Karnataka HC Deletes ₹25 Lakh Gross Profit Addition, Ruling Estimate Lacked Basis Despite 95% Sales to Sister Concern [Read Order]

The High Court of Karnataka, deleted the ₹25 lakh addition made towards gross profit, holding that the estimation lacked any rational basis despite 95% of sales being to a sister concern.

CASA DEL TUBO,appellant-assessee, engaged in trading hydraulic hoses, filed its return of income for the assessment year 2009-10. During scrutiny under Section 143(2), the Assessing Officer (AO) noted a decline in gross profit from 21.0% to 11.6% (on cost) and from 17.4% to 10.4% (on sales).

The assessee attributed the decline to exchange rate fluctuations that increased purchase costs. The AO rejected this explanation and added Rs.25,00,000 to the income by order dated 30.12.2011.

The assessee appealed to the Commissioner of Income Tax(Appeals)[CIT(A)], who observed that 95% of sales were made to the sister concern and noted a significant drop in gross profit compared to earlier years. The CIT(A) dismissed the appeal, upholding the addition.

The assessee further appealed to the tribunal, which considered the exchange rate rise and sales to the sister concern but still upheld the Rs.25,00,000 addition in its order dated 09.07.2020.

The assessee counsel, submitted that the books of account showing purchases and sales had been produced before the AO. He explained that the drop in gross profit was due to exchange rate fluctuations and that the pre-agreed sale price under a contract was not adjusted with the higher purchase cost.

He argued that the 1% increase in gross profit and the addition of Rs.25,00,000 had no basis and that estimating gross profit was impermissible since the books were not rejected. He relied on the judgments in Anil Kumar & Co. and R.G. Buildwell Engineers Ltd.

The Revenue counsel argued that gross profit for 2009-10 was unusually low compared to other years because 95% of sales were to the sister concern. He said that the selling price should have increased with rising purchase costs, which did not happen due to related-party sales. He also noted that the AO made the addition even without rejecting the books of account.

Justice S.G.Pandit and Justice K.V.Aravind observed that the assessee imported and supplied products to its sister concern, which accounted for 95% of total sales in the assessment year 2009-10, and that this percentage remained consistent in prior and subsequent years. Purchases and sales were properly recorded, and the increase in purchase price due to the Dollar exchange rate was admitted.

The AO had added Rs.25,00,000 by estimation, upheld by the CIT(A) and the Tribunal. The court found no material basis for this addition, noting that the officer had not referred to comparative data for prior or subsequent years.

Merely having most sales to a sister concern could not justify the addition without evidence showing higher gross profit in similar conditions. The tribunal’s finding was therefore deemed perverse.

Accordingly, the court allowed the appeal in part, deleted the Rs.25,00,000 addition, and made no order as to costs.

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