TRIANZ HOLDINGS PVT. LTD. vs. ITO,

In this appeal filed by the assessee against an order dt.05.09.2013 of CIT (A)-III, Bangalore, it assails the non-rectification of a mistake by the AO, which according to it, was apparent on record.

Facts apropos are that assessee an IT service provider had filed its return for impugned assessment year declaring nil income. During the course of assessment proceedings, it was noted by the AO that assessee had invoiced for ITA.1619/Bang/2013 Page - 2 the work performed by one M/s.Cougar Tech CA, USA with which assessee was having a service contract at the following rates :

The said profit margin was worked out by the AO at 16.22%. Since the assessee was not in a position to give the break up of exact professional charges paid to Bhaskaran and Israel Arockiaraj, AO applied the profit percentage of 16.22%, as worked out above, on the total cost of Rs.1.63,35,520/-. The resultant sum of Rs.26,49,620/- was considered to be undisclosed profit of the assessee and added to its income.

Assessee moved a rectification application before the AO inter alia pleading that against the cost of Rs.1,63,35,520/-, it had invoiced Rs.1,92,12,150/-. Thus, as per the assessee, it had offered a profit margin of ITA.1619/Bang/2013 Page - 3 Rs.28,76,630/- as a part of its profit in its profit and loss account and a further addition of Rs.26,49,620/- would result in taxing the same amount twice.

The AO was not fully impressed by the second contention of the assessee that profits were already booked. Nevertheless, the AO effected a rectification which partly went adverse to the assessee. According to him, the profit percentage of 16.22% ought to have been applied on revenue of Rs.1,92,12,150/- and not on the cost of Rs.1,63,35,520/-. He thus held that the actual addition which ought to have been made was Rs.31,16,210/- and after deducting the profit margin of Rs.7,54,914/- shown by the assessee in its profit and loss account, the addition required was Rs.23,61,296/- against a sum of Rs.26,49,620/- considered originally.

Aggrieved by the above rectification, assessee moved in appeal before the CIT (A). Contention before the CIT (A) was that assessee itself had shown the gross profit of Rs.28,76,630/- from which various expenditure were claimed resulting in a net profit of Rs.7,54,940/-. According to the assessee, when GP rate was applied and GP arrived at, the GP shown by the assessee in its profit and loss account ought to have been reduced and not the net profit as per the profit and loss account. CIT(A) was however not appreciative of the above contentions. According to him, addition of the profit margin of 16.22% was done on account of absence of evidence for the claim of professional service charges paid.

Now before us, Ld. AR strongly assailing the order of lower authorities submitted that the profit margin of 16.22% was worked out on cost. AO had applied such profit margin on the total revenue resulting in an erroneous figure.

Per contra, Ld. DR supported the order of lower authorities.

We have perused the orders and heard the rival contentions. In so far as the contention of the assessee that the profit rate of 16.22% was worked out by the AO on the average cost and not on the billings, it is absolutely true.. The 15$ margin was applied on the cost of 92.5 to arrive at the profit margin of 16.22%. Therefore, when such profit margin was to be applied globally for the whole year then, it ought to have been applied on the cost and not on the revenue. On the cost as shown by the AO at Rs.1,63,35,520/-, application of 16.22% on the above amount would result in a sum of Rs.26,49,620/-. This was a mistake which was not there in the original assessment order, but which was brought about in the rectification order dt.09.02.2012. We, therefore, direct rectification of this mistake and the addition has to be restricted to Rs.26,49,620/-, after deducting the profit of Rs.7,54,914/-, or in other words, addition that should be done for this would only be Rs.18,94,706/-. Vis-a-vis ITA.1619/Bang/2013 Page - 5 the contention of the assessee that it had by itself shown a GP of Rs.28,76,630/- in its profit and loss account and, therefore, from the estimated profit of 16.22% on the cost, such GP has to be first deducted. we are unable to appreciate. This is for the reason that the addition was made on account of the failure of the assessee to produce evidence in support of professional services as pointed out by the CIT (A). The issue, whether deduction from estimated GP has to be that of net profit shown in the profit and loss account or GP shown in the profit and loss account is, in our opinion, a debatable one and not amenable to rectification u/s.154 of the Act. What can be rectified u/s.154 of the Act, has been lucidly explained by the Hon’ble Apex Court in T. S. Balaram, ITO v. Volkart Bros [(1970) 82 ITR 50]. It is only a glaring apparent mistake which is not debatable. We are, therefore, of the opinion that the only mistake that has to be rectified is with regard to application of profit percentage of 16.22% which needs to be done on the cost and not on the sales. Ordered accordingly.

In the result, appeal of the assessee is treated as partly allowed.