ABHISHEK TAPADIA,INDORE vs. ITO -2(1), INDORE , INDORE

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ITA 249/IND/2026Status: DisposedITAT Indore30 October 2026AY 2020-2112 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the rejection of the assessee's books of account and the subsequent addition were unjustified and bad in law. The Tribunal noted that the assessee maintained regular books of account, which were audited and supported by various documentary evidences, including quantitative details of purchases, sales, and gratuity computations. The primary reason for rejection was the decline in the GP ratio from 30.47% to 3.64%. However, the Tribunal, relying on its own decisions in Arvind Kumar Singhavi and ACIT v/s Anant Commodities, and the Gujarat High Court's decision in CIT v. Symphony Comfort System Ltd., held that a mere decline in GP ratio, without specific defects or discrepancies pointed out in the books of account, is not a sufficient ground to reject the books or make an addition. The Tribunal observed that the AO himself noted the industry standard GP ratio to be between 10% to 15%, and the assessee's GP of 12.62% fell within this range. The Tribunal also considered the reasons provided by the assessee for the GP decline, such as increased raw material prices and rejection of goods by the Electricity Board, which were ignored by the AO. Therefore, the addition of Rs. 17,47,012/- was deleted.

What were the facts?

The assessee, Abhishek Tapadia, engaged in manufacturing, filed a return declaring NIL income for Assessment Year 2020-21. The case was selected for scrutiny concerning "Excess Contribution to Gratuity fund by Employer." During assessment, notices under sections 143(2) and 142(1) were issued. The assessee provided various details and documentary evidence. The Assessing Officer (AO) assessed total loss at Rs. 29,60,413/- and made an addition of Rs. 17,47,012/-. The assessee appealed to the National Faceless Appeal Centre (NFAC), Delhi, which dismissed the appeal. The assessee is now appealing to the Income Tax Appellate Tribunal (ITAT) against the NFAC's order dated 30.08.2025.

What were the issues?

1. Whether the NFAC erred in upholding the AO's action in rejecting the assessee's books of account, turning on Section 145(3) of the Income-tax Act, 1961. 2. Whether the NFAC erred in upholding the AO's action in estimating the Gross Profit (GP) at 18.27% against the declared GP ratio of 3.64%. 3. Whether the NFAC erred in upholding the addition of Rs. 17,47,012/- to the assessee's income. Assessee's Contentions: - The assessee maintained regular, audited books of account, subject to GST and tax audit under Section 44AB. - The case was selected for scrutiny on gratuity contribution, but additions were made on other issues, specifically the decline in GP ratio. - The assessee provided detailed explanations for the GP decline, including increased raw material costs and rejection of goods by electricity boards. - The AO rejected books of account based on an average decline of 12.20% in GP ratio, which is not a sufficient ground for rejection. - The assessee relied on the decision in Arvind Kumar Singhavi vs. ITO and ACIT v/s Anant Commodities (Indore Tribunal). - The AO's estimated GP rate of 15% is arbitrary, as the assessee's GP of 12.62% falls within the industry standard of 10-15%. - The addition was made on conjectures and surmises, without specific defects in accounts. Revenue's Contentions: - The learned Departmental Representative (DR) supported the orders of the lower authorities.

Which sections of the Income-tax Act were involved?

Section 143(2),Section 142(1),Section 143(3),Section 144B,Section 44AB,Section 145(3),Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SHRI PARESH M. JOSHI & SHRI ARVIND SONI

For Appellant: Shri Milind Wadhwani, & Ms. Shradha Piplodia, ARs
For Respondent: Shri Binay Kumar Rai, Sr. DR
Hearing: 10.09.2026Pronounced: 30.10.2026

PER ARVIND SONI, ACCOUNTANT MEMBER:

The assessee has preferred the present appeal against the order dated 30.03.2025 passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as "the ld. CIT(A)"] for Assessment Year 2020-21 arising out of assessment order framed under section 143(3) read with section 144B of the Income-tax Act, 1961 ("the Act").

2.

Facts of the case are that the assessee is an individual engaged in the business of manufacturing with name and style of M/s Universal Isolater. The assessee filed the return of income declaring total income at NIL on 15.02.2021 for A.Y. 2020-21. The case was selected for scrutiny through CASS to examine the issue of “Excess Contribution to Gratuity fund by Employer”. During the assessment proceeding the statutory notices u/s 143(2) & 142(1) of the Act were issued to the assessee. In response the assessee submitted various details explanation and documentary evidences. After recording the reasons and considering replies of the assessee the Ld. AO assessed the total loss at Rs.29,60,413/- and made the addition of Rs. 17,47,012/-.

3.

Being aggrieved the assessee preferred an appeal before the Ld. CIT(A). The learned CIT(A), vide order dated 30.08.2025, dismissed on the ground that the gratuity contribution of GP ratio & distress decline.

4.

Being aggrieved the assessee preferred and appeal before us on the following grounds of appeal:

“1. On the facts and in the circumstances of the case and in law, the Ld. NFAC erred in upholding the action of the Ld. AU in rejecting the books of account. 2. On the facts and in the circumstances of the case and in law, the Ld. NFAC erred in upholding the action of the Ld. AU in estimating the Gross Profit at 18.27% against declared GP ratio of 3.64%

3.

On the facts and circumstances of the case and in law, The Ld. NFAC erred in upholding the action of Ld. AU in making an addition of Rs. 17,47,012/- to the income of the appellant. 4. That the flat income rate is not invocable in the facts and circumstances of the case. 5. On the facts and circumstances and in law the Ld. AO erred in calculating the gross profit of the appellant by applying an adhoc rate of 18.27% on total turnover of Rs. 1,19,40,350/- and making the addition of Rs. 17,47,012/-. 6. On the facts and circumstances of the case and in law, the assessment order dated 24.09.2022 is contrary to law, facts and circumstances of the case and in any case is opposed to the principles of equity, natural justice and fair play. 7. On the facts and circumstances of the case and in law, the assessment order dated 24.09.2022 is bad in law, without jurisdiction, and liable to be quashed. 8. On the facts and circumstances of the case and in law, the additions are made on mere conjectures, surmises and suspicions. 9. On the facts and circumstances of the case and in law, the assessment was completed without complying with the statutory requirements of law. 10. On the facts and circumstances of the case and in law, That the Ld. NFAC erred in upholding the addition made by the Ld. AU on issues beyond the scope of scrutiny. 11. The facts and circumstances of the case, the Ld. NFAC erred in not holding at the Ld. AU had travelled beyond his jurisdiction, rendering the assessing order illegal, void ab initio and unsustainable. 12. On the facts and in the circumstances of the case and in law, the Ld. NFAC erred in not holding that the assessment order is bad in law and liable to be quashed, since no addition was made on the issue for which the case was selected for scrutiny, whereas additions were made on other issues. 13. On the facts and circumstances of the case and in law, the NFAC order 30.08.2025 is contrary to law, facts and circumstances of the case and in any case is opposed to the principles of equity, natural justice and fair play. 14. On the facts and circumstances of the case and in law, the initiation of penalty proceedings under Section 270A is bad in law. 15. For that the appellant craves leave to add, amend, alter vary and or withdraw any or all the above grounds of appeal.”

5.

The learned Authorised Representative (AR) submitted that the assessee maintained regular books of accounts and it is subject to taxability under Goods & Service Tax Act. The books of accounts were audited and tax audit report u/s 44AB of the Act was also filed along with the return. Ld. Counsel for the assessee submitted that the case was selected for scrutiny through CASS to examine the issue of “Excess Contribution to Gratuity fund by Employer”. During the assessment proceeding the statutory notices u/s 143(2) & 142(1) of the Act were issued to the assessee. In response the assessee duly complied from time to time and submitted various details explanation and documentary evidences inter alia, before the assessment Unit i.e. Income Tax Return, Employee wise details of salary and wages paid, Month wise details of salary and wages paid, detailed computation of gratuity paid to employees, party wise sales accounts in respect of electricity boards and party wise supplier accounts, ledger accounts of all expenditure, complete list of sales and purchases, copies of purchase orders received from various partis along with corresponding sales invoices and PF and ESIC payment details.

6.

Ld. Counsel for the assessee further submitted that no variation was made on the issue of gratuity contribution for which the case was selected for scrutiny, however the case was subsequently examined on other issues. Ld. Counsel for the assessee also submitted that the assessment unit observed that the Gross Profit ratio had declined from 30.47% to 3.64%. The assessee furnished detailed and comprehensive submissions explained the reasons for such decline, which have also been reproduced in the assessment order itself. Ld. Counsel for the assessee also submitted that the assessment Unit computed the average decline at 12.20% and on that basis, rejected the books of account maintained by the assessee. Ld. Counsel for the assessee relied upon the decision of the Co-ordinate bench of Indore in the case of Arvind Kumar Singhavi vs. ITO 189 taxmann.com 529.

7.

Per contra, the learned Departmental Representative (DR) supported the orders of the lower authorities.

8.

We have heard the rival submissions and perused the material available on record, including the orders of the lower authorities and observe that the assessee carried on the business as manufacture of Isolators being supplied to Electricity Boards. The raw material to manufacture isolators is copper, MS wire, Aluminum, zinc and steel alloys. In response to notices the assessee duly complied from time to time and submitted various details explanation and documentary evidences inter alia, before the assessment Unit. It is evident from record that though total turnover of the firm was almost equal to the preceding year but the gross profit as reduced to 3.64 % from 30.56%. There was a sharp reduction in the gross profit resulting into net loss for the year ended on 31.03.2020.

9.

We further find that the Ld. Counsel for the assessee cited the decision of the Co-ordinate Bench of Indore in the case of Arvind Kumar Singhavi (supra) wherein the coordinate bench held that:

“4.3 We basis records of the case & after hearing & further upon examining the rival contentions of the Ld. AR & the Ld. DR canvassed before us, are of the considered opinion that addition of Rs. 10,45,394/- basis estimation of gross profit for the year under consideration is wrong and not proper. The Ld. CIT (A) ought to have allowed the first appeal of the assessee. The Ld. CIT (A) has repeated and reiterated the finding of the Ld. AO in the Impugned Assessment Order dated 27.03.2023 [2nd round section 144 rws 263]. The Ld. AR basis material on record has established that a slightly lower GP rate from the earlier year or the preceding years ip so facto is not sufficient ground perse to reject the GP rate of 12.62% for the year under consideration, just because for FY 2015-16 the GP rate was at 17.71%. Further mere rejection of books of accounts u/s 145(3) for the failure to justify the reason for fall in GP with cogent documentary evidences is no ground to reject the books of accounts [Para 2.4 (d) of the Ld. AO Impugned Assessment Order). Under section 145(3) which deals with method of accounting is reproduced below:-

"145. [Method of accounting. [Substituted by Act 22 of 1995, Section 31, for Section 145 (w.e.f. 1.4.1997).]

(1)Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.] [Inserted by Act 20 of 2002, Section 60 (w.e.f. 1.4.2003).]"

A plain bare simple perusal of above section 145 speaks of satisfaction of the Ld. Assessing Officer on the books of accounts. It states that satisfaction should be on correctness or completeness of the account of the A plain bare simple perusal of above section 145 speaks of satisfaction of the Ld. Assessing Officer on the assessee which is the first limb and second limb is on method of accounting provided in sub section (1) of section 145 i.e. cash or mercantile system which has not been followed by the assessee or income has not been computed in accordance with standards notified under sub section (2) of section 145. None of these material ingredients were put to the notice of the assessee. The Ld. AR has made a grievance of it and we concur with his submission that due process with regard to section 145 have not been strictly adhered to by lower authority. The assessee has placed on the record of this tribunal ITR, COI, TAR, audited balance sheet and P/L A/c basis PB pages 1 to 17 with a certificate that these documents were available with the Ld. Assessing Officer and the Ld. CIT (A). We find that with these documents being on the file of lower authorities no specific allegation much less a finding is recorded that material ingredients of section 145 are not followed stricto senso. Under these facts and circumstances, we hold that rejection of book u/s 145(3) is not proper and correct. The Lower authorities have erred in law. The assessee had provided all the information, material in the scrutiny assessment and to establish contrary perse was initially on the department by making specific imputations but that has not happened in the instant case. The assessee has given a reasonable and plausible explanation both before lower authorities and before us and we do not see any imperfections in the same. The sales turnover in "Retail Textile Trade" is subject to market (fluid) conditions. Due to exigency of the market conditions the assessee took a commercial decision for the year under consideration that he would do a larger volume of business with the lower profit margin looking to present and future market too. In this regard the Ld. AO cannot question the wisdom of assessee business decisions and compare his turnovers and gross profit ratio with that of the earlier year or the preceding years in the absence of any cogent material in his possession. In the instant case the lower authorities have done so by making a comparison/ comparative analysis and have in fact estimated GP at 15% instead of 12.62% which is an exercise in the realm of the hypothesis.

4.4 We find that the Ld. AR has rightly relied upon precedents of High Court and that of coordinate benches of ITAT which we have analysed above and we concur with those decisions and orders. We respectfully follow Judgement of Hon'ble Delhi High Court in case of Smt. Poonam Rani(supra) wherein Hon'ble Delhi High Court has correctly held that :-

"6. On a perusal of the assessment order, we find that the Assessing Officer has not pointed out any particular defect or discrepancy in the account book maintained by the assessee. During the course of hearing before the Commissioner of Income Tax (appeals), it was pointed out by the assessee that the account books of the assessee were duly audited under Section 44 AB of the Excise Act and the quantitative details as required by Clause 28 (b) of Form No.3CD regarding raw material and finished products (l.e. opening stock of raw material, raw material Issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited by certified accountant and were enclosed with Form 3CD which had been placed on record but, the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings. It was for this reason that CIT (Appeals) was satisfied that the assessee had furnished complete details, including quantitative details în respect of purchase of raw material, manufacture of copper wire and sale of the furnished products. In these circumstances, we fail to appreciate how the accounts, maintained by the assessee, could have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete."

"10.Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act."

4.5 We respectfully follow our own decision case of ACIT v/s Anant Commodities (Indore Tribunal) wherein the ratio culled down is "mere decline in gross profit margin in relevant year compared to preceding assessment years cannot by itself justify addition to assessee's income unless Assessing Officer identifies specific defects or discrepancies in books of account maintained by assessee."

4.6 We simultaneously hold that on business and financial scores nothing is disputed by the revenue basis any documents/material/evidences. No cogent reasons are given by the lower authority save & except an estimation of GP @15% of turnover.

4.7 We gainfully refer to the decision of Hon'ble ITAT in case titled Mukesh Kumar Chandulal (supra) wherein in the Para 6.2 following is held:

"6.2 It is trite law that low profit, by itself, cannot be a ground to reject the books of account or to make an addition, unless specific defects are pointed out in the maintenance of accounts, stock valuation, or method of accounting. The Assessing Officer in the present case has not recorded any finding of inflated purchases, suppressed sales, or defects in stock records. The rejection of book results was made only on the basis of a fall in the GP ratio. This approach is not sustainable in law. The Hon'ble Gujarat High Court in CIT v. Symphony Comfort System Ltd. [(2013) 35 taxmann.com 533 (Guj.)) has held that the Assessing Officer was not justified in rejecting the book results and enhancing the gross profit rate merely because the GP ratio had fallen compared to the preceding year, when no specific defects were pointed out in the books of account. The Hon'ble High Court categorically observed that in absence of any defect pointed out in the books of account and the records maintained, the AO was not justified in rejecting the books results, so as to enhance the gross profit rate. The ratio of the said judgment, being that of the jurisdictional High Court, is binding on us and squarely covers the issue in favour of the assessee."

4.8 We observe that the Ld. Assessing Officer has himself observed that gross profit ratio is between 10% to 15% being industry standard [Para 2.4.1 page 27 of PAPER BOOK). The Ld. AR has rightly stated that the GP of 12.62% squarely falls under this standard and to take maximum rate of 15% is prejudicial to the assessee. We concur with the view of the Ld. AR on this score too.”

10.

We further find that the Ld. AO has rejected the books of accounts ignoring the facts in detail and not appreciating the fact that regular books of accounts were maintained which were maintained by the assessee. Therefore, the Ld. AO failed to appreciate the facts of the deduction in distress sale as in the range of 7% to 23% as observed in the assessment order itself but there were other reasons also such as, increase in purchase price of raw materials and rejection of goods by electricity board work Rs.26.54 lacs. Thus, we are of the view that there being no other discrepancy regarding genuineness of purchases or sales or mismatch of any kind, rejection of books of accounts by invoking provisions of section 145 of the Act and making addition of Rs.17,47,012/- is wholly unjustified, improper and bad in law.

11.

We further find that the Ld. AO did not appreciate aforesaid reasons while rejecting the books of accounts and thereby reducing the net loss declared by the assessee by Rs.17,47,012/- . The various reasons of continuous losses due to incapability to the assessee to manage the production as well as sales after the sad demise of father of the assessee were ignored by him. He also applied gross profit rate without considering substantial increase in purchase price of raw material, various adverse factors including rejection of goods worth Rs.26.54 lacs by Electricity Board which as valued at scrap price in the accounts. This also resulted into sharp reduction in the gross profit from the year. The addition made by the Ld. AO is therefore unjustified, improper and bad in law. Therefore, the addition of Rs.17,47,012/-made the Ld. AO and sustained by the Ld. CIT(A) deserves to be deleted. We order accordingly.

12.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 30 /10/2026.

Sd/- Sd/-

(PARESH M. JOSHI) (ARVIND SONI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Patel/Sr. PS Indore िदनांक /Dated : 30/10/2026 Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative Akhilesh Kumar Digitally signed by Akhilesh Kumar Date: 2026.11.02 17:20:42 +05'30' (6) Guard File By order UE COPYSr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore

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