2016 (2) TMI 1371 - AT - Income Tax

Addition of low gross profit - survey conducted - as per revenue surrendered amount was nullified by claiming loss within the accounting period after the survey - correctness of gross profit disclosed by the assessee in the post survey accounting period - HELD THAT - Even after the survey operation conducted u/s. 133A on 8.8.2007, no specific defect was referred by the AO pertaining to books of account of the assessee. There was no such allegation that there was suppression of sales or inflated purchases were accounted for in the books of account. Although there was an allegation of suppression of stock and excess cash were found but that was not made the basis of the impugned addition by the AO. AO had proceeded to compare the trading results of pre survey and post survey period but contention before us is that the AO should have examined the profit of the entire financial year . That profit should have been compared with the profit disclosed and accepted in the immediately preceding year i.e. A.Y. 2007-08. This fact has also not been challenged by the Revenue side that addition in question was made without rejection of books of account. On this issue, there are several decisions, wherein, it was consistently opined that there should be some defects to be pointed out by the revenue department so as to disturb the percentage of profit disclosed. In the absence of such discrepancy, the action of the AO remained un-substantiated. One more reason assigned by the ld CIT(A) before granting relief was that there was no uniform decrease in trading results of all the commodities. Rather in some of the commodities, the post survey profit rate was higher than the rate of profit already assessed in the past years. Therefore, we hereby confirm the findings of the ld CIT(A) and reject this ground of appeal taken by the revenue. Disallowance of remuneration and interest paid to partners - As per the AO, the income surrendered was assessable u/s. 69C i.e. income from other sources , therefore, deduction claimed u/s.40(b) was not an admissible expenditure - CIT(A) deleted the addition - HELD THAT - As we came to know that in a number of decisions, a consistent view has been taken that if the amount is surrendered pertaining to stock or business receipts, during the course of survey, then such surrender was nothing but income generated from the business activities of the assessee. Few case laws cited are S.K. Srigiri Bros 2007 (11) TMI 72 - KARNATAKA HIGH COURT , Jamnadas Muljibhai 2005 (1) TMI 366 - ITAT RAJKOT and Deepa Agro Agencies 2005 (8) TMI 288 - ITAT BANGALORE-B - thus we find no reason to interfere with the finding of ld CIT(A) and the same is hereby confirmed. This ground is accordingly rejected.

Summary

Issues Involved:
1. Addition of Rs. 50,45,000 on account of low gross profit.
2. Disallowance of Rs. 11,60,165 made in respect of remuneration and interest paid to partners.

Issue 1: Addition of Rs. 50,45,000 on account of low gross profit:

The appeal was against an order by the ld CIT(A) for the assessment year 2008-09. The AO noted excessive stock and cash during a survey but focused on the correctness of the gross profit post-survey. The AO observed a significant decline in gross profit without adequate justification, suspecting manipulation to nullify surrendered income. The AO calculated a total addition of Rs. 50,45,000 for suppression of GP in the post-survey period, taxing both the surrendered amount and the alleged suppression. The assessee contended that books and vouchers were in order, and the AO did not challenge the manner of account maintenance. The ld CIT(A) found no discrepancies and reversed the addition, citing lack of evidence for suppression. The Revenue challenged this decision, arguing manipulation of accounts to adjust surrendered income. The respondent argued that the business was closed due to unprofitability and highlighted previous years' accepted GP rates. The Tribunal held that the AO failed to point out defects in the accounts, and without rejection under section 145 of the IT Act, disturbing the profit percentage was unjustified. The Tribunal confirmed the ld CIT(A)'s decision, noting no uniform decrease in trading results and some post-survey profits exceeding past years' rates.

Issue 2: Disallowance of Rs. 11,60,165 in respect of remuneration and interest paid to partners:

The AO treated the surrendered income as assessable under section 69C of the IT Act, categorizing it as "income from other sources." Consequently, the deduction claimed under section 40(b) for payment of interest and remuneration to partners was disallowed and taxed in the assessee's hands. The ld CIT(A) analyzed the nature of the surrendered amount and held it to be business income, making the claimed expenditure admissible under section 40(b). The Tribunal reviewed various decisions establishing that surrendered amounts related to business activities should be considered business income. Citing relevant case laws, the Tribunal upheld the ld CIT(A)'s decision, confirming the admissibility of the claimed expenditure under section 40(b).

In conclusion, the Tribunal dismissed the appeal filed by the revenue, upholding the decisions of the ld CIT(A) on both issues.