Case Law Details
Hitesh Trading Company Vs ITO (ITAT Kolkata)
The Income Tax Appellate Tribunal (ITAT) in Kolkata has ruled in favor of Hitesh Trading Company, allowing its appeal against an order that enhanced its Gross Profit (GP) rate. The ITAT’s decision effectively reverses the additions made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals), or CIT(A). The central issue revolved around the validity of the AO’s arbitrary estimation of the assessee’s GP without providing a basis for comparison or rejecting the company’s books of accounts.
The case originated when the AO, based on information from the Sales Tax Department of West Bengal alleging sales suppression, decided to enhance Hitesh Trading Company’s GP. The company had reported a GP of 0.79%, which the AO deemed too low compared to similar businesses. Without citing any specific comparable cases or rejecting the company’s books of accounts under Section 145 of the Income Tax Act, 1961, the AO unilaterally estimated the GP at 5% and made an addition of Rs. 58,76,520.
The assessee challenged this addition before the CIT(A), but the appeal was unsuccessful. The CIT(A) confirmed the AO’s action, cryptically stating that the assessee should have provided better documentation and established its claim using the GP of comparable enterprises. This finding was a key point of contention for the assessee, who then appealed to the ITAT.
Before the ITAT, the assessee’s authorized representative argued that the burden of proof to justify a GP enhancement rested with the AO, not the assessee. The counsel emphasized that the AO had failed to establish a case of low GP by not citing comparable businesses. Crucially, the argument highlighted that the AO had not rejected the company’s books of accounts, rendering the addition legally invalid. The counsel also pointed out the contradictory findings in the CIT(A)’s order, where the authority seemed to agree with the assessee’s arguments in some parts of the order before abruptly confirming the AO’s action.
The ITAT, after carefully considering the submissions, found merit in the assessee’s arguments. The tribunal’s order held that the AO’s action could not be supported because he had neither doubted the book results nor rejected the books of accounts. The ITAT’s order implicitly relied on the settled principle of law that for a valid GP enhancement to be made, the assessing authority must first reject the books of accounts and then provide a clear, reasoned basis for the enhancement, which typically involves a comparison with similar businesses. The absence of these two critical steps—the rejection of books and reliance on comparable cases—was fatal to the Revenue’s case.
The ITAT granted relief to the assessee, allowing the appeal and effectively deleting the addition of Rs. 58,76,520. The tribunal’s decision reaffirms that an income tax officer cannot make an arbitrary estimation of profits without following the prescribed legal procedure and providing substantive evidence to support the claim. This case serves as an important precedent regarding the procedural requirements for the enhancement of gross profit in tax assessments.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
1. This appeal arises from order dated 30.07.2024, passed u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”) by the Ld. Commissioner of Income Tax (Appeals), (hereafter “the Ld. CIT(A)], National Faceless Appeal Centre (NFAC), Delhi.
1.1 In this case, the Ld. AO is seen to have added an amount of Rs. 58,76,520/- by enhancing the GP from 0.79% shown by the assessee to 5.0%. The logic given for such enhancement was that some information was received from the Sales Tax Department of West Bengal to the extent that there was suppression of sales by the assessee. Thereafter, the Ld. AO has mentioned that the GP shown by the assessee was on the lower side as compared to other businesses of similar nature. It is important to note at this stage that the Ld. AO did not mention any comparable case before arriving at an estimation of GP to the extent of 5%. Also, the Ld. AO has not rejected the books of accounts before making the impugned addition.
1.2 The assessee carried this matter in appeal where also he could not succeed on the ground of a cryptic finding in para 6.4 of the impugned order to the extent that the assessee should have presented better documents and should have established his claim on the basis of comparable GP of similar enterprises.
1.3 Further aggrieved, the assessee has filed the present appeal with the following grounds:
“1. That on the facts and in the circumstances of the case the order passed by the Ld. Commissioner of Income Tax (Appeal) NFAC U/S 250 of the Income Tax Act 1961 against the order appeal against vide DIN & Order No: ITBA/NFAC/S/250/2025-25/1075574024(1) is bad in law.
2. That the Ld. Commissioner of Income Tax (A), NFAC had erred in confirming the enhancement of Gross Profit by the Ld. Assessing Officer without rejecting the books of accounts.
3. That the appellant craves leave to add, amend, alter, vary and/or withdraw any or all the above Grounds of Appeal.”
2. Before us, the Ld. AR vehemently argued and stated that it was not the responsibility of the assessee to justify the GP rate shown by him rather it was incumbent on the Ld. AO to make out a case of low GP as compared to other similarly placed businesses. The Ld. AR also pointed out that the books of accounts were not rejected u/s 145 of the Act and hence the addition made had no legal validity. The Ld. AR also pointed out that the Ld. CIT(A) has given very confusing findings where at least in para 6.2 and 6.3 and even some part of para 6.4 it appears as if he is convinced by the assessee’s arguments and then suddenly he confirms the actions of Ld. AO.
2.1 The Ld. DR relied on the orders of authorities below.
3. We have carefully considered the rival submissions and have gone through the records before us. Right at the outset, it deserves to be held that the action of Ld. AO cannot be supported since he has not doubted the book results. The Ld. AO has not expressed any doubt on the sales and purchases shown by the assessee and he has also not relied on comparable cases for working out an appropriate GP rate over and above whatever was disclosed by the assessee. On this ground alone, the assessee deserves relief and the same is granted to him.
4. In result, this appeal is allowed.
Order pronounced on 26.08.2025
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