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Income Tax Appellate Tribunal, “SMC B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN
This is an appeal by the Assessee against the order dated 24.8.2018 of CIT(Appeals), Hubballi, relating to assessment year 2015-16.
2. The Assessee is a partnership firm which is engaged in the business of dealing in packaged edible oil. The Assessee filed return of income for AY 2015-16 declaring loss of Rs.2,22,918/-. The AO however made addition of Rs.5,47,163/- to the loss declared by the Assessee and determined the total income of the Assessee at Rs.3,24,245/- after making the following observations:
As per the audit report filed on 28.09.2015 along with P&L account and Balance Sheet, the gross profit shown was 1.55% on total turnover of Rs.3,46,30,558 and the net profit shown was 0.06%. For the previous year relevant to AY 2014-15, the gross profit was shown at 3.13%. The assessee was questioned by the AO on the fall in gross profit for the current year i.e. AY 2015-16. According to the AO, the assessee did not furnish any reasons for the fall in GP in spite of many opportunities. Hence the AO presumed that the assessee is unable to give any valid reasons for the fall in GP. Accordingly, an addition in GP of 1.58% was made amounting to Rs.5,47,163 by the AO to the total income of the assessee.
4. On appeal by the Assessee, the CIT(A) confirmed the order of the AO for the reason that the Assessee failed to justify the fall in G.P. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. The following are the grounds of appeal raised by the Assessee before the Tribunal.
“General Ground 1. The Assessing Officer, Range -2, Hubballi (‘AO’) has erred in passing the assessment order under section 143(3) of the Income Tax Act (‘the Act’), in the manner so passed and the learned CIT (Appeals), Hubballi (CIT (A)') has erred in partly confirming with the action of the AO. Grounds Relating to Addition in Gross Profit 1. The learned AO has erred to point out specific defects in the books of accounts of the appellant before rejecting the declared Gross Profit and estimating Gross Profit at previous year's rate.
The learned AO has admitted "all the details called for have been furnished by the assessee'.
3. The learned AO has failed to consider the oral submission made by the appellant before deciding the issue.
The AO has based his decision on presumptions and not on any findings based on fact or law.
The learned CIT (A) has erred in partly confirming the action of AO without giving any findings whatsoever. . 6. The learned CIT (A) committed serious error in partly confirming the order of the -assessing officer which is not based on any materials. 7. There was absolutely no material given by the revenue to show that the assessment rested on consideration to reject the explanation given by the appellant. 9. The learned AO made no enquiry to test the assessee's contentions. 10. The learned CIT (A) has rightly pin pointed that AO has failed to point out specific defects in the books of accounts of the assessee before estimating appellants GP, but yet he himself has grossly erred in granting part benefit to the appellant. 11. The learned CIT (A) has gone on record and has noticed that the AO has failed to point out defects in the books of accounts of the appellant, before rejecting the declared GP and estimating GP at previous years rate but yet he himself has grossly erred in estimating the GP @.2.5% of the turnover. 12. The learned CIT (A) has grossly failed to consider the case laws submitted in the appellants defense.” 5. I have heard the rival submissions. The learned counsel for the Assessee made submissions which are similar to the grounds of appeal filed before the Tribunal. The learned DR relied on the order of the CIT(A).
6. I have considered the rival contentions. Section 145 of the Act provides how income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” has to be computed and it lays down that such income 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. Sub-section (2) of Section 145 provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Sub-Section (3) of Section 145 provides that 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) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. It is thus clear from the statutory provisions that the starting point of computing of income from business is the profit or loss as per the profit and loss account of the Assessee. The AO cannot disregard the profit or loss as disclosed in the profit and loss account, unless he invokes the provisions of Sec.145(3) of the Act. In the present case it is not the case of the AO that the provisions of Sec.145(3) of the Act are applicable. In such circumstances, the question is as to whether the AO had power to go beyond the book results. In our view, the AO was not empowered under the Act to do so. In Pandit Bros. vs Commr. Of Income-Tax 26 ITR 159 (P&H), the Hon’ble Punjab and Haryana High Court held that the mere fact that the profits are low is not material upon which a finding under Section 13 of the Income Tax Act, 1922, equivalent to Sec.145 of the Act, can be based, because the assessee may be incompetent or his methods of business may be uneconomic. In the present case, the AO has not pointed out any defects in the books of accounts of the Assessee and in such circumstances, the mere fall in GP cannot be the basis to estimate income of the Assessee u/s.145(3) of the Act. The addition made by the AO is therefore liable to be deleted and is hereby deleted.
In the result, the appeal of the Assessee is allowed.
Pronounced in the open court on this 02nd day of January, 2019.