2011 (12) TMI 424 - AT - Income Tax

Summary

Issues Involved:
1. Claim of depreciation on twin pouch packing machine.
2. Addition on account of suppressed sales.
3. Disallowance of interest payment higher than prevailing rates.
4. Disallowance of salary payment due to lack of evidence of service rendered.

Issue-wise Detailed Analysis:

1. Claim of Depreciation on Twin Pouch Packing Machine:
The assessee purchased two twin pouch packing machines in the financial year 2000-01. The Assessing Officer (AO) disallowed the depreciation claim of Rs. 3,15,156 for the assessment year 2002-03, asserting the machines were not used during the year. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this disallowance, but the ITAT overturned this decision. The ITAT emphasized that the machines formed part of the block of assets and had been used in previous years. Citing the Delhi High Court's judgment in Bharat Aluminium Co. Ltd., the ITAT clarified that depreciation is allowable on the block of assets, not on the individual use of each asset within the block. Therefore, the ITAT allowed the depreciation claim.

2. Addition on Account of Suppressed Sales:
For the assessment year 2002-03, the AO added Rs. 23,49,100 to the assessee's income, representing sales outside the books. The CIT(A) rejected the AO's approach, applying a gross profit rate of 8.6% on the unrecorded sales, resulting in an addition of Rs. 2,02,022. The ITAT upheld the CIT(A)'s decision, referencing the Gujarat High Court's ruling in President Industries, which stated that only the profit margin, not the entire sales amount, should be added to income. For the assessment year 2005-06, the ITAT again upheld the CIT(A)'s approach of adding only the profit margin on unrecorded sales, rejecting the Revenue's appeal.

3. Disallowance of Interest Payment Higher than Prevailing Rates:
The AO disallowed interest payments at 18%, considering 12% as the prevailing rate. The CIT(A) deleted this disallowance, noting that unsecured loans typically attract higher interest rates. The ITAT upheld the CIT(A)'s decision, agreeing that the 18% rate was neither unreasonable nor excessive, and the Revenue failed to provide evidence that commercial unsecured loans were not available at this rate.

4. Disallowance of Salary Payment Due to Lack of Evidence of Service Rendered:
The AO disallowed a salary payment of Rs. 1,20,000 to Shri Atul Kumar Jain, citing a lack of evidence of services rendered. The CIT(A) deleted this disallowance, finding that the salary payment was reasonable and the employee's identity and association with the company were established. The ITAT upheld the CIT(A)'s decision, noting that the employee was an income-tax payee and the employer-employee relationship was not in doubt.

Conclusion:
The ITAT allowed the assessee's appeal for the assessment year 2002-03, granting the depreciation claim and upholding the CIT(A)'s approach to the suppressed sales addition. The ITAT dismissed the Revenue's appeals for both assessment years, supporting the CIT(A)'s decisions on interest disallowance and salary payment issues.