Estimation of GP is not sustainable where the books results are not totally ignored by the AO and he has assessed the income on estimate basis by totally disregarding the book results.

This appeal is filed by the assessee and the same is directed against the order of learned CIT(A)-7, Bengaluru, dated 23.05.2019 for Assessment Year 2009-10.

2. The grounds raised by the assessee are as under:

1. The order of the learned Commissioner of Income Tax (Appeals) - 7, Bengaluru, passed under section 250 of the Income Tax Act, 1961 ("the Act") is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case.

2. The appellant denies itself to be liable to be assessed to a total income of Rs.61,37,530/- as against the returned income of Rs. 36,37,530/- on the facts and circumstances of the case.

3. The learned Commissioner of Income Tax (Appeals) erred in law in upholding the action of the Assessing Officer in making an ad-hoc addition of Rs. 25,00,000/- to the returned income as reasonable, on the facts and circumstances of the case.

4. The learned Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer in the remand proceedings has accepted the factual matter of increase in cost of purchase due to appreciation of dollar rates which resulted in lower profits and as a result the fall in profits was explained, on the facts and circumstances of the case.

5. The learned Commissioner of Income Tax (Appeals) erred in law in holding that the assessing the appellant in the status of "FirmIndl" could be a typographical error on the facts and circumstances of the case.

6. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the assessment made under the wrong status renders the entire proceedings void-ab-initio and hence the assessment order is liable to be quashed on the facts and circumstances of the case.

7. The learned Commissioner of Income Tax (Appeals) erred in law in not arriving at a finding to quantify the relief granted to the appellant as the learned Commissioner of Income Tax (Appeals) directs the Assessing Officer to recompute the interest and the operative portion of the appellate order states that the appeal is partly allowed hence it appears that the appellate order is passed without application on the facts and circumstances of the case.

8. The appellant denies itself liable to be charged interest under section 244A and 234D of the Act on the facts and circumstances of the case.

9. The Appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal.

10. For the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed and justice rendered.

3. In course of hearing, the assessee has also raised 3 additional grounds which are as under:

1. The authorities below failed to appreciate tha,t no addition on an estimated basis could have been made without rejection of books and accordingly, the addition made is liable to be deleted on the facts and circumstances of the case.

2. The appellant craves leave of this Hon'ble Tribunal, to add, alter, delete, amend or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing.

3. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.

4. In course of hearing, it was submitted by learned AR of the assessee that ground Nos.1 and 2 are general and only ground Nos.3 and 4 are to be decided and the remaining grounds i.e., ground Nos.5 to 10 are academic. He made arguments about ground Nos.3 and 4 only and he did not raise any argument regarding additional grounds raised by the assessee and hence, it is inferred that additional grounds are also not pressed and hence the same are also dismissed as not pressed in addition to ground Nos.1 and 2 stated to be general and ground Nos.5 to 10 stated to be academic. Regarding ground Nos.3 and 4, it was submitted that the AO has made adhoc addition of Rs.25 lakhs by rejecting this submission of the assessee before him that there was increase in purchase cost because of increase in exchange rate of dollar in the relevant year and therefore, the addition made by the AO on the basis of fall in GP rate is not justified. At this juncture, the Bench pointed out that it is noted by learned CIT(A) in para 5.2 of his order that the assessee has submitted before him that the assessee did not raise the prices on the premise that the exchange rates would stabilize and sold at the earlier rates agreed upon orally and it is also noted by learned CIT(A) in the same para that the AO has also noted that the assessee made 95% sale to its sister concerns and the assessee company has increased the sale price for the next years and this finding of the AO has not been controverted by the assessee. The Bench wanted to see as to what is the evidence that the assessee was having an agreed rate contract with the buyers and because of that, the assessee could not increase the sale price in spite of increase in buying cost particularly when 95% of the sale is made to its sister concerns. In reply, it was submitted by learned AR of the assessee that the agreement regarding sale price to its sister concern was made orally and therefore, there is no evidence in this regard. He drawn our attention to page 41 of Paper Book and pointed out that on this page of Paper Book is the month wise details of exchange rate in the preceding year i.e., Financial Year 2007-08 and in the present year i.e. F. Y. 2008-09 and he submitted that the exchange rate in the preceding year was around Rs.40 per US$ but in the present year, the exchange rate has gone up to Rs.50 per US$ and since the assessee was expecting that the price will stabilize, the assessee did not raise the selling price because the selling price was earlier agreed orally. He submitted that under these facts, no addition should be made. He also submitted that books were not rejected by the AO and therefore, without rejecting the books of accounts, such an addition cannot be made and in support of his contention, reliance was placed on the Tribunal order rendered in the case of DCIT Vs. M/s. Mandya District Co-op. Milk Producers Societies Union Ltd., in ITA No.1512/Bang/2017 dated 20.02.2020. He submitted a copy of this Tribunal order and in particular, our attention was drawn to para 3 of this Tribunal order. Learned DR supported the orders of authorities below.

6. We have considered the rival submissions. It is noted by the AO on page 2 of the Assessment Order that the percentage difference for exchange rate change is only 10 to 15%, but the actually dip in the gross profit margin is 44% and the actual net increase in the cost of materials is in the range of 29% to 34%. The AO made additions of Rs.25 lakhs on this basis that since the assessee has not submitted satisfactory explanation for such fall in GP rate,this addition is made to plug the leakages in the gross under estimation of the gross profit and such addition is only about 1% of the total sales receipts since satisfactory explanation is not offered before him. The AO has placed reliance on the judgment of Hon’ble Apex Court rendered in the case of S. N. Namasivyam Chettiar Trading Co. Ltd., Vs. CIT (Panj) 38 ITR 579 and also on the judgment of Hon’ble Bombay High Court in the case of Dhondiram Dalichand vs CIT (Bom) 81 ITR 609. Hence, it is seen that the addition was made by the AO on this basis that regarding fall in GP, no satisfactory explanation is furnished by the assessee before him. At this juncture, we examine the applicability of the Tribunal order cited by learned AR of the assessee having been rendered in the case of DCIT Vs. M/s. Mandya District Co-op. Milk Producers Societies Union Ltd., (supra). In para 3 of this Tribunal order, it is noted by the Tribunal that in that case, this was submitted by learned AR of the assessee before the Tribunal that the reason for fall in GP and NP was explained by the assessee as noted by the Tribunal that the AO has noted on page 3 of the Assessment Order that the market price of the milk sold by the assessee was less in present year as compared to the preceding year and for this reason, the net profit is reduced although the total turnover is increased by 26%. In the present case, this is a categorical finding of the AO that no satisfactory explanation was offered by the assessee regarding fall in GP rate. Before us also, this could not be established that there was any advance price agreement with the buyers and therefore, the assessee could not increase the selling price. This is also very important fact of the present case that 95% of the assessee’s sales is made to the sister concern. As per page 4 of the Paper Book, it is seen that increase in cost is not only on account of increase in exchange rate of dollar but the purchase price in terms of dollar also has gone up because it is seen that the rate per meter was 1.33 US$ per meter during June to December 2007 and only in February to March 2008, the rate was 1.4 US$ per meter in the preceding year whereas in the present year,the purchase price was 1.4 US$ per meter up to September 2008 and during October to December 2008, it has further increased up to 1.54US$ per meter.

When the purchase cost is rising both in terms of rate per meter in US$ as well as the conversion rate of US$ into Indian rupees and the sale is mainly to the sister concerns that too without any agreed sale price in advance, the small addition made by the AO in the range of about 1% of the total sale value is neither excessive nor unreasonable. Since no explanation was offered by the assessee before the AO regarding fall in GP rate, the Tribunal order cited by learned AR of the assessee is not applicable in the present case. Moreover,the ratio of this Tribunal order is this that income cannot be estimated if the books are not rejected. In the present case, the AO has not estimated the income. He has made an estimated addition only because the assessee could not explain the reasons regarding fall in GP rate. Rejection of books of accounts is a pre-requirement if the books results are totally ignored and the income is estimated by the AO but in the present case, books results are not totally ignored by the AO and he has assessed the income on estimate basis by totally disregarding the book results but in the present case, the AO has not estimated the income by totally disregarding the book results and he has only made an estimated addition because the assessee could not explain the reasons behind fall in GP rate particularly when the major sales to the extent of 95% are to the related parties. Hence, in the facts of the present case, this Tribunal order is not applicable. In this case, the Tribunal has followed the judgment of Hon’ble Karnataka High Court rendered in the case of CIT Vs. Anil Kumar & Co., 386 ITR 702 and hence, we examine the applicability of this judgment of Hon’ble Karnataka High Court also in the facts of the present case. In that case, it is noted by Hon’ble Karnataka High Court that the AO has noticed in that case that the Gross profit declared by the assessee in the earlier Assessment Years and in the present Assessment Year were at variance and the GP were adopted at 4% of the total turnover. Hence, it is seen that in that case, the book results were totally disregarded and the GP was estimated at 4% of turnover and hence, the income was assessed by the AO after totally disregarding the book result whereas in the present case, the book results are not totally discarded by the AO and only an estimated addition of Rs.25 lakhs was made by the AO and therefore, in the facts of the present case, this judgment of Hon’ble Karnataka High Court is also not applicable. Considering the facts of the present case, particularly this fact that 95% of sales were made to related parties at the old selling rate in spite of increase in purchase rate both in terms of price per meter in US$ and also the exchange rate of dollars, we hold that no interference is called for in the order of CIT(A).

7. In the result, appeal of the assessee is dismissed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/-

(PAVAN KUMAR GADALE) (A.K. GARODIA)

Judicial Member Accountant Member

Bangalore,

Dated: 09th July, 2020.