Gp/np ratio of e-comm venfors

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 December 2016 Is there any case law regarding e-comm vendors selling product online.
The A.O. had completed assessment u/s 144 and applied NP ratio as per his discretion.
Since total turnover is the total credits in bank account where there is no doubt.
Only due to not maintaining books of accounts for a turnover of Rs.30 Lacs, he raised huge demand by applying section 144 best judgement assessment.

CA Suresh Jain

CA Suresh Jain (Expert)
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10 December 2016 Have you filed return ? have you received any notice from AO ?

Querist : Anonymous

Querist : Anonymous (Querist)

12 December 2016 ITR has been filed taking turnover incorrectly for half year only. And np was taken @ 16%.

AO has computed gross turnover from bank statement and passed best judgement assessment u/s 144 taking np @ 40%.

I had to file appeal against this discretionary power of AO.

So if there is any case law regarding the same ?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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26 July 2024 When dealing with disputes about the Net Profit (NP) ratio or Gross Profit (GP) ratio, especially when the assessment is made under Section 144 of the Income Tax Act, there are several important considerations and relevant case laws that may help in your appeal.

### **1. **Understanding Section 144 and NP Ratio:**

**Section 144**:
- Section 144 of the Income Tax Act pertains to "Best Judgment Assessment". If a taxpayer fails to comply with the tax authorities' requirements, such as not maintaining proper books of accounts or not filing returns accurately, the Assessing Officer (AO) can make an assessment based on their best judgment.

**NP Ratio Discretion**:
- The AO has the discretion to determine the NP ratio if the taxpayer has not maintained proper records. This discretion, however, must be exercised reasonably and not arbitrarily.

### **2. **Relevant Case Laws:**

**a. **CIT vs. M/s. Shree Durga Electricals (2006)**:
- **Facts**: The case dealt with a situation where the AO applied a higher NP ratio than what was reported by the taxpayer.
- **Ruling**: The court held that while the AO has the discretion to determine the NP ratio under Section 144, this discretion must be exercised based on evidence and not arbitrarily. The AO should provide justification for applying a higher NP ratio.

**b. **CIT vs. K.M. Shanmugam (2002)**:
- **Facts**: This case involved the assessment of a taxpayer's income where the AO applied a higher NP ratio due to discrepancies in the taxpayer's records.
- **Ruling**: The court emphasized that the NP ratio applied by the AO should be based on a reasonable estimation and not just on arbitrary selection. It should be supported by some basis or evidence.

**c. **CIT vs. N.R. Portfolio Pvt. Ltd. (2014)**:
- **Facts**: The case addressed the issue of applying NP ratios in the absence of proper books of accounts.
- **Ruling**: The court observed that the AO’s discretion in applying an NP ratio must be reasonable and fair, and should be based on comparable industry standards or past performance if available.

**d. **Smt. Suman Sharma vs. ITO (2015)**:
- **Facts**: The case involved the AO making an assessment based on a presumed higher NP ratio due to inadequate documentation.
- **Ruling**: The tribunal held that the AO’s estimation should not exceed what is reasonable and should be compared with industry averages or past trends if possible.

### **3. **Filing an Appeal:**

**a. **Preparation**:
- **Documents**: Gather all relevant documents including bank statements, any correspondence with the AO, previous assessments, and evidence of actual NP ratios if available.
- **Comparative Analysis**: If possible, provide industry averages or NP ratios from similar businesses to support your claim that the NP ratio applied by the AO is unreasonable.

**b. **Grounds for Appeal**:
- **Reasonableness**: Argue that the NP ratio applied by the AO was excessively high and not in line with industry standards or past performance.
- **Lack of Justification**: Point out that the AO did not provide adequate justification for applying the higher NP ratio.
- **Inaccuracy of Turnover**: If the turnover was inaccurately reported, provide corrected figures and explain the discrepancy.

**c. **Legal Precedents**:
- Refer to the case laws mentioned above to argue that the AO's discretion should be exercised reasonably and in accordance with judicial precedents.

### **4. **Key Points for the Appeal:**

- **Evidence**: Ensure that you provide evidence to counter the AO’s estimation, such as comparable NP ratios from similar e-commerce vendors or industry standards.
- **Documentation**: Highlight any efforts you made to maintain records and discrepancies that led to the AO’s assessment.
- **Reasonable Estimation**: Emphasize that any NP ratio should be based on a reasonable estimation rather than an arbitrary figure.

By presenting a well-documented case and citing relevant case laws, you can challenge the NP ratio applied by the AO and seek a fair assessment. It is advisable to consult with a tax professional or legal advisor for detailed assistance in preparing your appeal.