Estimation of Gross Profit Rate and Unverifiable Purchases: ITAT Upholds CIT(A)'s Decision to Limit GP to 1% [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax(Appeals)[CIT(A)]'s decision to limit the gross profit ( GP ) rate to 1% for the Assessment Year (AY)2012-13, rejecting the assessee's challenge against the enhanced GP rate and unverifiable purchases.

Neeraj Kumar, appellant-assessee, filed a cross appeal against the order dated 03.07.2017 passed by CIT(A) for the Assessment Year 2012-13.

The assessment order under section 144 of the Act was passed on 28.03.2016, with the Assessing Officer(AO) rejecting the books of accounts. As a result, the following additions were made: Rs. 39,62,489/- for an enhanced GP rate, Rs. 3,17,76,113/- for unverifiable purchases and sundry creditors, Rs. 1,18,82,031/- for understated sales, Rs. 1,44,925/- for unverifiable expenses, Rs. 1,85,599/- for an unexplained addition to the capital account, and Rs. 6,02,350/- for explained credits in the PNB account.

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The CIT(A) considered the assessee’s appeal and made several findings. He reduced the GP rate addition from 1.5% to 1%, as the books were rejected. He also deleted the ad-hoc disallowance on unverifiable purchases, as the AO had accepted the purchases from M/s. Indian Technometal Co. Ltd. Regarding sales, the CIT(A) found the difference was due to Value Added Tax(VAT) and deleted the addition for undisclosed sales. For expenses, he reduced the disallowance from 50% to 20% due to lack of verification but acknowledged that the business was being carried out.

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The CIT(A) sustained the addition of Rs. 1,85,599/- to the capital account as the assessee could not explain the deposit. He also upheld the addition of Rs. 6,02,350/- in the PNB account, as the appellant failed to clarify the business nature of these deposits. Lastly, the disallowance under section 80IC was maintained as the assessee could not provide evidence for the claimed deductions.

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The assessee filed a cross appeal against this order.

The two member bench comprising Vimal Kumar(Judicial Member) and Shamim Yahya(Accountant Member) after hearing both parties and reviewing the records, agreed with the CIT(A) that once the books were rejected, no ad-hoc additions should be made. The CIT(A) had correctly limited the GP to 1% instead of 1.5% as estimated by the AO. The assessee accepted that the 1% GP was fair and did not need any changes. As a result, the tribunal upheld the CIT(A)’s decision and dismissed the  cross appeal filed by the assessee.

To Read the full text of the Order CLICK HERE

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