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Facts
The assessee, M/s.GT Electronic (India) Private Limited, filed its return for AY 2018-19. The Assessing Officer (AO) rejected the books of account under Section 143(3) read with 143(3A), estimated income at 4.5% of turnover, and added foreign exchange fluctuation gain. The assessee contended that substantial sales returns (Rs. 85,43,793) of custom-made transformers due to quality issues (HV failures) by a customer (Siemens, Germany) in AY 2018-19 significantly impacted its profit, and these goods had no value for closing stock.
Held
The Tribunal observed that the AO wrongly applied the net profit rate to sales turnover instead of total turnover and erred in adding foreign exchange fluctuation gain. It held that the rejection of books was unjustified under Section 145(3) as the AO failed to establish any grounds for unsupported expenses, suppressed sales, or improper stock valuation, merely comparing net profit margins. The Tribunal noted that the assessee's books were maintained properly and accepted in prior assessments, concluding that none of the conditions for book rejection were met.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's books of account and making an addition based on estimated profit and foreign exchange fluctuation gain, considering the impact of significant sales returns due to product rejections.
Sections Cited
143(3), 143(3A), 145(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: HON’BLE SHRI MANU KUMAR GIRI & HON’BLE SHRI S. R. RAGHUNATHA
आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member)
The captioned appeal filed by the assessee is directed against order of the Ld. Commissioner of Income Tax (Appeals) NFAC, Delhi [CIT(A)] dated 23.01.2025 for Assessment Year 2018-19.
The assessee has raised following grounds of appeal:
“…1. The order of the Learned Commissioner of Income tax (Appeals) is contrary to the law and facts involved and not based on facts and circumstance of the case.
2. Addition of estimated profit Rs. 1,03,37,771/- 2.1 The Commissioner of Appeals erred in confirming the addition of Rs 1,03,37,771/-being the estimated profit after rejection of books of accounts. 2.2 The Commissioner of Appeals fails to appreciate that during the relevant assessment year, there was a sales return of goods amounting to Rs. 85,43,793, which were sold in the during the assessment year 2017-18, which resulted in reduction of Gross profit as well as net profit. The sales return is due to rejection of goods by the customer and hence these goods cannot be re used or re worked to make them good. 2.3 The Commissioner of Appeals failed to appreciate that since these goods are rejected by customer, these goods have no value and cannot be added with closing stock valuation. 2.4 The Books of accounts of the assessee is audited and all expenses are supported by documents like invoice etc., and hence rejection of books of accounts and estimating the profit is not warranted.
3. The Appellant craves leave to file additional grounds at the time of hearing….”
Brief facts of the case are as under: The assessee company filed its return of income for the assessment year 2018-19 on October 10, 2018, admitting an income of Rs.1,99,16,070/-. The assessing officer (‘AO’ in short) passed an order under section 143(3) read with section 143(3A) on August 3, 2021, rejecting the books of accounts and estimating the income at 4.5% of the turnover. The assessing officer quantified the income as Rs.1,91,14,840/- and added the foreign exchange fluctuation gain of Rs.1,11,39,001/-, arriving at a total income of Rs.3,02,53,841/-.
The ld. counsel for the assessee vehemently submitted that the AO completely ignored the fact that there was sales returns of Rs.85,43,793/- which were sold during the AY 2017-18, which resulted in reduction of Gross profit as well as net profit. He further contended that these goods are rejected by customers which have no value. Therefore, cannot be added with closing stock valuation. The ld. Counsel further submitted that the Books of accounts of the assessee is audited and all expenses are vouched by invoice therefore, the AO was not justified in rejecting the books of account and estimating the profit. The ld. Counsel has also filed written submissions elaborating the fact situation.
Per Contra, the ld.DR-JCIT relied upon the orders of the lower authorities and pleaded for the dismissal of the appeal.
We have heard the rival submissions, perused the orders of the authorities below and the paper book filed by the assessee.
We find that the asssessee company earns a net profit of 4.5% to 5% on the total turnover, including exchange fluctuation gains. However, the assessing officer wrongly applied this rate to the sales turnover instead of the total turnover and added the exchange fluctuation gain, resulting in an apparent mistake in computing the total income.
We further note that it had supplied electronic transformers to Siemens, Germany through GT GmbH, Germany (parent company of the assessee), which were rejected and returned by the customer due to quality issues. The assessee had sold S04-594 type transformers during the AY 2016-17 for Rs.85,43,793/-. We also observe that the transformers in question are designed to meet international standards, including EN60255-27, and are used in low-current applications. These transformers consist of two windings, primary and secondary, which are electrically isolated from each other. The design ensures complete vacuum protection for HV breakdown, adhering to standard creepage and clearance distances. In fact, these transformers are custom-made for electronic systems, where the input is connected to the main supply and the output is connected to the electronic system. However, if the transformer isolation fails, it can cause severe damage to the device and the entire system. We are of the considered view that the transformers manufactured were rejected by Siemens, Germany, due to a high risk of HV failure.
We also note the consequences of the rejection transformers. Since the transformers are tailor-made, they cannot be reused or repaired and must be scrapped. The transformers supplied during the AY 2016-17 were rejected and returned by Siemens, Germany, due to HV failures during the assessment year 2018-19. As a result, GT GmbH, Germany, has returned the rejected goods.
We also note the consequences of the financial Impact of the rejection on the assessee company. Due to the sales rejection, the ultimate net profit of the appellant is reduced to 4.5% during the assessment year 2016-17, and sales rejection is accounted for during the assessment year 2018-19. This is the only year in which the assessee had sales rejection. During the course of hearing, the ld. Counsel pointed out that if assessee re-compute the net profit without considering the sales rejection, the net profit ratio for the AY 2018-19 will be 6.40% as follows: AY Particulars Amount in INR 2018-19 Net profit 1,92,09,327 Sales rejections during the year 85,43,793 Recomputed profit 2,77,53,120 Sales from operation after adjusting Sales Rejection 43,33,18,006 Net profit ratio 6.40 In summary, the rejection of transformers by Siemens, Germany, due to HV failures, resulting in significant financial losses for the company. The table provides detailed financial data for the AY 2018-19, highlighting the impact of the rejection on the company's net profit and sales.
The assessee also referred a table comparing the gross profit ratio and net profit ratio for a period of 5 years, from 2016-17 to 2020-21. The table is as under:
2016-17 2017-18 2018-19 2019-20 AYs 2020-21 Sales 35,86,21,515 36,65,74,547 42,47,74,213 46,64,68,268 48,39,53,157 Sales 0 0 85,43,793 0 0 Rejection Total 35,86,21,515 36,65,74,547 43,33,18,006 46,64,68,268 48,39,53,157 Sales Material 21,86,10,913 21,80,61,645 26,44,99,160 27,90,82,692 27,15,74,090 Consumed Job Work 2,11,62,594 2,07,36,190 2,38,83,480 2,79,74,684 2,93,28,462 Charges Wages 3,57,44,268 3,62,55,153 4,57,07,266 5,42,59,255 6,43,79,434 Total 27,55,17,775 27,50,52,987 33,40,89,906 36,13,16,630 36,52,81,986 Gross 8,31,03,741 9,15,21,560 9,92,28,099 10,51,51,637 11,86,71,170 Profit GP Ratio 23 25 23 23 25 1,88,22,913.03 1,92,09,327.41 2,91,21,714.18 3,63,84,061.29 1,63,99,280.49 Net Profit Add Sales 85,43,793.00 Rejection Re- compute 1,63,99,280.49 1,88,22,913.03 2,77,53,120.41 2,91,21,714.18 3,63,84,061.29 net Profit Net Profit Ratio 4.57 5.13 6.40 6.24 7.52 12. We further observe that the assessing officer (AO) has not made any case for expenses not supported by voucher, suppression of sales, or stock not properly valued. The AO just compared the net profit margin and came to the wrong conclusion that income reported by the assessee is not correct, and estimated the income at 4.5% of the sales and again added fluctuation income. We are of the view that the Rejection of books is bad in law as per section 145 (3) of the Income- tax Act, 1961. The books can be rejected by the assessing officer in the following circumstances: 1. Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee or 2. Where the method of accounting provided in sub section (1) has not been regularly followed by the assessee or
3. Income has not been computed in accordance with the standard notified under sub section (2) As none of the circumstances explained above existed, the rejection of accounts is bad in law. The assessee following mercantile system of accounts from the inspection of the company and follows all applicable accounting standards while maintaining books of accounts and preparing financial statement. This had been accepted by the department and no addition or rejection of books made by AO in earlier scrutiny assessment (the assessee's case is subject to scrutiny for the assessment year 2012-2013 and 2014-2015). Since there is no change in method of accounting followed by the assessee and assessee also follows all applicable ICDS standards, the rejection of books by AO is not justified in the present facts. 13. Hence, in the light of above factual matrix, we delete the addition of Rs.1,03,37,771/-. 14. In result, appeal of the assessee is allowed. Order pronounced in the open court on 7th day of July-2025 at Chennai.