Addition for low GP ratio cannot be made if it is consistent with previous Years without any change in factual position
Case Law Citation: –Satish Agarwal vs. DCIT (ITAT Jaipur) , IT Appeal No.-969/2013, AY 2008-09 ,Date of Pronouncement -24.09.2015
Issue No.- 1 Addition on account of low GP declared by assessee:
Assessee declared GP @ 12.57% which was increased by AO to 15% and accordingly made an addition of Rs. 1,01,755/- to the total income. The assessee had shown various expenses for job work, which was comparatively higher per unit manufacturing of carpet as compared to expenses shown by M/s Carpet Palace and M/s Supreme Carpet (sister concerns of assessee) engaged in similar business declared gross profit rate ranging from 20% to 30% during the year under consideration.
ITAT observed that the assessee is a local trader whereas the sister concern from whom comparison made were exporters. In export business , generally the traders earns on higher side as compared to local trade. Further, assessee has shown G.P. rate during the year @ 12.57% on total sale of Rs. 39,35,037/- compared to immediate preceding year’s G.P. rate @ 13.57% on turnover of Rs. 39,89,388/-.
ITAT placed reliance on the decision of Hon’ble Rajasthan HC in the case of CIT Vs. Inani Marbles Pvt. Ltd. (2009) 316 ITR 125 (Raj) wherein the court held that in absence of any change in the factual position normally the profit rate declared and accepted in the preceding year constitute a good basis of working out the profits.
The GP rate declared by assessee is consistent as compared to that declared in earlier years, therefore, addition to GP without any change in other facts cannot be sustained.
Issue No.2- Investments earning exempt dividend income along with taxable capital gains not subject to Sec 14A disallowance
Brief of the case:
The ITAT Bench of Jaipur in the case of Satish Agarwal vs. DCIT held that the interest expenses incurred by assessee cannot be disallowed u/s 14A when the income from own funds are more than that of interest paid on borrowings used for making investments in shares yielding dividends.
Further, even if dividends exempt from tax any other income from dividend if taxable and offered to tax , then such investments won’t be subject to Sec 14A disallowance.
Facts of the case:
There was a search and seizure operation conducted in this case on 27/08/2008 U/s 132 of the Income Tax Act, 1961.AO observed that the assessee had debited a sum of Rs. 6,69,062/- in the income and expenditure account under the head interest paid to bank. He found that the assessee has utilized overdraft facility from bank to invest in IPO of Indian companies and paid interest to the bank.
AO observed that since dividend income from such investments is exempt from tax u/s 10(32) , such expenses incurred to earn exempt income are not allowable in view of Sec 14A of the Act. Accordingly, the interest expenditure of Rs. 6,69,062/- was added to the total income.
CIT(A) also confirmed the addition by holding that the surplus funds available with assessee was invested by him in FDR and investment in IPO was made from OD facilities.
Aggrieved assessee is in appeal before ITAT on the same issue.
Contention of the Assessee:
It was submitted that the assessee has earned more interest than paid as the interest paid on OD is of Rs. 6,69,062/- whereas interest earned by the assessee on FDR and others of Rs. 30,15,627/-.It implies that the assessee has not incurred expenditure on account of interest or investment in shares.
Further, in addition to dividend income the assessee has earned short term capital gains and also offered to tax an amount of Rs. 9,07,828/-.When short term capital gain has become part of the total income of the assessee, AO cannot hold that interest on OD amount was incurred for earning income which did not form part of total income.
Held by ITAT:
It is not in dispute that the assessee has more interest income than interest paid on OD, by which prima facie it does not seems that the assessee has used OD limit only of IPO investment. Further, assessee has also disclosed short term capital gain at Rs. 9,07,828/- in the income of the assessee which is taxable.
As such even if it is assumed that investment in IPO was out of OD facilities still interest paid on OD cannot be disallowed u/s 14A because the assessee had offered capital gains to tax though dividends earned are exempt which means that the incomes from investment are not wholly exempt from tax.
Tribunal agreed with the assessee’s reliance placed on the decision of Hon’ble Kerala HC in the case of CIT Vs. Dr. V.P. Gopinathan 229 ITR 801 wherein the court held that where interest is received by the assessee on his fixed deposit and is also paid on loan obtained on the security of that fixed deposit, only the net interest is chargeable to tax on the principle of mutuality.