INCOME TAX ACT, 1961

Section 145

Accounting method - Estimation of gross profit - Addition on account of decline in GP/NP Ratio under section 145 -

Assessee was engaged in business of manufacturing and sale of processed foods products. Assessee's was picked up for scrutiny and a notice under section 143(2) was issued. According to Revenue, during the course of assessment AO perused report of the Statutory Auditor with comment that accuracy of valuation of inventories of finished goods could not be commented upon. Their net profit ratio was found to be 10.72% as compared to 15.19% in earlier assessment year. AO rejected the explanation offered by assessee stating that it maintained excise records and that the note of auditor was only in respect of valuation. Held: ITAT having perused auditor's report noticed that a company's inventory was valued at lower cost or net reliable value and included cost of bringing the goods in the present location and other conditions. Auditor had stated that valuation adopted was based on the retail method could be used when the actual cost of production was approximated. With nature of business activity carried on by assessee, it was not possible to keep production cost of each and every finished product. It could be, therefore, on an approximate basis, it could be spread over the goods produced. ITAT had come to conclusion that there was a valid explanation for the drop in the net profit ratio. Therefore, no substantial question of law.

REFERRED : M/s. VRB Foods (P) Ltd. v. DCIT ITA No. 2291/DEL/2015 : 2018 TaxPub(DT) 0662 (Del-Trib)

FAVOUR : In assessee's favour

A.Y. :

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