2020 (2) TMI 316 - AT - Income Tax

Rejection of books of accounts u/s 145 - trading addition - HELD THAT - CIT(A) has referred to non-maintenance of qualitative stock details, no separate rates for gold and diamond, non- reflection of work-in-progress and valuation of diamond in one of the export invoice. We find that each of these matters have been satisfactorily explained by the ld AR in his written submissions we have taken note above and hence, we are of the view that there is no justifiable basis for rejection of books of accounts in the instant case. In the result, the trading addition so made on rejection of books results is deleted and both the grounds are allowed. Disallowance of interest paid on secured loan taken from the HDFC Bank and disallowance of processing charges relating to bank loan - HELD THAT - We find force in the arguments of the ld AR that where the assessee firm has charged interest from the family members and has not paid interest which it was supposed to pay on the opening credit balance in partners capital account which stay invested in the assessee s firm throughout the year, the interest paid to the bank shall be offset from the said recovery of interest and there should not be any disallowance to extent of such recovery. Therefore, for the limited purposes of determining the interest paid to the bank and interest recovered from family members/interest saved on partner s capital account for the period their opening capital remain invested and not withdrawn, the matter is remanded to the file of the Assessing officer who shall verify and allow set off of interest recovered from family members/interest saved on partner s capital account from interest on bank loan and balance, if any of interest expense shall only be brought to tax. In the result, the ground is disposed off in light of above directions. Disallowance of loan processing fee paid to HDFC loan - As submitted by the ld AR that no such disallowance was made by the AO and the ld CIT(A) without issuing any show-cause as required u/s 251(2) has enhanced the income by disallowing the said claim of the assessee firm. From perusal of order of ld CIT(A) and material on record, we find that no such show-cause was issued by the assessee firm and being a mandatory requirement u/s 251(2) before any enhancement being made by the ld CIT(A), the same cannot be dispensed with and in absence thereof, the addition so made by the ld CIT(A) is directed to be deleted. In the result, the ground of appeal is allowed. Disallowance of rent on showroom premises - HELD THAT - The question is where there is no dispute that the rent payment has been made by the assessee firm for taking on rent premises for setting up a new showroom and thereby, expanding its existing business, can the same be allowed in the year the premises are ready to be used. Given that in the instant case, the assessee has also incurred expenditure on fit-outs/improvements on such leased premises, and has accumulated and shown the same under the head work-in-progress , drawing similar analogy, we are of the view that rent payment, pertaining to the period the premises are not ready to be used, can be accumulated and the same can be claimed and will be allowed in the year in which the premises were ready to be used i.e, next assessment year 2014-15. The ground of appeal is disposed off in light of aforesaid directions. Unexplained cash credit u/s 68 - HELD THAT - There is no dispute on the proposition that where the cash so deposited represent the cash sales made by the assessee firm and such cash sales are duly recorded in the books of accounts, no addition can be made in the hands of the assessee firm. However, such a claim need to be substantiated by the assessee firm and to be verified by the Assessing officer. In this regard, we find that source of cash deposits of ₹ 13,77,000 on the specific dates were submitted along with cash book and sale bills for verification during the assessment proceedings as we have noted in para 36 above and however, there doesn t seem to be any specific finding by the Assessing officer. We therefore deem it appropriate to set-aside the matter to the file of the AO for the limited purposes of verification of source of cash deposits of ₹ 13,77,000 as submitted by the assessee firm as we have noted and where the same is found to be in order, allow the necessary relief to the assessee firm Disallowance of interest - assessee had taken unsecured loans from the family members of the partners in the earlier years and paying interest @ 15% on the same - AO made the addition of entire amount of interest paid to family members holding that the borrowings have not been used for business purpose - HELD THAT - Fresh borrowing during the year from HDFC bank has been utilized for advancing to the partners and the family members and there is thus a direct nexus which has been established between the said borrowing and advancing the funds to the family members and has no nexus with the past borrowings. Further, the assessee has contended that the borrowing from family members being unsecured as compared to bank borrowings which was claimed to be taken on collateral of personal property of the partners and family members and thus carries a differential rate of interest. We find that the internal comparable relied upon by the Revenue is not appropriate given the qualitative difference in the two loan transactions and it would have been appropriate to compare the related party transaction with an independent third party transaction carrying the same qualitative unsecured loan parameters. In absence of the same, the addition so sustained by the ld CIT(A) is hereby directed to be deleted.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the IT Act.
2. Trading addition of ?3,85,880.
3. Disallowance of interest of ?15,19,571 on a loan taken by the assessee.
4. Disallowance of processing fees of ?95,316.
5. Disallowance of rent of ?27,50,000.
6. Addition of ?27,54,000 on account of unexplained cash credit under Section 68 of the IT Act.
7. Disallowance of interest of ?1,57,081 paid to partners.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee's books of accounts were rejected by the AO due to discrepancies in the qualitative and quantitative details of purchases and sales, unsupported expenses, and unverifiable cash sales. The CIT(A) upheld the rejection, citing non-maintenance of qualitative details and discrepancies in stock valuation. The Tribunal found that the assessee satisfactorily explained the issues raised, including maintaining detailed stock registers and providing specific explanations for lower GP rates. Consequently, the Tribunal held that there was no justifiable basis for the rejection of books of accounts, and the trading addition was deleted.

2. Trading Addition of ?3,85,880:
The AO applied a GP rate of 26% to the declared turnover, resulting in an addition of ?4,49,539. The CIT(A) revised the GP rate to 25.86%, granting partial relief. The Tribunal, however, found that the assessee provided satisfactory explanations for the discrepancies noted by the AO and CIT(A), including maintaining detailed stock records and explaining the reasons for the lower GP rate. The Tribunal deleted the trading addition.

3. Disallowance of Interest of ?15,19,571:
The AO disallowed the interest paid on a loan taken by the assessee, stating it was not incurred for business purposes. The CIT(A) upheld the disallowance. The Tribunal found that the loan was used to purchase a showroom for the business, and the interest paid on the loan was offset by interest charged to family members. The Tribunal directed the AO to verify and allow the setoff of interest recovered from family members and interest saved on the partner’s capital account against the bank loan interest, and disallow only the balance, if any.

4. Disallowance of Processing Fees of ?95,316:
The CIT(A) disallowed the processing fees without issuing a show-cause notice as required under Section 251(2). The Tribunal directed the deletion of this disallowance, citing the mandatory requirement of issuing a show-cause notice before making any enhancement.

5. Disallowance of Rent of ?27,50,000:
The AO disallowed the rent on the grounds that the premises were not used for business purposes during the year. The CIT(A) upheld the disallowance, stating the showroom was not inaugurated until the next financial year. The Tribunal found that the premises were not ready to be used for business purposes as necessary improvements were ongoing. The Tribunal directed that rent payments be accumulated and allowed in the year the premises were ready to be used.

6. Addition of ?27,54,000 on Account of Unexplained Cash Credit:
The AO added ?27,54,000 as unexplained cash credit, noting discrepancies in the cash memos and lack of verification from the books of account. The CIT(A) upheld the addition, doubting the cash deposits made by customers. The Tribunal found an arithmetical error and noted that the cash deposits were explained with corresponding sales bills and stock register. The Tribunal set aside the matter to the AO for verification of the source of cash deposits and directed relief if found in order.

7. Disallowance of Interest of ?1,57,081 Paid to Partners:
The AO disallowed the interest paid to family members on the grounds that the borrowings were not used for business purposes. The CIT(A) restricted the interest to 12% instead of 15%. The Tribunal found that the past borrowings were used for business purposes and the interest rate was reasonable given the unsecured nature of the loans. The Tribunal directed the deletion of the addition sustained by the CIT(A).

Conclusion:
The Tribunal allowed the appeal filed by the assessee, providing relief on all grounds, subject to verification and directions provided for specific issues. The Tribunal emphasized the importance of proper verification and adherence to procedural requirements in making disallowances and additions.