2011 (1) TMI 14 - AT - Income Tax

Loss on account of sale of opening stock - treatment as undisclosed investment u/s 69 - the investments are recorded in the books of account - Disallowance of salary expenses and telephone expenses - Held that - (i) we do not find any reason to doubt the genuineness of the sales being effected at loss after five years of holding the chemicals. There is no gain saying that chemicals loose their quality with the passage of time and, therefore, whatever assessee could realize by sale of the same, could not be doubted. We, accordingly, set aside the order of the learned CIT (A) and allow the ground of appeal raised by the assessee. - (ii) regarding salary, the assessee could not give the details of services rendered by these employees - onus is on the assessee to substantiate its claim and when it fails to do the same, the disallowance is called for - salary expenses partly allowed - (iii) telephone in the name of director - 50% expenses allowed - (iv) merely because a liability is existing in the books for over three years would not lead to the conclusion that the liability has ceased to exist and, therefore, the same could not be taxed as deemed profit u/s 41(1)

Issues Involved:
1. Disallowance of loss on sale of opening stock.
2. Addition of inflated expenses.
3. Addition of salary expenses.
4. Addition of telephone expenses.
5. Addition of non-est liabilities under Section 41(1).

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Sale of Opening Stock:
The assessee, a closely held company engaged in investment in shares and trading in ferro alloys, declared a total loss of Rs. 2,55,182 under regular provisions and a book loss of Rs. 2,66,509 under section 115JB of the Income Tax Act, 1961. The Assessing Officer (AO) noted that the opening stock worth Rs. 8,33,750 was sold for Rs. 4,89,213 without any purchases during the year, resulting in no closing stock. The assessee claimed the stock was damaged due to exposure to rain and weather, necessitating its sale at a lower price. However, the AO found no supporting material for the stock's holding and damages, treating the sale transaction as unproved and adding Rs. 3,44,537 as undisclosed investment. The CIT (A) upheld the AO's action despite the assessee submitting various certificates regarding the sale.

Upon appeal, the Tribunal noted that the assessee's claim of stock damage and subsequent sale was supported by evidence, including sales bills, details of parties, realization through cheques, and a certificate from Sam Spintex Ltd. confirming storage of the material. The Tribunal found no reason to doubt the genuineness of the sales at a loss, setting aside the CIT (A)'s order and allowing the assessee's appeal.

2. Addition of Inflated Expenses:
The AO disallowed Rs. 26,647 as inflated expenses, including audit fees and bank charges, which the CIT (A) upheld. The Tribunal found no interference necessary with the CIT (A)'s order, as the assessee failed to reconcile the difference and some expenses related to capital in nature.

3. Addition of Salary Expenses:
The AO disallowed Rs. 54,289 representing salary expenses, which the CIT (A) confirmed, noting the assessee could not provide descriptions of the employees. The Tribunal partially allowed the appeal, considering that services were required for selling the opening stock, and allowed Rs. 20,000 from the salary expenses while disallowing the remaining Rs. 34,289.

4. Addition of Telephone Expenses:
The AO disallowed Rs. 10,948 for telephone expenses, confirmed by the CIT (A), as the telephone was in the director's name without a board resolution for business use. The Tribunal allowed 50% of the claim for business purposes, considering the circumstances.

5. Addition of Non-est Liabilities under Section 41(1):
The AO included Rs. 3,72,847 as non-est liabilities, noting they were outstanding for more than three years. The CIT (A) confirmed this addition. The Tribunal referred to the Mumbai Bench's decision in DSA Engineers (Bombay) v/s ITO, which held that mere duration of outstanding liabilities does not constitute cessation under Section 41(1). The Tribunal set aside the CIT (A)'s order, allowing the assessee's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the loss on sale of opening stock and non-est liabilities while partially allowing the appeal on salary and telephone expenses. The addition of inflated expenses was upheld. The comprehensive analysis by the Tribunal ensured that the assessee's claims were substantiated with adequate evidence, leading to a fair judgment.

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