2017 (10) TMI 1002 - AT - Income Tax

Additions made on the basis of the fall of GP rate - CIT-A deleted the addition - Held that - The variance in GP rate, according to the Ld. CIT (A) had to be considered in holistic view, but picking up some units for penalization without reward to the units where the GP rate was increased is bad. In respect of FL 2 Unit, gas division, parvat fabrication and parvat wires the declination was in significant Ld. CIT (A) observed that there is marginal declination. In respect of all these units Ld. CIT (A) observed that no specific case of inflation of direct expenses or suppression of receipts was found by the AO. Merely because there is decrease in the GP rate addition could be made in the absence of any specific finding as to the incorrectness of the accounts. On this aspect, we are in agreement with the Ld. CIT (A) because the AO had to take both the increased and decreased in GP rate in respect of all the units as a whole but leaving the profit making units unrewarded it is not fair to pick up only such units where the GP rate is on a fall. - Decided against revenue Addition made on account of interest earned on year marked funds - CIT-A deleted the addition - Held that - As per the comments of C&AG the interest earned on these earmarked fund shall be transferred and credited to the earmarked fund and the corporation has no authority to use or expand or utilized the interest earned for its own purposes, and any credit of this earmarked fund to the accounts of the assessee results in understatement of loss and current liabilities. However, AO felt that the interest earned on the earmarked fund would also go to the same kitty of funds of the company, as such, the interest amount of ₹ 12,32,322/- has to be treated as income. Ld. CIT (A) on this aspect found that in respect of all the assessment years 2005-06 and 2006-07 also in appeal Ld. CIT (A) accepted the contention of the corporation and held that the interest earned on earmarked fund FDR cannot be treated as income of the corporation. Following the same in respect of the AY 2007-08 also Ld. CIT (A) granted relief to the assessee. No change of facts from those of the assessment years 2005-06 and 2006-07 is brought to our notice. We do not find any illegality or irregularity in the Ld. CIT (A) in taking the same view on identical facts - Decided against revenue

Summary

Issues:
1. Challenge to the order dated 17.08.2011 by the Ld. Commissioner of Income Tax (Appeals)-II
2. Assessment of total income for AY 2007-08 based on tentative profit and loss account
3. Non-compliance with tax audit provisions under Section 44AB of the Income Tax Act, 1961
4. Disallowances and additions made by the Assessing Officer (AO)
5. Appeals filed by the assessee and Revenue challenging different aspects of the order

Analysis:

1. The appeals were filed challenging the order dated 17.08.2011 by the Ld. Commissioner of Income Tax (Appeals)-II. The assessee, a Government Company engaged in various commercial activities, filed its return of income for AY 2007-08 based on a tentative profit and loss account. The accounts were voluminous due to the diverse business activities, and the statutory audit had not been completed as per Section 44AB of the Income Tax Act, 1961. The AO made various disallowances and additions, including treating certain deposits and interest as income of the corporation.

2. The Assessing Officer (AO) enhanced the GP rates in certain divisions where there was a decline in GP compared to the previous year. The AO also treated one-time refundable security deposits and interest earned on earmarked funds as income. The accounts were audited by a Special Auditor under Section 142(2A) of the Act, who expressed inability to opine on the true and fairness of the profit. The Ld. CIT (A) deleted some additions but confirmed others, leading to appeals by both the assessee and Revenue.

3. The assessee's appeal was dismissed due to continuous absence and lack of cooperation in the proceedings. The Revenue challenged the deletion of additions based on the decline in GP rates in certain units. The Ld. CIT (A) noted that penalizing units with decreased GP rates without compensating those with increased rates was unjust. The Tribunal agreed that additions should not be made solely based on GP rate decline without specific defects in accounts.

4. Ground no. 5 related to the deletion of additions on interest earned on earmarked funds. The AO treated the interest as income, but the Ld. CIT (A) held that it should not be considered as corporation income. The Tribunal upheld this decision based on consistency with previous assessment years and the corporation's inability to use the interest for its own purposes.

5. Ultimately, both appeals were dismissed, affirming the Ld. CIT (A)'s decisions on the various issues raised in the appeals. The Tribunal found no justification to interfere with the findings and upheld the order pronounced on 24.10.2017.