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2017 (7) TMI 1011 - DELHI HIGH COURTInvocation of Section 145 - interpretation to Section 80IA (8) and (10) - ITAT concluded that the AO had arbitrarily made the addition by rejecting the books of accounts and the additions made by the AO were rightly deleted by the CIT(A) - Held that:- The expression “such reasonable basis” pre-supposes that the AO has to explain with sufficient clarity why the AO is rejecting the profit figures as put forth by the Assessee which emerges from the audited accounts of the Assessee. In the present case, for instance, the AO had to explain why he was rejecting for AY 2006-07 the GP ratio of 38.05% and substituting it with a rate of 23%. What the AO appears to have done in the present case is to reject an explanation given by an Assessee as to the difference in the selling price of the products manufactured by it at its Baddi unit compared to that at Delhi unit. The AO proceeded on the basis that the sales were to related parties thus giving an unfair advantage to the Assessee. The above approach of the AO was rightly found by the CIT(A) to be not justified. Without pointing out the error, if any, in the accounts or disturbing the figures of sales or purchases, to compare the trading results of business of two units and simply reject was clearly not a “reasonable basis”, as contemplated by the proviso to Section 80-IA (8) of the Act. The AO’s order does not explain the basis for determining the GP ratio of 23% instead of 38.05% for AY 2006-07 and 25% instead of 43.07% for AY 2007-08. In the circumstances, the ITAT’s conclusion that the AO’s order was passed on conjectures and surmises cannot be said to be erroneous. When there are audited accounts of an entity and the calculation of the GP ratios hinges upon their analysis, the AO should not lightly undertake an exercise that would amount to negating those accounts. Question (i) is answered in the negative by holding that the ITAT did not err in holding that invocation of Section 145 of the Act in the facts of this case was not justified. Question no. (ii) is answered in the negative by holding that the impugned order of the ITAT in its interpretation of Section 80-IA (8) and (10) of the Act is not erroneous. - Decided in favour of the Assessee.
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