1991 (2) TMI 178 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of excess processing charges under Section 40A(2).
2. Addition on account of free samples distributed.
3. Disallowance of interest on deposit accounts of employees.
4. Addition due to alleged under-valuation of finished goods.

Detailed Analysis:

1. Disallowance of Excess Processing Charges under Section 40A(2):

The Tribunal dealt with cross appeals by the assessee and the revenue for the assessment year 1979-80. The primary issue in the miscellaneous application was the Tribunal's decision in the appeal of the revenue regarding the disallowance of Rs. 12,64,212 as excess processing charges paid to Wockhardt Pvt. Ltd. The assessing authority had disallowed this amount, arguing that Wockhardt Pvt. Ltd. and the assessee-firm belonged to the same family, thus invoking Section 40A(2). The Commissioner (Appeals) deleted the disallowance, stating that the assessing authority had not established that the market price paid to Wockhardt Pvt. Ltd. was lower than the amount actually paid by the assessee. The Tribunal noted that the Commissioner (Appeals) failed to consider that the subsequent payment represented charges calculated retrospectively and that there was no evidence to justify the increase in processing charges. The Tribunal concluded that the matter required further scrutiny and restored it to the IAC for re-examination, emphasizing the need to properly scrutinize the increase in overheads and their relation to processing charges.

2. Addition on Account of Free Samples Distributed:

The assessee's appeal included a ground against the addition of Rs. 1 lakh for free samples distributed, which was confirmed by the CIT(A). The IAC had noticed high percentages of samples distributed compared to goods processed. The assessee argued that distributing samples was a common practice in the pharmaceutical industry, essential for marketing. The Tribunal referenced a similar issue for an earlier year, where the addition was deleted after detailed consideration. The Tribunal agreed with the assessee, noting that the CIT(A) had based his findings on reasoning adopted for the assessment year 1978-79, which was not sustained by the Tribunal. Consequently, the Tribunal held that there was no justification for sustaining the addition of Rs. 1 lakh and allowed the assessee's appeal on this issue.

3. Disallowance of Interest on Deposit Accounts of Employees:

The second ground in the assessee's appeal was against the disallowance of Rs. 56,700 as interest on deposit accounts of employees. The IAC had disallowed this amount, questioning the genuineness of the loans. The Tribunal, for the assessment year 1978-79, had restored the matter for reconsideration, directing the IAC to allow the assessee to cross-examine the deponents. The Tribunal noted that the IAC accepted the genuineness of the loans and interest in a subsequent order. Since no fresh loans were taken during the year under appeal, the Tribunal deleted the addition of Rs. 56,700.

4. Addition Due to Alleged Under-valuation of Finished Goods:

The third ground in the assessee's appeal was against the addition of Rs. 50,616 on account of alleged under-valuation of finished goods. The CIT(A) had confirmed this addition. The Tribunal referenced a similar issue for an earlier year, where the addition was sustained. The Tribunal, following the reasoning given for the assessment year 1978-79, upheld the CIT(A)'s order confirming the addition of Rs. 50,616.

Separate Judgments Delivered by Judges:

The Tribunal's order was delivered by M.A. Ajinkya, Accountant Member, and O.P. Jain, Judicial Member. The Tribunal dismissed the miscellaneous application, noting that the Tribunal had not given any finding on the merits and had restored the issue to the IAC for re-examination. The Tribunal emphasized that there was no mistake of law or fact that called for rectification under Section 254 of the Act.