1983 (4) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of interest paid to HUF.
2. Disallowance of miscellaneous expenses.
3. Application of Section 40(b) regarding payment to partners.
4. Inclusion of income from two other firms.
5. Ad hoc addition in the trading account.

Detailed Analysis:

1. Deductibility of Interest Paid to HUF:

The assessee contested the CIT (A)'s decision disallowing the interest paid to the HUF of G. N. Mehra. The Tribunal noted that it had previously ruled in similar cases that interest credited to an HUF account in the name of a partner must be added to the total income of the assessee. Thus, this ground was rejected, relying on the Tribunal's earlier judgments in the cases of M/s Gupta Mechanical & Sundry Store.

2. Disallowance of Miscellaneous Expenses:

The assessee challenged the disallowance of Rs. 1000 out of the total miscellaneous expenses of Rs. 33,275. The ITO had disallowed this amount based on a similar disallowance in the previous year. The Tribunal found no justification for this disallowance, as there was no evidence showing that the amount was not wholly and exclusively laid out for business purposes. The addition was merely an estimate without supporting evidence. Therefore, the disallowance was deleted.

3. Application of Section 40(b) Regarding Payment to Partners:

The assessee argued that the provisions of Section 40A(2) should override Section 40(b) concerning payments to partners. The Tribunal disagreed, stating that Section 40(b) specifically disallows any payment of interest, salary, bonus, commission, or remuneration to any partner of the firm in the computation of income under 'profits and gains of business or profession.' Consequently, this ground was also rejected.

4. Inclusion of Income from Two Other Firms:

The assessee disputed the CIT (A)'s decision to set aside the inclusion of income from M/s Mehra Sales Corporation and M/s Rajindra Trading Co. in the assessee's income. The ITO had included these incomes based on a statement from an employee, Mr. V. P. Soni, without giving the assessee an opportunity to cross-examine him. The Tribunal noted that the three firms had separate sales-tax numbers, bank accounts, tenancies, godowns, and maintained separate books of account. The Tribunal found that the ITO's reliance on Mr. Soni's statement, recorded in the absence of the assessee, violated principles of natural justice. The Tribunal annulled the ITO's action, emphasizing the need for substantial proof, which was not provided.

5. Ad Hoc Addition in the Trading Account:

The assessee contested an ad hoc addition of Rs. 7000 made by the ITO due to a decline in the G.P. rate from previous years. The CIT (A) had restored this issue to the ITO for re-examination. The Tribunal found that the ITO's addition was based on an insignificant difference in G.P. rates and lacked specific evidence. The Tribunal noted that ad hoc additions are generally disapproved by higher courts and directed the deletion of the Rs. 7000 addition.

Conclusion:

The appeal was allowed in part. The Tribunal upheld the CIT (A)'s decisions on the disallowance of interest paid to HUF and the application of Section 40(b). However, it deleted the disallowance of miscellaneous expenses and the ad hoc addition in the trading account. Additionally, the Tribunal annulled the inclusion of income from the two other firms in the assessee's income, emphasizing the need for adherence to principles of natural justice.