Bogus purchases and director commission: relief sustained where book entries were verified and remuneration showed no dividend-avoidance device.

Alleged bogus purchases were considered only to the extent actually recorded in the books, because the factual finding on verified book entries was not disturbed by any contrary material, and the disallowance was sustained only to that recorded amount. Commission paid to directors was treated as part of a consistent remuneration arrangement; with declared dividends, tax paid on them, and no proved nexus to dividend avoidance, the payment was accepted as genuine and the disallowance under section 36(1)(ii) was deleted. The Revenue's challenge failed on both issues, and the relief granted by the first appellate authority was maintained.

---

---

Issues: (i) Whether the addition on account of alleged bogus purchases was to be restricted to the amount actually recorded in the assessee's books. (ii) Whether commission paid to the directors was liable to be disallowed under section 36(1)(ii) of the Income-tax Act, 1961.

Issue (i): Whether the addition on account of alleged bogus purchases was to be restricted to the amount actually recorded in the assessee's books.

Analysis: The recorded purchases were verified from the books of account and the factual finding was that the assessee had actually booked purchases only to the extent found by the first appellate authority. No material was produced to disturb that finding.

Conclusion: The restriction of the disallowance to the amount actually recorded in the books was upheld in favour of the assessee.

Issue (ii): Whether commission paid to the directors was liable to be disallowed under section 36(1)(ii) of the Income-tax Act, 1961.

Analysis: The commission had been paid consistently over the years as part of the remuneration arrangement, dividend had also been declared and tax paid thereon, and there was no established nexus showing that the commission was a device to avoid dividend distribution tax. The services rendered by the directors were accepted as genuine.

Conclusion: The disallowance of commission was rightly deleted and the addition was not sustainable.

Final Conclusion: The Revenue's appeal failed on both substantive issues and the assessee succeeded in sustaining the relief granted by the first appellate authority.

---