2018 (6) TMI 414 - AT - Income Tax

Addition on account of shortage of stock - Held that - Explanation given by the assessee is not strong enough to justify the fact of theft specially taking into consideration the conduct of the assessee in not taking proper steps to control the situation. The assessee ought to have taken proper/adequate measure to save the loss of the company as claimed. No proper explanation is forthcoming form the assessee in this respect. We think it fit to delete 10% of the addition in the total income as undisclosed stock of MS Scrap (wrong cut) as ordered by the AO - Decided partly in favour of assessee. Addition towards undervaluation of closing stock - method of accounting to be followed - Held that - We find that the assessee has followed FIFO method while determining the cost of inventories. The raw materials were correctly valued following the Accounting Standard at cost or market value which ever is lower as shown by the assessee. The ld. CIT(A) without taking into consideration this particular aspect of the matter followed the observations made by the ld. AO which is unjust and we therefore deleted the addition of 5, 58, 525/- to the total income of the assessee on the ground of under valuation of stock of raw material - Decided in favour of assessee. Addition u/s 40(A)(2) - remuneration given to lady directors - Held that - If the lady directors are not involved in pure managerial or supervising work of the assessee company their contribution to some extent cannot be brushed aside. Both the AO as well as the CIT(A) indirectly accepted that to certain extent the women directors are rendering services to the benefit of the assessee company. Furthermore taking into consideration the return of income of these lady directors it can also not be said that the income has escaped taxation. We therefore think it fit to allow 30% of the remuneration given to these lady directors. - Decided partly in favour of assessee. Disallowance of depreciation - Held that - The assets acquired by the assessee company on lease were ready to use though not used in the business for whatever reason the assessee is entitled to get relief of deprecation as charged on these assets and we therefore quash the order passed by the ld. CIT(A) and delete the addition made by the ld. AO - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?95,68,468/- as shortage of stock.
2. Addition of ?5,58,525/- towards undervaluation of closing stock.
3. Disallowance of ?6,40,000/- paid as salary to lady directors under Section 40A(2) of the Income Tax Act, 1961.
4. Disallowance of ?3,07,487/- on depreciation.

Detailed Analysis:

1. Addition of ?95,68,468/- as Shortage of Stock:
The assessee company, engaged in fabrication from sheet metals, showed sales of MS Scrap/Off Cut/Wrong Cut amounting to 13,27,718 kg at a sale value of ?79,63,323/-. Upon verification, it was found that only 5,91,681 kg of the stock was sold, leading to a shortage of 7,36,036 kg. The assessee did not maintain a stock register and explained the shortage as due to theft, supported by general complaints lodged with the police. The AO did not accept this explanation and added ?95,68,468/- to the total income as undisclosed stock. The CIT(A) confirmed this addition. The Tribunal found the explanation insufficient and noted the lack of proper steps taken by the assessee to control the situation. However, considering the submissions, the Tribunal decided to delete 10% of the addition, partly allowing the ground.

2. Addition of ?5,58,525/- towards Undervaluation of Closing Stock:
The assessee showed a closing stock valued at ?1,79,40,385/- using the FIFO method. The AO found some items undervalued and asked for a true valuation, which was determined at ?1,84,98,910/-, leading to an addition of ?5,58,525/-. The CIT(A) upheld this addition. The Tribunal found that the assessee followed the FIFO method correctly and valued the stock at cost or market value, whichever was lower, as per Accounting Standard-2. The Tribunal deleted the addition, allowing the ground in favor of the assessee.

3. Disallowance of ?6,40,000/- Paid as Salary to Lady Directors:
The assessee claimed ?12,80,000/- as directors’ remuneration, including ?6,40,000/- for four lady directors. The AO disallowed this amount under Section 40A(2) of the Income Tax Act, citing lack of justification for their qualifications and involvement in business activities. The CIT(A) affirmed this disallowance. The Tribunal noted that the lady directors contributed to some extent and their income was taxed. The Tribunal allowed 30% of the remuneration, partly allowing the ground.

4. Disallowance of ?3,07,487/- on Depreciation:
The assessee claimed depreciation on fixed assets acquired on lease, which were not put to use but were ready to use. The AO disallowed the depreciation based on a director's statement that the assets were not utilized. The CIT(A) upheld this disallowance. The Tribunal referred to a jurisdictional High Court judgment, which held that depreciation should be allowed if assets are ready for use. The Tribunal quashed the CIT(A)’s order and deleted the addition, allowing the ground.

Conclusion:
The appeal by the assessee was allowed with partial relief on the issues of shortage of stock and salary to lady directors, and full relief on the issues of undervaluation of closing stock and depreciation.