GRP Auto Vs JCIT (ITAT Delhi)
Summary: The Income Tax Appellate Tribunal, Delhi Bench “F”, allowed the appeal filed by GRP Auto for Assessment Year 2010-11 and deleted the addition of Rs. 1,08,51,505 made by the Assessing Officer by adopting a differential gross profit rate. The Tribunal also held that rejection of the assessee’s books of account under section 145(3) of the Act was not justified.
The assessee, a firm engaged in trading auto parts, filed its return for AY 2010-11 declaring total income of Rs. 4,36,31,310. It belonged to a group of concerns engaged in manufacturing and trading auto parts and had made major purchases from sister concerns, including Swiss Auto Products, Swiss Lamps Pvt. Ltd., Swiss Auto Pvt. Ltd., Swiss Devices (1) and Taruna Auto Pvt. Ltd.
A survey under section 133A was conducted at the assessee’s business premises on 21-01-2010. Following discrepancies noticed during the survey, the assessee declared additional income of Rs. 1,15,16,100 towards excess cash, Rs. 1,75,98,542 towards excess stock and Rs. 2,27,29,200 towards undisclosed investment in furniture and fixtures, aggregating to Rs. 5,18,43,842.
The assessee incorporated the excess-stock amount of Rs. 1,75,98,542 in its profit and loss account under “Sales and Other Income”. After considering that amount, its gross profit worked out to Rs. 8,42,95,900, or 10.79%. The Assessing Officer, however, treated the excess-stock surrender as income from other sources and excluded it while computing the business gross profit. The resulting gross profit was Rs. 6,66,97,358, representing 8.53% of turnover.
The Assessing Officer compared the 8.53% gross profit rate with the immediately preceding year’s rate of 9.92%. Applying the 1.39% difference to turnover of Rs. 78,06,83,867, the Assessing Officer computed a differential gross profit of Rs. 1,08,51,505. The Assessing Officer also examined ten purchase and sales invoices and observed that the gross profit earned on those transactions was higher than 8.53%.
Another consideration was the assessee’s purchases from its sister concern, M/s Swiss Devices (I), which was claiming deduction under section 80IC of the Act. The Assessing Officer noted that the sister concern had shown gross profit of 32.08% and net profit of 28.81%. The Assessing Officer also compared the assessee’s gross profit for the pre-survey period of 1-4-2009 to 21-01-2010, which was 8.73%, with the post-survey period from 22-01-2010 to 31-03-2010, which was 7.85%.
On these grounds, the Assessing Officer rejected the books and book results to the extent of closing stock and made the addition of Rs. 1,08,51,505. The CIT(A) upheld the action.
The Tribunal rejected the reasoning adopted for invoking section 145(3). One principal basis cited by the Assessing Officer was the assessee’s major purchases from a sister concern and the allegation that such purchases were made at excessive prices, with reference to section 40A(2)(b). The Tribunal found that the sister concern was an eligible undertaking under section 80IC and that its deduction under that provision had been granted by the Revenue. The assessment order of the sister concern under section 143(3), dated 12-3-2013, did not draw any adverse inference regarding the alleged excessive sales to the assessee. The Tribunal therefore held that the Assessing Officer’s reasoning on this aspect failed.
The Tribunal further found that the Assessing Officer’s observation that quantitative details had not been furnished was incorrect. The assessee had furnished quantitative details during assessment proceedings, as evidenced by pages 225 to 277 of the paper book. The Tribunal accordingly held that the collective facts did not justify rejection of the books and book results and that this was not a fit case for invoking section 145(3).
Having allowed ground numbers 2 and 3, the Tribunal held that there could not be any adhoc adoption of a gross profit rate for determining the assessee’s income. According to the Tribunal, the gross profit rate need not remain identical during the pre-survey and post-survey periods because product prices fluctuate periodically according to market conditions and there cannot be a uniform pricing mechanism or uniform gross profit rate throughout the year.
The Tribunal also noted that the survey had resulted in additional income being disclosed by the assessee and considered in the return. It held that the additional stock found during the survey would have to be brought into the books and, if unsold, would form part of closing stock at the lower of cost or market price in accordance with Accounting Standard-2 (AS-2) issued by the Institute of Chartered Accountants of India.
Consequently, the Tribunal held that there was no basis for making an adhoc estimate of gross profit by the Revenue. Ground No. 4 was allowed, while ground numbers 1 and 5, being general in nature, did not require specific adjudication. The appeal of the assessee was ultimately allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No.5708/Del/2016 for AY 2010-11, arises out of the order of the ld. Commissioner of Income Tax (Appeals)-12, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 08.07.2016 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 07.03.2013 by the Assessing Officer, JCIT, Range-19, New Delhi (hereinafter referred to as ‘ld. AO’).
2. The only issue to be decided in this appeal is as to whether the Learned CITA was justified in confirming the addition made on account of inventory in the facts and circumstances of the instant case. The interconnected issue involved therein is as to whether the Learned CITA was justified in upholding the action of the Learned AO in rejecting the books of accounts and book results of the Assessee under section 145(3) of the Act in the facts and circumstances of the instant case.
3. We have heard the rival submissions and perused the materials available on record. The return of income for the assessment year 2010-11 was filed by the Assessee Firm declaring total income of Rs 4,36,31,310 on 26-09-2010. The Assessee Firm is engaged in the business of trading in auto parts. The Assessee belongs to a group of Assessees which are all into the business of manufacturing and trading of auto parts. The details of sister concerns of the Assessee Firm are as under:-
| S.No | Name of sister concern | PAN | Business Activity |
|---|---|---|---|
| 1. | Swiss Auto Products | AARPS6458D | Manufacturers of auto parts |
| 2. | Swiss Lamps Pvt. Ltd. | AAJCS1745E | Manufacturers of auto parts |
| 3. | Swiss Auto Pvt. Ltd. | AAFCS5788K | Manufacturers of auto parts |
| 4. | Swiss Devices (1) | ABHFS7066A | Manufacturers of auto parts |
| 5. | Taruna Auto Pvt. Ltd. | AAACT4706F | Trading of auto parts |
4. The Assessee had made major purchases from the above sister concerns, which are manufacturing auto parts and hence, same was subjected to test by applying the provisions of section 40A(2) of the Act by the Learned AO. During the year under consideration, a survey action under section 133A of the Act was carried out in the business premises of the Assessee on 21-01-2010 wherein, pursuant to the discrepancy found by the survey team, a declaration of additional income was made by the Assessee towards the following:-
a) on account of excess cash found – Rs 1,15,16,100
b) on account of excess stock found – Rs 1,75,98,542
c) on account of undisclosed investment in furniture and fixtures – Rs 2,27,29,200
5. The main grievance of the revenue was that the total additional income surrendered by the Assessee was Rs 5,18,43,842 whereas the return of income was filed declaring total income of Rs 4,36,31,310. The additional income offered by the Assessee towards excess stock of Rs 1,75,98,542 was incorporated by the Assessee in the profit and loss account under the head “Sales and Other Income” and after considering the same, the Assessee earned gross profit of Rs 8,42,95,900 which was worked out to 10.79%. The Learned AO observed that excess income offered on account of excess stock to be taxed only as income from other sources and hence the same cannot be considered as business income of the Assessee and consequently, the same should not be considered for the purpose of working out the gross profit. Accordingly, the Learned AO by ignoring the value of income on account of excess stock of Rs 1,75,98,542 arrived at the gross profit of Rs 6,66,97,358 which worked out to 8.53% of turnover. The Learned AO compared this gross profit of 8.53% with the gross profit for the immediately preceding year at 9.92%. The Learned AO added a sum of Rs 1,08,51,505 being the difference in gross profit margin disclosed by the Assessee for the year under consideration when compared to with the last year as under:-
a) GP for Assessment Year 2009-10 9.92%
b) GP of current year excluding additional income on account of excess stock 8.53%
c) Difference (a) – (b) 1.39%
d) Turnover of the Assessee Rs 78,06,83,867
e) Differential gross profit (c ) * (d) Rs 1,08,51,505
6. The Learned AO observed that the additional income offered by the Assessee on account of excess stock of Rs. 175,98,542 surrendered by the Assessee during the course of survey was not shown by the Assessee in the trading account by including it in the closing stock and that the same was offered to income tax only as other income. Hence, the said surrender is not included in the closing stock as on 31-03-2010 at Rs. 450,31,614. The Assessee furnished details of closing stock of Rs. 450,31,614. The Learned AO observed that while what the Assessee had surrendered at the time of survey was the value of inventories found during survey in excess over the stock as per books of accounts as on 21-01-2010 and not the value of particular item of stock. The Learned AO justified the additional amount on account of difference of Rs. 108,51,505 by taking sample of 10 invoices of purchase and sales made by the Assessee and arrived at the corresponding gross profit percentage thereon, wherein he found that the gross profit earned thereon were much more than 8.53% in all the cases. Further, the Learned AO noted that the Assessee had made majority of the purchases from sister concern i.e. M/s Swiss Devices (I) which was claiming deduction under section 80IC of the Act showing exorbitant GP of 32.08% and net profit of 28.81% which means that expenses debited to its profit and loss account was just 3.27% of the sales as against 9.6% of the sales in Assessee’s case. The Learned AO also observed that gross profit shown by the Assessee for the period 1-4-2009 to 21-01-2010 was 8.73% whereas the gross profit shown by the Assessee from 22-01-2010 to 31-03-2010 was only 7.85%. Based on these observations, the Learned AO proceeded to reject the books and book results of the Assessee to the extent of closing stock and made addition towards the difference in gross profit of Rs. 108,51,505 as explained supra. This action of the Learned CITA was upheld by the Learned CITA.
7. At the outset, we find that one of the main basis for the Learned AO to resort to rejection of books of accounts and book results of the Assessee under Section 145(3) of the Act was that Assessee had made major purchases from its sister concern. There has been some allegation leveled on the Assessee on the aspect that the purchases made from the sister concern had been made at excessive price and the revenue had sought to invoke the provisions of Section 40A(2)(b) of the Act for the same. But the Learned AO before us had placed on record evidence to prove that the said sister concern is a section 80IC eligible undertaking and the sales made by such sister concern to the Assessee was subjected to claim of deduction under Section 80IC of the Act for the said sister concern and the said claim of deduction under Section 80IC of the Act had been duly granted by the revenue in the hands of the said sister concern. To prove this fact , the Learned AR drew our attention to page 389 of the paper book volume II which contain the assessment order framed in the hands of the sister concern under Section 143(3) of the Act dated 12-3-2013. We find that no adverse inference was drawn by the revenue in the hands of the sister concern while granting deduction under section 80IC of the Act and the alleged excessive sales made by them to Assessee was not disturbed or even whispered. Hence the reasoning of the Learned AO on this aspect fails.
8. Further, yet another reason adopted by the Learned AO to reject the book results and books of accounts of the Assessee was that the quantitative details were not furnished by the Assessee during the course of assessment proceedings. This fact is found to be incorrect as Assessee had indeed furnished the quantitative details before the Learned AO as is evident from evidences enclosed in pages 225 to 277 of the paper book. Hence, all these facts collectively prove that the action of the Learned AO in resorting to reject the books of accounts and book results of the Assessee per se is bad in law. This is not a fit case to invoke the provisions of Section 145(3) of the Act. Hence, the ground numbers 2 and 3 raised by the Assessee are hereby allowed.
9. The ground numbers 1 and 5 raised by the Assessee are general in nature and does not require any specific adjudication.
10. Pursuant to our decision in Ground Nos. 2 and 3 supra, we hold that there cannot be any adhoc adoption of GP rate for determining the income of the Assessee. The GP rate obviously cannot remain the same for post survey and pre-survey period as the prices of the products fluctuate periodically based on market conditions and there cannot be any uniform pricing mechanism or uniform gross profit rate that could be maintained throughout the year. No doubt, the survey conducted by the revenue did fetch additional income from the side of the Assessee to the exchequer which had been duly disclosed at the time of survey and considered in the return filed after the survey. Obviously the Assessee would have to bring the additional stock found in the survey in its books and the said stock would get included in the closing stock, if not sold, at the lower of cost or market price in accordance with Accounting Standard -2 (AS-2) issued by the Institute of Chartered Accountants of India (ICAI) which is in accordance with generally accepted accounting principles. Hence there is no question of making any estimate of gross profit on an adhoc basis by the revenue. Accordingly, the Ground No. 4 raised by the Assessee is allowed.
11. In the result, the appeal of the Assessee is allowed.
Order pronounced in the open court on 24/04/2026.
