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2020 (12) TMI 718 - AT - Income TaxEstimation of income - Bogus purchases - HELD THAT:- There is merit in the contentions of the assessee that if quality claim and the discount are taken to the trading account, where they rightly belong as per the accounting principles, then the rate of gross profit comes to 0.52% of sales which compares favourably with the normal rate of gross profit ranging from 0.1% to 0.5% in the assessee’s business of trading in HR and CR coils/sheets and galvanized coils/sheets on wholesale basis. Similar level of gross profit has been shown by the assessee in AYs 2008-09, 2009-10 and 2012-13, which has been accepted by the AO in the assessment passed u/s 143(3) of the Act. AO has estimated the profit of the assessee-company at 8% of opening stock held and purchases made during the year on the ground that the sale is not ascertainable with item-to-item purchase and stock held by the assessee. This is the incorrect method adopted by the AO. A perusal of the order of the CIT(A), as mentioned earlier clearly indicates that the assessee filed before the AO the relevant details. AO could have estimated the gross profit margin which is the surplus available out of the sales revenue, after subtracting the cost of goods sold. The correct method is indicated below: Gross Profit = Sales – COGS Gross Profit Margin (GPM) = (Gross Profit X 100)/(Sales) AO has resorted to an estimation which is not based on accounting principles. The AO has also disregarded the submissions made by the assessee during the course of assessment proceedings.
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