2018 (3) TMI 881 - AT - Income Tax

Trading Addition - G.P. rate determination - Held that - GP rate declared by the assessee for the year under consideration is 6.056%. Therefore, if we compare the average G.P. of past history with the G.P. declared for the year under consideration the G.P. for the year under consideration is more than the average figure of GP and therefore, even if the books of accounts of the assessee are rejected it may not necessary by lead to any addition to the total income of the assessee. We do not find any reason to interfere with the order of the CIT(A) on this issue. Disallowance of interest on account of charging short interest or interest free loan to the sister concerns - Held that - The assets and liabilities reveals that during the year under consideration the assessee has added fixed asset of about ₹ 1 crore and further there is an increase of trade debtor from ₹ 2.27 Crores to ₹ 4.08 Crores. The current liabilities show that the borrowing are only for the short term and therefore, are not meant for acquiring the fixed asset. Availability of the assessee s own fund is required to be examined and verified by considering all the facts. Neither the AO nor the CIT(A) has gone only the factual aspect of the issue. The assessee is also required to filed the proper fund/cash flow statement to show that the availability of the assessee s own funds for fresh loan and advances given during the year to the tune of ₹ 9.7 Crores. AO to examine the availability of the assessee s own fund to the extent of the loan and advances given to the sister concerns during the year under consideration. Appeal of the Revenue is partly allowed for statistical purposes

Summary

Issues:
1. Trading addition deletion by CIT(A)
2. Interest disallowance on short interest or interest-free loan to sister concerns

Issue 1: Trading Addition Deletion by CIT(A):
The appeal by the Revenue challenged the CIT(A)'s order for the assessment year 2013-14, specifically regarding the deletion of a trading addition of ?60,22,485. The AO rejected the assessee's books of accounts under Section 145(3) and determined income with a GP rate of 6.385%, resulting in the addition. The CIT(A) upheld the rejection but restricted the addition to ?12,00,000. The Tribunal noted that the AO computed the weighted average GP rate instead of considering the past GP rates declared by the assessee, which is accepted or attains finality. The Tribunal emphasized that fair estimation should rely on the past history of GP rates. The average GP rate for the last 5 years was 4.8532%, while the assessee declared 6.056% for the year under consideration. As the GP for the current year exceeded the historical average, no addition was warranted even if the books were rejected. The Tribunal upheld the CIT(A)'s decision on this issue, stating no reason to interfere.

Issue 2: Interest Disallowance on Short Interest or Interest-Free Loan to Sister Concerns:
The second and third grounds pertained to the disallowance of interest due to charging short interest or providing interest-free loans to sister concerns. The AO disallowed interest expenditure proportionately, alleging the assessee charged short interest on loans to sister concerns while receiving interest-free loans. The CIT(A) deleted this disallowance, citing the sufficiency of the assessee's own funds for advancing money to sister concerns. The Tribunal considered both parties' arguments, with the DR supporting the AO's decision and the AR relying on precedents favoring the assessee. The Tribunal noted that if the assessee's funds were adequate for interest-free loans to sister concerns, no disallowance was necessary. While a previous decision favored the assessee on this issue, fresh loans and advances of ?9.7 crores during the current year required examination of the availability of the assessee's funds. The Tribunal found the factual aspects inadequately addressed by the AO and CIT(A), directing the AO to verify the availability of the assessee's funds for the loans given during the current year. Thus, the appeal was partly allowed for statistical purposes.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's reasoning and decision for each issue involved in the case.