Creditors Written Off and Discount Receipts Linked to Business Income Taxable at Only 8% of Their Value: ITAT [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to modify the addition citing that only 8% of creditors written off and discount receipts linked to business income are taxable.

Priya Construction (assessee) is a partnership firm engaged in the business of undertaking civil construction/real estate. The assessee converted the partnership firm into a private company. The assessee filed Income Tax Return (ITR) declaring total income of Rs. 6,00,08,400 for Assessment year(AY) 2019-20.

The income tax authorities conducted a survey under section 133A of the Income Tax Act, 1961, and observed that receipts for expenses claimed in the books of accounts cannot be found on the premises of the assessee.

The Managing Partner of the firm declared 8% as profit and also declared a net profit after claiming interest on partners and partners' remuneration for AY 2019-20. Thereafter, the AO computed the total income amounting to Rs. 6,39,95,057 of the assessee.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

In spite of this, the Principal Commissioner of Income Tax (PCIT) interfered in the action of the AO by invoking his revisional jurisdiction under section 263 of the Income Tax Act. The PCIT observed that the assessee had other income of Rs. 43,60,829 which included interest on deposits, discount receipts and creditors written off.

The PCIT issued a show cause notice to the assessee. The assessee submitted that the income was part of the business income and also stated that only 8% of the creditors written off and discount receipts can be taxable. Despite the reply, the PCIT made an addition of Rs. 43,60,829 to the taxable income.

Aggrieved by the order of the PCIT, the assessee filed an appeal before ITAT. The counsel for the assessee contended that creditors write off and discount receipts linked with business income. The counsel argued that though it was mistakenly shown under other income, the assessee offered 8% to taxable income which amounts to Rs. 2,55,224.

On the other hand, the counsel for the revenue supported the action of the PCIT and sought to dismiss the appeal.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The two-member bench comprising Aby T. Varkey (Judicial Member) and Jagadish (Accountant Member) observed that the amount was linked to the business income of the assessee and further stated that only 8% of the profit was taxable.

Therefore, the tribunal modified the order PCIT and directed the AO to add Rs. 2,55,224 to the taxable income. The appeal of the assessee was partly allowed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates