‘It is not the duty of the tax authorities to direct how a business should be handled’: ITAT deletes Addition by AO on Account of Low GP Rate. [Read Order]
“It is the business decision of the businessman to conduct in such a manner beneficial to his business. It is not the duty of the tax authorities to direct how a business should be handled or conducted”, said the bench.
Gross - profit - taxscan
Gross - profit - taxscan
The Income Tax Appellate Tribunal ( ITAT ), Delhi Bench has held that tax authorities cannot sit in the armchair of a businessman and direct how business should be conducted, while deleting an addition made by the Assessing Officer (AO) on account of low Gross Profit (GP) rate.
D&Y Technologies Pvt. Ltd., the appellant engaged in manufacturing mobile phone parts. The AO observed a huge fall in the company’s GP and NP ratios as per its Tax Audit Report, GP dropped from 18.57% to (-)2.12%, and NP from 9.33% to (-)15.17%.
Without issuing any specific show-cause notice or examining the books of account, the AO rejected the assessee’s books and made an addition of over ₹7.97 crore, alleging suppression of profits.
The company explained that the decline in profitability was due to the production of new mobile phone models, higher rejection rates, and cost structures controlled by customers, making it difficult to maintain earlier profit margins.
These explanations were accepted by the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the addition, observing that merely because profits had fallen, books could not be rejected unless specific defects or suppression of income were demonstrated.
The bench of Satbeer Singh Godara (Judicial member) and S. Rifaur Rahman (Accountant member), while upholding the CIT(A)’s findings, said that the AO had acted in a summary manner without pointing out defects in the books or substantiating suppression of revenue or inflation of expenses.
The Tribunal observed that “It is the business decision of the businessman to conduct in such a manner beneficial to his business. It is not the duty of the tax authorities to direct how a business should be handled or conducted.”
Accordingly, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the addition, confirming that a fall in profits alone cannot justify rejection of accounts unless supported by cogent evidence.
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