2010 (7) TMI 1172 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of labour charges amounting to Rs. 25,000.
2. Addition on account of undervaluation of closing stock amounting to Rs. 18,65,290.
3. Disallowance u/s 40(a)(ia) for non-deduction of tax at source u/s 194J on advertising expenses amounting to Rs. 4,66,176.

Summary:

1. Disallowance of Labour Charges:
The assessee did not press the ground relating to the disallowance of labour charges amounting to Rs. 25,000. Consequently, this ground was dismissed.

2. Addition on Account of Undervaluation of Closing Stock:
The assessee, a retail trader of silver and gold jewellery, valued its closing stock at Rs. 483 per gram, which was Rs. 70 per gram less than the purchase price of Rs. 552 per gram. The Assessing Officer (AO) added Rs. 18,65,290 to the closing stock valuation, arguing that the valuation should be at least at the cost price. The CIT(A) upheld the AO's decision, suggesting that the FIFO method should be used instead of the LIFO method.

The Tribunal found that the assessee consistently followed the weighted average method for valuing the closing stock at the lower of cost or market value. The Tribunal noted that the AO did not revalue the opening stock similarly, which is necessary as per the precedent set by the Calcutta High Court in CIT v. Bengal Jute Mills Co. Ltd. The Tribunal held that the valuation adopted by the assessee was in accordance with a consistent system of accounting and directed the deletion of the addition of Rs. 18,65,290.

3. Disallowance u/s 40(a)(ia) for Non-Deduction of Tax at Source u/s 194J on Advertising Expenses:
The AO disallowed Rs. 4,66,177 u/s 40(a)(ia) for non-deduction of tax at source u/s 194J on payments made for advertising expenses. The CIT(A) upheld this disallowance but directed that the expenses be allowed in the year in which TDS is paid.

The Tribunal noted that the payments were made to copywriters and artists for advertising, which might not fall under the purview of professional services u/s 194J. The Tribunal referred to CBDT Circular No. 714, which clarifies that tax at source for advertising expenses should be deducted u/s 194C and not u/s 194J. The Tribunal restored the issue to the AO for fresh consideration to determine the applicability of Section 194J in light of the CBDT Circular.

Conclusion:
The appeal filed by the assessee was partly allowed. The addition on account of undervaluation of closing stock was deleted, and the issue of disallowance u/s 40(a)(ia) was remanded to the AO for fresh consideration.