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The revenue has questioned first appellate order on thel Grounds involving the issue as to whether Ld CIT(A) was justified in deleting the addition of Rs.20,71,483/- made by the A.O due to significant fall in the G.P. rate from 24.09% to 19.87% in the year under consideration.

2. The assessee is engaged in the business of manufacturing of control equipments of engineering goods such as valves etc., In its return of income for the year it had disclosed a loss of Rs. 59,82,256/-. The A.O has assessed the loss at Rs.39,10,774/-. The assessee on the total turnover of Rs. 10,36,80,512/- had shown Gross Profit of Rs. 2,06,04,439/- having the G.P. rate of 19.87% against the Gross Profit of 24.09% declared during the last A.Y. i.e. A.Y. 2005-06. The A.O observed that Gross Profit rate has gone down by 4.22% as compared to the earlier 2 ITA . No 408/PN/2010 M/s. Stafford Controls Ltd., A.Y. 2006-07 Page of 4 year which as per him was very much at higher side. The assessee tried to explain that decline in G.P was on account of decrease in activity level of the company, which affected the inventory and also caused under absorption of fixed production cost like factory rent and also activity level of one of its products "actuator" declined significantly due to cancellation of export order. The A.O. did not agree with this explanation and made adhoc addition of 2% G.P. i.e. Rs. 20,71,482/- with this observation that though there was no significant change in the manufacturing and other expenses, hence there was no reason why Gross Profit should go down substantially by 4.22%. Before the Ld CIT(A), the assessee contended that the A.O was not justified in making an adhoc addition without appreciating the fact. They had attributed the decline in Gross Profit primarily due to increase in key raw material prices such as castings without corresponding increase in sale price of finished products i.e. control equipment of engineering goods. There was also a sharp decline in sales as compared to the immediately earlier year, which has effected the absorption of fixed costs leading to reduction in G.P. ratio. Due to sharp decrease in export turnover, there was decrease in overall profit margin. It was pointed out that exports yield a substantially higher margin as compared to local sales. In support of their contention, the assessee submitted the following comparative figures of domestic and export sales of actuators and butterfly valves for the F.Y. relevant to the A.Ys. 2005-06 and 2006-07 as below :