2012 (8) TMI 665 - AT - Income Tax

Addition profit rate - trading (gross) profit for the year at 26% as against the preceding year, where the same stood at 27.77 Held that - In the event of the trading results for the immediately preceding year being better than that for the current year, the assessee shall be allowed to present its case before the assessing authority by the ld. CIT(A), and adjudicate in the matter only subsequently Disallowance of the sum paid to directors of the assessee company Held that - where payments were made by assessee-company to its directors was supported by a Board resolution which authorised payment being in appreciation of directors services and encouraging operational results of company, deduction should be allowed to assessee Disallowance in respect of traveling expenses - ad hoc estimates in view of the inability of the assessee to substantiate its claim in this regard in full Held that - In the absence of details as the reason, it stood explained by assessee before the ld. CIT(A), that the same is only by way of journal vouchers, to balance the accounts where short payments are received, so that the (personal) accounts of the business associates, being customers (oil companies) to whom cylinders are supplied, have been squared up by writing off the differences, being for minor sums 10% of the amount is disallowd Deduction u/s. 80IA of the Act repair or manufacture for the purpose of deduction Held that - Repair of cylinders - raw material and finished product is only a gas cylinder, the assessee by its processes removing the deficiency/s, as by way of welding the joints, and effecting improvements, as by way of fixing the bottom and/or the top ring - Rendering a particular thing fit for being used for which it stand already produced or manufactured, i.e., restoring it to good and workable condition, once again, is essentially a repair - assessee s activity only amounts to repair for the purpose of deduction

Issues Involved:
1. Trading Addition
2. Disallowance of Director's Commission
3. Disallowance of Traveling Expenses
4. Disallowance on Account of Business Adjustment
5. Deduction under Section 80IA

Issue-wise Detailed Analysis:

1. Trading Addition:
The Revenue appealed against the deletion of a trading addition of Rs. 5,22,352/-. The Assessing Officer (AO) had estimated the gross profit rate at 26% against the disclosed rate of 24.71%, citing an unexplained decline compared to the previous year's rate of 27.77%. The assessee contended that the books of accounts were produced before the AO and that the previous year's gross profit rate was incorrectly taken as 27.77% instead of 23.13%. The Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition based on this argument. The tribunal found that the matter required factual verification, especially regarding the production of books of accounts and the correct gross profit rate for the preceding year. The case was remanded back to the CIT(A) for specific findings and proper adjudication.

2. Disallowance of Director's Commission:
The AO disallowed Rs. 5.40 lacs paid to the directors, arguing the payment lacked a supporting resolution and was made at the end of the year. The assessee argued that the commission was a legitimate business expense, supported by a resolution dated 12-01-2001, and that the directors were taxed at the same rate as the company. The CIT(A) allowed the claim, noting the overall improvement in the company's performance. The tribunal upheld the CIT(A)'s decision, stating that the payment was an incentive linked to the company's performance and not an ex gratia payment. The tribunal found no infirmity in allowing the commission as a business expense.

3. Disallowance of Traveling Expenses:
The AO made an ad hoc disallowance of 10% of the traveling expenses, totaling Rs. 72,365/-, due to the assessee's failure to fully substantiate the claim. The CIT(A) reduced this disallowance to Rs. 35,000/-, finding the action reasonable based on the details provided. The tribunal confirmed the CIT(A)'s decision, considering it fair and justified.

4. Disallowance on Account of Business Adjustment:
The AO disallowed Rs. 27,820/- due to the absence of details. The assessee explained that the amount was adjusted through journal vouchers to balance accounts where short payments were received. The CIT(A) accepted this explanation, noting the nature of the adjustments and the relevant vouchers provided. The tribunal found no reason to interfere with the CIT(A)'s decision and upheld the deletion of the disallowance.

5. Deduction under Section 80IA:
The AO denied the deduction under Section 80IA, arguing that the assessee was not engaged in manufacturing. The CIT(A) allowed the deduction, stating that the assessee's process amounted to manufacturing or production. The tribunal examined the nature of the activities, concluding that the assessee was engaged in repairing gas cylinders, which did not qualify as manufacturing or production. The tribunal noted that the deduction under Section 80IA was not applicable, as the activities did not fall under the specified categories. The tribunal also highlighted procedural lapses in admitting new evidence without following Rule 46A. The tribunal ultimately denied the deduction under Section 80IA, stating that the assessee's activities amounted to repair, not manufacturing or production.

Conclusion:
The tribunal partly allowed the Revenue's appeal, remanding the trading addition issue back to the CIT(A) for further verification, upholding the deletion of disallowances related to director's commission, traveling expenses, and business adjustment, and denying the deduction under Section 80IA.

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