ITAT restored matter to AO to assess GP rate on sale & purchase of cotton

1. The assessee was engaged in business of trading in cotton yarn and machinery. The assessee has filed its return of income declaring total income at Rs.16,45,010/-. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) (of Income Tax Act, 1961) was issued and served upon the assessee. It had shown GP at the rate of 1.74% of the turnover, whereas in the immediately preceding year, such GP was shown at 4.70% of the turnover. AO observed that the figures used by the assessee to explain the fall in GP did not match with the figures of ledger account and the figures in the audit report. AO adopted the GP rate of last year and applied it to cotton segment only. The purchase and sales with regard to cotton during the year was Rs 4,52,04,360/-. AO worked out the GP on these sales at the rate of 4.70% at Rs.21,24,605/-. He debited this amount by a sum of Rs.5,33,411/- which is the GP at the rate of 1.18% disclosed by the assessee qua the cotton sales. The balance amount of Rs.15,91,194/- was added to the income of the assessee. The assessee had claimed remuneration to the partners at Rs.11,23,356/- from net profit of Rs.26,77,318/-. A sum of Rs.14,57,771/- was interest income which was earned by the assessee on late realization of its sale proceeds.

2. CIT(A) upheld the addition. CIT(A) excluding the interest income for the purpose of calculation of remuneration of the partners u/s 40(b) (of Income Tax Act, 1961).

3. On appeal, the ITAT held as under:

4. In the light of the above, if we examine the facts of the present case, then it would reveal that the figures submitted by the assessee for reconciliation did not match with the figures in audit report. The ld. Counsel for the assessee took us through page no.61 of the paper book, wherein, he has tried to explain the bill of Rs.9,55,953/- alleged to have been wrongly debited in its purchase register. There is a discrepancy of 19,329 kgs. of purchase and sales of cotton. There are other discrepancies also, for which an effort has been made to explain vide letter dated 25.10.010 whose copy available at page no.63 of the paper book. After due considerations of all these explanation, we are satisfied that it was quite difficult for the AO to deduce the true income of the assessee from the alleged account, though, the AO has not specifically recorded a finding about rejection of the books of accounts, but impliedly from his discussion, it reveals that book result was not accepted and the AO has estimated the GP after not satisfying himself that the income could not be deduced from these accounts.

5 . On due considerations of the above facts, we are of the view that this aspect requires to be verified at the level of the AO. Therefore, we set aside this issue for limited purpose. The ld.AO shall first determine the rate of profit earned by the assessee in Asstt.Year 2007-08 in cotton segments i.e. the rate of profit for purchase and sales of cotton only. That very rate will be applied to the cotton sales of Rs.4,52,04,360/-. Whatever GP comes out that is to be considered for making addition.

According to the ld.CIT(A), this interest income deserved to be assessed as an income from other sources and not business income. If it is to be assessed as income from other sources, then this component would exclude from computation of partner's remuneration under section 40(b) (of Income Tax Act, 1961). The ld.counsel for the assessee at the very outset relied upon the decision of the decision of the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. DCIT, 283 ITR 402 where it is held that interest income received by the assessee on late realization of its sale proceeds will be assessed as business income which will qualify for deduction under section 80IA (of Income Tax Act, 1961), because, it is to be construed as income derived from industrial undertaking. If that yardstick is applied here, then, this interest income is to be assessed as business income, and accordingly, the partners would get remuneration on this amount. Considering this aspects, we are of the view that the ld.CIT(A) has erred in excluding this ITA No.1318/Ahd/2012 amount for the purpose of calculation of remuneration of the partners under section 40(b) (of Income Tax Act, 1961). We allow the ground of appeal raised by the assessee, and delete the addition made by the ld.CIT(A) on this issue. This interest income be assessed as business income.”

Case Reference- M/s.Neo Enterprises Vs ACIT

IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ./ ITA.No.1318/Ahd/2012 /Asstt. Year: 2008-2009