2017 (6) TMI 283 - AT - Income Tax

Rejection of books of accounts - trading addition - Held that - Admittedly, the rejection of books of accounts is not challenged by the assessee. We are in agreement to the observations of the ld. CIT(A) where the books of account are rejected the Assessing Officer is required to make best judgment and this best judgment should be based on the material on record and after conducting through enquiry a fair and just estimate of profit should be deduced from the materials so placed before him. We find that the ld. CIT(A) sustained an addition of ₹ 5,00,000/- considering the fact that turnover had increased and also taking into consideration, the past history of the assessee qua the Gross Profit. He estimated. Gross Profit at 4.12 % which is lower than the Gross Profit of assessment year 2009-10 and 2008-09 where the Gross Profit was 5.13% and 5.34% respectively against turnover of ₹ 154.37 crores and 150.39 crores respectively. Under these facts. we are of the view that the ld. CIT(A) estimated at the lower side of the Gross Profit, it would be fair to adopt Gross Profit at 4.20%. The ld. Assessing Officer is directed to adopt which the Gross Profit at 4.20% and re-compute the trading addition accordingly. Thus ground No. 1 of Revenue s appeal is partly allowed Addition involving the provisions of section 40A(2)(b) - CIT-A deleted the addition as A.O.has not established that the payment to relatives is excessive compared to prevailing market rate - Held that - We find that admittedly, there is increase in turnover of the asssessee company. Moreover, the Assessing Officer has not demonstrated as to how the salary paid is excessive to the Fair Market Value of the services rendered by the Director of the Company under this, which condition precedent for making such disallowance. Therefore, we do not see any infirmity in the order of the Ld. CIT(A), same is hereby upheld. - Decided against revenue Addition u/s 36(1)(iii) - CIT-A allowed claim - Held that - The Assessee has sufficient other interest free funds available for investment carried for long term business. Assessing Officer was not able to prove anything to the contrary by bifurcating the interest bearing and free funds and their respective use. This finding of fact is not rebutted by the revenue by placing any contrary material on record. We do not see any infirmity in the order of the Ld. CIT(A). As it is not disputed that the assessee has sufficient interest free funds available for advancing money to sister concerns. - Decided against revenue

Summary

Issues Involved:
1. Deletion of trading addition of ?27,86,979 out of total addition of ?32,86,979.
2. Deletion of addition of ?1,00,000 out of total addition of ?3,00,000 made u/s 40A(2)(b) of the Act being excessive salary paid to one of the Directors.
3. Deletion of addition of ?5,54,000 made u/s 36(1)(iii) being diversion of higher interest-bearing loan to sister concerns at a lower rate of interest.
4. General ground for liberty to raise additional ground and to modify/amend the ground of appeal at the time of hearing.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition:
The revenue contested the deletion of ?27,86,979 out of the total trading addition of ?32,86,979 made by the Assessing Officer (AO). The AO had rejected the books of account and applied a Gross Profit (GP) rate of 4.30%, citing specific defects such as unverifiable expenses and improper valuation of closing stock. The CIT(A) reduced this addition, noting that the GP rate, although lower than in two preceding years, was higher than the immediately preceding year. The CIT(A) concluded that the AO's estimation was based on conjectures and sustained an addition of ?5,00,000, raising the GP rate to 4.12%. The Tribunal agreed with the CIT(A) but adjusted the GP rate to 4.20%, directing the AO to recompute the trading addition accordingly.

2. Deletion of Addition u/s 40A(2)(b):
The AO had disallowed ?3,00,000 as excessive salary paid to a Director, invoking Section 40A(2)(b). The CIT(A) reduced this disallowance by ?2,00,000, stating the AO did not establish that the payment was excessive compared to the prevailing market rate. The Tribunal upheld the CIT(A)'s decision, noting the AO failed to demonstrate how the salary was excessive relative to the fair market value of the services rendered.

3. Deletion of Addition u/s 36(1)(iii):
The AO disallowed ?5,54,000, arguing the assessee paid higher interest on loans taken while charging lower interest on loans given to sister concerns. The CIT(A) deleted this addition, citing that the assessee had sufficient interest-free funds for such advances and the AO did not prove otherwise. The Tribunal upheld this deletion, agreeing that the assessee had sufficient interest-free funds and the AO failed to bifurcate the interest-bearing and free funds and their respective uses.

4. General Ground:
The Tribunal noted that this ground was general in nature and did not require specific adjudication.

Conclusion:
The appeal by the revenue was partly allowed, with adjustments made to the GP rate and the trading addition recomputed accordingly. The deletions of additions u/s 40A(2)(b) and 36(1)(iii) were upheld, and the general ground was dismissed as it required no specific adjudication. The order was pronounced in the open court on 23/05/2017.