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2012 (3) TMI 43 - AT - Income TaxAssessee importing & trading timber - Requisition under 133(6) - Books of Account Rejected - On comparable GP calculated at 3% - CIT(A) reduced the rate to 2.5% - Revenue aggrieved by action of CIT is in appeal - Held That - CIT was correct in rejecting books of account. After considering the nature of business, loss declared and after considering the decision cited by ld. A.R. including the decision of ITAT, Rajkot Bench, we find that it will be fair and just to both sides if GP is estimate at the rate of 2% as against 3% applied by the AO and 2.5% applied by the CIT(A). Interest free Advances - Additions made by applying 18% rate of interest - Held That - In view of Torrent Financiers v. Asstt. CIT (2001 - TMI - 55358 - ITAT AHMEDABAD-A),disallowance deleted.
Issues Involved:
1. Addition of Gross Profit 2. Disallowance of Interest Expenses Issue-Wise Detailed Analysis: 1. Addition of Gross Profit: The assessee, engaged in the import and trading of timber, reported a turnover of Rs. 2.48 crores with a net loss of Rs. 1,07,07,108/-. During assessment, the AO issued notices u/s. 133(6) to various parties for verification of transactions, but no replies were received. Consequently, the AO rejected the books of account, estimating the gross profit (GP) at 3% based on comparable cases, resulting in a GP addition of Rs. 7,45,641/-. The CIT(A) reduced the GP estimation to 2.5%, sustaining an addition of Rs. 6,21,368/-. The CIT(A) agreed with the AO's rejection of the books of account due to non-receipt of replies from the parties, indicating that the book results did not reflect the true business affairs. The assessee argued that the books of account were maintained as per the Companies Act and the Income-Tax Act, supported by bills, vouchers, and other records. The assessee attributed the loss to a fall in international timber prices and damage to goods due to climatic conditions. It was also highlighted that the net profit margin in the timber business is typically less than 3%, citing comparable cases with lower GP ratios. After hearing both parties, the Tribunal found that the CIT(A) rightly confirmed the rejection of the books of account but considered the GP estimation of 3% by the AO and 2.5% by the CIT(A) to be on the higher side. The Tribunal directed the AO to estimate the GP at 2%, providing a fair and just resolution. 2. Disallowance of Interest Expenses: The AO disallowed interest expenses of Rs. 1,80,000/-, calculated at 18% on advances given to V.K. Tours & Travels amounting to Rs. 10,00,000/-, as the assessee did not charge interest on these advances. The CIT(A) confirmed this disallowance, referencing the ITAT, Rajkot Bench's decision in Prime Lumber (P.) Ltd. and the Supreme Court's ruling in S.A. Builders Ltd. v. CIT. The Tribunal examined the allowability of interest expenditure under section 36(1)(iii) of the Act, emphasizing that the borrowed capital should be used for business purposes. It was noted that interest on borrowed funds diverted for non-business purposes is not allowable. However, if the assessee has sufficient interest-free funds to cover the advances, no disallowance is warranted. In this case, the assessee had interest-free funds in the form of share capital amounting to Rs. 2.88 crores, significantly exceeding the interest-free advances of Rs. 10,00,000/-. The assessee also claimed that the advance was for business purposes, specifically for purchasing a land cruiser car. Based on these facts and the Supreme Court's judgment in S.A. Builders Ltd., the Tribunal found the disallowance of Rs. 1,80,000/- unwarranted and deleted the addition. Conclusion: The appeal by the assessee was partly allowed. The Tribunal directed the AO to estimate the gross profit at 2% instead of 3% and deleted the disallowance of interest expenses amounting to Rs. 1,80,000/-.
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