2012 (10) TMI 1210 - AT - Income Tax

Summary

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

Summary:

Issue 1: Disallowance of Commission Payment to Non-Whole Time Directors

Ground No.1 to 3 of the assessee's appeal relate to disallowance of commission payment of Rs. 3,93,061 to non-whole time directors. The assessee, engaged in publishing and selling books, claimed this expenditure, which was disallowed by the Assessing Officer (AO) on the grounds that there was no contract of employment and no evidence of services rendered by the directors. The AO viewed the commission as a distribution of profit rather than an expenditure incurred wholly and exclusively for business purposes u/s 37 of the Income-tax Act. The CIT(A) upheld this view, citing the lack of evidence of services rendered by the directors. The Tribunal agreed with the lower authorities, stating that the assessee failed to prove that the expenditure was wholly and exclusively for business purposes, and thus, the grounds of the assessee on this issue were rejected.

Issue 2: Addition on Account of Undervaluation of Closing Stock

Grounds No.4 to 7 of the assessee's appeal concern the addition of Rs. 45 lakhs on account of undervaluation of closing stock. The AO found the valuation method of the closing stock by the assessee to be provisional and based on contingent events. The AO revalued the closing stock, resulting in an addition of Rs. 75,36,842 to the total income. The CIT(A) 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 noted the inconsistencies in the assessee's valuation method and the lack of a clear basis for the CIT(A)'s estimation. The Tribunal set aside the CIT(A)'s order and remitted the matter to the AO for fresh determination, instructing the AO to consider the issue afresh and give the assessee an opportunity to substantiate its claim with supporting evidence.

Revenue's Appeal:

The only grievance of the Revenue in its appeal was the relief granted by the CIT(A) regarding the addition on account of undervaluation of closing stock. In light of the Tribunal's decision to remit the issue back to the AO for fresh adjudication, the grounds of the Revenue were treated as allowed for statistical purposes.

Conclusion:

In the result, the assessee's appeal (ITA No.529/Hyd/2009) is partly allowed for statistical purposes, and the Revenue's appeal (ITA No.595/Hyd/2009) is allowed for statistical purposes.

Order pronounced in the court on 19.10.2012.