2013 (9) TMI 674 - AT - Income Tax

Disallowance of commission payment - payment to directors without rendering any service - Held that - The assessee has not produced any evidence before the lower authorities, to show that the commission was paid for rendering any service, which resulted in enhancing the profitability of the company. - Payment of commission cannot be allowed as expenditure simply because, it is approved by the board and it is in accordance with the provisions of the Companies Act, 1956. An expenditure which falls within the ambit of section 37 of the Act can be allowed, if it is incurred wholly and exclusively for the purpose of business. In the present case, the assessee has failed to prove that the expenditure incurred was wholly and exclusively for the purpose of business - Decided against assessee. Valuation of closing stock - Held that - The contention of the learned authorised representative for the assessee that the assessee is consistently following the same method of valuation of closing stock, which has also been accepted by the Department in the earlier as well as the subsequent years also requires to be considered. The Assessing Officer in the assessment order accepts the fact that the method of accounting followed by the assessee is not questioned. The Commissioner of Income-tax (Appeals) has also not given any basis for estimating the undervaluation of closing stock at Rs.45 lakhs. There is nothing in the order of the Commissioner of Income tax (Appeals) to suggest why he has adopted the figure of Rs. 45 lakhs. The assessee however is required to substantiate with supporting evidence, which are the stocks lying with it, which are not considered for the purposes of valuation, and the reason for doing so. The assessee also had to explain the specific instances pointed out by the Commissioner of Income tax (Appeals), where the assessee has taken into consideration lesser number of books for valuation of closing stock from the current year s printing, when the assessee himself has adopted a formula, as per which the current year s printing is valued at 75 percent of the cost. The assessee is also required to reconcile the discrepancy between the number of copies considered for arriving at the closing stock figure of Rs. 4,23,61,003 as per the consolidated stock statement submitted before the Commissioner of Income-tax (Appeals) and the details given before the Assessing Officer - Matter remitted back - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of commission payment to non-whole time directors.
2. Addition on account of undervaluation of closing stock.

Issue-wise Detailed Analysis:

1. Disallowance of commission payment to non-whole time directors:
The assessee, engaged in the business of publishing and selling books, claimed an expenditure of Rs. 3,93,061 towards commission to non-whole time directors. The Assessing Officer (AO) disallowed this expenditure, arguing that the commission was paid as a percentage of net profit without any contractual obligation or evidence of services rendered by the directors. The AO viewed the commission as a distribution of profit rather than a business expenditure under section 37 of the Income-tax Act.

The assessee contended that the commission, approved by a Board resolution and as per the Companies Act, should be considered as part of "salary" and thus allowable. However, the Commissioner of Income-tax (Appeals) upheld the AO's decision, citing the lack of evidence of services rendered by the directors, referencing the Supreme Court decision in Swadeshi Cotton Mills Co. Ltd. v. CIT.

Upon appeal, the Tribunal noted the absence of a contract of employment and specific services rendered by the non-whole time directors. The Tribunal upheld the lower authorities' decision, stating that the expenditure could not be allowed merely because it was approved by the Board and in accordance with the Companies Act. The assessee failed to prove that the commission was wholly and exclusively for business purposes, leading to the rejection of the grounds of the assessee on this issue.

2. Addition on account of undervaluation of closing stock:
The assessee valued its closing stock at Rs. 4,23,61,003, considering various factors like change in syllabi, competitors' titles, and piracy. The AO, finding the assessee's valuation method provisional and based on contingent events, revalued the closing stock, leading to an addition of Rs. 75,36,842 to the total income.

The assessee argued before the Commissioner of Income-tax (Appeals) that it consistently followed a valuation method considering the age of the stock and expected future sales. The Commissioner, however, found discrepancies in the assessee's valuation method and estimated the undervaluation at Rs. 45 lakhs, directing the AO to restrict the addition to this figure.

Both the assessee and the Revenue appealed against this decision. The Tribunal found inconsistencies in the assessee's valuation method and discrepancies in the number of copies considered for valuation. The Tribunal noted that the assessee's method appeared reasonable in considering titles printed two years back as having no value due to changes in syllabi. However, the assessee needed to substantiate its claims with supporting evidence and reconcile discrepancies.

The Tribunal set aside the Commissioner of Income-tax (Appeals)'s order and remitted the matter to the AO for fresh determination, directing the AO to consider the issue afresh and allow the assessee to substantiate its claim.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and allowed the Revenue's appeal for statistical purposes, remitting the matter of closing stock valuation back to the AO for fresh adjudication.