1977 (4) TMI 61 - AT - Income Tax

Summary

Issues:
1. Treatment of freight amount in the Trading A/c.
2. Charging of commission on sales.
3. Addition of notional income.
4. Disallowance of interest under section 40(b).

Detailed Analysis:

1. The appellant, a cloth trading firm, sold goods with a gross profit rate of 7.56%. The freight amount was wrongly debited to the P&L a/c instead of the Trading A/c. After correction, the gross profit rate reduced to 6.5%. The AAC sustained an addition of the freight amount, but the ITAT ruled the addition as erroneous since the correct gross profit rate was already considered, leading to the deletion of the addition.

2. The firm did not charge commission on certain sales, prompting the ITO to estimate income from commission. The ITAT held that the ITO cannot create notional income where none exists, and the firm's decision not to charge commission is valid. Therefore, the addition of estimated income was deleted.

3. Additionally, an addition on account of interest was made by the ITO, even though the firm did not charge interest on advances made. The ITAT emphasized that the authorities cannot presume income on a notional basis when the assessee did not intend to earn it. Consequently, the addition of interest income was also deleted.

4. The last issue pertained to the disallowance of interest paid to a partner under section 40(b) based on cross gifts between partners' children. The ITAT disagreed with the AAC's decision, stating that section 40(b) only disallows interest paid to a partner, not to a minor child of a partner. The income of the minor child, even if clubbed with the partner's income, does not make the interest payment disallowable under section 40(b. Therefore, the disallowance of interest was deemed unjustified, and the appeal was allowed.