1994 (6) TMI 35 - AT - Income Tax

Summary

Issues:
1. Addition made in general merchandise goods account and soap account.
2. Rejection of books and estimation of gross profit by the Assessing Officer.
3. Disallowance of salary paid to partner's relatives.

Analysis:

Issue 1: Addition made in general merchandise goods account and soap account
The case involved cross-appeals for the assessment year 1986-87 concerning the addition made in the general merchandise goods account and soap account. The Assessing Officer rejected the books of account and estimated gross profit based on a comparison with another firm, M/s Garg Bros. The CIT(A) upheld the rejection but reduced the addition. The appellant argued that the rejection was unjustified as the gross profit rate was higher that year compared to previous years. They contended that the rate was fixed and not subject to change. The Departmental Representative supported the Assessing Officer's estimate based on the comparison with M/s Garg Bros. The tribunal found no justification for increasing sales or gross profit rate, especially considering the higher sales that year. They noted the past history of accepted book results and the lack of defects in the books. The addition was deemed unjustified, and the tribunal deleted the sustained addition.

Issue 2: Disallowance of salary paid to partner's relatives
The Assessing Officer disallowed a portion of the salary paid to the partners' relatives, totaling Rs. 20,000, deeming it excessive and unreasonable. The appellant argued that the partners were rendering services to the firm, and the increase in sales justified the salary payments. The Departmental Representative supported the disallowance as unreasonably high. The tribunal found that the salary paid to the relatives was not excessive, considering the abnormal rise in sales that year. They concluded that the increase in salary was justifiable and deleted the addition made under section 40A(2)(a).

In conclusion, the tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, ruling in favor of the assessee on both issues of addition in the general merchandise goods account and soap account, as well as the disallowance of salary paid to partner's relatives.