DCIT, circle-25(2), New Delhi V. TNG Retails India Pvt. Ltd., Delhi

ITA 843/DEL/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7813 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2011-2012
• Appeal Filed On: 04-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARMITA BISWAS
• Keywords: Gross profit estimation; Rejection of books of accounts; Business income; Rule of consistency; Additional evidence; Bad and doubtful debts; TDS
• Section: 145; 144; 143(3); 13; 145(3); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘G’: NEW DELHI (Through Video Conferencing) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI N. K. CHOUDHRY, JUDICIAL MEMBER ITA No.843/DEL/2019 [Assessment Year: 2011-12] DCIT, Circle-25(2), R. No.196A, C.R. Building, New Delhi Vs M/s TNG Retail Pvt. Ltd. 503, F.I.E. Patparganj, Delhi-110092 PAN-AAHCA2563L Revenue Assessee Revenue by Smt. Parmita Biswas, CIT-DR Assessee by Sh. Inder Paul Bansal, Adv. Sh. Vivek Bansal, Adv. Date of Hearing 25.01.2022 Date of Pronouncement 28.02.2022 ORDER PER R.K. PANDA, AM, This appeal filed by the Revenue is directed against the order dated 30.11.2018 of the learned CIT(A)-9, New Delhi, relating to Assessment Year 2011-12. 2. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and trading of readymade garments & accessories. It filed its return of income on 29.09.2011 declaring total loss of 2 ITA NO.843/DEL/2019 Rs.5,49,25,063/-. During the course of assessment proceedings, the AO asked the assessee to justify the increase in production expenses as compared to sales and the gross profit and net profit for last three years. From the various details furnished by the assessee, the AO noted that the gross profit rates declared by the assessee are as follows:- Particulars Assessment year 2009-2010 Assessment Year 2010-2011 Assessment Year 2011-12 Gross Profit Raito 47.85% 50.89% 59.85% 2.1. From the month-wise purchase, sale and production expenses filed by the assessee, he observed that the assessee company incurred major expenses on production in the month of March. He noted that from the month of April 2010 to December 2010, the assessee made purchases of Rs.37 crores and in the month of January and February, made purchases of Rs.40.13 cores. The assessee in its submission justified the increase in production expenses that “because of increase in the price of raw material and accessories and increase in wage rates, production cost was increased.” However, the AO while scrutinising the schedule of cost of production, noted that there is sharp decline in production 3 ITA NO.843/DEL/2019 charges. He observed that in Financial Year 2009-10, the assessee made total purchases of Rs.73.02 crores and incurred production charges Rs.9.65 Crores. However, in FY 2010-11, the assessee incurred production charges of Rs.4.82 Crores on a total raw material purchase of Rs.77.54 Crores and closing stock of raw material and work in progress in both the years are almost same. He also noticed certain irregularities in the books of accounts and accordingly issued a show cause notice, asking the assessee to explain as to why the books of accounts should not be rejected and assessment made u/s 144 of the Act. The relevant portion of the notice reads as under:- “.From the perusal of month wise sales, purchase & production expenses, it is observed that the assessee company has made major raw material purchases in the month of December, January and February. However, production expenses have drastically expenses reduced in the same period. In the month of March the assessee company incurred production Rs. 2,79 crores, however- in the eleven months of the financial year i.e. April, 2010 to February, 2011 the assessee company incurred only Rs. 2.02 crores. In view of the same, it is seen that the accounts as mentioned by the assessee company are not reliable and therefore I propose to reject the books of accounts of the assessee as per section 145(3). You are requested to showcause why your books of account be not rejected and assessment made u/s 144 by 29.03.2014 failing which it will be assumed that you have nothing to state/submit 4 ITA NO.843/DEL/2019 and assessment made accordingly. ”. 2.2. In response to the show-cause notice, the assessee produced copy of ledger and vouchers of productions expenses and stated that the company had two premises and for these premises maintained separate accounts. At the end of the year, the company used to merge the balances of premises No.496 with production expenses of premises no.503, the assessee also filed month-wise expenses of both units separately. However, the AO was not satisfied with the submission made by the assessee. He noted that in the initial months, the company incurred around 20 to 25% as production expenses which fluctuate in every month invariably. However, in the subsequent month, the production expenses have gone up. He, therefore, concluded that the assessee is manipulating the accounts to return profit according to its whims and fancies. He, therefore, held that the books of accounts of the assessee company do not present true and correct picture of facts of the case for which he rejected the book results invoking the provisions of section 145(3) of the Act. After taking into account, the average gross profit of FY 2008-09 and 2009-10 at 49.37%, the AO determined the gross profit for the impugned assessment year 5 ITA NO.843/DEL/2019 at Rs.64,49,20,316/-. After deducting the gross profit declared in the books at Rs.38,98,89,894/-, the AO made addition of Rs.25,50,30,422/- to the total income of the assessee. He accordingly determined the total income at Rs.20,01,05,360/-. 3. Before the ld. CIT(A), it was argued that the assessee is engaged in the business of manufacturing and trading of readymade garments and accessories. The sale turnover of the assessee consists of the following three streams:- i. Retail sale of garments manufactured and purchased (‘first stream’) ii. Trading of fabric (‘second stream’) iii. Wholesale trading of garments (‘third stream’) 3.1 It was submitted that in the first stream only, the assessee has to incur production expenses to the extent it relates to the garments manufactured by the assessee. On the rest of the turnover, the assessee is not required to incur any production expenses. Therefore, incurrence of production expenses by the assessee cannot be matched/correlated to the entire purchases/turnover of all the three streams. Thus, the AO has committed an error in taking the gross profit at entity 6 ITA NO.843/DEL/2019 level as the discrepancy alleged to be found by her in the incurrence of production expenses relates only to the turnover in the first stream i.e. sale of garments manufactured by the assessee and it could not have effect on other streams of the turnover. It was submitted that there is neither mismatch of month wise purchases vis-a-vis production expenses nor the entire purchases can be correlated to the production expenses. The assessee filed a chart to substantiate that the turnover relating to first stream of AY 2011-12 is only 63.88 Crores on which the gross profit is calculated at 58.59% as against the gross profit of 70.57% in the preceding year. In the other two streams, the gross profit is progressive. It was submitted that this figure can be verified from the books of accounts and vouchers, etc. maintained by the assessee which were duly produced by the assessee before the AO. It was accordingly argued that the decline of gross profit is only in first stream, which are due to the following reasons:- i. During the year under consideration, as there was recession in the garment market, the assessee was compelled by the circumstances to close down 84 outlets out of 199 outlets and remaining outlets were closed in Assessment Year 2012-13. 7 ITA NO.843/DEL/2019 ii. The turnover of the first stream in the year under consideration has considerably declined to Rs.63.37 crores from turnover of 98.72 crores in the preceding year, which is consequential to the closure of 84 retail outlets. It was argued that due to closure of the retail outlets, the assessee was forced to either sold at heavy discounts to cut down further regular expenses of the outlets or the same were sold to the retail franchises at discounted rates. Therefore, the gross profits for the impugned assessment year were low. It was argued that the low gross profit as a result of closure of many retail outlets has been accepted by the Assessing Officer in the case of the assessee for AY 2012-13 where under similar circumstances all the retail outlets were closed and heavy losses were suffered by the assessee. iii. It was argued that production expenses relate to only fabric utilized for manufacturing of garments. The increase in the production expenses is normal and phenomenal. The percentage wise increase in the production expenses is 12.06% as against 13.47% in the AY 2010-11. Thus, there is no unprecedented increase in the production expenses. iv. Due to the fact of recession in the market and also the closure of many retail outlets, the assessee, in order to survive and cut-down the expenses, had shifted its focus on the second stream of the turnover i.e. 'trading of fabric'. It was argued that the turnover of this stream has gone up to 42.20 crores from 14.60 crores. It was 8 ITA NO.843/DEL/2019 argued that there is low profit in the case of trading in the fabrics. 3.2. Relying on various decisions, it was argued that the AO has not appreciated the facts properly and made huge addition on flimsy ground by rejecting the book results which is not correct and not in accordance with law. 4. Based on arguments advanced by the assessee and decisions cited, the Ld. CIT(A) called for a remand report from the AO. After considering the remand report of the AO and the rejoinder filed by the assessee to such remand report, the Ld. CIT(A) deleted the addition by observing as under:- “4.2 I have carefully gone through the submissions made by the appellant, remand reports submitted by the AO and rejoinder submitted by the appellant. As pointed out earlier, the case of the appellant is that under the fact and circumstances of the case, the books of account have been wrongly rejected by the AO, therefore addition of Rs. 25,50,30,422/- made by applying the average gross profit of two earlier assessment years is bad in law. It is the case of appellant that the mere fall in the gross profit rate cannot lead to rejection of books of account. For rejection of books of account u/s 145(3), the AO has to point out specific defect and discrepancy in the maintenance of books of account. It was submitted that the AO called for information regarding production expenses only on 26-03-14 and detailed reply was submitted. The AO applied gross profit rate on the entire turnover, whereas the production expenses relates only to the turnover of first streams of turnover 9 ITA NO.843/DEL/2019 i.e., “retail sale of garment manufactured and purchased”. The AO was incorrect in correlating the production expenses to the entire turnover and also the purchases made in the other streams of turnover. 4.3 As per Annexure-1 of the written submissions filed on 07-12-2016, it is seen that the gross profit rate of first stream (“retail sale of garment manufactured and purchased”) in the year under consideration has declined to 58.59% from gross profit rate of the similar stream at 70.57% in A.Y. 2010-11. The reason for such decline as described is mainly on account of prevailing recession in the garment market. In support, the appellant has relied upon the fact that the 84 outlets out of total 199 retail outlets maintained by the appellant were closed during the year under consideration and the rest of the outlets were closed in the next A.Y. i.e 2012-13. The turnover of the assessee has also declined in the year under consideration to 63.37 crore from earlier turnover of 98.72 crore for A.Y. 2010-11. The gross profit rate in the other stream of the turnover i.e., “trading of fabric” and “wholesale trading of garment” is progressive. The list of outlets has also been furnished stating closure thereof as per Annexure- 2 submitted with the written submissions. The assessee has also submitted ratio of production expenses vis-a-vis fabric consumption and it is the case of the appellant that the increase in production expenses, which for the year under consideration is 59.96%, as against 47.89% in respect of A.Y. 2010-11. This increase has been explained with reference to similar expenses incurred in respect of A.Y. 2009-10 at 34.43%. Thus, the increase in the production expenses from A.Y. 2009- 10 to 2010-11 was 13.47% and increase in production expenses from A.Y.2010-11 to 2011-12 is 12.06%. Therefore, it has been explained that increase in production expenses in the year under consideration is also normal increase from year to year. 4.4 In the written submission, it has been explained that the incidence of incurrence of production expenses cannot be seen in the light of incident of making the purchase, which fact has been relied upon by the AO 10 ITA NO.843/DEL/2019 for pointing out the defect in the maintenance of books of account. It has been submitted that the debit of production expenses will depend on issue of raw- material If or manufacturing, issue of bill by the person to whom the job has been handed over and completion of job by him. Thus, there is force in the submission made by the Id. counsel that the production expenses are required to be seen in the light of production and not in the light of purchases made. 4.5 All the data furnished by the assessee was forwarded to the AO and detailed remand report was called for and has been submitted by the AO vide letter dated 06-04-2018, which has also been re- produced above. In para 2.4 the assessing officer has not denied about the existence of three streams of turnover having separate data of GP etc., and has submitted that the Annexures enclosed with the submission are appearing to be co-related to each other and appears to be relevant. The AO has also mentioned about the reasons for fall in gross profit rate which is mainly attributed to closing down of several outlets and recession in the market and closure of rest of the outlets in the next A.Y i.e 2012- 13. The AO has also accepted about the fact regarding decline of the turnover of the first streams to Rs. 63.37 crore from Rs. 98.72 crore in A.Y 2010-11. The AO in para 2.7 has also accepted that on similar facts in respect of assessment for A.Y 2012-13 huge loss returned by the assessee was accepted by the AO and assessment was framed for A.Y. 2012-13 at a loss of Rs. 27,60,33,300/-. Similarly, the AO has also accepted that for assessment year 2013-14 also the loss was assessed at a sum of Rs. 23,73,97,410/- after getting explanation from the assessee. In both the subsequent assessment years, the books of account were not rejected for the reason of low GP. The AO has stated that the arguments of the assessee regarding consistency in the method of accounting may be decided on merits. However, the AO has objected to the furnishing of data by the assessee during the course of present appeal in respect of each streams of turnover on the ground that the same was 11 ITA NO.843/DEL/2019 not furnished during the course of assessment proceedings despite the opportunities having been granted to the assessee. 4.6 In the remand report, the AO has not found any discrepancy in the data furnished by the assessee and no adverse remarks have been passed by the AO except objecting the submission of data on the ground that during the course of assessment proceedings such explanation was not furnished by the assessee. The figures submitted by the assessee in the Annexures have been culled out from the books of account and details of which were furnished before the AO during the course of assessment proceedings. The figures culled out were sent to the AO which have been checked and verified by the AO. Therefore, it is not a case where any additional evidence has been submitted by the appellant. Moreover, all the data was sent to the AO and after considering the same, the AO has submitted the remand report. 4.7 It is not the case of additional evidence/ new evidence in true spirit in as much as details and data are part of regular books of accounts and no evidence relating to any third party is being filed. 4.8 It has been brought on record that in A.Y. 2012- 13, the assessee had reported loss of Rs.28,40,34,399. The assessment has been framed by the AO as per assessment order dated 20-03- 2015 which is subsequent to the assessment framed for the year under consideration which is 31-03- 2014. It is seen from the assessment order that the loss of the assessee had been assessed at Rs. 27,61,33,380/- by accepting the books of account and only the two additions have been made which relates to disallowance of donation of Rs. 2,100/- and disallowance u/s 40(a) (ia) Rs. 38,99,000/-. The said assessment order has been annexed as annexure-4 with the written submission filed on 07-12- 2016. 4.9 Assessment for A.Y. 2013-14 has also been framed u/s 143(3) vide order dated 18-03-2016. The assessee had returned a loss of Rs. 24,02,10,005/- 12 ITA NO.843/DEL/2019 which has been assessed at Rs. 23,73,97,410/-. In this assessment order also the AO has accepted the accounts maintained by the assessee and has made some minor disallowances. Thus, the method of accounting maintained by the assessee is consistence and has been accepted. 4.10 In the case of CIT Vs Winner Construction Pvt. Ltd. (supra), Hon’ble Delhi High Court has held that gross profit or net profit rate can vary from year to year depending on favorable or unfavorable factors and market conditions. There can be fall or reduction in gross profit but this by itself is not a good reason to reject the books. Books results or addition to gross profits cannot be made on the sole or mere fact that the profits are low. In the case of CIT Vs Paradise Holidays (supra) it has been held the accounts. If the accounts are maintained in the regular course and are duly audited by an independent chartered accountant and are free from any qualification by the auditors, the same should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the revenue to show that either the books of account maintained by the assessee were incorrect or incomplete or method of account adopted by him was such that true profits of the assessee cannot be deduced there from. In the case of CIT Vs Jackson House (supra) Hon’ble Delhi High Court has held that in absence of any specific defect or discrepancy pointed out in the maintenance of books of account of the assessee, section 145(3) could not be applied. 4.11 Affirming the aforementioned position of law, very recently Hon’ble Delhi Court in the case of Pr. CIT vs. IBILT TECHNOLOGIES LTD.[ ITA 995/2018 Pronounced on 12-09-2018] has held that If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a non-partisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of 13 ITA NO.843/DEL/2019 accounts. Good and cogent reason why the financial results should be rejected has to be given. Books of accounts cannot be rejected as the respondent/ assessee has suffered losses, where as in the immediate earlier year profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment. 4.12 Therefore, in this view of situation, keeping in view the entirety of facts and circumstances of the case, I am of the opinion that it is not a fit case for rejection of books of account as no specific defect has been pointed out by the AO in the maintenance of books of account by the assessee except so called discrepancy in the incurrence of production expenses vis-a-vis commensurate incidence of purchase. The increase in the production expenses has been explained by the assessee with reference to earlier year’s figures and the increase in the production expenses is normal increase. Incurrence of production expenses also cannot be correlated to the incidence of purchase as incurrence of production expenses would depend on the various factors such as time of issue of raw- material, time of preparation of finished goods and issue of bill by the person performing the job. No other specific defect has been pointed out by the AO either during the course of assessment proceedings or in the remand reports. Therefore, the rejection of books of accounts on account of lower gross profit is not called for particularly in the peculiar facts and circumstances of the case as most of its retail outlets were closed during the year under consideration and rest of the retail outlets were closed in the next assessment year. Thus, the reason for decline in gross profit rate in the year under consideration is self- evident. 4.13 In view of above discussion, I am of the opinion that the rejection of books of accounts by the AO u/s 145(3) was not called for and therefore, consequential addition made by the AO of a sum of 14 ITA NO.843/DEL/2019 Rs.25,50,30,422/- is deleted. Appellant succeeds in this ground of appeal. 5. In the result, appeal is allowed.” 5. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:- 1) “On the facts and in circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of GP rate of Rs.25,50,30,422/-. 2) The appellant craves for reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal”. 6. The ld. DR heavily relied on the order of the AO. He submitted that the Ld. CIT(A) without considering the facts properly, which were brought on record by the AO, has deleted the addition which is not justified. She accordingly submitted that the order of the ld. CIT(A) be reversed and that of the AO be restored. 7. The ld. Counsel for the assessee, on the other hand, heavily relied on the order of the ld. CIT(A). While reiterating the same arguments as made before the ld. CIT(A), the Ld. Counsel for the assessee submitted that the assessee has maintained books of account which were duly audited and 15 ITA NO.843/DEL/2019 such audited books of accounts were produced before the AO and no mistake whatsoever was found. The AO has gone only on the reason that the gross profit of the assessee has gone down drastically during the year. However, while doing so, he forgot to consider that the assessee has closed 84 of the 199 retail outlets during the year. Due to the closure of the outlets, the assessee has sold its goods either at heavy discount or such goods were sold to the retail franchises at discounted rates to cut down the further regular expenses. The ld. Counsel for the assessee referring to assessment order passed u/s 143(3) of the Act, dated 20.03.2015 for AY 2012- 13, the copy of which is placed at pages 24 to 26 of the paper book, submitted that the loss declared by the assessee at Rs.28,40,34,399/- was accepted and the addition only on account of donation paid and disallowance u/s 40(a) of the Act for short payment of TDS was made but books of account were not rejected and the book results were accepted. Referring to the copy of the assessment order for AY 2013-14, copy of which is placed at page 39 to 46 of the paper book, he submitted that here also the AO in the order passed u/s 143(3) on 18.03.2016 has accepted the loss of 16 ITA NO.843/DEL/2019 Rs.24,02,10,005/-, wherein, he has made addition on account of various other items such as bad debts, traffic fine, deemed income, interest income, disallowance of loss on account of bad debts and disallowance on account of loss of sale of fixed assets but has not rejected the books of account. He submitted that when the assessee has closed down lot of its retail outlets, it is incomprehensible that the gross profit will increase. Relying on various decisions, the ld. Counsel for the assessee submitted that the books of account cannot be rejected merely for the reason that there is decline in gross profit rate. For the above proposition, he relied upon the decisions of the Hon’ble Delhi High Court in the case of CIT vs Winner Construction Pvt. Ltd. reported in (2012) 81 CCH 0091(Del.), CIT vs Paradise Holidays 325 ITR 0013(Del.) and CIT vs Jacksons House 198 Taxman 0385 (Del.). He submitted that when the Revenue has accepted one view consistently in subsequent years and the facts remain constant, the rule of consistency also should be followed. For the above proposition, he relied on the decisions of the Hon’ble Supreme Court in the case of RadhaSoami Satsang vs CIT reported in 193 ITR 321(SC), Honda Siel Power Products vs 17 ITA NO.843/DEL/2019 CIT reported in 295 ITR 466 (SC) and the decision of Hon’ble Delhi High Court in the case of Promain Limited vs CIT vide W.P.(C) 3910/2015 order dated 15.02.2016. 8. So far as the various decisions relied on by the AO are concerned, he submitted that the same are distinguishable and not applicable to the facts of the present case. He accordingly submitted that the order of the Ld. CIT(A) being in consonance with law should be upheld and the grounds raised by the Revenue should be dismissed. 9. We have heard the rival arguments made by both the sides, perused the orders of the A.O. and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in the business of manufacturing and trading of readymade garments & accessories. It filed its return of income declaring total loss of Rs.5,49,25,063/-. We find the AO rejected the book results on the ground that the gross profit rate declared by the assessee is very low and the books are not reliable. According to him, the assessee has incurred around 20 to 25% as production expenses in the initial months and the same fluctuates in 18 ITA NO.843/DEL/2019 every month invariably. According to him, such expenses are not in consonance with the purchases of the company since the company made heavy purchases in the month of January and February. However, production in these months is very less. We find, applying average gross profit rate of 49.37% by considering gross profit rate for FY 2008-09 and 2009-10, the AO computed the average gross profit rate for the impugned assessment year at Rs.64,49,20,316/-. After taking gross profit declared in the books at Rs.38,89,894/-, the AO made addition of Rs.25,50,30,422/- to the total income of the assessee. 10. We find the Ld. CIT(A) after considering various submission filed by the assessee and after obtaining the remand report from the AO, deleted the addition made by the AO, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of Ld. CIT(A) on this issue. From the various details furnished by the assessee, we find the case of the assessee was also scrutinized in AY 2012-13 and 2013-14 and in both the assessment years, the AO has passed orders u/s 143(3) and the book results were not rejected and loss declared at 19 ITA NO.843/DEL/2019 Rs.(-) 28,40,34,399/- for AY 2012-13 and loss of Rs.(-) 24,02,10,005/- for AY 2013-14 have been accepted with minor additions on various other issues but not on account of low gross profit. Further, the assessee in the instant case has maintained its books of accounts and such books of accounts were duly audited and the auditors have not pointed out any mistakes in the books of accounts. Such audited books of account along with bills and vouchers were produced before the AO and no specific defects were pointed out by the AO in the books of accounts. The submission of the ld. Counsel for the assessee that out of 199 retail outlets, the company has closed down 84 outlets could not be controverted by the ld. DR. The submission of the ld. Counsel for the assessee that the turnover of the assessee consists of the three streams i.e. retail sale of garments, trading of fabric and wholesale trading of garments, also could not be controverted by the Ld. DR. Under these circumstances, we are of the considered opinion that merely because there is a fall in the gross profit rate cannot be a ground for rejection of the book results in absence of any specific defects being pointed out by the AO. Even in his remand report also, as mentioned by the Ld. CIT(A), the AO 20 ITA NO.843/DEL/2019 has not found any discrepancy in the data furnished by the assessee and no adverse remarks have been made by the AO except objecting to the submission of the data on the ground that during the course of assessment proceedings such explanation was not furnished by the assessee. Although, the ld. CIT(A) has called for a remand report from the AO and has given an opportunity to the AO to make his submission, however, the AO has not pointed out any defects or mistakes in the various details furnished by the assessee. 11. We find the Hon’ble Delhi High court Count in the case of CIT vs Winner Construction Pvt. Ltd.(supra) has observed as under:- “Low gross or net profit may be a ground or reason to conduct a detailed and thorough investigation and verification, but on standalone basis cannot be a ground for rejecting the books. Gross profit or net profit rate can vary from year to year depending on favourable or unfavourable factors and market conditions. There can be a fall or reduction in gross profit but this by itself is not a good reason to reject the books. Books results or additions to gross profits cannot be made on the sole or mere fact that the profits are low. This cannot be the circumstance or material alliunde to make estimation of profits. [See Pundit Brothers versus Commissioner of Income Tax, (1954) 26 ITR 56 (Pun.)] System of accounting adopted by an assessee cannot be rejected on the ground that the gross profit disclosed in the books was low, in comparison with others in the same line of business. 21 ITA NO.843/DEL/2019 Low profit with other defect can justify rejection of books, Therefore, we have to examine the three reasons given by the Assessing Officer recorded above to determine whether or not the books of accounts were rightly rejected, but without ignoring the low profit rate.” 12. We find the Hon’ble Delhi High Court in the case of CIT vs Paradise Holiday 325 ITR 0013 (Del.) has observed as under:- In this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of business and are duly audited, free from qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. Reference can be made to the following observations:- In this case it has been held that section 145(3) can be applied only where the AO is not satisfied about the correctness or completeness of the accounts. The accounts which are regularly maintained in the course of business and are duly audited, free from qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. Reference can be made to the following 22 ITA NO.843/DEL/2019 observations:- Revenue that the Central Government had notified any particular Accounting Standards to befollowed by tour operators. Hence, the second part of sub-s. (3) of s. 145 does not apply to this case. 6. The AO has not pointed out any specific defect or discrepancy in the account books maintained by the assessee. Admittedly, the assessee had been maintaining regular books of accounts, which were duly audited by an independent chartered accountant. As noted by CIT(A), the financial results were fully supported by the assessee with vouchers and the books of account were complete and correct in all respects. The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom." 13. We find the Hon’ble Delhi High Court in the case of CIT vs Jackosons House 198 Taxman 0385(Del.) has observed as under:- "6, As noted by the CIT(A) as well as by the Tribunal, the AO has not pointed out any specific defect or discrepancy in the accounts books maintained by the assessee. The accounts books, admittedly, were produced before the AO for his 23 ITA NO.843/DEL/2019 consideration. This is also not the finding of the AO that the account of the assessee were not complete. As regards the assessee not maintaining stock register in the form expected by the AO, the assessee has given an explanation which has been accepted not only by the CIT(A) but also by the Tribunal and both of them have given a concurrent finding of fact that maintaining stock register of that nature was not feasible, considering the nature of the business being run by the assessee which was engaged in the business of manufacturing readymade garments by purchasing fabric which was then subjected to embroidery, dyeing and finishing and was then converted into readymade garments by stitching. Our attention has not been drawn to any provision of the Act or to Rules framed thereunder, requiring the assessee engaged in the business of manufacturing and export of garments or all assessees in general having business income, to maintain stock register, in a particular form. As found by the Tribunal, the income of the assessee was clearly discernible from the accounting method followed by it. Hence, the accounts of the assessee cannot be said to be defective or incomplete, merely because the stock register was not maintained in a particular form. Sec. 145(3) of the IT Act, therefore, could not have been invoked by the AO to the present case". 14. The various other decisions relied upon by the Ld. Counsel for the assessee also supports his case to the proposition that book results cannot be rejected or addition of gross profit cannot be made on the sole or mere fact that the gross profits are very low. In view of the above discussion and in view of the detailed reasoning given by the ld. CIT(A) while deleting the addition, we do not find any infirmity in the order 24 ITA NO.843/DEL/2019 of the Ld. CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. 15. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 28 th February, 2022. Sd/- Sd/- [N.K.CHOUDHRY] [R.K.PANDA] JUDICIAL MEMBER ACCOUNTANT MEMBER Delhi; Dated: 28 th February, 2022. f{x~{tÜ? f{x~{tÜ?f{x~{tÜ? f{x~{tÜ? fÜA fÜA fÜA fÜA P.S P.SP.S P.S Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi