2015 (5) TMI 903 - AT - Income Tax

Rejection of the books results u/s 145(3) - fall in Gross Profit / difference in sales - CIT(A) deleted the addition - Held that - CIT(A), while deleting the addition, has given a finding that the amount of loss of ₹ 15,15,785/- represented loss of 43,555 Kgs of Ispaghula Seeds which have been duly accounted for in the audited accounts of the assessee and the assessee had also submitted the proper reconciliation and reasons for the fall in Gross Profit. Before us, the Revenue has not brought any material on record to controvert the findings of the ld. CIT(A). We, therefore, find no reason to interfere with the order of the CIT(A). Hence, this ground of appeal of the Revenue is dismissed - Decided against revenue. Disallowance on account of interest expenses - CIT(A) deleted the addition - Held that - It is undisputed fact that during the year under consideration, the assessee has earned net interest income of ₹ 11,81,410/-. Before us, the ld. Authorized Representative also pointed out to the cost of fund, the rate at which it has lent and from the statement submitted by the ld. AR, it is seen that the amount which has been lent to M/s. Swati Autolink Pvt Ltd is at a higher rate than the weighted average cost of funds. Before us, it is also the assessee s submission that the amounts were advanced in earlier years also and no disallowance was made in the earlier years, for which reliance was placed on judgment of Sridev Enterprises (1991 (1) TMI 52 - KARNATAKA High Court). Before us, the Revenue has not brought any material on record to controvert the above submissions made by the assessee nor has brought any contrary binding decisions in its support nor could point out any distinguishable features of the decisions cited by ld. AR. In view of the above facts, we are of the view that no disallowance on account of interest could be made in the present case. - Decided in favour of assesse.

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of rejecting the books results under Section 145(3) of the Income-tax Act.
2. Deletion of disallowance of interest expenses made by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Rejection of Books Results under Section 145(3):

During the assessment proceedings, the Assessing Officer (AO) noticed discrepancies in the quantitative information of inward and outward Ispaghula Seeds provided by the assessee, a partnership firm dealing in Psyllium Seeds. The AO found that the quantitative details were not reconciled and that the loss due to infestation was not debited in the Profit and Loss account. Consequently, he deemed the books of accounts defective and rejected the book results under Section 145(3) of the Income-tax Act, adding Rs. 15,15,785 to the income based on the difference in Gross Profit (GP) compared to the previous year.

The Commissioner of Income Tax (Appeals) [CIT(A)], however, accepted the assessee's contentions, noting that the loss of 43,555 Kgs of Ispaghula Seeds was duly accounted for in the audited accounts and that the reasons for the fall in GP were adequately explained. The CIT(A) found the AO's rejection of the reconciliation and reasons for the fall in GP illogical and deleted the addition.

Upon appeal by the Revenue, the Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide any material to counter the CIT(A)'s findings. The Tribunal found no reason to interfere with the CIT(A)'s order, thereby dismissing this ground of the Revenue's appeal.

2. Deletion of Disallowance of Interest Expenses:

The AO disallowed Rs. 18,88,846 of interest expenses, noting that the assessee had given loans at lower interest rates while paying higher interest on borrowed funds. Specifically, the AO observed that the assessee lent Rs. 4,35,50,183 to Swati Autolink Pvt Ltd at 6.75% interest while paying 9% interest on borrowed funds. Additionally, the AO found that the assessee had given interest-free loans totaling Rs. 1,00,99,625 to five concerns, leading him to conclude that interest-bearing funds were used for non-interest-bearing advances.

The CIT(A) partially upheld the AO's disallowance, calculating a reasonable disallowance of Rs. 4,95,651 based on the differential interest rate (2.25%) on the interest-bearing funds advanced to Swati Autolink Pvt Ltd. However, the CIT(A) deleted the remaining disallowance of Rs. 13,93,195, noting that the assessee had sufficient non-interest-bearing funds to cover the interest-free advances.

Upon appeal by the Revenue and cross-objection by the assessee, the Tribunal found that the assessee had earned a net interest income of Rs. 11,81,410 and had lent funds at a rate higher than its weighted average cost of funds. The Tribunal also noted that the advances were made in earlier years without disallowance, citing the Karnataka High Court's decision in CIT v. Sridev Enterprises, which held that the nature and status of outstanding amounts from previous years could not change. The Tribunal concluded that no disallowance of interest expenses was warranted and directed the AO to delete the disallowance, thereby dismissing the Revenue's appeal and allowing the assessee's cross-objection.

Conclusion:

The appeal of the Revenue was dismissed, and the cross-objection filed by the assessee was allowed. The Tribunal upheld the CIT(A)'s deletion of the addition made by the AO under Section 145(3) and directed the AO to delete the disallowance of interest expenses.

← Previous Next →