Sinai Maritime Service Private Limited Vs ITO (ITAT Mumbai)
Lower GP Is a Red Flag, Not a Licence to Rewrite Profits-ITAT Deletes ₹3.79 Crore Addition Without Rejection of Books u/s 145(3)
The controversy
The assessee, Sinai Maritime Service Private Limited, was engaged in ship chandelling—supplying food, provisions, technical goods & other materials to Indian and foreign vessels at various ports.
For AY 2023-24, it filed its return declaring total income of ₹84,59,170. The return was selected for scrutiny because of the comparatively low net-profit rate.
In the preceding year, the assessee had reported turnover of ₹15.54 crore with a gross-profit rate of approximately 20.91% and net-profit rate of 2.60%.
During the year under consideration, turnover increased substantially to ₹40.63 crore, while the gross-profit rate declined to 10.67% and the net-profit rate to 1.54%.
The AO treated the decline as inadequately explained, adopted a gross-profit rate of 20% & made an addition of ₹3,79,19,056. The CIT(A) confirmed the addition.
Business expanded—but margins contracted
The assessee explained that its turnover had increased by more than 2.6 times because it acquired several new customers.
Sales to new customers amounted to approximately ₹27.15 crore, constituting nearly 66% of total turnover. To penetrate the market and meet competitive pressures, those sales were made at lower margins.
Customer-wise data showed a gross-profit margin of approximately 6.83% from new customers, compared with 18.40% from existing customers.
The assessee had also commenced a new activity of providing catering services to Afcons Infrastructure Ltd. in the Maldives, generating sales of approximately ₹11.82 crore. This new segment earned lower margins and contributed to the overall decline.
The assessee furnished GST returns, GST audit report, purchase and sale invoices, customer and supplier ledgers, confirmations, bank statements & party-wise gross-profit details.
AO suspected three possible leakages
The AO was not satisfied merely because turnover had increased. He suspected that the reduced margin could have resulted from suppression of purchase value, reduction of sale price or inflation of direct expenditure.
A show-cause notice dated 7 March 2025 proposed substitution of the reported margin with a 20% GP rate.
However, neither the show-cause notice nor the assessment order identified any specific suppressed sale, inflated purchase, bogus expenditure or discrepancy in stock records.
No independent comparable case, industry benchmark or transaction-wise material was cited to support the precise rate of 20%. The estimate was effectively based upon the previous year’s result and the AO’s dissatisfaction with the explanation.
Books were never rejected
The assessee’s principal legal argument was that the AO had not rejected its audited books u/s 145(3).
The AO could not accept the turnover, purchases and underlying books, yet replace only the resulting gross profit through an estimated percentage merely because the current rate was lower than the preceding year.
The CIT(A) observed that the customer-wise margin statements were self-prepared and were not adequately supported by cost sheets, agreements or confirmations.
However, even the CIT(A) did not identify a particular transaction as fictitious, inflated or suppressed. Nor did he record that the books were incorrect or incomplete.
Dissatisfaction with explanation is not rejection of accounts
The ITAT drew a distinction between two separate questions:
Was the assessee’s explanation for the fall in GP fully satisfactory?
Were the books incorrect or incomplete so as to justify rejection u/s 145(3)?
A weakness in the explanation might justify deeper verification, but it did not automatically answer the second question.
Section 145 permits a best-judgment exercise only where the statutory conditions are satisfied. Before substituting the disclosed results with an estimated profit, the AO must record cogent reasons showing why the accounts cannot be relied upon.
The Tribunal relied upon Smt. Poonam Rani v. CIT, Pr. CIT v. IBILT Technologies Ltd. & Pr. CIT v. Swananda Properties Pvt. Ltd., which recognise that a fall in GP may trigger enquiry but cannot, without more, justify rejection of books or estimation.
Suspicion cannot become an accounting defect
The assessment order contained no finding that the purchase records, sales records, stock registers, vouchers or primary accounting documents were defective.
The AO merely entertained a possibility that purchases, sales or expenses might have been manipulated. The ITAT held that suspicion or possibility cannot substitute a finding that the books are incorrect or incomplete.
Even the particular rate of 20% lacked an independent foundation. It approximated the preceding year’s margin, but past results are only an indicator and not a statutory formula compelling identical profitability every year.
The assessee also pointed out that a similar GP rate of 10.91% declared in AY 2024-25 had been accepted. The Tribunal, however, considered it unnecessary to rely upon subsequent-year consistency because the addition failed on the record of the year itself.
ITAT’s ruling
The ITAT held that the AO was not justified in replacing the reported GP rate of 10.67% with an estimated rate of 20% solely because profitability had declined.
Without invoking s.145(3), recording defects in the books or providing a rational comparable basis for the selected rate, the estimation was legally unsustainable.
The addition of ₹3,79,19,056 was deleted and the assessee’s appeal was allowed.
Author’s comments
The ruling does not say that books must be rejected before every individual disallowance. An AO may disallow a specific bogus purchase or inadmissible expenditure without rejecting the entire accounts.
But where the AO discards the overall book result and substitutes an estimated GP, rejection of books supported by identified defects must ordinarily precede estimation.
Profitability is shaped by product mix, turnover scale, customer acquisition, geography & competition. A growing business may rationally sacrifice margin for volume.
Past GP is a useful diagnostic tool—not a statutory jacket formula. The AO must first find the leak before chow much escaped through it.
Cases Discussed
- Smt. Poonam Rani v. CIT
- Pr. CIT v. IBILT Technologies Ltd.
- Pr. CIT v. Swananda Properties (P.) Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order dated 24.11.2025, passed by the learned Commissioner of Income-Tax (Appeals) – National Faceless Appeal Centre, Delhi [in short, ‘the Ld. CIT(A)’], for Assessment Year (in short ‘A.Y’), 2023-24, raising following grounds:
“1.0 On facts and circumstances of the case and in law, Ld. CIT(A), erred in confirming the addition u/s.28 of suppressed Gross profit of Rs.3,79,19,056/-, on estimating the Gross profit @ 20% as against declared by the appellant @ 10.67% on sales;
2.0 On facts and circumstances of the case and in law, Ld. CIT(A), erred in confirming the addition of suppressed Gross profit of Rs.3,79,19,056/-, though appellant’s audited books of accounts had not been rejected u/s.145(3) of the Act;
3.0 The Ld. CIT(A), before confirming the addition u/s.28 of Rs.3,79,19,056, ought to have considered the understated vital facts, being;
a) The appellant had properly substantiated, with documentary evidences, the reason for decline in Gross profit margin during the year;
b) There does not exist any standard jacket formula of the Gross profit margin required to be earned in appellant’s business;
c) The Ld. AO and Ld. CIT(A) had not relied on any contrary material/evidence to disbelieve the book results and made/sustained the addition only on the basis of assumption and surmise;
d) The Ld. AO and Ld. CIT(A) had not pointed any specific defect in the submissions/documents filed by the appellant and had not conducted any enquiries to disbelieve the bonafide transactions of the appellant;
4.0 On facts and circumstances of the case and in law, Ld. CIT(A) erred in deciding the appeal and confirming the addition, without providing an adequate opportunity of being heard and without considering the submissions and documents filed on record.”
2. At the outset, the learned counsel for the assessee submitted that Ground No.4 was not pressed. Accordingly, Ground No.4 is dismissed as not pressed.
3. Briefly stated, the assessee is engaged in the business of ship chandelling, involving supply of food, eatable goods, provisions, technical and other goods to Indian and foreign vessels and ships at various ports in India. For the year under consideration, the assessee filed its return of income on 21.09.2023 declaring total income of Rs.84,59,170/-. The return was selected for scrutiny for verification of the low net profit rate declared by the assessee. The statutory notices under the Income-tax Act, 1961 (in short, “the Act”) were issued by the Faceless Assessment Unit (i.e. the Assessing Officer) and duly served upon the assessee.
3.1 During the course of assessment proceedings, the Assessing Officer compared the profit disclosed by the assessee with that of the immediately preceding year. In the preceding year, the assessee had disclosed turnover of Rs.15,54,40,658/- and gross profit of Rs.3,24,96,019/-, yielding a gross profit rate of approximately 20.91%, with a net profit rate of approximately 2.60%. In the year under consideration, the assessee disclosed turnover of Rs.40,63,37,097/-, with a gross profit rate of 10.67% and a net profit rate of 1.54%.
3.2 The Assessing Officer was of the view that the substantial increase in turnover, by itself, did not satisfactorily explain the decline in the gross profit rate. He accordingly expressed the possibility of suppression of purchase value, reduction in sale value or inflation of direct expenses. A show-cause notice dated 07.03.2025 was, therefore, issued proposing adoption of a gross profit rate of 20% on the total turnover.
3.3 In response, the assessee attributed the decline in the overall gross profit rate to two reasons: firstly, expansion of its business and due to business competition the lower margins earned on sales to new customers. The assessee furnished customer-wise gross profit details and submitted that the gross profit margin on sales to new customers was approximately 6.83%, as against approximately 18.40% in respect of existing customers. In its written submission before the Tribunal, the assessee stated that sales to new customers amounted to approximately Rs.27.15 crores, constituting about 66% of the total turnover. Secondly, the assessee submitted that, during the year, it had undertaken a new business activity of providing catering services to M/s Afcons Infrastructure Ltd., Maldives, against which sales of approximately Rs.11.82 crores were made, and that the lower margin on such activity also contributed to the overall decline in the gross profit rate.
3.4 However, the Assessing Officer did not accept the explanation furnished by the assessee and proceeded to adopt a gross profit rate of 20% on the total turnover. On that basis, an addition of Rs.3,79,19,056/- was made.
4. The assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) sustained the addition, observing, inter alia, that the customer-wise gross profit details furnished by the assessee were self-prepared and were not accompanied by corroborative material such as purchase details, cost sheets, agreements or confirmations, and that the explanation had not been independently verified.
5. Before us, the learned counsel for the assessee reiterated that the decline in gross profit was duly explained with reference to the substantial expansion of business during the year. He submitted that turnover had increased from approximately Rs.15.54 crores in the immediately preceding year to Rs.40.63 crores in the year under consideration, an increase of more than 2.6 times. It was submitted that the assessee had furnished complete details of new customers, including their names, addresses and PANs, and party-wise details of sales and gross profit. According to the assessee, sales to new customers were made at lower margins, resulting in a lower overall gross profit rate. The assessee also furnished GST returns, GST audit report, sale and purchase invoices, ledger accounts, confirmations of major customers and suppliers, bank statements and other supporting material. The learned counsel further submitted that the assessee had commenced a new business activity of providing catering services to M/s Afcons Infrastructure Ltd., Maldives, against which sales of approximately Rs.11.82 crores were made. He submitted that the Assessing Officer had not brought any material on record to establish suppression of sales, inflation of purchases or inflation of direct expenses.
5.1 The principal legal contention of the learned counsel was that the Assessing Officer had neither rejected the books of account under section 145(3) nor pointed out any specific defect therein. According to him, the Assessing Officer could not discard the disclosed book results and substitute an estimated gross profit rate merely because the gross profit rate was lower than that of the preceding year. Reliance was placed upon (i) Smt. Poonam Rani vs. CIT 192 Taxman 167 (Del-HC)/ 326 ITR 223 (Delhi),); (ii) Pr. CIT v. IBILT Technologies Ltd., 98 taxmann.com 255 (Delhi); and (iii) Pr. CIT v. Swananda Properties (P.) Ltd., 111 taxmann.com 94 (Bom.).
6. We have heard the rival submissions and perused the material placed on record. The controversy before us essentially concerns the sustainability of the addition of Rs.3,79,19,056/- made by estimating the gross profit at 20% of the turnover, notwithstanding the fact that the assessee had disclosed its results in audited books of account. The material on record shows that the assessee had disclosed turnover of Rs.40,63,37,097/- and gross profit at the rate of 10.67%. The Assessing Officer compared the result with the preceding year, in which the turnover was Rs.15,54,40,658/- and the gross profit rate was approximately 20.91%. The Assessing Officer considered the fall in the gross profit rate to be inadequately explained and, by the show-cause notice dated 07.03.2025, proposed adoption of a gross profit rate of 20%.
6.1 The assessee, on the other hand, did not merely rely upon the difference in the two rates. It attributed the decline to expansion of its customer base and the lower margins earned on sales to new customers. It furnished customer-wise gross profit details and stated that the margin from new customers was approximately 6.83%, whereas the margin from existing customers was approximately 18.40%. The assessee also referred to the new catering activity undertaken for M/s Afcons Infrastructure Ltd., Maldives. These explanations were not accepted by the Assessing Officer and the learned CIT(A).
6.2 We are, however, concerned at this stage not merely with the acceptability of the explanation furnished by the assessee, but with the manner in which the disclosed book results have been displaced. The assessment order, as placed before us, does not record any specific defect or discrepancy in the books of account maintained by the assessee which would render the disclosed results unreliable. The addition proceeds essentially from the decline in the gross profit rate vis-à-vis the preceding year and the Assessing Officer’s dissatisfaction with the explanation furnished by the assessee.
6.3 The statutory scheme contained in section 145 of the Act permits the Assessing Officer, where the conditions prescribed therein are satisfied, to proceed in the manner provided under section 144. The judicial position is that a mere fall in the gross profit rate, by itself, does not establish that the accounts are incorrect or incomplete. In CIT v. Smt. Poonam Rani, (supra) the Hon’ble Delhi High Court held, in the facts of that case, that a fall in the gross profit rate by itself could not justify rejection of the books in the absence of cogent reasons. The Delhi High Court in Pr. CIT v. IBILT Technologies Ltd (supra) similarly recognised that a decline in the gross profit rate may warrant verification but cannot, without more, constitute the basis for rejecting the books. The same principle is reflected in the judgment of the Hon’ble Bombay High Court in Pr. CIT v. Swananda Properties (P.) Ltd., (supra). In that case, the Court observed that rejection of books should precede a best-judgment assessment and that, where the Revenue was unable to point out a defect in the assessee’s records warranting rejection of the books, the rejection could not be sustained.
6.4 The legal position emerging from the aforesaid decisions is that a mere fall in the gross profit rate, by itself, does not establish that the accounts are incorrect or incomplete so as to justify rejection of the books under section 145(3). Past results may constitute a reason for undertaking further verification, but cannot, without more, furnish the sole basis for rejecting the book results and making a best-judgment estimation. The Assessing Officer must have cogent material or reasons for disturbing the disclosed financial results. Therefore, is not that every addition affecting the profit disclosed in the accounts necessarily requires a mechanical reference to section 145(3). Rather, where the Assessing Officer seeks to discard the book results and substitute them by a best-judgment estimate, the statutory conditions for rejecting the accounts must be satisfied, and the basis for treating the accounts as incorrect or incomplete must be discernible from the assessment order. A mere comparison with the profit rate of an earlier year, without identification of a defect rendering the accounts unreliable, does not by itself furnish such a basis.
6.5 Tested on the aforesaid parameters, we find that in the present case, the Assessing Officer has not recorded any finding that the books of account maintained by the assessee were incorrect or incomplete. There is no reference to any specific defect in the purchase records, sales records, stock records, vouchers or other primary accounting records. The Assessing Officer’s reasoning proceeds essentially from the fact that the gross profit rate had declined from 20.91% in the preceding year to 10.67% in the year under consideration. On that basis, he entertained a suspicion that the assessee might have suppressed purchases, reduced sale prices or inflated direct expenses and consequently proposed adoption of a 20% gross profit rate. However, suspicion or possibility of suppression cannot, by itself, substitute for a finding that the books of account are incorrect or incomplete.
6.6 Further, we find that the Assessing Officer has not rejected the assessee’s books of account under section 145(3) of the Act. The assessee has filed a copy of the show-cause notice dated 7th March, 2025 issued by the ld AO. However, even in the said notice, the Assessing Officer has not pointed out any defect in the books of account of the assessee nor invoked Section 145(3) of the Act for rejecting the book results of the assessee. More importantly, no specific defect or discrepancy in the books has been recorded in the assessment order as placed before us. The assessment order proceeds from the lower gross profit rate and the view that the explanation furnished by the assessee did not satisfactorily account for such decline. Such dissatisfaction with the explanation, without a corresponding finding rendering the books of account incorrect or incomplete, cannot by itself justify replacing the disclosed gross profit by an estimated rate of 20%. Further, from the assessment order as reproduced before us, no specific comparable case, industry benchmark or identified transaction forming the basis for adopting the particular rate of 20% has been brought out. The estimation appears to have been made principally with reference to the preceding year’s gross profit rate and the Assessing Officer’s dissatisfaction with the explanation furnished by the assessee.”
6.7 We are conscious that the learned CIT(A) found the customer-wise gross profit details to be self-prepared and unsupported, in his view, by sufficient corroborative material. However, such observation, even if accepted, does not by itself constitute a finding that the books of account maintained by the assessee were incorrect or incomplete. The learned CIT(A) has also not identified any particular purchase or sale transaction which was found to be bogus, inflated or suppressed. No specific discrepancy in the books has been brought on record. The question whether the assessee’s explanation was satisfactory and the distinct question whether the books could legally be rejected under section 145(3) have to be kept separate.
6.8 The learned counsel also submitted before us that in the subsequent Assessment Year 2024-25, the assessee disclosed similar gross profit rate of 10.91% and a net profit rate of 8.93%, which has been accepted by the Assessing Officer. Therefore, following the rule of the consistency, the gross profit rate shown by the assessee for the year under consideration should not to have been disturbed. But in or opinion, it unnecessary to base our decision upon the results disclosed by the assessee in the subsequent Assessment Year 2024-25 and the sustainability of the impugned addition can be determined on the basis of the assessment record for the year under consideration itself.
6.9 On an overall consideration of the matter, we are of the considered view that the Assessing Officer was not justified in replacing the book result by an estimated gross profit rate of 20% merely on account of the decline in the gross profit rate, without rejecting the books of account under section 145(3) and without recording any specific defect therein. The addition of Rs.3,79,19,056/- is, therefore, not sustainable.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 17/08/2026.
