1990 (2) TMI 82 - AT - Income Tax

Appeal granted for disallowed expenses. Reassessment ordered for stock valuation. Interest levy to be reviewed.

DEVANBABU PVT. LTD. Versus INCOME TAX OFFICER.

DEVANBABU PVT. LTD. Versus INCOME TAX OFFICER. - [1990] 36 TTJ 664 Issues Involved:1. Disallowance of salaries to Directors.2. Disallowance of purchase expenses.3. Addition of unexplained stocks.4. Valuation of closing stock.5. Levy of interest under Section 217.Detailed Analysis:1. Disallowance of Salaries to Directors:Issue: The CIT(A) disallowed Rs. 18,000 and Rs. 18,200 being salaries to Directors for the assessment years 1982-83 and 1983-84, respectively, on the grounds that no such salary was paid in the past, and there was no Board resolution authorizing such payments.Judgment: The Tribunal noted that the Directors, with 35-40 years of experience, were acclaimed jewellers and had proven capabilities. The Tribunal held that the necessity of incurring such expenditure is not relevant; what matters is whether the expenditure was incurred for commercial considerations. The meagre salary of Rs. 750 per month for each Director was justified, and the disallowance was deleted for both years.2. Disallowance of Purchase Expenses:Issue: The ITO disallowed Rs. 19,000 representing the purchase price of 190 kg of rough emeralds from Shri Chandulal M. Patel, questioning the genuineness due to the seller's inability to explain the source of acquisition.Judgment: The Tribunal found that Shri Patel confirmed the sale and receipt of payment by cheque. The mere fact that he was a petty dealer and encashed the cheque on the same day did not prove that he returned the money to the assessee. The Tribunal noted that similar transactions with Shri Patel were accepted in other cases. The disallowance was deleted.3. Addition of Unexplained Stocks:Issue: The ITO added Rs. 4,47,319 for unexplained stocks found during a search, which included 300 kg of rough emeralds, unexplained stocks at Bombay and Cambay, and a mixture of rough rubies and emeralds.Judgment: The Tribunal examined the evidence, including statements made during the search and the jangad memo. The Tribunal found that the explanation given by the Director during the search was consistent and supported by the records. The Tribunal noted that the ITO and CIT(A)'s suspicion about the transportation of 300 kg of rough emeralds in a car was not sufficient evidence. The addition of Rs. 2,98,800 was quashed. Regarding the remaining items, the Tribunal directed the ITO to revalue the stocks and consider the assessee's explanations, providing an opportunity for cross-examination of the departmental valuer.4. Valuation of Closing Stock:Issue: The assessee contended that the real value of the closing stock was much less than that adopted by the Departmental valuer.Judgment: The Tribunal noted that the ITO and CIT(A) did not provide an opportunity for the assessee to get the stocks revalued or to cross-examine the departmental valuer. The Tribunal directed the ITO to allow the assessee to get the stocks valued by a registered valuer and to consider the explanations regarding the stock register and jangad transactions. The matter was restored to the assessing authority for redetermination.5. Levy of Interest Under Section 217:Issue: The CIT(A) confirmed the interest of Rs. 1,08,968 charged by the ITO under Section 217.Judgment: The Tribunal noted that the CIT(A) considered this ground as consequential and directed the ITO to reconsider the levy of interest along with the preceding points. The ITO was also directed to consider the provisions of Rule 40 relating to waiver of interest and the judgment of the Rajasthan High Court in CIT vs. Golcha Properties (P) Ltd.Conclusion:The appeal for the assessment year 1982-83 is treated as allowed for statistical purposes, and the appeal for the assessment year 1983-84 is allowed.