1998 (2) TMI 149 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of trading addition of Rs. 6,71,090.
2. Deletion of addition of Rs. 12,500 under section 40A(2)(b).
3. Sustaining the addition of Rs. 4,000 on account of the estimated value of packing material.
4. Sustaining the disallowance of Rs. 1,000 out of telephone expenses.

Detailed Analysis:

1. Deletion of Trading Addition of Rs. 6,71,090:
The primary issue was whether the CIT(A) was justified in deleting the trading addition of Rs. 6,71,090 made by the Assessing Officer (AO). The AO had rejected the book results of the assessee, who was engaged in the sale and purchase of brass/copper scrap, under section 145(1) of the Income-tax Act. The AO's contention was that the assessee understated the sale of scrap by routing it through other parties to divert profit, as evidenced by the higher resale prices to the assessee's sister concerns.

The CIT(A) deleted the addition, reasoning that:
- The assessee maintained correct and complete accounts, consistent with previous years where trading results were accepted.
- No material evidence was presented by the AO to substantiate the claim that the market value of the scrap was higher than recorded.
- The sales were made at market rates, payments were received through cheques or drafts, and all vendees were regular income-tax assessees.
- The quality of scrap varied widely, and the sales prices reflected these differences.
- The GP rate declared by the assessee was 2.3%, better than the previous year's 1.89%.
- The case of M/s. Krishna Engg. Industries was not comparable as it dealt with costlier virgin metal scrap.

The Tribunal upheld the CIT(A)'s order, noting that the AO failed to prove that the sales were bogus or that the same goods sold by the assessee were later sold to its sister concerns. The AO also did not establish any benefit derived by the assessee or its sister concerns from such transactions. The Tribunal found no merit in the revenue's appeal and dismissed it.

2. Deletion of Addition of Rs. 12,500 under Section 40A(2)(b):
The AO disallowed Rs. 12,500 out of the rent paid to related parties, considering it excessive. The CIT(A) deleted the disallowance, reasoning that:
- The rent of Rs. 1,500 per month for 650 sq. yds. of land adjacent to the assessee's factory was reasonable, considering the high land rates in urban areas.
- The necessity for hiring the land arose due to the large quantity of scrap imported by the assessee during the year.

The Tribunal upheld the CIT(A)'s order, finding no infirmity in the reasoning and conclusion that the rent paid was reasonable and not excessive.

3. Sustaining the Addition of Rs. 4,000 on Account of the Estimated Value of Packing Material:
The AO made an addition of Rs. 4,000, estimating the value of packing material (steel drums) not disclosed by the assessee. The CIT(A) sustained the addition, reasoning that:
- The cost of packing material was included in the cost of scrap purchased, and the value of closing stock of packing material was required to be shown.
- The appellant's claim that the goods were sold in the same packages was not credible, as the scrap was sorted and sold in small lots.

The Tribunal upheld the CIT(A)'s decision, agreeing that the addition was reasonable and justified.

4. Sustaining the Disallowance of Rs. 1,000 out of Telephone Expenses:
The AO disallowed Rs. 3,000 out of total telephone expenses of Rs. 29,020 for personal use by partners. The CIT(A) reduced the disallowance to Rs. 1,000, considering that the entire expenditure related to business premises telephones.

The Tribunal upheld the CIT(A)'s order, finding the reduced disallowance reasonable and justified.

Third Member's Opinion:
On a difference of opinion between the Members, the Third Member was called upon to decide whether the CIT(A)'s order should be confirmed or the matter should be remitted back to the AO for fresh adjudication. The Third Member agreed with the Accountant Member, confirming the CIT(A)'s order, reasoning that:
- The CIT(A) and the Accountant Member provided detailed and justified reasoning for their conclusions.
- There was no new material or evidence presented that would warrant a different conclusion.
- The dissenting Judicial Member's suggestion to examine the stock register was not argued by the revenue and was not necessary for deciding the quality of scrap.

The Third Member's decision led to the dismissal of the revenue's appeal and the assessee's cross-objection, confirming the CIT(A)'s order in its entirety.