Estimation of gross profit within industry range and disallowance of reasonable interest on unsecured loans are unsustainable without identifying specific defects in audited accounts.

ORDER

Paresh M. Joshi, Judicial Member.- This is an Appeal filed by the Assessee under section 253 of the income tax Act 1961,[herein after referred to as the Act for the sake of brevity] before this tribunal, as & by way of a second appeal .The Assessee is aggrieved by the order bearing No:-ITBA/NFAC/S/250/2024-25/1072319660(1) dated 20.01.2025 passed by the Ld. CIT(A) u/s 250 of the Act, which is hereinafter referred to as the “Impugned Order”. The Relevant Assessment year is 2017-18 and the corresponding previous year period is from 01.04.2016 to 31.03.2017

2.1 That as and by way of an “Original Assessment order” made u/s 143(3) of the Act, the total income of the Assessee was computed & assessed at Rs. 4,75,263/-. The total income as per the return of income was at Rs.4,38,550/-. An addition of Rs.7, 867/- was made as disallowance against “telephone expenses”. Yet another addition of Rs. 28,846/- was made as disallowance against the caption “other expenses”. The agriculture income was computed at Rs. 72,000/-. That the aforesaid “Assessment order” bears no:- ITBA/AST/S/143(3)/2019-20/1022601037(1) and that the same is dated 18.12.2019, which is herein after referred to as the “Original Impugned Assessment Order”. [First original Assessment Order]

2.2 During the year under consideration, the assessee was engaged in the business of retail trading of cloth under the name & style M/s. Navrang Vastralaya, Jawahr Marg. Nalkheda, Distt-Agar Malwa. The comparative chart with regard to gross sales and net profit for last three years is as under as per para 3 of the “original impugned assessment order”.-

2.3 The core reason for disallowance of the telephone expenses to the extent of Rs. 7, 867/- against the amount of Rs. 31,468/-claimed was that the complete vouchers were not available for the verification purpose. Accordingly the Ld. AO disallowed 25% of the expenses claimed and added Rs. 7, 867/- to the income of the assessee exigible to tax [Para 4 of the original Impugned Assessment Order][first round].

2.4 The core reason for disallowance under the caption of “other expenses” to the extent of Rs. 28,846/- against the amount of Rs. 1, 15,390/- claimed was that upon verification of this expenses on the test check basis it was noticed by the Ld. AO that some of the payments were not supported by the proper bills and were routed through internal vouchers and were not opened for complete verification. Relevant evidences for debit were absent. Some payments under head “other expenses” were supported by vouchers with only “thump impression” where identity was found to be unverifiable. Some bills/vouchers were found to be “self-made” under head “other expenses”. Accordingly the Ld. AO disallowed 25% of other expenses claimed and added Rs. 28,846/- to the income of the assessee exigible to tax [Para 5 of the original Impugned Assessment Order].

2.5 Further as and by way of an order made u/s 263 of the act the Original Impugned Assessment Order dated 18.12.2019 u/s 143(3) was revised by PCIT vide order bearing no.-ITBA/REV/F/REVS/2021-22/1040273089(1) dated 02.03.2022. Thereafter the Ld. AO passed a fresh Assessment Order bearing no. – ITBA/AST/S/144/2022-23/1051455091(1) dated 27.03.2023 u/s 144 RWS 263 of the act where by the total income exigible to tax was quantified and assessed at Rs. 10,78,950/. Income as per the ROI was at Rs. 4, 38,550/-. The addition of Rs. 10, 45,394/- was made as “estimated profit from business”. Addition of Rs. 33,557/- was made as and by way of disallowance the bifurcation of which were provided for at Para 6 of the “Impugned Assessment Order” [Second Round] dated 27.03.2023 [2^nd “Impugned Assessment Order u/s 144 rws 263”].

2.6 The core issue in the Impugned Assessment Order dated 27.03.2023 [Passed u/s 144 rws 263 of the act] was that there is a fall in the GP rate in the FY 2016-17 AY 2017-18. The assessee had submitted that this fall [from 17.71% to 12.62%] was due to factors such as change in the business strategy, the purchases of the goods form new parties who offered wide variety of the goods, instead of the traditional vendors apart from offering attractive prices which all lead to higher turnover and fall in GP. The assessee had submitted a chart which explained turnover vis-a-vis profits generated in the last three years which was as under:-

2.7 The assessee also contended that in order to achieve the high turnover the assessee sacrificed profits.

2.8 The explanation of the assessee was not found suitable for following reasons by the Ld. AO:-

Hence, the reasons for fall in G.P. are considered too general and vague and in absence of any documentary evidences in support of the claims raised as discussed above, the contention of the assessee is rejected for want of sustainable evidence and the Gross Profits for the year is estimated at 15% of the turnover of Rs.2,08,53,053/-, which works out to Rs.31,27,958/-. At this point, the books of accounts of the assessee are rejected u/s 145(3) of the IT Act, 1961, for having failed to justify the reason for fall in Gross Profit with cogent documentary evidences. The Gross Profit is estimated at 15% taking into consideration the fact that the assessee’s turnover has increased from 1.34Cr from earlier year to 2,08Cr in the current year. Accordingly, the Gross Profits from Business is worked out at Rs.31,27,958/-and the Net Profits from business is accordingly recomputed at Rs. 10,45,394/-.”

2.9 Accordingly basis above the Ld. AO from the business worked out the G.P. @ 15% of the turnover [estimated] and net profit from the business was recomputed at Rs. 10,45,394/-.

2.10 For aggregation of all the disallowances of Rs. 33,557/- the chart was drawn up by the Ld. AO in Para 6 with narrations [reasoning] at Para 3, 4, 5 of the Impugned Assessment Order dated 27.03.2023[second round].

2.11 That the assessee being aggrieved by the aforesaid Impugned Assessment Order dated 27.03.2023 passed u/s 144 rws 263 of the act prefers the first appeal u/s 246 A of the act before the Ld. CIT (A) who by the “Impugned Order” has dismissed the first appeal of the assessee on the grounds and reasons stated therein. The core grounds and reasons for the dismissal of the first appeal were as under:-

“4. During the course of appellate proceedings, the appellant has filed written submissions electronically and the same has been taken due cognizance off for the disposal of present appeal.

5. All the grounds raised by the appellant in the present appeal are against the against the aforesaid disallowances/additions made by the AO of 10,45,394/-(Business income) plus 33,557/- (various issues as already discussed above) and the same is adjudicated as under:

5.1 During the appellate proceedings the appellant contended exactly on the same tune as contended during the assessment proceedings. Nothing specifically was stated/furnished by the appellant in respect of the declaring the low profit percentage in the year under consideration. It was just stated by the appellant that due to increase in the business turnover the appellant has compromised the profit margin. The appellant further argued that the books of account of the appellant are audited and therefore the figures in the same should be adopted.

5.2 Now in order to adjudicate the matter all the facts of the case, findings of the AO during the assessment proceedings and the submission made by the appellant have been taken due cognizance off. Upon perusal of the facts of the case and the submissions made by the appellant, it is clear that the appellant has not provided any substantial or cogent reason during the assessment or appellate proceedings to justify the significant decline in the profit rate from 17.71% in the previous years to 12.62% in the current year. The AO during the course of assessment has thoroughly examined the appellant’s submissions and effectively countered each of the appellant’s claims with sound reasoning. Moreover, the AO, despite the lack of satisfactory explanations from the appellant, adopted a fair and reasonable approach by estimating the profit rate at 15% instead of 17.71%, thereby providing partial relief to the appellant. The AO is directed to estimate income as per above and compute total income of the appellant

5.3 In respect of the other issues the appellant merely contended that the additions made by the AO were ad-hoc and requested their deletion, without substantiating this claim with any credible evidence or arguments. The AO, however, had determined the additions based on relevant material facts, circumstances, and logical reasoning, and there is no basis to classify these additions as ad-hoc or arbitrary. Considering the facts of the case and the detailed reasoning provided by the AO, the additions made and the profit rate adopted by the AO appear to be justified and in accordance with law. Therefore, the additions made by the AO of 10,45,394/-(Business income) plus 33,557/-(various issues) are hereby upheld and the grounds raised by the appellant in this regard stands dismissed.

6. In the result the appeal is Partly Allowed.”

2.12 That the assessee being aggrieved by the “Impugned Order” has preferred the instant second appeal before this tribunal and has raised the following grounds of appeal in the form no. 36 against the “impugned Order” which are as under:-

“1.On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the order passed by the Assessing Officer u/s 144 r.w.s. 263 of the Income Tax Act, 1961.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO of estimating the profit of the appellant at Rs. 10,45,394/-.

3. On the facts and circumstances of the case and in law the Ld.CIT(A) erred in upholding the action of the Assessing Officer of rejecting the books of accounts of the appellant.

4. On the facts and circumstances of the case and in law the Ld.CIT(A) erred in upholding the action of the Assessing Officer of making addition of Rs. 33,557/- on account of disallowance of expenses.

5. The appellant craves leave to add any new ground of appeal or alter, amend or delete any of the above grounds of appeal.”

3.1 The hearing in the matter took place before this Tribunal on 21.05.2026 when the Ld. AR for & on behalf of the Assessee appeared before this tribunal & interalia contended that the “Impugned Order” is bad in law, illegal & not Proper. It therefore deserves to be set aside. The Ld. AR has placed on the record of this tribunal a paper book containing pages 1 to 61. An additional paper book which is case law compilation from pages 1 to 80. The Ld. AR submitted that assessee is in the business of retail textile trade. A brief history of the case as narrated by us as above was repeated and reiterated. In so far as proceedings u/s 263 of the act was concerned it was submitted that no appeal was filed before this tribunal against the section 263 order dated 02.03.2022 of PCIT Indore-1. It was submitted that the book of accounts were rejected by the Ld. AO u/s 145(3) of the act by passing the Impugned Assessment Order dated 27.03.2023 [second round] u/s 144 rws 263 of the act. The core dispute is addition of Rs. 10, 45,394/- as GP of 12.62% for the year under consideration year was not accepted as earlier year GP was at 17.71% [FY 2015-16]. The Ld. AO estimated GP @ 15% of turnover of Rs. 2, 08, 53,053/- and added Rs. 10, 45,394/- to the income of the assessee. The Ld. AR attributed the higher sales volumes during the year under consideration with the earlier year [FY 2015-16] and the preceding year [FY 2014-15] and relied upon table reproduced at Para 2.6 above. The order u/s 263 was read out. It was submitted that in the original Assessment Order dated 18.12.2019 [first round] limited additions were made as we have narrated above. Our attention was drawn to PB page 19 to 21 i.e. notice u/s 142(2) of the act dated 04.01.2023. Page 21 where the information/ documents were sought which was read out. Our attention was invited to PB page 29 which was a reply of assessee dated 11.01.2023 to 142(1) notice dated 04.01.2023. Basis reply dated 11.01.2023 it was submitted that the sales from FY 2016-17 Assessment Year 2017-18 the year under consideration, the sales of the assessee had drastically increased. The reason for such an increase in the sales trends was due to change in the business strategy. It was submitted in brief that the reasons are given in reply dated 11.01.2023 PB page 29. The increase in sales was drastic in terms of % jump when compared with the earlier year & the preceding year. It was submitted that the lower authorities have wrongly rejected books of accounts. The limbs of section of 145(3) are not satisfied. No cogent reasons have been given by the lower authorities to reject the ‘books of accounts’ within the meaning of section 145(3) of the act. There is no express finding in the orders of the lower authorities that books of accounts are incomplete in nature and that its contents are incorrect. The Ld. AO himself has ranged GP between 10 to 15% and that assessee is in range of 15% as determined by the Ld. AO himself. It was emphasised that in the show cause notice there was nothing about rejection of books of accounts of the assessee but in the Impugned Assessment Order dated 27.03.2023 [second round by virtue of section 263 order] books of accounts are rejected hence the Impugned Assessment Order is beyond the scope of the show cause notice. Further the lower GP % as compared with earlier year & the preceding year has not been held to be a reason to reject the books of account. Reliance was placed on case law compilation page 1 where there is a reported decision of this tribunal in case of ACIT v. Anant Commodities Ltd. 214 ITD 68 (Indore – Trib.) wherein it is held that mere decline in gross profit margin in the relevant year compared to preceding assessment years cannot by itself be a ground to make addition to the assessee income unless assessing officer identifies specific defects or discrepancies in books of accounts maintained by the assessee. Our attention was drawn to Para 2.2 & 4.4 of the said order of ITAT Indore. Our attention was next drawn to PB (case law compilation) page 7 to the Judgement of Hon’ble Delhi High Court in case of CIT v. Smt. Poonam Rani 326 ITR 223 (Delhi) wherein it was held that low rate of gross profit, in the absence of any material pointing towards falsehood of account books cannot by itself be a ground to reject accounts books under section 145(3) of the act. Reliance was placed on Para 6, 7 & 8 of the Delhi High Court Judgement. The Ld. AR basis above two precedents submitted that only “eyebrow” can be raised. Books of accounts in the instant case are audited done. No defective account, (it’s entries) are found. No falsehood is established. It was submitted that the GP is net figure. The opening stock, the closing stock, the purchases and the sales are not doubted at all. The components of GP are not wrong. The GP is a mathematical result of certain components but nothing is doubted by the Ld. AO submitted the Ld. AR. Reliance was placed on Amarjothi Granites (India) (P.) Ltd v. Asstt. CIT 58 SOT 130 (Jodhpur – Trib.) wherein it was held that section 145 by itself does not deal with addition or deletion in income and thus, merely because there is some deficiency in books of account or merely because there is rejection of books of accounts, it does not mean that it must necessarily lead to addition in the returned income of the assessee. Reliance was also placed on in case of Century Tiles Ltd. v. JCIT [2015] 152 ITD 327 (Ahmedabad – Trib.) wherein it was held that where the assessee maintained the regular book of account which were duly audited, decline in the gross profit and disproportionate increase in the expenses in certain heads by itself, would not empower the revenue to reject book results, said reason can, at best present a case where the assessing officer ought to have verified the books with caution and make due inquiries. Reliance was placed on ACIT v. Budhalal & Co.  (Ahmedabad Tribunal) and unreported decision in Mukesh Kumar Chandulal v. ACIT [ITA No.-529(Ahd) of 2025, dated 4-9-2025]and in particular Para 6.2 of said order wherein following was recorded:-

“6.2 It is trite law that low profit, by itself, cannot be a ground to reject the books of account or to make an addition, unless specific defects are pointed out in the maintenance of accounts, stock valuation, or method of accounting. The Assessing Officer in the present case has not recorded any finding of inflated purchases, suppressed sales, or defects in stock records. The rejection of book results was made only on the basis of a fall in the GP ratio. This approach is not sustainable in law.

The Hon’ble Gujarat High Court in CIT v. Symphony Comfort System Ltd.   (Guj.)] has held that the Assessing Officer was not justified in rejecting the book results and enhancing the gross profit rate merely because the GP ratio had fallen compared to the preceding year, when no specific defects were pointed out in the books of account. The Hon’ble High Court categorically observed that in absence of any defect pointed out in the books of account and the records maintained, the AO was not justified in rejecting the books results, so as to enhance the gross profit rate. The ratio of the said judgment, being that of the jurisdictional High Court, is binding on us and squarely covers the issue in favour of the assessee.”

3.2 Per contra the Ld. DR appearing for and on behalf of the revenue submitted that books of accounts were not produced before the fresh proceedings PB pages 41 & 30 were compared. The Ld. DR submitted that the festival timeline are not getting correlated. In reply dated 11.03.2023 to the show cause notice dated 06.03.2023 page 36 to 37 [page 36 to 44] there is no mention of any festivals. No details are given with regard to stand of the Ld. AR that new vendors were found and that new prices emerged, no details are given in the proceedings. Books of accounts not given despite order u/s 263 of PCIT. Discrepancies were not addressed by the assessee. Basis Para 2.4 of the Impugned Assessment Order dated 27.03.2023 [section 144 rws 263 2^nd innings] books of accounts were not produced contended the Ld. DR. The assessee had produced the books in the original assessment proceedings (first round). The Ld. DR then placed reliance on Para 5.2 of the Impugned Order and stated that the Ld. AR has not brought on record nor has contended that said observation of the Ld. CIT (A) in Para 5.2 is devoid of any merits. The Ld. DR supported Para 5.2 of the Impugned Order and stated that by estimating 15% instead of 17.71% GP partial relief already stands given to the assessee.

3.3 In the rejoinder arguments the Ld. AR submitted that issue of scrutiny in the first round was complete scrutiny of large case deposit during demonetization and abnormal increase in sales with decrease in profitability compared to previous years and Para 2 of section 263 order dated 02.03.2022 was read out by the Ld. AR. The Ld. AR further submitted that there was no proper inquiry by the Ld. AO to reject the books of accounts in the second round and that books of accounts were not called in 142(1) notice.

3.4 The Ld. AR then submitted that on Para 6 page 5 of the Impugned Assessment Order (second round) where there is disallowance of Rs. 10,780/- u/s 40(a)(ia) in respect of payment of interest to Shri Akshay Kumar Bam of Rs. 35,932/- the form 15G was not provided and that no grievance is made on this score. With regard to excess payment of interest on loan to Smt. Suman Phaphariya of Rs. 52,118/- is concerned it was an unsecured loan and interest payable was @ 15%. The Ld. AO has not seen the commercial expediency angle. The Ld. AO observation in Para 4 of the “Impugned Assessment Order”[second round] are general in nature. The inter se transactions of unsecured loan have not been held to be bogus. No allegation of specific nature is on record. Disallowance of Rs. 10,424/- being difference between 15% rate and 12% rate is wrongly decided and added to income [Rs. 52,118 @ 15% & Rs. 41,694 @12%]. With regard to the disallowance of Rs. 10,853/- on account of addition to building is wrong and so also of Rs. 1500/- on account of addition of furniture. Reliance was placed on section 40A (3) and 43(1) second proviso. It was finally submitted that except Rs. 10,780/- [40 (a) (ia)] the remaining disallowance should be deleted. The Ld. DR submitted that appropriate call with regard to the remaining 3 item be taken by bench as they deem fit. Hearing was over and concluded.

4.1 We have to decide the legality, validity and proprietary of the “impugned order” basis records of the case & the rival submission canvassed before us.

4.2 We have carefully perused the records of the case and have heard the submissions.

4.3 We basis records of the case & after hearing & further upon examining the rival contentions of the Ld. AR & the Ld. DR canvassed before us, are of the considered opinion that addition of Rs. 10,45,394/- basis estimation of gross profit for the year under consideration is wrong and not proper. The Ld. CIT (A) ought to have allowed the first appeal of the assessee. The Ld. CIT (A) has repeated and reiterated the finding of the Ld. AO in the Impugned Assessment Order dated 27.03.2023 [2^nd round section 144 rws 263]. The Ld. AR basis material on record has established that a slightly lower GP rate from the earlier year or the preceding years ip so facto is not sufficient ground perse to reject the GP rate of 12.62% for the year under consideration, just because for FY 2015-16 the GP rate was at 17.71%. Further mere rejection of books of accounts u/s 145(3) for the failure to justify the reason for fall in GP with cogent documentary evidences is no ground to reject the books of accounts [Para 2.4 (d) of the Ld. AO Impugned Assessment Order]. Under section 145(3) which deals with method of accounting is reproduced below:-

“145. [Method of accounting. [Substituted by Act 22 of 1995, Section 31, for Section 145 (w.e.f. 1.4.1997).]

(1)Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2)The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3)Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.] [Inserted by Act 20 of 2002, Section 60 (w.e.f. 1.4.2003).]”

A plain bare simple perusal of above section 145 speaks of satisfaction of the Ld. Assessing Officer on the books of accounts. It states that satisfaction should be on correctness or completeness of the account of the assessee which is the first limb and second limb is on method of accounting provided in sub section (1) of section 145 i.e. cash or mercantile system which has not been followed by the assessee or income has not been computed in accordance with standards notified under sub section (2) of section 145. None of these material ingredients were put to the notice of the assessee. The Ld. AR has made a grievance of it and we concur with his submission that due process with regard to section 145 have not been strictly adhered to by lower authority. The assessee has placed on the record of this tribunal ITR, COI, TAR, audited balance sheet and P/L A/c basis PB pages 1 to 17 with a certificate that these documents were available with the Ld. Assessing Officer and the Ld. CIT (A). We find that with these documents being on the file of lower authorities no specific allegation much less a finding is recorded that material ingredients of section 145 are not followed stricto senso. Under these facts and circumstances we hold that rejection of book u/s 145(3) is not proper and correct. The Lower authorities have erred in law. The assessee had provided all the information, material in the scrutiny assessment and to establish contrary perse was initially on the department by making specific imputations but that has not happened in the instant case. The assessee has given a reasonable and plausible explanation both before lower authorities and before us and we do not see any imperfections in the same. The sales turnover in “Retail Textile Trade” is subject to market (fluid) conditions. Due to exigency of the market conditions the assessee took a commercial decision for the year under consideration that he would do a larger volume of business with the lower profit margin looking to present and future market too. In this regard the Ld. AO cannot question the wisdom of assessee business decisions and compare his turnovers and gross profit ratio with that of the earlier year or the preceding years in the absence of any cogent material in his possession. In the instant case the lower authorities have done so by making a comparison/ comparative analysis and have in fact estimated GP at 15% instead of 12.62% which is an exercise in the realm of the hypothesis.

4.4 We find that the Ld. AR has rightly relied upon precedents of High Court and that of coordinate benches of ITAT which we have analysed above and we concur with those decisions and orders. We respectfully follow Judgement of Hon’ble Delhi High Court in case of Smt. Poonam Rani(supra) wherein Hon’ble Delhi High Court has correctly held that :-

“6. On a perusal of the assessment order, we find that the Assessing Officer has not pointed out any particular defect or discrepancy in the account book maintained by the assessee. During the course of hearing before the Commissioner of Income Tax (appeals), it was pointed out by the assessee that the account books of the assessee were duly audited under Section 44 AB of the Excise Act and the quantitative details as required by Clause 28 (b) of Form No.3CD regarding raw material and finished products (i.e. opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited by certified accountant and were enclosed with Form 3CD which had been placed on record but, the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings. It was for this reason that CIT (Appeals) was satisfied that the assessee had furnished complete details, including quantitative details in respect of purchase of raw material, manufacture of copper wire and sale of the furnished products. In these circumstances, we fail to appreciate how the accounts, maintained by the assessee, could have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete.”

“10.Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assessing Officer and serve as a warning to him, to look into the accounts more carefully and to look for some material which could lead to the conclusion that the accounts maintained by the assessee were not correct. But, a low rate of gross profit, in the absence of any material pointing towards falsehood of the accounts books, cannot by itself be a ground to reject the account books under Section 145(3) of the Act.”

4.5 We respectfully follow our own decision case of ACIT v/s Anant Commodities (Indore Tribunal) wherein the ratio culled down is “mere decline in gross profit margin in relevant year compared to preceding assessment years cannot by itself justify addition to assessee’s income unless Assessing Officer identifies specific defects or discrepancies in books of account maintained by assessee.”

4.6 We simultaneously hold that on business and financial scores nothing is disputed by the revenue basis any documents/ material/evidences. No cogent reasons are given by the lower authority save & except an estimation of GP @15% of turnover.

4.7 We gainfully refer to the decision of Hon’ble ITAT in case titled Mukesh Kumar Chandulal (supra) wherein in the Para 6.2 following is held

“6.2 It is trite law that low profit, by itself, cannot be a ground to reject the books of account or to make an addition, unless specific defects are pointed out in the maintenance of accounts, stock valuation, or method of accounting. The Assessing Officer in the present case has not recorded any finding of inflated purchases, suppressed sales, or defects in stock records. The rejection of book results was made only on the basis of a fall in the GP ratio. This approach is not sustainable in law. The Hon’ble Gujarat High Court in CIT v. Symphony Comfort System Ltd.  (Guj.)] has held that the Assessing Officer was not justified in rejecting the book results and enhancing the gross profit rate merely because the GP ratio had fallen compared to the preceding year, when no specific defects were pointed out in the books of account. The Hon’ble High Court categorically observed that in absence of any defect pointed out in the books of account and the records maintained, the AO was not justified in rejecting the books results, so as to enhance the gross profit rate. The ratio of the said judgment, being that of the jurisdictional High Court, is binding on us and squarely covers the issue in favour of the assessee.”

4.8 We observe that the Ld. Assessing Officer has himself observed that gross profit ratio is between 10% to 15% being industry standard [Para 2.4.1 page 27 of PAPER BOOK]. The Ld. AR has rightly stated that the GP of 12.62% squarely falls under this standard and to take maximum rate of 15% is prejudicial to the assessee. We concur with the view of the Ld. AR on this score too.

4.9 In so far as other disallowance of the assessee are concerned which are tabulated in Para 6 of the Impugned Assessment Order aggregating of Rs. 33,557/-the Ld. AR has fairly conceded that the disallowance of Rs. 10,780 for non-submission of 15G is justifiable u/s 40 (a)(ia) against the interest paid to Shri Akshay Kumar Bam of Rs. 35,932/-. In so far as other three disallowances are concerned with regard to disallowance of Rs. 10,424/- being the differential interest between Rs. 52,1118/- @ 15% paid and Rs. 41,694/-@12% which is allowed by the Ld. Assessing Officer. We are of the considered view that on what basis and at what rate the unsecured loan is to be taken is the prerogative of the assessee. In any event interest rate of 15% paid by assessee to the unsecured creditor is not an exorbitant and excessive. It is reasonable we delete this addition. In so far as disallowance of Rs. 10,853/- on the fixed assets [Addition to fixed assets i.e. the buildings] and Rs. 1500/- on furniture the assessee too is entitled to the reliefs and the additions are deleted, as “furniture” and addition to fixed assets i.e. the building are part of “assets” for purpose of business & shown as such in the balance sheet [5.1 of “impugned assessment order” dated 27.03.2023 [second round]. The reasoning applied is wrong by the lower authorities as the assessee basis PB pages 48 to 52 has demonstrated addition to the building and the furniture. The Ld. AR alternatively has contended that if the issue of “Depreciation” is not considered then whole of the amount expended on the “building” and “furniture” should be allowed as “Revenue expenditure” incurred solely for business which would further reduce income exigible to tax.

4.10 In view of premises laid down by us appeal of the assessee is partly allowed. Addition of Rs. 10,45,394/- is deleted. Addition of Rs. 10,780/- is sustained. Remaining additions of Rs. 10,424/- , Rs.10,853/- and Rs.1500/- are all deleted.

5.1. In result, appeal of the assessee is partly allowed.