The Income Tax Appellate Tribunal ( ITAT ), Jaipur bench has held that an insignificant decline in the Gross Profit cannot be a reason for an addition under the Income Tax Act, 1961.
The Assessing Officer made an addition of Rs. 3.00 lakhs on the ground that the gross profit rate is lower as compared to the last year.
On appeal, the first appellate authority restricted the addition to 1.5 lakhs by holding that for the year under consideration, the turnover of the assessee has increased for more than six times whereas there is the only insignificant decrease in the G.P. ratio declared by the assessee for the year under consideration.
The Tribunal noted that there is no significant decline in the G.P. ratio which is less than 1% whereas the turnover of the assessee has increased six times during the year under consideration in comparison to the earlier years.
“Hence, it is settled proposition of law that even if the books of account are rejected U/s 145(3) of the Act, it would not ipso facto result to an addition except the income estimated on same reasonable and proper basis lead to an addition. In the case in hand, neither the Assessing Officer nor the ld. CIT(A) has undertaken an exercise to estimate the income of the assessee on some proper and reasonable basis and therefore the ad hoc addition made by the Assessing Officer as well as the ld. CIT(A) is not permissible under the provisions of the Act. After the rejection of books of account, the Assessing Officer was mandated to estimate the income of the assessee on some proper and reasonable basis. The past history of the declared G.P. is considered as a reasonable and proper guidance for estimation of the income. In absence of any estimation made by the Assessing Officer, the ad hoc addition made by the authorities below is not sustainable. Accordingly, in the facts and circumstances of the case when there is no significant or noticeable decline in the G.P. in comparison to the earlier year whereas there is a significant increase of six times in the turnover. The said insignificant decline in the G.P. cannot be a reason for an addition,” the Tribunal said.
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