2016 (4) TMI 383 - AT - Income Tax

Interest paid to third parties - Held that - What has been estimated is not the gross profit but net profit. When computing the net profit, the expenditure incurred by the assessee in respect of earning of income under the head business is rightly to be allowed. Here, the books of account of the assessee has been rejected, the interest paid to third parties falls under the head business expenditure which is liable to be deducted while computing the net profit. In the present case, as the net profit itself has been estimated no further addition to the same by picking and choosing items from expenditure account can be made. Consequently, we are of the view that the interest paid to third parties are liable to be allowed and further addition made by the Assessing Officer on account of the interest paid to third parties stands deleted. Interest received from the bank on FDs - Held that - As noticed that the interest income of the assessee from fixed deposit is not business income of the assessee. It is liable to be assessed under the head income from other sources . The business of the assessee is not making any Fixed Deposit and deriving interest there from. Further, the assessee has also not been able to show as to how the bank interest was in any way intrinsically connected to the business activity of the assessee for the purpose of claiming that the interest received on the FDRs are business income. In the circumstances, the findings of the learned CIT (A) in confirming the addition ₹ 70,709/- on account of bank interest especially under the head income from other sources stands confirmed.

Summary

Issues Involved:
1. Net profit rate estimation for assessment year 2007-08.
2. Rejection of books of account and its implications.
3. Treatment of interest paid to third parties.
4. Categorization of interest received from bank on FDs.

Issue 1: Net profit rate estimation for assessment year 2007-08
The Revenue challenged the direction of the CIT (A) to apply a net profit rate of 6% instead of the 7% applied by the Assessing Officer. The assessee contested the rejection of books of account and the application of a 6% net profit rate instead of the declared 5.30%. The CIT (A) upheld the rejection of the books of account due to inadequate record-keeping. The CIT (A) considered factors like increased costs of cement and steel, along with VAT rate changes, in reducing the net profit rate to 6%. The Tribunal found the reduction justified based on actual cost variations and upheld the CIT (A)'s decision, dismissing the Revenue's appeal and the relevant grounds of the assessee's appeal.

Issue 2: Rejection of books of account and its implications
The rejection of the assessee's books of account was due to inadequate stock record maintenance and improper documentation. The Tribunal upheld the rejection as the assessee failed to challenge the findings. The rejection led to an estimation of net profit, with the CIT (A) reducing it to 6% considering cost variations. The Tribunal found the rejection justified and did not interfere with the decision.

Issue 3: Treatment of interest paid to third parties
The Assessing Officer disallowed the deduction claimed for interest paid to third parties, which the assessee challenged. The Tribunal clarified that when computing net profit, business-related expenditures should be allowed. As the net profit was estimated due to book rejection, the interest paid was considered a business expenditure and allowed. The Tribunal deleted the addition made by the Assessing Officer, concluding that the interest paid to third parties was deductible.

Issue 4: Categorization of interest received from bank on FDs
The interest income from fixed deposits was categorized as "income from other sources" rather than "business income." The Tribunal noted that the interest was not related to the assessee's business activities and confirmed the CIT (A)'s decision to treat it as income from other sources. The addition made on account of bank interest was upheld, resulting in the dismissal of the Revenue's appeal and partial allowance of the assessee's appeal.

In a subsequent assessment year (2010-11), similar issues were raised, with the Tribunal upholding the net profit rate estimation and the treatment of interest paid to third parties, leading to the dismissal of the Revenue's appeal and partial allowance of the assessee's appeal.