2005 (11) TMI 170 - AT - Income Tax

Issues Involved:
1. Adjustment under Section 143(1)(a) and additional tax under Section 143(1A).
2. Trading addition of Rs. 7,29,378.
3. Disallowance of secret commission of Rs. 1,19,895.
4. Disallowance of commission paid to M/s. Mahavir Fabrics (P.) Ltd. and Shri Suresh Jain.
5. Disallowance of deposit in the names of children of the partner.
6. Disallowance of printing expenses.
7. Disallowance of bad debts.
8. Disallowance of vehicle expenses and depreciation.
9. Disallowance of rent.
10. Disallowance under Section 37(2A).
11. Levy of interest under Sections 234A and 234B.

Detailed Analysis:

1. Adjustment under Section 143(1)(a) and Additional Tax under Section 143(1A):
The assessee filed a return showing total income of Rs. 3,52,306. The Assessing Officer made an adjustment of Rs. 1,30,815 for bad debts and charged additional tax under Section 143(1A). The CIT(A) upheld this action. The Tribunal noted the retrospective amendment to Section 36(1)(vii) by the Finance Act, 2001, effective from 1-4-1989, which disallowed provisions for bad and doubtful debts. The Supreme Court's decision in CIT v. Hindustan Electro Graphites Ltd. was cited, stating that additional tax could not be charged based on subsequent amendments. The Tribunal held that no additional tax under Section 143(1A) should be charged, partly allowing the appeal.

2. Trading Addition of Rs. 7,29,378:
The assessee, a trading firm, disclosed a lower GP rate of 8.01% compared to 11.87% in the previous year. The Assessing Officer rejected the books of account due to discrepancies and adopted a higher GP rate, making an addition of Rs. 7,29,378. The CIT(A) sustained this addition. The Tribunal found that the assessee maintained complete quantitative stock details and provided a reasonable explanation for the lower GP rate, including increased discounts and turnover. The Tribunal deleted the trading addition, allowing the appeal.

3. Disallowance of Secret Commission of Rs. 1,19,895:
The assessee could not provide details of secret commission payments, claiming business expediency. The Assessing Officer and CIT(A) disallowed the commission, citing the Supreme Court's decision in French Dyes & Chemicals India (P.) Ltd. The Tribunal upheld the disallowance, referencing a similar Tribunal decision and the Explanation to Section 37(1), which considers both genuineness and legality of payments.

4. Disallowance of Commission Paid to M/s. Mahavir Fabrics (P.) Ltd. and Shri Suresh Jain:
The Assessing Officer disallowed commissions paid to these parties, questioning their genuineness. The CIT(A) upheld the disallowance. The Tribunal found that the Assessing Officer recorded statements at the back of the assessee, violating natural justice principles. The Tribunal remitted the issue back to the Assessing Officer for fresh adjudication, allowing the assessee to rebut the evidence.

5. Disallowance of Deposit in the Names of Children of the Partner:
The ground was not pressed by the assessee and was dismissed.

6. Disallowance of Printing Expenses:
The Assessing Officer treated Rs. 22,320 spent on printing and stationery as capital expenditure. The Tribunal agreed with the assessee that these were revenue expenses for printing sales bills and deleted the disallowance.

7. Disallowance of Bad Debts:
The Tribunal upheld the disallowance of Rs. 1,30,815 for bad debts, citing the retrospective amendment to Section 36(1)(vii), which requires debts to be written off in the debtor's account.

8. Disallowance of Vehicle Expenses and Depreciation:
The Tribunal deleted the disallowance of Rs. 2,942 for vehicle expenses and Rs. 1,409 for depreciation, considering the small amounts relative to the business turnover.

9. Disallowance of Rent:
The ground was not pressed by the assessee and was dismissed.

10. Disallowance under Section 37(2A):
The Assessing Officer disallowed Rs. 20,000 out of Rs. 61,631 for office expenses, treating them as entertainment expenses. The Tribunal found the disallowance excessive and reduced it to Rs. 5,000, partly allowing the appeal.

11. Levy of Interest under Sections 234A and 234B:
The Tribunal directed the Assessing Officer to recompute the interest based on the finally assessed income, allowing the ground for consequential relief.

Separate Judgments:
The Judicial Member disagreed with the Accountant Member on ITA No. 698/Ahd./95, particularly on the deletion of additional tax under Section 143(1A). The Judicial Member cited the Supreme Court's decision in Asstt. CIT v. J.K. Synthetics Ltd., which expressed reservations about the earlier decision in Hindustan Electro Graphites Ltd. The Judicial Member upheld the levy of additional tax. The matter was referred to the President, ITAT, for resolution. The President agreed with the Accountant Member, holding that additional tax was not warranted due to the retrospective amendment. The appeal was partly allowed.

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