Mahabubsaheb Husensab Ronad Vs ITO (ITAT Bangalore)
Bangalore ITAT: Gross Profit Cannot Be Estimated Merely by Averaging Earlier Years Without Rejecting Books of Account
The ITAT Bangalore allowed the assessee’s appeal and set aside the orders of the lower authorities. The assessee, engaged in wholesale and retail trading of live chickens, was selected for scrutiny to examine large cash deposits during the demonetization period and a decrease in profitability despite higher turnover. The Assessing Officer accepted the explanation regarding cash deposits and found that the assessee had sufficient cash balance from livestock sales. However, the AO estimated the gross profit at 10.61% by averaging the gross profit rates of AYs 2016-17, 2017-18 and 2018-19 and made an addition, despite accepting the books of account. The Tribunal observed that the assessee’s business had commenced in AY 2016-17 with lower turnover and that turnover and gross profit had increased over subsequent years. It held that there was no valid reason to estimate gross profit by averaging three assessment years, particularly when the AO had accepted the books of account, found no defects therein, and had not rejected the books before making the estimation. Accordingly, the Tribunal held that the estimated addition lacked valid grounds and allowed the assessee’s appeal.
Bangalore ITAT deleted an addition made by estimating the assessee’s gross profit solely on the basis of the average GP rate of three assessment years. The assessee, engaged in the wholesale and retail trade of live chickens, had been selected for scrutiny due to large cash deposits during demonetisation and an apparent decline in profit margin. The Assessing Officer accepted the explanation regarding cash deposits and found no defects in the books of account. However, he enhanced the gross profit by adopting the average GP of AYs 2016-17, 2017-18 and 2018-19, resulting in an addition.
The Tribunal held that once the books of account were accepted and no defects were pointed out or the books rejected, the AO could not arbitrarily estimate profits merely because the GP rate was lower than an earlier year. It also observed that AY 2016-17 was the assessee’s first year of business with lower turnover, while the subsequent year’s results showed increased turnover and improving profitability, making the comparison adopted by the AO inappropriate. Accordingly, the addition based on estimated gross profit was deleted and the assessee’s appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
