M/S CASA DEL TUBO vs. THE ASSISTANT COMMISSIONER OF INCOME TAX

M/S CASA DEL TUBO, REP. BY ITS PARTNER, LALIT SETHI, No.497/D-1, 14TH CROSS, 4TH PHASE, PEENYA INDUSTRIAL AREA, BANGALORE 560058. …APPELLANT (BY SRI S.V. RAVISHANKAR, ADVOCATE) AND:

THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 6(1), BMTC BUS STAND BUILDING, KORAMANGALA, BANGALORE 560095. …RESPONDENT (BY SRI E.I. SANMATHI, SENIOR STANDING COUNSEL)

The assessee has preferred this appeal assailing the order dated 09.07.2020 passed in ITA No.1705/Bang/2019 for the assessment year 2009-10, by raising the following substantial questions of law: "(i) Whether the Income Tax Appellate Tribunal (for short, ‘the Tribunal’) was justified in law in holding that the appellant failed to explain to the satisfaction of the Assessing Officer, as to why there was a lower gross profit during the year, which is contrary to fact, thus has passed a

The assessee, engaged in the business of trading in hydraulic hoses, filed its return of income for the assessment year 2009-10. The return was selected for scrutiny by issuance of notice under Section 143(2) of the Income-tax Act, 1961. During the course of assessment proceedings, the Assessing Officer noticed that the gross profit had declined from 21.0% to 11.6% (on the cost of material) and from 17.4% to 10.4% (on sales). The assessee offered an explanation that the reduction in gross profit margin was on account of fluctuation in the exchange rate, resulting in increased cost of purchase. The Assessing Officer, however, rejected the said explanation and, by order dated 30.12.2011, added a sum of Rs.25,00,000/- towards gross profit.

Sri S.V. Ravishankar, learned counsel for the assessee, submits that the books of account reflecting purchases and sales were produced before the Assessing Officer. The assessee had offered an explanation for the decrease in gross profit on account of fluctuation in the exchange rate. It is submitted that the pre-agreed sale price, owing to a pre-arranged contract, was not revised in proportion to the increase in purchase cost. Learned counsel further submits that the enhancement of 1% in gross profit and the consequent estimated addition of

Per contra, Sri E.I. Sanmathi, learned Senior Standing Counsel for the Revenue, submits that, when compared with the percentage of gross profit in the years prior and subsequent to the assessment year 2009-10, the gross profit declared for the year under consideration is abnormally low, which is attributable to the fact that 95% of the sales were made to the sister concern. It is contended that if the purchase price had increased, in the ordinary course of prudent business, the selling price would have been proportionately increased.

Having considered the submissions of learned counsel for the parties, the issue lies within a narrow compass. The assessee is engaged in importing and supplying certain products to its sister concern, and sales to the said concern constitute about 95% of its total sales. The present appeal pertains to the assessment year 2009-10. It is stated that both prior and subsequent to the said year, the percentage of sales to the sister concern has remained the same. There is no dispute that the purchases and sales are duly accounted. It is also admitted that the purchase price increased on account of the rise in the exchange rate of the Dollar. It is axiomatic that when the assessee imports material from abroad, the purchase price necessarily depends on the exchange rate of the Dollar.

The Assessing Officer, by way of estimation, added a sum of Rs.25,00,000/-, which has been upheld by the CIT(A) as well as by the Tribunal. Without entering into the question of necessity for rejection of books of account at this stage, we note that there is no material basis for the estimated addition of Rs.25,00,000/-. The record discloses statistics with respect to purchase price, selling price, and percentage of profit for the years prior to assessment year 2009-10 and for the assessment year 2010-11. However, without reference to any such data, the Assessing Officer concluded that there was a dip in gross profit as compared to the preceding and succeeding assessment years. Be that as it may, in the absence of any rational basis, the estimated addition of Rs.25,00,000/- cannot be sustained. Merely 95% sales made to sister concern cannot be a ground to hold dip in gross profit, unless comparison is available to demonstrate higher gross profit in similar business. The Tribunal, without examining the factual aspects in their proper perspective, has recorded a perverse finding.

In light of the above discussion, the finding recorded by the Tribunal cannot be sustained. Hence, the following: