2017 (5) TMI 786 - HC - Income Tax

Errors in Gross Profit Addition Ruling Upheld, Historical Ratios Not Definitive

The ITAT erred in deleting the addition made on account of low Gross Profit without considering the facts of the case. The High Court upheld the ITAT's ... Addition on account of low Gross Profit - Held that:- The reasoning given by the Assessing Officer that in the earlier years with respect to the same contract the respondent – assessee estimated the profit at 53.32%. However, the Assessing Officer has not properly appreciated the fact that there may be number of reasons for decline in the profit. The expenditure might have increased and /or maybe for some or the other reason the profit might have decreased. Merely with respect to the same contract in the earlier years the respondent – assessee estimated the Gross Profit at 53.32% on the aforesaid ground alone the Assessing Officer was not justified in estimating the Gross Profit for the year under consideration. One of the ground, which has been weighed with the learned tribunal in not accepting the Gross Profit ratio at 48.39% claimed by the respondent – assessee is, for the year under consideration the income has increased, and therefore, there was justification in decrease in the Gross Profit. Under the circumstances, the learned tribunal has rightly observed and held that the Assessing Officer was not justified in estimating the Gross Profit ratio at 53.32% against the claim of the respondent – assessee of Gross Profit at 48.39%. Whether the assessee is doing the huge turnover without maintaining site wise stock register, work-in-progress register - Held that:- What was weighed with the Assessing Officer was that in the contract between the GMDC and the respondent – assessee it was agreed that GMDC will pay the diesel expenses to the extent of 30%, and therefore, the Assessing Officer restricted the diesel expenses to 30%. However, it is required to be noted that as per the terms and conditions of the agreement between the GMDC and the respondent – assessee, GMDC agreed to pay diesel expenses to the extent of 30% only and whatever expenses above 30% was required to be borne by the respondent – assessee, and therefore, merely because GMDC agreed to pay diesel expenses to the extent of 30% the Assessing Officer was not justified in restricting the diesel expenses to 30%. Issues:1. Whether the ITAT erred in deleting the addition made on account of low Gross Profit without considering the facts of the caseRs.2. Whether the ITAT erred in not appreciating the facts arrived by the Assessing Officer regarding the lack of site-wise stock register and work-in-progress register maintenanceRs.Analysis:1. The respondent-assessee declared a total income for the Assessment Year 2007-08 with a Gross Profit of 48.39%. The Assessing Officer rejected the books of accounts due to the absence of site-wise and item-wise stock registers. Additionally, the diesel expenses claimed at 39% were not accepted, and the Gross Profit was estimated at 53.32%, resulting in an addition of Rs. 1,76,91,830. The CIT(A) allowed the appeal and deleted the addition. The ITAT upheld the CIT(A)'s decision, leading to the current Tax Appeal by the revenue.2. The revenue argued that the rejection of books was justified due to the lack of proper stock registers. They also contended that the diesel expenses should have been restricted to 30% based on the contract terms with GMDC. The Assessing Officer's estimation of Gross Profit at 53.32% was supported by the revenue, citing consistency with previous years. However, the ITAT disagreed, emphasizing that an increase in income justified a decrease in Gross Profit. The ITAT found the Assessing Officer's estimation unjustified and ruled in favor of the respondent.3. The High Court reviewed the Assessing Officer's reasoning for rejecting the books, restricting diesel expenses, and estimating Gross Profit. While acknowledging potential justification for book rejection, the Court found the Gross Profit estimation flawed. The Court noted that historical Gross Profit ratios do not guarantee consistency due to various factors affecting profitability. Regarding diesel expenses, the Court highlighted the contract terms, indicating the Assessing Officer's error in restricting expenses to 30%. Ultimately, the Court upheld the ITAT's decision, dismissing the revenue's appeal as no substantial legal questions were identified.This detailed analysis of the judgment outlines the issues raised by the revenue, the arguments presented, and the reasoning behind the decisions made by the CIT(A), ITAT, and the High Court, providing a comprehensive overview of the legal proceedings and outcomes.