2015 (9) TMI 172 - AT - Income Tax

Disallowance of interest expenses on the basis of net debit cumulative balance of all the partners - Held that - All the capital accounts of the partners are to be examined by the AO while disallowing the interest on debit balance. The assessee has calculated the disallowance of interest on the basis of credit and debit balances of all the partners at ₹ 4,91,054/-. Therefore, we uphold the order of ld. CIT (A). Thus Revenue s appeal on this ground and assessee s cross objection are dismissed. Trading addition - Held that - The facts and circumstances of the case are identical to A.Y. 2008-09. During the year under consideration the assessee has prepared the closing stock on estimated basis which cannot be verified as no quantitative and qualitative stock was maintained by the assessee. The GP rate has increased compared to preceding year on enhanced turnover. However, the defects pointed out by the AO required to be confirmed certain addition, therefore, we reverse the order of ld. CIT (A) and in the interest of justice, addition to the tune of ₹ 1,00,000/- is confirmed against addition made by the AO at ₹ 3,00,000/-. Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenses
2. Rejection of books of accounts under section 145(3)

Analysis:

Issue 1: Disallowance of interest expenses
The Revenue filed an appeal challenging the restriction of disallowance of interest expenses from Rs. 29,09,278 to Rs. 4,91,054. The AO observed that partners had debit balances with no interest charged, leading to an increase in interest liability due to higher borrowings. The AO proposed charging 12% interest on loans given to partners. The assessee argued that interest was payable only on fixed capital accounts as per the Partnership Deed. The CIT (A) restricted the disallowance to Rs. 4,91,054, considering the net debit balance of partners. The Tribunal upheld the CIT (A) decision, emphasizing examining all partners' capital accounts and dismissing both the Revenue's appeal and the assessee's cross objection.

Issue 2: Rejection of books of accounts under section 145(3)
The AO rejected the books of accounts under section 145(3) due to the absence of a stock register, making the trading results unacceptable. The CIT (A) upheld the rejection based on similar defects in a previous year. However, the Tribunal reversed the decision, noting an increase in GP rate and prepared closing stock on an estimated basis. The Tribunal confirmed an addition of Rs. 1,00,000 against the AO's addition of Rs. 3,00,000, partially allowing the Revenue's appeal and dismissing the assessee's cross objection.

In conclusion, the Tribunal addressed both issues, affirming the disallowance of interest expenses and overturning the rejection of books of accounts under section 145(3). The judgment emphasized the importance of maintaining accurate records and considering all partners' capital accounts in interest calculations.