2018 (1) TMI 540 - AT - Income Tax

Rejection of books of account and trading addition - Held that - It is not in dispute that this Tribunal in assessee s own case for the A.Y. 2006-07 has upheld the rejection of books of account on the similar defects found by the Assessing Officer in the books of account therefore following the earlier order of this Tribunal in assessee s own case for the A.Y. 2008-09 and 2009-10 the action of the Assessing Officer in rejecting the books result is upheld. As regard the G.P. rate applied by the Assessing Officer @ 17% as against the G.P. rate declared by the assessee at 15.36% there is no dispute that after rejection of books of account the income of the assessee is required to be estimated on best judgment of the Assessing Officer. Thus it is settled proposition of law on the point that while estimating the income after rejecting the books of account the average G.P. of the past years which has attained the finality or accepted by the revenue would be a proper and reasonable basis for adopting the G.P. for the current year. Accordingly we set aside this issue to the record of the Assessing Officer for computing the average G.P. of past years to be adopted for the year under consideration to estimate the income of the assessee. Addition on account of interest charged from the related parties @ 6% as against the interest paid by the assessee @ 12% - assessee has given loan to relatives and charged 6% interest as against the interest paid by the assessee on borrowings @ 12% - Held that - Assessee has raised various contentions before the ld. CIT(A) including the contention that the assessee s own interest free funds are more than the advance given to the related parties and therefore no disallowance on account of interest is called for due to short charging of interest. Further the assessee has pointed out before us that out of five debtors to whom the advance was given. The assessee charged the interest @ 12% from one Shri Rahul Bhandari and therefore to the extent of loan given to that person no disallowance is called for. All these facts and contentions were not properly examined by the authorities below therefore this issue requires a proper verification and afresh adjudication at the level of the Assessing Officer.

Summary

Issues:
1. Rejection of books of account and trading addition for A.Y. 2011-12.
2. Addition made on account of interest charged from related parties for A.Y. 2011-12.
3. Rejection of books of account and trading addition for A.Y. 2012-13.
4. Disallowance of interest on account of short charging of interest from related parties for A.Y. 2012-13.

Analysis:

1. Rejection of books of account and trading addition for A.Y. 2011-12:
The Assessing Officer rejected the books of account due to lack of day-to-day stock inventory, making the valuation of stock unverifiable. Consequently, the income was estimated by applying a Gross Profit (G.P.) rate of 17%. The CIT(A) upheld this action. The appellant argued that since all sales were exports, undervaluation of closing stock was improbable. Referring to a previous year's decision, the appellant contended that the G.P. rate applied lacked justification. The Tribunal upheld the rejection of books but directed the AO to compute the average G.P. of past years for estimating the income.

2. Addition made on account of interest charged from related parties for A.Y. 2011-12:
The Assessing Officer disallowed interest charged at 6% from family members while the assessee paid interest at 12%, adding ?15,27,073. The appellant argued that the interest charged was based on commercial expediency due to poor financial conditions of the relatives. The Tribunal found the contentions not adequately considered by the lower authorities and remanded the issue to the AO for proper verification and adjudication.

3. Rejection of books of account and trading addition for A.Y. 2012-13:
Similar to the previous year, the books of account were rejected due to non-maintenance of stock records, leading to an income estimation at a G.P. rate of 17%. The appellant contended that maintaining stock records was impractical and explained the fall in G.P. ratio. The Tribunal partly allowed the appeal based on the decision for A.Y. 2011-12.

4. Disallowance of interest on account of short charging of interest from related parties for A.Y. 2012-13:
The issue of disallowance of interest due to short charging from related parties was common with the previous year. The Tribunal set aside the matter to the AO for further examination based on the findings for A.Y. 2011-12.

In conclusion, the Tribunal partly allowed both appeals of the assessee, directing the AO to reevaluate the issues concerning the rejection of books of account, trading additions, and interest charged from related parties for both assessment years.