Unexplained stock addition and commission disallowance deleted; cash credit sent back for verification, while car and telephone disallowance was upheld.

Unexplained investment in closing stock could not be sustained where the books were not found defective, the stock statement given to the bank was not independently verified, and the higher figure was plausibly explained as inflated for credit facilities; the addition was deleted. Commission expenditure paid through banking channels and supported by recipient responses and business explanation was treated as genuine, and the disallowance was deleted. A cash credit of Rs. 1 lakh required further verification because creditworthiness was not fully established and later repayment or adjustment needed examination; the matter was remitted. Ad hoc disallowance of car and telephone expenses was upheld because no logbook or comparable material showed exclusive business use.

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Issues: (i) Whether the addition made on account of alleged unexplained investment in closing stock, based on a stock statement furnished to the bank, was sustainable; (ii) Whether the disallowance of commission expenditure was justified; (iii) Whether the cash credit of Rs. 1 lakh required verification under section 68; and (iv) Whether the ad hoc disallowance out of car and telephone expenses was warranted.

Issue (i): Whether the addition made on account of alleged unexplained investment in closing stock, based on a stock statement furnished to the bank, was sustainable.

Analysis: The books of account, supported by audit and regular records, were not found defective. The Assessing Officer relied mainly on the stock statement given to the bank, but did not verify the alleged purchases, creditors, or the factual explanation that the higher stock figure was inflated only to obtain credit facilities. In the absence of rejection of the books under the statutory accounting provisions and without independent enquiry into the alleged discrepancies, the bank statement alone could not displace the book result for income-tax purposes.

Conclusion: The addition on account of closing stock was not sustainable and the finding was in favour of the assessee.

Issue (ii): Whether the disallowance of commission expenditure was justified.

Analysis: The expenditure was paid through banking channels, the recipients responded to notices, some explained the services rendered, and the payments had been accepted in earlier and later years on similar facts. For business expenditure, the test is whether the payment was laid out wholly and exclusively for business purposes, judged from the point of view of a prudent businessman. The absence of a formal agreement by itself did not disprove the genuineness or business necessity of the commission.

Conclusion: The disallowance of commission expenditure was not justified and the finding was in favour of the assessee.

Issue (iii): Whether the cash credit of Rs. 1 lakh required verification under section 68.

Analysis: Identity of the creditor and the banking channel were shown, but the creditworthiness of the creditor was not established to the requisite degree. The surrounding circumstances required verification as to whether the amount had been repaid or adjusted in later dealings, so as to test whether it was a genuine loan or an introduction of the assessee's own money.

Conclusion: The matter required fresh verification and was remitted for readjudication.

Issue (iv): Whether the ad hoc disallowance out of car and telephone expenses was warranted.

Analysis: In the absence of a logbook or other material establishing exclusive business use, some element of personal use could not be ruled out. The disallowance was made on a reasonable estimate and was restored.

Conclusion: The disallowance out of car and telephone expenses was sustained and the finding was in favour of the Revenue.

Final Conclusion: The appeal succeeded only in part: the additions relating to closing stock and commission were deleted, the credit of Rs. 1 lakh was sent back for verification, and the disallowance out of car and telephone expenses was restored.

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