DCIT, NEW DELHI vs. M/S. AVL INDIA PVT. LTD., NEW DELHI
In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.
What did the Tribunal hold?
The CIT(A) deleted the addition made by the AO, finding that the assessee had provided valid reasons for the decline in gross profit rate, such as business promotion activities, increased component costs, reduced selling prices, and lower margins on specific projects. The Tribunal agreed with the CIT(A) that there was no tangible reason to reject the books of accounts.
What were the facts?
The Assessing Officer (AO) rejected the assessee's books of accounts under Section 145(3) due to a decline in the gross profit rate compared to previous years. The AO also made an addition on account of disallowance under Section 14A read with Rule 8D.
What were the issues?
Whether the AO was justified in rejecting the assessee's books of accounts under Section 145(3) based on a lower gross profit rate without identifying defects in the books. Whether the disallowance under Section 14A was correctly made.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: Sh. Amit ShuklaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order of ld. CIT(A)-I, New Delhi dated 04.11.2016.
Following grounds have been raised by the revenue:
“1. The ld. CIT(A) erred in law and on facts in deleting addition of Rs.5,28,11,537/- made by the AO invoking u/s 145(3) of the Income Tax Act, 1961.
2. The ld. CIT(A) erred in law and on facts in deleting addition of Rs.1,99,354/- made on account of disallowance u/s 14A r.w.r. 8D.”
The assessee company is engaged in the manufacturing of smoke meters, di-gas analyzer, dynamometers & custom built
2 AVL India Pvt. Ltd. system, dyno systems, di-check, dycon, fuel consumption meter and AC system.
The AO held that the assessee has shown abnormally very low gross profit rate for the year under consideration in comparison to the gross profit rates shown in earlier years and also failed to substantiate the reasons thereof. The AO held that the assessee failed to justify the decline in gross profit rate with supporting evidences, therefore, rejected the books of the assessee u/s 145(3) of the Income Tax Act, 1961.
The ld. CIT (A) examined in detail the reasons given by the assessee validating the financials and that of the Assessing Officer for rejection of books of accounts.
The only reason given by the Assessing Officer was that the gross profit was less compared to the earlier years from 26.6% to 18.9% and also has not brought any defect in the books of account or any bogus nature of expenditure or suppression of receipt.
On the other hand, the ld. CIT (A) examined the various reasons for contraction of the profits. The ld. CIT (A) held that with regard to distribution of goods free of cost to the customers is kind of business promotion activity which creates a sense of confidence and trust among the customers. The detail of expenditure incurred by the assessee has not been doubted by the AO in the assessment order. The allegation of AO is not with respect of incurrence of the expenditure by the assessee rather the same relates to the benefit that the assessee has derived out of the same. This is a question of business prudence
3 AVL India Pvt. Ltd. which cannot be challenged by the AO. Once expenditure is incurred for the business purpose, the same is an allowable deduction. The assessee might not derive immediate benefit from such replacement of goods to the customers but it creates a goodwill and reputation in the market for the assessee. Such expenditure is held to be wholly and exclusively for business purposes and same is an allowable expenditure and cannot be doubted. The Assessing Officer cannot sit in the chair of businessman and take decision on his behalf. The observation of the AO in the assessment order nowhere leads to any defect or error in the books of the accounts on the basis of which the books could be rejected.
With regard to increase in cost of component supplier and reduction in price of the goods, the ld. CIT (A) held that increased cost of components used in the manufacturing of goods and reduced selling price of the goods sold have direct impact on the gross profit. He held that the AO in the assessment order has not been able to controvert the facts and figures submitted by the assessee and there is no evidence on record which could prove that the facts submitted by the assessee were false. The observations of the AO in the assessment order that inflation is a subjective issue and it hits both sides i.e. purchases as well as sales, may be right in general sense. However, the ld. CIT (A) held that in the present case, the assessee has quantified the impact of both sides which the AO could not controvert and point out any specific defect in the books of accounts of the assessee which could lead to rejection of books u/s 145(3). Hence, this allegation of the 4 AVL India Pvt. Ltd. AO does not qualify as ground for rejection of books of accounts.
On the issue of low GP rate in project with Indian Oil Corporation, the ld. CIT (A) after examination of the details categorically held that the assessee has been above to substantiate its claim for earning low margins in two of its prestigious projects along with evidences. Further, the turnover and margin earned by the assessee has not been doubted by the AO anywhere in the assessment order. The ld. CIT (A) held that the AO has not pointed out any single defect in the submissions made by the assessee with respect to projects with M/s India Oil Corporation Ltd. and M/s Simpson & Co. Ltd., on the basis of which the books of accounts maintained by the assessee could be doubted. Accordingly, he held that the low margin in the projects of M/s India Oil Corporation Ltd. counts as valid reason for fall in the gross profit rate of the assessee.
With regard to foreign exchange, the ld. CIT (A) on going through the factual position held that the figure of forex gain reported in the financial statement is the net gain which was mainly on account of gain realized on the receivables carried forward from earlier years due to increase in the rate of foreign exchange.
Thus, we find that the ld. CIT (A) has examined in detail the various reasons attributed by the Assessing Officer and rebutted by the assessee. We find primarily no tangible reason which could lead to rejection of books of accounts u/s 145(3) and hence, decline to interfere with the well reasoned order of the ld. CIT (A).
5 AVL India Pvt. Ltd. 12. In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 14/07/2021.
More judgments on Section 145(3)
- M/S. Sarvesh Mercantile Private Limited… vs DCIT Central Circle 2(1), MumbaiITA 1952/MUM/2026[2015-16]Status: Disposed15 Oct 2026AY 2015-16
- M/S. Sarvesh Mercantile Private Limited… vs Deputy Commissioner of Income Tax, Central…ITA 1951/MUM/2026[2014-15]Status: Disposed15 Oct 2026AY 2014-15
- M/S. Sarvesh Mercantile Private Limited… vs Deputy Commissioner of Income Tax, Central…ITA 1950/MUM/2026[2013-14]Status: Disposed15 Oct 2026AY 2013-14
- Assistant Commissioner of Income-Tax… vs Pacifica India Projects Private Limited…ITA 2336/AHD/2026[2020-21]Status: Disposed13 Oct 2026AY 2020-21
- Assistant Commissioner of Income-Tax… vs Pacifica Builders Private Limited, AhmedabadITA 2335/AHD/2026[2020-21]Status: Disposed13 Oct 2026AY 2020-21
Recent GST High Court judgments
Search GST case law →- Gagan Bihari Rout@Gagan Rout vs. State Of OdishaOrissa · 28 Oct 2026
- Biswanath Rana vs. The Commissioner, CT And GST, Odisha, CuttackOrissa · 28 Oct 2026
- Sushama Mishra vs. The Commissioner Of CT And GST, Odisha, KatakOrissa · 28 Oct 2026
- Saudamini Samantray vs. Assistant Commissioner Of State Tax, CT And GST, Bhubaneswar IiOrissa · 28 Oct 2026
- M/S. Keshav Rice Mill, Ganjam vs. Chief Commissioner, CT And GST, Odisha, KatakaOrissa · 28 Oct 2026