2015 (12) TMI 1500 - AT - Income Tax

Trading addition - CIT(A) deleted the addition - Held that - Firstly, it is not under dispute that the assessee is in a line of business of petroleum trading wherein both purchase of petroleum products as well as subsequent sale thereof are governed by Oil Marketing Companies, in the instant case which is Indian Oil Corporation (IOC). Accordingly, the margin which is earned by the assessee is effectively governed by the IOC. It is also not under dispute that assessee has declared turnover of ₹ 33.11 cr and it is not the case of the revenue that there is a suppression of sales by the assessee during the year under consideration. Further, the assessee has demonstrated through the chart (reproduced above) that with the change in sale price of the petroleum products, the margin in the hands of the assessee remains the same. Further, we agree with the contention of the ld. A/R that since the revenue has not challenged the finding of the ld. CIT (A) wherein he has held that books of account cannot be rejected, revenue cannot be allowed to take the ground that ld. CIT (A) has erred in deleting the trading addition. In the light of above, we do not find any infirmity in the order of ld. CIT (A) - Decided against revenue. Disallowance of salary expenses made by AO u/s 40A(2)(b) - CIT(A) deleted the addition - Held that - We believe that ld. CIT (A) has rightly stated that the salary which is derived by a person not only depends on experience but also depends on his qualification. In the instant case it is not under dispute that Shri Naresh Pareek was holding Post Graduate diploma in Management from Balaji Institute of Modern Management, Pune. Secondly, the appellant, considering the educational qualification, has contractually agreed to pay ₹ 15,000/- per month to Shri Naresh Pareek. It is a settled principle that it is the businessman who is the best judge to determine the services which are required for the purpose of his business and what should be reasonable compensation to avail the services. In the instant case the appellant in his wisdom has decided to appoint Shri Naresh Pareek to run its business more efficiently and have agreed to pay a salary of ₹ 15,000/- per month to him. We see no infirmity in the order of ld. CIT (A). - Decided against revenue.

Summary

Issues:
1. Deletion of trading addition made by AO
2. Deletion of disallowance of salary expenses under section 40A(2)(b) of the IT Act

Analysis:

Issue 1: Deletion of Trading Addition
The appeal was filed by the Revenue against the order of ld. CIT (A) regarding the trading addition made by the AO. The AO had added Rs. 11,49,127 to the income of the assessee firm due to a decrease in the gross profit rate. The AO contended that the assessee did not maintain quantitative details of various products, leading to an unverifiable trading result. However, the ld. CIT (A) directed the deletion of the addition, emphasizing that the books of accounts/trading results could not be rejected without specific defects being brought on record. The Tribunal agreed with the ld. CIT (A) that the assessee, engaged in petroleum trading, operated under the guidelines of Oil Marketing Companies, notably Indian Oil Corporation, and the turnover declared was not disputed. The Tribunal also noted that the margin remained consistent despite changes in sale prices, supporting the assessee's claim. Since the Revenue did not challenge the finding that books of account cannot be rejected, the Tribunal dismissed the Revenue's appeal, upholding the deletion of the trading addition.

Issue 2: Deletion of Salary Expenses
The second ground of appeal involved the deletion of salary expenses of Rs. 69,300 under section 40A(2)(b) of the IT Act. The assessee firm had appointed a qualified individual, Shri Naresh Pareek, with a Post Graduate diploma in Management, at a monthly salary of Rs. 15,000. The AO considered this salary excessive, especially compared to another employee with more experience but lower pay. The ld. CIT (A) agreed with the assessee's justification that the need for a qualified person justified the salary. The Tribunal concurred with the ld. CIT (A), stating that the salary of an individual depends not only on experience but also on qualifications. Given Shri Naresh Pareek's educational background and the business's decision to appoint him for efficiency, the Tribunal upheld the deletion of the salary expenses. It emphasized that the businessman is best placed to determine required services and reasonable compensation. Consequently, the Tribunal rejected the Revenue's appeal on this ground as well.

In conclusion, the Tribunal dismissed the Revenue's appeal in its entirety, upholding the decisions of the ld. CIT (A) regarding the trading addition and the salary expenses.