ITAT Remits Profit Estimation and Salary Disallowance Matter for Fresh Adjudication:

The appeal was filed by the Revenue against the order of the NFAC which had allowed the assessee’s appeal against the assessment framed under Section 144 read with Section 144B of the Income Tax Act, 1961. The assessee is proprietor of Shri Ghantakarna Enterprise and was engaged in manufacturing BOPP bags. For AY 2018-19, the assessee declared a gross loss of Rs. 58.61 lakh on turnover of Rs. 12.01 crore, resulting in a negative gross profit rate of 4.88%. In contrast, gross profit rates of 19.27% and 15.23% had been disclosed in the preceding two years.

The AO, observing the substantial fall in gross profit, rejected the books of account under Section 145(3). The AO thereafter estimated profit by applying the average gross profit rate of the preceding two years. The AO also noticed that salary and wages expenditure had increased from Rs. 60.25 lakh in the preceding year to Rs. 1.35 crore during the relevant year, despite the decline in turnover. Accordingly, an amount of Rs. 74.72 lakh was disallowed on account of excess salary expenditure.

The Tribunal observed that the present case involved an abnormal variation in trading results along with the assessee’s failure to furnish basic details required for verification of purchases, sales, expenses, loans and advances and other relevant particulars. The Tribunal further noted that the assessee had not provided a satisfactory explanation for the substantial loss compared with the positive gross profit disclosed in the preceding two years. Similarly, the substantial increase in salary and wages expenditure, despite reduced turnover, remained unexplained before both the AO and CIT(A).

Considering the deficiencies and in the interest of justice, the Tribunal set aside the order of the CIT(A) and restored the matter to the file of the Jurisdictional AO for fresh adjudication. The AO was directed to provide the assessee a reasonable opportunity to produce books of account and supporting documents relating to purchases, sales, expenses, salary and wages, loans and advances and other relevant particulars. Accordingly, the Revenue’s appeal was allowed for statistical purposes.