2014 (1) TMI 1970 - AT - Income Tax

Determination of Net profit - CIT(A) erred on facts and in law in allowing only part relief to the appellant and applying a N.P. rate of 6.5% - HELD THAT - When we compare the gross profit of the present year with average of preceding three years gross profit rate including the present year we find that such average rate comes to 14.51% as against 13.70% declared by the assessee in the present year. This goes to show that the gross profit rate in the present year is lower by 0.81% as compared to this average rate of gross profit for the three years period including present year. We also feel that in any case the addition in the present year cannot exceed 0.81% of the gross receipts. But at the same time we also feel that since the turnover in the present year is almost three times the addition of 0.81% is not justified. In our considered opinion if the net profit rate of 5% is confirmed in the present year it will amount to addition of 0.57% of the gross receipts as against the maximum possible addition of 0.81% on the basis of average gross profit rate of the three years period including present year. Thus net profit is determined at 5% of the gross receipts. Appeal of the assessee is partly allowed.

Summary

In the appeal before the ITAT Lucknow, the assessee contested the order of the CIT (A)-I, Lucknow, which applied a net profit (N.P.) rate of 6.5% for the assessment year 2010-11. The appellant argued that the CIT (A) erred in applying this rate, as similar cases had accepted a 5% N.P. rate or even loss returns. The appellant maintained that their books of accounts were properly maintained and produced, and thus, the addition confirmed by the CIT (A) should be deleted.The assessee reported a turnover of Rs. 247.70 lacs with a net profit of Rs. 10.98 lacs, equating to a 4.43% N.P. rate. It was noted that the turnover for the current year was nearly three times that of previous years, which justified a lower net profit rate. The gross profit rates for the previous years were 14.20% and 15.6%, while the current year was 13.7%.The Tribunal considered that the gross profit rate should be the basis for comparison, finding the current year's rate lower by 0.81% compared to the average of preceding years. It concluded that while an addition of 0.81% was possible, it was not justified given the increased turnover. The Tribunal decided that a 5% net profit rate would be fair, resulting in an addition of 0.57% of the gross receipts. Consequently, the appeal was partly allowed, adjusting the net profit rate to 5%.