2016 (4) TMI 1010 - AT - Income Tax

Interest income received on late realization of sale proceeds - assessed as business income OR income from other sources - Held that - Hon ble Gujarat High Court in the case of Nirma Industries Ltd. DCIT, 2006 (2) TMI 92 - GUJARAT High Court where it is held that interest income received by the assessee on late realization of its sale proceeds will be assessed as business income which will qualify for deduction under section 80IA, because, it is to be construed as income derived from industrial undertaking. If that yardstick is applied here, then, this interest income is to be assessed as business income, and accordingly, the partners would get remuneration on this amount. Considering this aspects, we are of the view that the ld.CIT(A) has erred in excluding this amount for the purpose of calculation of remuneration of the partners under section 40(b). We allow the ground of appeal raised by the assessee, and delete the addition made by the ld.CIT(A) on this issue. This interest income be assessed as business income.

Summary

Issues:
1. Justifiability of estimated GP addition when books of accounts were not rejected by AO
2. Assessment of interest income received on late realization of sale proceeds as business income or income from other sources

Analysis:

Issue 1:
The assessee appealed against the order of the ld.CIT(A) regarding the estimated GP addition of Rs. 15,91,194, questioning its justifiability when the books of accounts were not rejected by the AO. The AO, dissatisfied with the assessee's explanation for the decrease in GP, applied the previous year's GP rate to cotton sales, resulting in the addition of Rs. 15,91,194 to the income. The CIT(A) upheld this decision. The ITAT observed that discrepancies in the figures submitted by the assessee made it challenging for the AO to ascertain the true income. While the AO did not explicitly reject the books of accounts, his actions implied a lack of acceptance of the book results, leading to the estimation of GP. The ITAT directed the AO to verify the GP rate for cotton sales in the previous year to determine the addition accurately.

Issue 2:
Regarding the assessment of interest income on late realization of sale proceeds, the ld.CIT(A) treated it as income from other sources, excluding it from the calculation of partner's remuneration under section 40(b). The assessee argued that as per a decision of the Hon'ble Gujarat High Court, such interest income should be considered as business income eligible for deduction under section 80IA. The ITAT agreed with the assessee, ruling that the interest income should be assessed as business income, allowing the appeal and deleting the addition made by the ld.CIT(A) on this issue. Consequently, the interest income was to be assessed as business income, impacting the calculation of partner's remuneration.

In conclusion, the ITAT partially allowed the appeal, emphasizing the correct assessment of GP addition and interest income to ensure compliance with the Income Tax Act.