2005 (8) TMI 288 - AT - Income Tax

Cash credit - book profits defined in s. 40(b) - Disallowance of a sum being discount allowed to the customers through the credit notes - HELD THAT - The cash credits were found recorded in the books of account. Thus the nature of such cash credits attains the character of business income. The words book profit defined in s. 40(b) mean net profit as shown in P L a/c computed in the manner laid down in Chapter IV-D. The assessee included such unexplained cash credits in its P L a/c. The book profit is to be computed in the manner laid down in Chapter IV-D. Thus this cash credit forms part of book profit. The assessee is not carrying on any other business and has no other source of income. Thus whatever income arising to the assessee is business income and hence computation is in accordance with Chapter IV-D. Thus it can be held that such cash credit forms part of book profit for the purpose of computation of remuneration. The AO is directed to include such cash credit in the book profit for the purpose of allowing remuneration to the partners which is authorized by and in accordance with the terms of partnership deed. In the result the appeal is allowed.

Summary

Issues:
1. Disallowance of discount allowed to customers through credit notes.
2. Disallowance of remuneration to partners.
3. Charging of interest under sections 234B and 234C of the Act.

Issue 1: Disallowance of discount allowed to customers through credit notes

The appeal was against the disallowance of a sum of Rs. 1,79,350 being discount allowed to customers through credit notes. The AO disallowed the sum as the credit notes were not issued by the assessee and the discount had not been passed on. The learned CIT(A) directed the AO to provide cross-verification before disallowing the claims of incentive and discount. However, the learned CIT(A) later held that the discount payment was not genuine. The assessee challenged this finding, arguing that the direction to provide all information was not complied with. The Tribunal concluded that the matter needed to be restored back to the AO for a fresh examination of the claim of the assessee regarding discount/rebates.

Issue 2: Disallowance of remuneration to partners

The AO restricted the claim of remuneration to partners by excluding the additional income declared during the survey from the book profits. The learned CIT(A) upheld this decision. The assessee contended that any credit in the books forming part of profit should be considered for book profit under section 40(b). The Tribunal noted that the cash credits found in the books of account were part of business income and should be included in the book profit for the purpose of allowing remuneration to the partners as per the terms of the partnership deed.

Issue 3: Charging of interest under sections 234B and 234C of the Act

Interest under section 234C is chargeable on advance tax payable based on the income declared in the return of income. Interest under section 234B is consequential when the assessee does not deny the liability to pay advance tax. The appeal was allowed in this regard.

In conclusion, the Tribunal ordered the matter to be restored back to the AO for a fresh examination of the discount claim, directed the inclusion of cash credits in the book profit for allowing remuneration to partners, and clarified the charging of interest under sections 234B and 234C of the Act.