Rajmoti Industries Vs ACIT (ITAT Rajkot)
Summary: Estimation of gross profit cannot be made merely because the gross profit ratio has declined, unless the Assessing Officer first rejects the books of account under section 145(3) by identifying specific defects. Further, in a Limited Scrutiny assessment, an addition on an issue outside the approved scope, without following the prescribed procedure for conversion into Complete Scrutiny, is unsustainable.
Facts
The assessee was engaged in manufacturing and trading of edible oils and returned a loss of Rs. 7,08,02,914 for AY 2018-19. The case was selected under Limited Scrutiny through CASS for verification of default in deduction/deposit of TDS and allowability of business loss arising from such default. The assessee furnished the required details in response to notices under sections 143(2) and 142(1). The AO made a disallowance of Rs. 3,21,351 under section 40(a)(ia). He further noticed that the assessee’s gross profit ratio had declined from 10.42% in the preceding year to 3.64% in the year under consideration. Without rejecting the books of account, the AO estimated gross profit at 11.08% of turnover of Rs. 125,79,07,800 and made an addition of Rs. 9,35,43,196.
AO / CIT(A) Finding
The AO considered the substantial fall in the gross profit ratio as sufficient justification for estimating the assessee’s profit. He determined gross profit at Rs. 13,93,76,184 as against Rs. 4,58,32,988 disclosed by the assessee and made the consequential addition of Rs. 9,35,43,196.
