2015 (11) TMI 1280 - AT - Income Tax

Trading addition - rejection of books U/s 145(3) - CIT(A) reducing the trading addition - Held that - The assessee has shown G.P. rate @ 13.2% on total sale of ₹ 6.86 crores as against the G.P. rate @ 13% on sale of ₹ 6.82 crores in immediate preceding year. The assessee has maintained day to day stock register of gold and silver ornaments but not maintained the stock register for diamond jewellery, this constitutes 5.6% of total turnover. The assessee had not made any purchase from URD but made purchase from customer who are bringing their old ornaments for sale at assessee s shop and normally the jewellery is either being converted/remade or new jewellery is being purchased by them. The assessee has only finished goods, therefore, the assessee is not required to maintain stock register of unfinished stock. The assessee had followed LIFO method of closing stock since number of years and no addition had been made by the ld Assessing Officer in past on this ground and same has been followed by the assessee consistently. The Coordinate Bench had already considered the identical facts and circumstances of the case in assessee s own case in A.Y. 2006-07 and 2007-08 and dismissed the revenue s appeal. - Decided against revenue. disallowance of interest - CIT(A) deleted the addition - Held that - The partners of the firm had sufficient interest free funds including profit earned during the year. Therefore, no notional interest disallowance can be made by the Assessing Officer in absence direct nexus between the interest bearing fund and interest free advances. Thus, we confirm the order of the ld CIT(A). - Decided against revenue. Addition on excessive interest payment to the persons covered by Section 40(A)(2)(b) - CIT(A) deleted the addition - Held that - Disallowance under the provisions of Section 40A(2)b) cannot be made out of interest payment to family members without establishing excessiveness or unreasonableness of the rate of interest. The assessee paid interest to the close person covered U/s 40(A)(2)(b) of the Act @ 18% confirmed - Decided against revenue.

Summary

Issues Involved:
1. Justification for reducing the trading addition.
2. Deleting disallowance of interest.
3. Deleting the addition made on account of excessive interest payment under Section 40(A)(2)(b).

Detailed Analysis:

1. Justification for Reducing the Trading Addition:
The first issue concerns whether the CIT(A) was justified in reducing the trading addition to Rs. 5,60,827 even after upholding the rejection of books under Section 145(3) of the Income Tax Act, 1961. The assessee firm, engaged in the business of manufacturing and trading gold and silver ornaments, had its books rejected due to discrepancies such as unverifiable URD purchases, lack of quantitative and qualitative stock details, and the use of the LIFO method not acceptable as per accounting standards. The Assessing Officer (AO) applied a G.P. rate of 14% against the declared G.P. rate of 13.20%, resulting in an addition of Rs. 5,60,827. However, the CIT(A) deleted this addition, citing the ITAT's previous decisions in the assessee's own case for earlier assessment years (2006-07 and 2007-08), where similar additions were deleted. The ITAT upheld the CIT(A)'s decision, noting that the assessee had maintained sufficient records and that the rejection of books did not necessarily warrant an addition to income.

2. Deleting Disallowance of Interest:
The second issue involves the deletion of a Rs. 9,000 disallowance of interest. The AO disallowed this amount, arguing that the assessee provided an interest-free advance of Rs. 3 lakhs to an individual while incurring interest expenses on secured and unsecured loans. The AO claimed the assessee failed to satisfactorily explain the absence of interest charges on the advance. However, the CIT(A) deleted the disallowance, stating that the AO made the addition without any substantial justification. The ITAT upheld the CIT(A)'s decision, noting that the assessee had sufficient interest-free funds, including partner capital and profits, and that there was no direct nexus between interest-bearing borrowings and the interest-free advances.

3. Deleting Addition on Excessive Interest Payment (Section 40(A)(2)(b)):
The third issue pertains to the deletion of an addition of Rs. 7,68,872 made on account of excessive interest payment to persons covered under Section 40(A)(2)(b). The AO deemed the 18% interest rate paid to related parties excessive and reduced it to 12%, resulting in the addition. The CIT(A) deleted this addition, referencing the ITAT's previous rulings in the assessee's own case for earlier years, where similar additions were dismissed. The ITAT upheld the CIT(A)'s decision, emphasizing that the burden under Section 40(A)(2)(b) lies with the revenue to prove the unreasonableness of the expenditure. The ITAT also cited past decisions where an 18% interest rate was considered reasonable.

Conclusion:
The ITAT dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s decisions. The ITAT found no reason to intervene in the CIT(A)'s order, as the issues raised were consistent with the assessee's past cases where similar additions were deleted. The judgment emphasized the importance of maintaining consistency in legal decisions and the need for substantial evidence to justify any disallowances or additions made by the AO.