MUKESHKUMAR CHANDULAL DALWADI,ANAND vs. THE ACIT, CIRCLE-1(3) NOW CIRCLE-1(1)(1), VADODARA

1 The assessee, an individual engaged in the business of trading in grocery items and cattle feed under the name and style of Akshar Trading 2

2 During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee had disclosed total turnover of Rs.7,23,92,430/- and declared gross profit (GP) of Rs.13,30,399/-, giving a GP rate of 1.84%. The AO observed that in the immediately preceding year the assessee had shown GP rate of 2.78%, which was significantly higher. On being queried, the assessee explained that the fall in GP was due to volatility in cattle feed prices and losses suffered in some months. It was also contended that detailed quantitative particulars, stock valuation, and monthly sales and purchase details had already been filed, and there was no defect in the books of account.

3 The AO, however, recorded that despite several opportunities, the assessee had only filed part details, and the reply to the show-cause notice was in routine manner without any supporting documentary evidence. In absence of complete quantitative details and verifiable records, the AO held that correct GP rate could not be computed. Accordingly, invoking the provisions of section 145(3), the AO proceeded to estimate the profit by applying GP rate of 3% on the turnover of Rs.7,23,92,430/-, which resulted in gross profit of Rs.21,71,773/- as against Rs.13,30,399/- declared. Thus, the AO made a trading addition of Rs.8,41,374/- and assessed total income of the assessee at Rs.14,03,440/-.

4 The assessee filed appeal before the CIT(A), Vadodara, on 22.01.2020 against the order passed under section 143(3). With the advent of faceless appeal regime, the appeal was transferred to the National Faceless Appeal Centre and finally assigned to the office of Addl./JCIT (A)-1, Gurugram. 3

5 Before the CIT(A), the assessee contended that the addition of Rs.8,41,374/- was made merely on surmises, without rejection of books of account, and in absence of any specific defect in accounting or stock valuation. It was argued that the assessee had maintained and submitted complete quantitative details of purchases, sales, opening and closing stock with value and quantity, as also the tax audit report in Form 3CB/3CD. Before CIT(A), the reliance was placed on several judicial precedents including ITO Vs. Abbey Chemicals Pvt. Ltd. (ITA No.2875/Ahd/2004) and CIT vs. Amitbhai Gunwantrai (129 ITR 573) to support the proposition that low profit, in absence of defects in books, could not justify trading addition.

6 The CIT(A), however, held that the assessee had failed to substantiate the fall in GP with adequate supporting bills or documentary evidence. It was observed that while GP rate in earlier years was consistently improving (2.52% in AY 2014-15, 2.64% in AY 2015-16, and 2.78% in AY 2016-17), in the year under appeal the GP rate declined to 1.84% without satisfactory explanation. The CIT(A) further noted that only partial ledger extracts were filed, and the complete books of account were not produced through the e- proceedings portal. In these circumstances, the CIT(A) held the action of the AO in applying GP rate of 3% to be justified and dismissed the appeal of the assessee.

Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

LEARNED CIT(A) HAS ERRED IN FACTS AND ON LAW IN DISMISSING THE APEAL OF ASSESSEE AND CONFIRMING ADDITION OF RS. 841374 MADE ON MERE SURMISE AND AGAINST THE FACTS OF THE CASE. 2. ADDITION OF GP OF RS. 841374 WITHOUT REJECTION OF BOOKS OF ACCOUNTS BEING BAD IN LAW, THE ADDITION OF RS. 841374 BE DIRECTED TO BE DELETED. 3. ADDITION OF RS. 841374/- MADE WITHOUT ISSUE OF NOTICE U/S 145 BEING BAD IN LAW BE DIRECTED TO BE DELETED. 4

YOUR APPELLANT PRAYS TO ADD ALTER OR AMEND GROUNDS OF APPEAL AT THE TIME OF HEARING. 4. During the course of hearing before us, the learned Authorised Representative (AR) reiterated the factual background and submitted that the assessee had maintained regular books of account duly audited under section 44AB of the Act, along with quantitative records of purchases, sales, opening and closing stock. No defect had been pointed out either by the Assessing Officer or by the auditors in the maintenance of such records. The AR submitted that the primary reason for the fall in the gross profit ratio during the year under consideration was attributable to abnormal fluctuations in the cattle feed segment, which constituted one of the major items traded by the assessee. It was pointed out that though the sales volume of cattle feed increased in absolute terms during the year, the selling rates declined substantially, thereby reducing the margin percentage.

1 In support of this contention, the AR placed on record a comparative statement of financial results for Assessment Years 2016-17 and 2017-18. The same revealed that:

2 The AR further submitted a detailed analysis of cattle feed trading, comparing F.Y. 2015-16 and F.Y. 2016-17, which showed the following: 5

4 In addition, the AR furnished monthly summaries of cattle feed transactions for both the years under comparison, indicating the month- wise quantities purchased and sold, the corresponding purchase and sale rates, and the closing stock balances. A perusal of the said statements, according to the AR, clearly showed that in F.Y. 2016-17 the average rate of sale had consistently decreased, notwithstanding the higher turnover in terms of volume.

5 In support of the above submissions, the learned AR placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Commissioner of Income-tax-IV v. Symphony Comfort System Ltd. [(2013) 35 taxmann.com 533 (Guj.)]. In that case, the Assessing Officer had made an addition to the income of the assessee on account of fall in gross profit rate as compared to the preceding year, without pointing out any specific defect in the books of account or in the method of accounting followed by the assessee. Both the Commissioner of Income Tax (Appeals) and the Tribunal had deleted the addition, and the Hon’ble High Court upheld their orders.

The learned Departmental Representative (DR), on the other hand, strongly relied upon the orders of lower authorities.

We have carefully considered the rival submissions, perused the orders of the lower authorities, and examined the material placed on record including the comparative statements of gross profit, monthly summaries of cattle feed trading, and judicial precedents cited. It is an admitted fact 6

1 On a perusal of the submissions made before us, it is noted that the assessee had filed comparative details for FYs 2015-16 and 2016-17, which clearly demonstrate that the fall in GP was essentially attributable to the cattle feed segment. While the turnover of cattle feed increased from Rs.1.56 crores in FY 2015-16 to Rs. 1.77 crores in FY 2016-17, the gross profit thereon sharply reduced from 9.08% to 2.91% due to decline in selling rates, despite increase in volumes. The monthly summaries furnished substantiate this position, showing consistent fall in the sale rates even as the quantities traded increased. This explanation has a direct nexus with the fall in GP ratio.

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 7

3 The reliance placed by the DR on the orders of the AO and CIT(A) does not advance the Revenue’s case. Both the authorities below have primarily proceeded on surmises arising from the fall in GP ratio, without recording any cogent reasons or defects in the books. The fact that the assessee had filed quantitative details of stock and trading, and that the accounts were duly audited, has not been disproved. The rejection of books under section 145(3) is, therefore, not justified in the present case.

4 In the totality of the facts and circumstances, and in light of the binding precedent of the juri ictional High Court, we hold that the trading addition of Rs.8,41,374/- made by the AO and sustained by the CIT(A) is unsustainable in law. The same is accordingly directed to be deleted.

In the result, the appeal of the assessee is allowed.