2015 (3) TMI 806 - HC - Income Tax

Rejection of books of accounts - application of 6% G.P. Rate - transactions with sister concern are liable to be examined as per the provisions of sec 40A(2) - Held that - CIT(A) to hold that the action of the AO of rejecting the books of accounts is not justified and then considered in detail the various reported decisions with respect to the G.P. Rate and held that since the assessee had furnished complete particulars of transactions, various issues which in turn were analysed and the purchases made from its sister concern as compared with other parties had resulted in excess payment of ₹ 10,02,125/-. The addition under Section 40A(2)(b) was restricted to that sum. The ITAT confirmed this but required the AO to give effect to the order. At the same time, it remitted the matter on certain limited aspects as Ld. CIT(A) has not confronted the AO with the details of transactions furnished by the assessee with sister concern. Under the circumstances, we are of the considered opinion that in the interest of justice the issue should be set aside to the file of the AO for fresh verification. No question of law arises. - Decided against revenue. Disallowance of interest - ITAT decision for directing cancellation of disallowance - Held that - ITAT recorded that the assessee had sufficient erest-free funds. Consequently, the application of Reliance (2009 (1) TMI 4 - HIGH COURT BOMBAY) cannot be faulted. Being a finding of fact, this Court does not propose to re-examine the matter. Furthermore, we notice that the entire addition is to the tune of ₹ 12,10,000/- and the tax effect is less than ₹ 10 lakhs. Consequently, no question of law arises on this count too. - Decided against revenue.

Summary

Issues:
1. Correctness of ITAT's opinion on rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Decision regarding the cancellation of Rs. 12,10,000 disallowed on account of interest.

Analysis:
1. The case involved an appeal by the revenue against the ITAT's order. The assessee was engaged in manufacturing and trading activities, and the AO had rejected the books of accounts under Section 145(3) of the Income Tax Act. The AO also added Rs. 12,10,000 on account of interest. The CIT(A) set aside the rejection of books and the application of 6% Gross Profit Rate but confirmed the interest addition. The ITAT partly allowed the appeal, considering the availability of interest-free funds by the assessee. The High Court upheld the ITAT's decision, emphasizing the presumption of investing interest-free funds as interest-free loans.

2. The CIT(A) analyzed the AO's approach in rejecting the books of accounts and applying the 6% Gross Profit Rate. The CIT(A) found that the AO had not justified the rejection of the audited books solely based on transactions with a sister concern. The CIT(A) held that the AO must show specific defects in the books that hinder proper income determination. As a result, the High Court allowed the ground related to rejecting the books of accounts.

3. Regarding the Gross Profit Rate, the CIT(A) examined the transactions and purchases made by the assessee from its sister concern. The CIT(A) restricted the addition under Section 40A(2)(b) to Rs. 10,02,125, based on the excess payment identified. The ITAT confirmed this decision but required the AO to verify the transactions with the sister concern for justice. The High Court upheld this decision, emphasizing the need for fresh verification by the AO.

4. Lastly, the issue of adding Rs. 12,10,000 on account of interest was addressed. The ITAT found that the assessee had sufficient interest-free funds, aligning with the decision in CIT v. Reliance Utilities and Power Limited. As it was a factual finding, the High Court did not re-examine the matter. Since the tax effect was less than Rs. 10 lakhs, the appeal was dismissed as lacking merit.