1981 (5) TMI 59 - AT - Income Tax

Summary

Issues:
1. Determination of income from business
2. Disallowance of interest under s. 40A(2) of the IT Act, 1961

Analysis:

Issue 1: Determination of income from business
The appeal concerns the assessment year 1978-79 of a Registered Firm engaged in the business of iron goods and general goods. The primary dispute revolves around the determination of income from business. The assessee filed separate returns for two distinct periods, and the Income Tax Officer (ITO) calculated profits for each period. The ITO made additions based on a comparison with a similar case, resulting in additional income for the assessee. The ld. AAC upheld the additions, citing inadequate maintenance of accounts by the assessee. However, the assessee argued that the gross profit rate was misrepresented due to inclusive lorry freight. The assessee presented evidence of maintained weight particulars and profit margins on transactions. After reviewing the facts, the Tribunal concluded that the additions made by the authorities were unwarranted. The Tribunal found the assessee's trading results comparable to the referenced case and deleted the additions.

Issue 2: Disallowance of interest under s. 40A(2) of the IT Act, 1961
The second issue pertains to the disallowance of interest under section 40A(2) of the IT Act, 1961. The assessee paid interest at a higher rate to relatives of the partners compared to other creditors. The ITO disallowed the excess interest paid to relatives under s. 40A(2), a decision upheld by the ld. AAC. The assessee argued that the loans to relatives were long-standing, and previous years' interest payments were accepted. The Tribunal's order in a related case supported the payment of interest at a higher rate. After considering the contentions and facts presented, the Tribunal found no justification for disallowing the excess interest under s. 40A(2). The Tribunal deemed the higher interest rate reasonable given the historical nature of the loans and allowed the appeal, deleting the addition.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee on both issues.