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In the present case from the details of the facts brought on record, it is observed that the while the assessee's G.P. rate is lower as compared to 2 preceding years, there is also a substantial decrease in turnover as compared to the immediately preceding year (A.Y. 2014-15).
The A.O. has reached his conclusion of estimating the G.P. rate in this case by taking average of three years, out of which the immediately preceding two years were years of higher profitability. There are cycles of ups and downs in various sectors of economy and it is important for the Officer to examine this issue. A fall in GP for the assessee may be coupled with a general recession in that sector and hence profits of all the peers may have dipped. Similarly, the year may represent an exceptional year wherein all the peers have made exceptional profits. Hence, while examining gross margins, the assessing officer should not only compare the past margins of the assessee but also the current year margins of other assessees engaged in similar business. This would give an insight into the actual profit margins during the year under reference and would be a correct guide for estimation of profits. It has to be noted that a minor addition to the percentage point without actual basis for the finding can make a huge difference in real terms.