SANTOSH ENTERPRISES,SAGAR TALUK vs. ADDITIONAL COMMISSIONER OF INCOME TAX, SHIMOGA

PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER :

2.1 The assessee, a firm engaged in the business of rice and phova manufacturing, filed its return of income for asst. year 2006-07 on 2/8/2006 declaring total income of Rs.60,04,900/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny. The assessment was concluded u/s 143(3) of the Act vide order dated 28/11/2008, wherein the assessee’s income was computed at Rs.66,39,149/-; wherein, inter alia, there was (i) addition of Rs.6,47,249/- on account of the Assessing Officer (‘AO’) estimating the gross profits (‘GP’) at 7.5% as against 6.79% declared by the assessee and (ii) an estimated addition of Rs.37,000/- in respect of closing stock of Bran. On appeal; the assessee’s appeal was dismissed by the CIT(A), Davangere vide the impugned order dated 22/2/2017. 3.0 Aggrieved by the order of the CIT(A), Davangere dated 22/2/2017 for asst. year 2006-07, the assessee has filed this appeal before the Tribunal, wherein it has raised the following grounds:-

“1. The Learned Additional CIT erred in assessing to tax a sum of Rs 6,47,249/- as addition to the Gross Profit and the CIT (A) erred in upholding the addition 2. The Learned Additional CIT and CIT (A) erred in ignoring the plea of the appellant that an addition cannot be made purely on the basis of assumptions without pointing any defect in the books of accounts maintained which are audited and covered by an audit report 3. The Learned Additional CIT and CIT (A) ought to have accepted the declared income which is on the basis of regularly maintained accounts and subjected to audit and the nature of business explained. 4. The Learned Additional CIT erred in making an addition of Rs 37,000/- to the closing stock of bran purely on an estimate basis and the CIT erred in ignoring the ground as taken not presented.”

4. Grounds Nos. 1 to 3 – Gross Profit Estimation 4.1 In these grounds (Supra), the assessee assails the impugned order for making an estimated addition of Rs.6,47,249/- on account of gross profit being estimated at 7.5% as against G.P of 6.79% declared by the assessee. According to the ld AR of the assessee, the ld CIT(A) erred in brushing aside the assessee’s contention that the aforesaid G.P addition had no factual basis and was made purely on assumption and without pointing out any defect in the audited books of account and audit report maintained by the assessee or rejecting the same. It was prayed by the ld AR that in view of the above factual matrix of the case there was no basis for the GP estimation by the AO and therefore the addition ought to be deleted. In support of this contention, reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Anil Kumar & Co (2016) 67 taxmann.com 278 (Karnataka) wherein it was held that when the books of account of the assessee had not been rejected and the assessment having not been framed u/s 144 of the Act, the entire addition made by the AO based on estimation was to be deleted. 4.2 Per contra, the ld DR for Revenue vehemently supported the order of the authorities below: 4.31 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The undisputed facts of the matter before us is that the Assessing Officer made an estimated addition of Rs.6,47,249/- to the assessee’s income by estimating the assessee’s G.P at 7.5% as againt G.P of 6.79% declared by the assessee; brushing aside the submissions put forth by the assessee in this regard. We also observe that the AO made the aforesaid estimated addition on account of G.P without either detecting any deficit in the assessee’s audited books of account on rejecting the book results of the assessee. In this factual matrix of the case, we find merit in the contention of the assessee that the aforesaid estimation of G.P at 7.5% by the AO, as against G.P of 6.79% declared by assessee, to be baseless and made solely on suspicions and surmises and therefore in our view is unsustainable in view of the facts and circumstances of the case. In coming to this view, we draw support from the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Anil Kumar & Co (2016) 67 taxmann.com 278 (Karnataka) wherein the Hon’ble Court held that where the books of account of the assessee has not been rejected and the assessment having not been framed u/s 144 of the Act, the AO and the ld CIT(A) were in error in resorting to an estimation of income and thus the entire estimated addition made by the AO was to be deleted. In our considered view the aforesaid decision of the Hon’ble Karnataka High Court in the case of Anil Kumar and Co. (Supra) is squarely applicable to this fact situation of the case on hand and we therefore delete the addition of Rs.6,47,249/- made by the AO on account of estimation of the assessee’s G.P at 7.5%. Consequently, the grounds 1 to 3 raised by the assessee are allowed.