2013 (12) TMI 1199 - AT - Income Tax

Tribunal allows appeal, restricts addition on profit rate, permits deduction of penal interest

The Tribunal partially allowed the appeal, restricting the addition on the fall in gross profit rate and allowing the deduction of penal interest paid to ... Fall in G.P. Rate – Held that:- AO simply mentioned that all the manufacturing expenses are not verifiable. Keeping in view this fact, we are of the view that it will meet the ends of justice if the addition of Rs.5,00,000/- is sustained instead of addition of Rs.12,61,810/- made by the AO – Partly allowed in favour of assessee. Penal interest on late payment of interest to the bank – Held that:- As per the provisions of Explanation to Section 37(1) of the Act, any expenditure incurred by the assessee for any purpose which is an offence is not allowable - The late payment of interest to the bank is occurred during the normal course of business of the assessee - The expenditure in question is not incurred for any purpose which is an offence within the meaning of Explanation to Section 37(1) – Decided in favour of assessee. Issues:1. Addition of lump sum amount on fall in gross profit rate.2. Disallowance of penal interest on late payment to the bank.Issue 1: Addition of lump sum amount on fall in gross profit rateThe appeal was against the order of the ld.CIT(A) for the assessment year 2007-08. The Assessing Officer (AO) made an addition of Rs.12,61,810/- due to a reduction in the gross profit rate compared to the preceding year. The ld. CIT(A) confirmed this addition based on the reasoning that manufacturing expenses had increased significantly and were not fully verifiable. The appellant contended that no defects were found in the books of accounts and argued against the addition. The Tribunal noted a similar case involving the appellant's sister concern where an addition of Rs.5 lakhs was confirmed. After considering the arguments, the Tribunal restricted the addition to Rs.5,00,000/-, deleting the balance of Rs.7,61,810/-. The Tribunal found that the AO did not point out specific defects in the books of account, leading to the partial allowance of Ground No.1.Issue 2: Disallowance of penal interest on late payment to the bankThe AO observed that the appellant firm paid penal interest on late payment of interest to the bank amounting to Rs.1,98,026/-. The ld. CIT(A) upheld this disallowance based on the decision of the Hon'ble Supreme Court in the case of Prakash Cotton Mills, stating that the interest charged by the bank was not compensatory in nature. The appellant argued that the penal interest was paid for late payment of interest and should be considered a business expense. The ld. DR contended that the penal interest was not allowable as per the Explanation to Section 37(1) of the Income Tax Act. The Tribunal, after considering the arguments and relevant provisions, deleted the disallowance of interest paid to the bank amounting to Rs.1,98,026/-. Ground No.2 was allowed in favor of the appellant.In conclusion, the Tribunal partially allowed the appeal of the assessee, restricting the addition on fall in gross profit rate and allowing the deduction of penal interest paid to the bank. The judgment provided detailed analysis and reasoning for each issue, ensuring a fair and just decision based on the facts and legal provisions presented during the proceedings.