2012 (8) TMI 558 - AT - Income Tax

Addition to the closing stock on an adhoc basis - low gross profit margin - non-maintenance of stock register - Held that - It is observed that AO simply made addition to the closing stock valuation without rejecting the books of account and non verification of valuation adopted by assessee for the closing stock. Also, there was no increase in the royalty expenditure and also turnover. Therefore, there is no basis for making an addition. Salary expenses - part time employees - dis-allowance of 50% - CIT(A) restricted addition to 15% - non-maintenance of salary register etc - Held that - CIT (A) after considering the explanation of assessee that part-time employees were engaged to supervise sales at various exhibitions and since they are continuously changing, they are not on pay roll but assessee produced the vouchers to support the expenditure paid to them, restricted the addition to 15%. No infirmity in the order Payment made to BMC for property tax - dis-allowance on ground of inability to substantiate the amount - Held that - Requirement of proof of payment to the BMC authorities to allow in the year of payment was required while computing the income from house property but not allowing the expenditure under section 37(1) as business expenditure. Moreover, assessee has already furnished the evidence regarding the dispute with the owner and payment by way of deposit to the Court. No need for any dis-allowance. Dis-allowance u/s 40(a)(ia) - royalty payments made to Authors - AO disallowed amount on the reason that assessee did not file details of the authors to whom royalty was paid and basis on which royalty was paid - non-deduction of TDS - Held that - Provisions of Section 194J cannot be made applicable to the payment made to the authors. Without establishing that the amounts are covered by any TDS provisions, there is no need for invoking the provisions of section 40(a)(ia). Deletion of dis-allowance confirmed - Decided against Revenue

Summary

Issues Involved:
1. Addition of Rs.1,75,000 on account of low gross profit margin.
2. Restriction of salary expenses to 15% instead of 50%.
3. Disallowance of BMC property tax of Rs.2,93,015.
4. Addition on account of royalty to workers under section 40(a)(ia) of Rs.11,11,565.

Analysis:

Issue 1 - Addition of Rs.1,75,000 on account of low gross profit margin:
The AO made an adhoc addition to the closing stock valuation without rejecting the books of account or verifying the valuation adopted by the assessee. The CIT (A) deleted the addition citing an increase in royalty expenditure and turnover. The Tribunal upheld the CIT (A)'s decision, stating that the AO lacked a basis for the addition and did not provide any defects in the books of account or vouchers. The deletion was deemed appropriate as the AO's action was unsupported.

Issue 2 - Restriction of salary expenses to 15% instead of 50%:
The AO disallowed 50% of the salary expenses due to the absence of a maintained salary register. The CIT (A) restricted the disallowance to 15% after considering the explanation provided by the assessee regarding part-time employees engaged for sales supervision at exhibitions. The Tribunal found no reason to interfere with the CIT (A)'s decision, as it was based on factual examination and the explanation provided by the assessee.

Issue 3 - Disallowance of BMC property tax of Rs.2,93,015:
The AO disallowed the claimed amount as the assessee failed to substantiate that it was paid to BMC for property tax. The CIT (A) allowed the amount considering the facts and the deposit made in the Court towards municipal taxes. The Tribunal upheld the CIT (A)'s decision, emphasizing that there was no basis for disallowance by the AO, especially when the payment was claimed as a business expenditure on a tenanted property.

Issue 4 - Addition on account of royalty to workers under section 40(a)(ia) of Rs.11,11,565:
The AO disallowed the royalty payment to authors under section 40(a)(ia) for non-deduction of TDS and lack of details on the royalty payments. The CIT (A) deleted the amount after assessing the details submitted by the assessee and interpreting the provisions of section 194J. The Tribunal concurred with the CIT (A), stating that the provisions of section 194J were not applicable to the payment made to authors, and there was no need to invoke section 40(a)(ia).

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions made by the CIT (A) on all the issues raised by the Revenue. The judgment emphasized the importance of factual examination and adherence to legal provisions in making additions or disallowances.