Facts of the Case


  • The assessee is engaged in the business of preparation and trading of Hing.
  • For the Assessment Year (AY) 2010-11, the assessee filed a return declaring an income of ₹3,15,210/-.
  • During scrutiny, the Assessing Officer (AO) rejected the turnover figures and the Gross Profit (GP) Rate of 3.57% declared by the assessee.
  • Instead, the AO directed the application of a 10% GP Rate against a total turnover of ₹6,14,84,607/-, resulting in an addition of ₹39,54,014/-.
  • The CIT(Appeals) partially accepted the assessee's contentions, granting relief by applying a GP rate of 6.55% (mirroring the preceding year) and confirming an addition of ₹21,21,220/-.
  • Upon further appeal, the Income Tax Appellate Tribunal (ITAT) refused to grant relief and confirmed the lower authority's findings.

Issues Involved 


  • The primary question of law was whether the ITAT and lower authorities erred in rejecting the assessee's accounts on the assumption that a quantitative tally of ingredients and raw materials was not maintained, thereby leading to improper GP Rate and turnover estimations.

Petitioner’s Arguments


  • The assessee argued that the AO and other authorities failed to consider that a quantitative tally of ingredients and raw materials was actually available in the records.
  • It was submitted that the total turnover for the concerned year was lower than previous years due to family problems.
  • The petitioner contended that the AO's opinion was improperly influenced by the low GP Rate of 3.57% claimed against a high total turnover of ₹6,14,84,607/-.
  • The assessee highlighted that previous years' figures did not follow a uniform pattern for either turnover or GP rate, and the department had historically accepted their books of accounts and maintenance methods.
  • The assessee argued that the Revenue proceeded with a predisposed mind that raw material tallies were absent.
  • It was further urged that the CIT(Appeals) and ITAT failed to apply their minds to whether the materials on record actually reflected the procurement of raw materials and the existence of a qualitative tally.

Respondent’s Arguments


  • The Revenue contended that two appellate authorities had already rejected the assessee's contentions after due consideration of the material on record.

Court Order / Findings

  • The High Court noted the assessee's categorical submission that a quantitative tally of all raw materials consumed in making the final marketable product was maintained.
  • The Court observed that while the CIT(Appeals) noticed this contention, the authority failed to render any specific finding on it.
  • The Court pointed out that the ITAT merely went by the lower authority's findings, based its conclusion on Section 145(2) of the Income Tax Act, 1961, and wrongly assumed that details for ingredients like mixing gum, starch, and oil were not maintained.
  • The High Court ruled that the CIT(Appeals) should have addressed the assessee's stand regarding the availability of the quantitative tally and rendered clear findings.
  • The failure to render such findings prejudiced the assessee; consequently, the impugned order was set aside.
  • The matter was remitted back to the CIT(Appeals) for a fresh examination of the books of accounts to specifically determine if a quantitative tally of raw materials was undertaken and what inferences should be drawn from the available material.
  • The question of law was answered in favor of the assessee and against the Revenue.
  • The appeal was partly allowed.

Important Clarification


  • Appellate authorities must critically examine the books of accounts and render clear, specific findings regarding the maintenance of quantitative tallies, rather than relying on unverified assumptions to reject books of accounts and arbitrarily estimate Gross Profit rates.

Sections Involved


  • Section 145(2) of the Income Tax Act, 1961.

Link to download the order: https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:2253-DB/RKG09032015ITA7432014.pdf


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