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Issues involved: Appeal against disallowances of staff salary and service tax made by Assessing Officer and sustained by Commissioner of Income Tax (Appeals).
Staff Salary Disallowance: The assessee, a firm of CAs, filed its return declaring income for AY 2006-07. The Assessing Officer disallowed 60% of staff salary claimed as an expense, citing excessive payment to a partner's wife and lack of evidence. The CIT(A) upheld the disallowance. The ITAT observed that the assessee provided evidence of salary genuineness, including employee affidavits and employee examination. Notably, S.40A(2)(b) was not invoked. The ITAT found the adhoc disallowance unjustified, as the assessee substantiated staff salary expenses adequately. The ITAT allowed this ground of the assessee. Service Tax Disallowance: The Assessing Officer disallowed 100% of service tax paid without verification, which was upheld by the CIT(A). However, the ITAT noted that the assessee presented challans as evidence of service tax payment. The ITAT criticized the lack of verification by the authorities and deemed the payment evidenced by challans to be legitimate. Consequently, the ITAT allowed this ground of the assessee. In conclusion, the ITAT, in the appeal against disallowances of staff salary and service tax, ruled in favor of the assessee, overturning the decisions of the lower authorities. The ITAT found the disallowances to be unjustified and lacking proper verification, thereby allowing both grounds of appeal.
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