AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (3) TMI 43
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....mber Traders, Indore, MP No reply received. 2. Aggarwal Traders No reply received. 3. Annapurna enterprises No reply received. 4. Ashit Shipping Services No reply received. 5. Dadu Timber Traders No reply received. 6. Spee Industries No reply received. 7. Amirsingh & Sons No reply received. 8. Arihant Plywood Industries No reply received. 9. Gautam Timber No reply received. 10. Green Gold Timber Pvt. Ltd. As per part's reply no such closing balance, but you have in your books a debit balance of Rs. 298793/- 4. The AO found that the assessee had not entered into any genuine business transaction with the above parties. The AO accordingly, rejected the books of account of the assessee and estimated the income by noting that there are many comparable cases of same line of business who have shown GP even more than 3% for example Prime Lumber Pvt., Ltd. For same A.Y. 2005-06 and shown GP at 3.63%. The AO accordingly, estimated GP applying 3% rate and accordingly, GP is taken Rs. 7,45,641/- in computation of taxable income. 5. The CIT(A) reduced the amount of estimation of the addition from 3% to 2.5% and sustained addition of Rs. 6,21,368/- and allowed relie....
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....imited is Government Entrepreneurs and has put many restrictions on the assessee. The ld. A.R. while explaining the loss in teak wood submitted that rate of goods was fallen down in international market. The other reasons of loss were same as stated above in respect of hard wood. As regards the notice issued by AO u/s. 133(6) and noncompliance by the parties, the ld. A.R. submitted that the AO issued notices u/s. 133(6) to 10 parties but during the year under consideration, the transaction was only with 3 parties and in respect of 7 parties, only there was opening balance. The ld. A.R. further submitted that in this line of timber business, net profit margin is never at the rate of 3%. It is always less than 3%. The ld. A.R. drew our attention on comparative cases and submitted that in case of M/s. Green Gold Timber Pvt. Ltd., the net profit rate is 0.46% in AY 2005-06. Similar in case of M/s. Shipra Veneers Pvt. Ltd. the rate of gross profit was 1.07%. The ld. A.R. submitted that in case of Shipra Wood Products Pvt. Ltd., the CIT(A). Rajkot vide Appeal No. 301/2007-08 for AY 2005-06 estimated GP at 2% as against the GP estimated by the AO at 3%. The ld. A.R. submitted that the ITA....
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....5% will meet the ends of justice instead of 3% adopted by the AO. In principle, the CIT(A) was of the view that the estimation made by the AO was on higher side. After considering the nature of business, loss declared and after considering the decision cited by ld. A.R. including the decision of ITAT, Rajkot Bench, we find that it will be fair and just to both sides if GP is estimate at the rate of 2% as against 3% applied by the AO and 2.5% applied by the CIT(A). The AO is directed to estimate the gross profit applying 2% rate instead of 3% adopted by him. 10. The brief facts of the second ground are that during the assessment proceedings, the AO noticed that the assessee has given advances to various parties without charging interest. The AO calculated interest on advances to V.K. Tours & travels of Rs. 10,00,000/- and calculated interest by applying 18% rate of interest Rs. 1,80,000/- and to that extent, interest expenditure was disallowed. The CIT(A) confirmed the order of the AO observing that the ITAT, Rajkot Bench on the similar issue in the case of Prime Lumber (P.) Ltd. [IT Appeal No. 129 (Rjt.) of 2009, dated 7-8-2009], held that the finding in case of Torrent Financiers....
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.... is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is, therefore, necessary for the purpose of running the business. 11.3 The object of the provision is not to enable an assessee to make a large borrowing and create a liability for payment of interest thereon not only in the year in which the borrowing was made, but the subsequent years as well, keep the loan outstanding and thereafter, divert the amount borrowed by taking it out of the business by giving it interest-free to others like sister concerns and relatives or for personal use, but continue to pay interest out of the income of the business and claim the amount of interest paid as a business expenditure. The payment of interest on the amount not used in the business cannot be regarded as a business expenditure as....
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.... in its business. The time at which the diversion takes place is not the only relevant criterion but it is the fact of the diversion which is material and once it has been shown that there has been diversion of interest on the amount borrowed, but subsequently diverted would not qualify for deduction. Any view to the contrary would not in the least sub serve the object of the legislative provision, but it would only open the gates for the assessees to borrow merrily and after ostensibly using it in the business for a short period and at a subsequent point of time divert the funds in whole or part, for non-business purposes and continue to claim the interest on the borrowing as a deductible item of expenditure. The objects of the section would not in any way be advanced by the adoption of such a view. If a business for which the interest paid is claimed as a deduction has not benefited during the year from the capital borrowed by such borrowed amount being used in the business, such interest cannot be regarded as expenditure for the purposes of the business. The assessee may not even while using borrowed funds for its personal purposes and not business purposes claim deduction of th....
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....enses. This is a case where the loans were taken for carrying on the business but the family used to withdraw some amounts from the business whenever occasions arose. The family was surely entitled to withdraw from the capital supplied by it with the result of the capital being depleted. There is, therefore, no substance in the submission that the fact that part of the amount borrowed was later on used for personal expenses, would deprive the assessee of the benefits." 11.7 From the above judgment of Hon'ble Andhra Pradesh High Court we find that the assessee has right to replace his own capital with borrowed funds which were already used for the purpose of business in acquiring assets and other. With the help of this ratio of the judgment such problem can be resolved by examination and analyses of financial statements prepared on the basis of books of account maintained by the assessee. It is well accepted proposition that for the purpose of ascertaining profit and gains, the normal principles of commercial accounting should be applied, so long as they do not conflict with any express statutory provisions as held by the Hon'ble Supreme Court in CIT v. U.P. State Industrial Develo....