbed the profits declared and proceeded to estimate the GP. We also find that the learned CIT(A) had, on factual examination, observed that the GP earned by the assessee on different items had a very wide GP range and therefore the assessee could not have earned consistent GP year after year. Details on record in this respect show that the assessee’s GP varied from 7.66% in A.Y. 2007-08 to 15.38% in A.Y. 2008-09, 5.9% in A.Y. 2009-10 (i.e. the year under consideration), 4.6% in A.Y. 2010-11 and 9.6% in A.Y. 2011-12. It is seen that the learned CIT(A) had also observed that apart from huge foreign exchange fluctuation loss suffered, i.e. of ₹ 1,01,98,459/- in the year under consideration, there were also instances of high sea sales which resulted in GP @ 2% and that such sales were not there in the immediately preceding year. Lastly, we also find that the learned CIT(A) observed that the assessee was able to place on record many instances of cases in the similar line of business in which may instance of sale had resulted in low GP and in loss also. In the peculiar factual matrix of the case, as discussed above, we concur with and uphold the finding of the learned CIT(A) that the AO was not justified in making the addition on account of low GP. - Decided against revenue Issues Involved:1. Addition on account of Low Gross Profit (GP)2. Addition on account of Dollar Fluctuation3. Disallowance of Interest Expenses under section 36(1)(iii)Detailed Analysis:1. Addition on account of Low Gross Profit (GP):The Revenue challenged the deletion of the addition of Rs. 1,56,28,960/- made by the Assessing Officer (AO) due to low GP. The AO noted a significant drop in the GP from 15.38% in the previous year to 5.93% in the current year. The AO attributed this to the assessee's inability to satisfactorily explain the reasons for the low GP and estimated the GP at the previous year's rate, allowing a 50% reduction for recession and adverse market conditions.The assessee argued that the decrease in GP was due to worldwide recession, dollar rate fluctuations, and high seas sales earning only 2% profit. The assessee's accounts were audited under section 44AB of the Income Tax Act, and no defects were found by the AO. The CIT(A) accepted the assessee's explanations and deleted the addition, noting that the AO did not reject the books of accounts or find any comparable cases showing higher GP.The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not point out defects in the audited books or reject them. The Tribunal found that the GP varied significantly over the years due to factors like foreign exchange fluctuation losses and high seas sales. The Tribunal concluded that the AO was not justified in making the addition without rejecting the books of accounts and dismissed the Revenue's appeal on this ground.2. Addition on account of Dollar Fluctuation:The CIT(A) deleted the addition made on account of dollar fluctuation, which the AO had included in the assessee's income. The AO observed a foreign exchange fluctuation loss of Rs. 1,01,98,459/- in the current year. The assessee contended that this loss was due to the increase in the dollar rate, which affected the cost of imports and sales prices during the recession.The CIT(A) found the assessee's explanation acceptable and noted that the AO did not find any defects in the assessee's accounting for foreign exchange fluctuations. The Tribunal agreed with the CIT(A)'s findings, emphasizing that the assessee's books were audited, and the AO did not reject them. The Tribunal upheld the deletion of the addition on account of dollar fluctuation.3. Disallowance of Interest Expenses under section 36(1)(iii):The AO disallowed interest expenses of Rs. 91,663/- under section 36(1)(iii) of the Income Tax Act. The CIT(A) upheld this disallowance, and the assessee did not contest it further.Conclusion:The Tribunal dismissed the Revenue's appeal for A.Y. 2009-10, upholding the CIT(A)'s decision to delete the additions on account of low GP and dollar fluctuation while maintaining the disallowance of interest expenses. The Tribunal emphasized the importance of the AO's failure to reject the assessee's audited books of accounts and the lack of comparable cases showing higher GP. The order was pronounced in the open court on 23rd September 2016.