2019 (10) TMI 663 - AT - Income Tax

Under valuation of closing stock - taking rate of Guar Seeds @19.53 per kg. as against the value taken by the assessee @ 9.49 per kg. as on 31.03.2010 - HELD THAT - In the case of Alfa Laval India Ltd. v. DCIT 2003 (9) TMI 43 - BOMBAY HIGH COURT it was held that the obsolete items were sold in subsequent year at a price less than 10 percent of cost the valuation made arbitrarily not justified. Considering the totality of facts and case laws and nature of goods, we are of the considered view that it would be reasonable and justifiable if average rate were applied for valuation of closing stock. We find that rate of opening stock was at ₹ 19.15 per kg. whereas closing stock was at ₹ 9.49 per kg. The average realization value is at ₹ 17.75 per kg. therefore, it would meet end of justice if average of 19.15 9.49 17.15 46.14/3 15.83 per kg. may be adopted for valuation of closing stock as on 31.03.2010. Accordingly, the AO is directed to recalculate the closing stock by taking rate of ₹ 15.83 per kg. Thus, the Ground No. 1 to 4 are partly allowed. Whether if the closing stock is valued higher than shown by the assessee then Ld. CIT (A) ought to have given direction to the AO to adopt opening stock of subsequent year at the same figure as valued as on 31.03.2010 by the AO? - HELD THAT - Since the closing stock is opening stock for next year. Therefore, as a corollary to increase in closing stock would lead to increase in opening stock of next year, therefore, the AO would take opening stock as on 1st April of next financial year as worked out on the basis of average rate as per our observation given herein above. Accordingly, this ground is allowed. Disallowance of salary payment in respect of person specified under section 40A(2)(b) - HELD THAT - The Hon ble Gujarat High Court in the case GUJARAT GAS FINANCIAL SERVICES LIMITED. 2015 (7) TMI 743 - GUJARAT HIGH COURT after considering the CBDT Circular 06.07.1968 held that where the payer and recipient are assessed at maximum marginal rate, then the payment may be treated as bonafide, hence, no disallowance under section 40A(2)(b) of the Act be made. In the light of above facts and circumstances, we are of the considered opinion that disallowance made under section 40A(2)(b) of the Act are not justified.

Summary

Issues:
1. Valuation of closing stock - under-valuation dispute.
2. Treatment of salary payment under section 40A(2)(b) of the Act.

Valuation of Closing Stock:
The appeal was against the order of the Commissioner of Income tax (Appeals) regarding the addition of ?79,93,072 due to under-valuation of closing stock of Guar Seeds. The Assessing Officer (AO) found discrepancies in the valuation method used by the assessee, leading to a trading loss. The AO determined the market value of the stock to be higher than the assessee's valuation. The CIT (A) upheld the AO's decision. The Tribunal considered the facts, including the age and quality of the goods, and referred to relevant case laws. It concluded that an average rate should be applied for the valuation of closing stock. The Tribunal directed the AO to recalculate the closing stock at ?15.83 per kg, partially allowing the appeal.

Treatment of Salary Payment:
The dispute involved the disallowance of salary payment under section 40A(2)(b) of the Act. The AO disallowed a portion of the payment made to two women associated with the assessee firm, considering it excessive. The CIT (A) upheld the disallowance. The Tribunal noted that the recipients had qualifications and likely rendered services, as accepted by the AO. As both recipients were assessed at the maximum marginal rate, the Tribunal applied relevant case laws to rule that no disallowance should be made under section 40A(2)(b). The disallowance was directed to be deleted, allowing this ground of appeal.

The Tribunal partly allowed the appeal, ruling in favor of the assessee on the valuation of closing stock and the disallowance of salary payment under section 40A(2)(b) of the Act.

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