TMI Blog2018 (10) TMI 1637X X X X Extracts X X X X X X X X Extracts X X X X ..... ary evidences. AO was erred in estimating gross profit on total sales to make additions. Although the CIT(A) has accepted the contentions put-forth by the assessee to delete addition made by the AO towards estimation of gross profit, yet, he has sustained adhoc disallowance of ₹ 1 crore by following his predecessor’s order. But fact remains that the addition sustained by CIT(A) was deleted by ITAT, on further appeal by the assessee. Accordingly, we set aside the order of CIT(A) in confirming the adhoc addition of ₹ 1 crore and direct the AO to delete addition made towards estimation of gross profit in total. - Decided in favour of assessee. - I.T.A No.5010/Mum/2016 (Assessment year: 2012-13) - - - Dated:- 10-10-2018 - Shri Mahavir Singh And Shri G Manjunatha, JJ. Revenue by Shri D.G. Pansari Assessee by Shri Jitendra Jain ORDER G Manjunatha, These cross appeals filed by the revenue as well as the assessee are directed against the order of the CIT(A)-12, Mumbai dated 06-05-2016 and they pertain to QY 2012-13. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and explained reasons for fall in gross profit. According to the assessee, the main reason for decline in gross profit. Second reason for decline in gross profit is that is increase in raw material cost which fluctuates according to the international market because of which there was an increase in cost of oil which is one of the reasons for decline in gross profit. The second reason for decline in gross profit is grouping / rearranging of certain expenses from consumption of raw materials to manufacturing cost which resulted in enhanced consumption of raw materials. Another reason for decline in gross profit is that in the previous financial year, the assessee has included freight, transportation, coolie and cartage expenses and consignment expenses under the head 'selling and distribution expenses' whereas during the year under consideration, the said expenses has been included in manufacturing cost. This resulted in sharp decline in gross profit ratio when compared to previous financial year. If freight, transportation expenses, etc. are excluded from manufacturing cost, then the gross profit ratio works out to 5.68% as against reported gross profit ratio of 3.55% i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may not be a reason for estimation of gross profit when assessee has substantiated fall in gross profit with necessary evidence. The assessee further submitted that the gross profit ratio cannot be expected to be at same rate when the assessee has procured raw materials from various sources. The assessee is in the business of manufacturing and sale of edible oils and vanaspati, purchased raw materials, and the price of which is dependent upon international market rates, therefore, there is a sharp rise in price of raw materials which resulted in decline in gross profit ratio for the year under consideration. The assessee further submitted that another reason for fall in gross profit is on account of regrouping / re-arranging certain expenses from P L Account to trading account which resulted in lesser gross profit. All these factors have been explained before the AO with necessary evidence, but the AO has ignored explanation furnished by the assessee and estimated gross profit only on the basis of gross profit rate declared for AY 2010-11 without assigning any reason as to how books of account maintained by the assessee are inconsistent with accounting principles / method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AY 2012-13 as per which the correct gross profit after regrouping of expenses works out to 5.68% as against 3.55% declared in the books of account. If correct gross profit of 5.68% is considered to the gross profit declared for AY 2011-12 of 6.8%, then there is a marginal difference of 1.12% which is on account of increase in cost of raw materials. Therefore, there is no reason for the AO to estimate gross profit. The Ld.AR further submitted that although the Ld.CIT(A) has accepted the contention of the assessee, still sustained adhoc disallowance of ₹ 1 crore by following his predecessor's appellate order without assigning any reasons. But fact remains that on further appeal, the ITAT has deleted the addition sustained by the Ld.CIT(A). Therefore, for similar reasons, this year also the addition made by the AO should be completely deleted. 9. On the other hand, the Ld.DR submitted that the AO has brought out clear facts to the effect that the books of account maintained by the assessee are inconsistent for various reasons, but the Ld.CIT(A) without assigning any reasons, negated observations made by the AO for rejection of books of account. The Ld.DR further submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head 'manufacturing cost1. If the above expense of ₹ 17,90,84,942 is excluded from the manufacturing expenses, then the correct gross profit rate for the year under consideration works out to 5.68% and the correct gross profit rate of 5.68% is compared to gross profit declared for AY 2011-12, i.e. 6.8%, then, - there is a minor difference of 1.12% which is purely on account of increase in cost of raw materials which is beyond the control of the assessee. Though, the assessee has explained all these factors with necessary evidence, the AO has ignored complete details filed by the assessee and made addition by taking gross profit rate of 9% without making any adverse comments on books of account maintained by the assessee. On the other hand, the assessee had filed complete details to justify gross profit declared in its books of account and also reconciled gross profit ratios between AYs 2011- 12 and 2012-13. Therefore, the AO was incorrect in rejection of books of account and estimation of y gross profit. 11. Having considered both the sides, we find that a similar issue arose for consideration before ITAT, Mumbai Bench E for AY 2011-12 in assessee's own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has simply rejected the same without finding fault with the explanations so given by the assessee. 11 . In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the AO has not made out a proper case for rejecting the books of accounts. On the contrary, we notice that the assessee M /s.KamaniOillndustriesPrivateLimited has convincingly explained the reasons for the fall in G.P rate. Accordingly we uphold the order of Ld CIT(A) in setting aside the order of rejection of books of account. 12. Since the assessee has explained the reasons for the fall in G.P rate and since the normal loss declared by the assessee is much lower than earlier years, we are of the view that the non-maintenance of inter process record has not impacted the profit of the year. We notice that the assessee has been maintaining same set of books of accounts and stock register year after year and they have been accepted by the AO in the past. Even otherwise, the assessee has reconciled the quantity details of raw materials and finished goods category wise. Under these set of facts, we are of the view that the Ld CIT(A) was not justified in making adhoc additi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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