2006 (9) TMI 454 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest paid to sister concern.
2. Addition on account of low household withdrawals.
3. Sustaining trading addition and disallowance of advertisement expenses.

Summary:

1. Disallowance of interest paid to sister concern:
The first effective issue raised in this appeal is that the learned CIT(A) was not justified in confirming an addition of Rs. 85,764 made by the Assessing Officer by disallowing interest paid to M/s. Dawar Cloth House, Banga. The Assessing Officer disallowed the interest u/s 37(1) read with section 40A(2)(b) of the Act, observing that the purchases were made at the fag end of the year and the firm had sufficient liquidity of funds. The CIT(A) upheld this disallowance. However, the Tribunal found that the Assessing Officer had presumed wrong facts and that the assessee did not have sufficient cash balance. Since the interest rate of 12% was neither excessive nor unreasonable, the Tribunal set aside the order of the CIT(A) and deleted the disallowance of interest.

2. Addition on account of low household withdrawals:
The next issue raised in this appeal relates to sustaining an addition of Rs. 3,754 out of an addition of Rs. 57,080 made by the Assessing Officer on account of low household withdrawals. The Assessing Officer estimated household expenses including education, telephone, and electricity, and made an addition. The CIT(A) reduced the addition by taking into account other additions surrendered by the assessee. The Tribunal upheld the CIT(A)'s order, rejecting the assessee's claims regarding additional sources of household expenses, as no evidence was furnished to support these claims.

3. Sustaining trading addition and disallowance of advertisement expenses:
The last two grounds of appeal relate to sustaining a trading addition of Rs. 36,294 and disallowance of advertisement expenses of Rs. 18,500. The Assessing Officer made these additions on an agreed basis after pointing out defects in the valuation of closing stock and unverifiable nature of purchases and sales. The CIT(A) upheld these additions, relying on judgments that additions made on an agreed basis cannot be challenged in appeal. The Tribunal found no factual error in the orders of the authorities below and upheld the CIT(A)'s order, dismissing the grounds of appeal.

Conclusion:
In the result, the appeal filed by the assessee is partly allowed.