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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The revenue has filed this appeal challenging the order dated 20-06- 2014 passed by Ld CIT(A)-13, Mumbai and it relates to the assessment year 2009-10. The revenue is aggrieved by the decision of Ld CIT(A) in reducing the rate of Gross profit estimated by the AO to 25% and also in deleting the disallowance made u/s 40(a)(ia) of the Act.
The assessee is engaged in the business of installation of Air Conditioning plant. The AO noticed that the assessee has declared G.P rate of 20.4% during the year under consideration. However, in the immediately preceding year, the G.P rate was shown at 29.90%. The AO further noticed that the assessee did not maintain stock register. Hence the AO rejected the books of account. According to calculation made by AO, the G.P rate of immediately preceding year worked out to 31.03%. The AO adopted the same rate for the year under consideration also and made addition of Rs.90.51 lakhs on account of difference in G.P rate. The AO also noticed that the assessee has claimed
2 M/s. Space HVAC System Private Ltd. transportation expenses of Rs.5,15,206/- and disallowed the same u/s 40(a)(ia) of the Act for non-deduction of tax at source.
The Ld CIT(A) called for a remand report from the AO. After considering the same, the Ld CIT(A) confirmed the action of AO in rejecting the books of account. However, the Ld CIT(A) took the view that G.P rate may be determined by adopting three years’ average rate, which worked out to 26.10%. However, he chose to sustain the addition to 25% and thus gave partial relief to the assessee. With regard to the disallowance made u/s 40(a)(ia) of the Act, the AO reported in the remand report that the same represents tempo and taxi charges paid from time to time. He also admitted that the he has made the addition without raising any query. Hence the Ld CIT(A) deleted the addition made u/s 40(a)(ia) of the Act. The revenue is aggrieved.
We heard the parties and perused the record. The first issue relates to the estimation of gross profit by rejecting the books of account. We have noticed that the Ld CIT(A) has confirmed the rejection of books of account and the said decision has been accepted by the assessee. Once the books have been rejected, the natural consequence is that the profit is required to be estimated. We notice that the AO has followed G.P rate declared in the immediately preceding year, while the Ld CIT(A) has taken average rate of three years. At the time of hearing, the Ld D.R supported the order of the AO, while the Ld A.R submitted that the average rate adopted by Ld CIT(A) would give better picture, as it would even out variations.
We find merit in the submissions of Ld A.R. It cannot be expected that the G.P rate would remain static, as would depend upon various types of market conditions. We notice that the G.P rate declared by the assessee was 23.10%, 25.40%, 29.90% and 20.40% respectively for assessment years 2006-07 to 2009-10. The above rates would show that the G.P rate was varying every year. Accordingly we agree with the view taken by Ld CIT(A) that the average rate of three years would give better picture. However, we notice that the Ld
3 M/s. Space HVAC System Private Ltd.
CIT(A), having worked out the average rate of G.P at 26.10%, has adopted the G.P rate at 25% without assigning any reason. Before us also, the assessee could not furnish any explanation for the fall in G.P rate of the year under consideration. Accordingly we are of the view that the G.P rate may be determined at the average rate of 26.10% as per the reasoning given by Ld CIT(A). Accordingly we modify the order passed by Ld CIT(A) and direct the AO to work out the addition by taking the G.P rate at 26.10%. We order accordingly.
In the result, the appeal of the revenue is partly allowed. Order has been pronounced in the Court on 15.6.2018.