Gross profit estimation must use a comparable five-year average when the immediately preceding year is not representative.

Where income is estimated by gross profit rate and the immediately preceding year is not comparable because turnover and market conditions have materially changed, the average gross profit rate of the preceding five assessment years is the proper benchmark; if that average is below the declared rate, no addition arises. The gross profit estimation issue was decided in favour of the Revenue, subject to recomputation on that basis. The deletion of disallowance of business promotion expenses was set aside for factual verification, as the supporting bills and invoices had not been properly examined by the Assessing Officer; the matter was remanded for fresh decision in accordance with law.

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Issues: (i) whether, while estimating income on the basis of gross profit rate, the average gross profit rate of the preceding five assessment years should be applied instead of the immediately preceding year; (ii) whether the deletion of disallowance out of business promotion expenses was sustainable.

Issue (i): whether, while estimating income on the basis of gross profit rate, the average gross profit rate of the preceding five assessment years should be applied instead of the immediately preceding year.

Analysis: The assessment involved estimation of income by applying a gross profit rate. The record showed that the immediately preceding year was not comparable because the turnover in the year under appeal had increased substantially and market conditions had changed. In such circumstances, reliance on only the immediately preceding year was held to be inappropriate for estimating profit. The proper basis was the average gross profit rate of the preceding five assessment years. If that average was lower than the gross profit rate declared in the year under appeal, no addition would arise.

Conclusion: The issue was decided in favour of the Revenue, subject to recomputation by applying the average gross profit rate of the preceding five assessment years.

Issue (ii): whether the deletion of disallowance out of business promotion expenses was sustainable.

Analysis: The deletion of the disallowance was based on bills and invoices produced by the assessee, but it appeared that the Assessing Officer had not been given an opportunity to verify those materials. The matter therefore required factual verification of the supporting evidence before a final decision could be taken on the claim.

Conclusion: The issue was remanded to the Assessing Officer for verification and fresh decision in accordance with law.

Final Conclusion: The Revenue succeeded on the gross profit estimation issue and obtained remand of the business promotion expense issue, resulting in a partial allowance of the appeal.

Ratio Decidendi: Where income is estimated by applying a gross profit rate and the immediately preceding year is not comparable, the average gross profit rate of the preceding five assessment years is a proper basis for estimation; additional evidence affecting an expense disallowance requires verification by the Assessing Officer before final acceptance.

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