DCIT, NEW DELHI vs. M/S. AVL INDIA PVT. LTD., NEW DELHI

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:

The assessee company is engaged in the manufacturing of smoke meters, di-gas analyzer, dynamometers & custom built

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

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).