Case Law Details
Montage Enterprises Pvt. Ltd. Vs DCIT/ACIT (ITAT Delhi)
Delhi ITAT Slashes GP Estimation in Search Case- Industry Average Prevails Over AO’s Aggressive 18% Rate; Undisclosed Sales Also Substantially Reduced
In a significant relief to the assessee in a major search assessment, the Delhi ITAT held that the Assessing Officer was unjustified in applying an aggressive 18% Gross Profit rate on both disclosed and alleged undisclosed turnover merely on the basis of seized diaries and assumptions. The Tribunal followed its own order in assessee’s earlier year and ruled that industry average GP is the proper benchmark for estimation after rejection of books.
The case arose from a search on the Uflex-Montage Group where diaries allegedly containing cash receipts were seized. The AO treated entries aggregating to about ₹639 crore as undisclosed sales after reducing RTGS entries from total diary receipts of ₹1,827 crore and estimated profits thereon at 18%, resulting in massive additions exceeding ₹456 crore.
The CIT(A) had already granted partial relief by reducing the GP rate to 9.463% and undisclosed turnover to ₹328 crore, but both parties went in appeal. The assessee argued that the packaging industry had witnessed severe raw material inflation, stagnant selling prices, forex fluctuations and post-Covid cost pressures, making past GP comparisons unrealistic. It also contended that comparable companies selected by the department were giant multinational integrated manufacturers and not functionally comparable.
Accepting the broad contention of the assessee, the Tribunal held that the companies relied upon by the Revenue were not proper comparables since they were vertically integrated global players with different business models and cost structures. At the same time, it also found defects in the assessee’s own comparable selection. Ultimately, the ITAT adopted a balanced approach and directed that GP be estimated by considering all eight comparable companies together, arriving at an industry GP rate of 4.315%.
The Tribunal further observed that in the immediately preceding year also, the Coordinate Bench had rejected the Revenue’s insistence on 18% GP and accepted industry trends as the correct basis for estimation.
On the issue of alleged undisclosed sales, the assessee pointed out multiple contra entries, totaling mistakes and post-search period sales wrongly considered by the lower authorities. The Tribunal examined the seized material and entertained the assessee’s claim that substantial reductions were required while computing actual undisclosed turnover.
The ruling is important for reiterating that even after rejection of books under section 145(3), estimation of profits cannot be arbitrary or punitive and must be grounded in realistic industry comparables and surrounding business circumstances.
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