2018 (11) TMI 858 - AT - Income Tax

Addition on account of interest payment - assessee has given loans/advances of ₹ 1,00,96,320/- free of interest whereas the assessee has incurred interest expenditure of ₹ 8,75,543/-. - Held that - it is the assessee s decision to advance moneys on the basis of commercial expediency with or without interest and the fact that the A.O could not prove any adverse nexus between the two parties and the assessee firm., it is opined that the disallowances of interest on proportionate basis to the extent of ₹ 8,75,543/- by the assessing officer was not warranted. The same is accordingly directed to be deleted. - Decided against revenue Addition u/s 68 for unexplained credit on account of unsecured loans - Held that - We note that all the six creditors have produced the confirmations, returns of income as well as their relevant record from the books of account to show that the transactions of loans given to the assessee were duly recorded in the books of account and through banking channel. AO conducted the enquiry and in response the relevant supporting evidences were filed by these creditors. Thus it is clear that despite receiving the supporting evidence directly from the creditors, the AO has made the addition by citing the reason that the assessee did not produce supporting evidence CIT (A) has examined the evidences available on the assessment record and found that the AO was having all the relevant details and supporting evidence during the assessment proceedings as called for under section 133(6) of the Act. On examination of these details and evidence as submitted by the six creditors, we find that the claim of the assessee was duly supported by the evidence produced by the creditors who having confirmed the transactions and also produced the evidence regarding their creditworthiness as all these creditors filed their returns of income, their ledger account and bank statements showing the transactions of loans given to the assessee.- Decided against revenue Addition by applying the GP rate of earlier year - Held that - AO has to estimate the income of the assessee by taking a reasonable and proper basis and average of the past GP declared by the assessee can be a good guidance. Since this is the second year of the business, therefore, only two years are available for considering the average of the GP. Hence in the facts and circumstances of the case, when the variation in the GP is insignificant and there is an increase in the turnover of the assessee of more than three times from ₹ 9,60,00,000/- to ₹ 28,69,00,000/- then there is no justification of making addition by applying the GP rate of earlier year. Accordingly, in the facts and circumstances of the case, we delete the addition made by the AO on this account. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition made by disallowing proportionate interest payment.
2. Deletion of addition made under Section 68 for unverified unsecured loans.
3. Trading addition confirmed by the CIT (A).

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by Disallowing Proportionate Interest Payment:

The assessee, engaged in wholesale trading of mobile phones, filed a return declaring total income of ?8,58,680/-. During scrutiny, the AO noted that the assessee had given interest-free loans/advances amounting to ?1,00,96,320/- while incurring interest expenditure of ?8,75,543/-. The AO disallowed the entire interest claim due to the non-production of books of accounts. The CIT (A) deleted this addition, considering that ?25,00,000/- was a security deposit to M/s. More Mobile & Support Pvt. Ltd., and ?74,96,320/- was an advance for purchasing mobiles from The Mobile Store Services Ltd., both given in the normal course of business. The remaining ?1,00,000/- was from the assessee's interest-free funds.

The Tribunal upheld the CIT (A)'s decision, noting that the advances were for business purposes and supported by evidence, including VAT returns and balance sheets. The Tribunal referenced the Supreme Court's decision in Hero Cycles (P) Ltd. v. CIT, emphasizing that commercial expediency justifies such expenditures.

2. Deletion of Addition Made Under Section 68 for Unverified Unsecured Loans:

The assessee had taken unsecured loans totaling ?70,50,000/- from six parties. The AO added this amount due to insufficient documentary evidence. The CIT (A) deleted the addition after reviewing the documents on record, including confirmations, bank statements, and returns of income from the creditors.

The Tribunal supported the CIT (A)'s decision, noting that the creditors had provided adequate evidence, including identity, creditworthiness, and transaction genuineness. The Tribunal found that the AO had all necessary documents but still made the addition without proper justification.

3. Trading Addition Confirmed by the CIT (A):

The AO rejected the assessee's book results due to non-production of books and noted a decrease in GP rate from 1.08% to 0.92%, making an addition of ?4,49,453/-. The assessee argued that the decrease in GP was due to a substantial increase in turnover.

The Tribunal found that the three-fold increase in turnover justified the slight decrease in GP rate. Given the significant increase in business volume and the fact that it was only the second year of business, the Tribunal deemed the addition unwarranted and deleted it.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, affirming the CIT (A)'s decisions on all counts. The Tribunal emphasized the importance of commercial expediency, adequate documentation, and reasonable estimation in tax assessments.