1998 (2) TMI 152 - AT - Income Tax

Summary

Issues Involved:
1. Bogus Purchases
2. Disallowance under Section 40A(3)
3. Disallowance of Staff Welfare Expenses
4. Disallowance of Tour and Consultancy Expenses
5. Disallowance of Salary and Meeting Fees to Directors
6. Disallowance of Interest on Debit Balance
7. Disallowance of Interest on Amount Advanced to Managing Director
8. Non-chargeability of Interest under Sections 139(8) and 215/217
9. Deletion of Addition in Trading Account

Detailed Analysis:

1. Bogus Purchases:
The primary issue revolves around the alleged bogus purchases made by the assessee from four parties: Kamal Synthetic Hosiery, Zebra Knitting Works, M.S. Knitting Mills, and Madhu Trading Corporation. The Assessing Officer (AO) found that the transactions with the first three parties were not verifiable as these parties were untraceable. The AO held these purchases as bogus and added Rs. 4,96,755. For Madhu Trading Corporation, although it was an existing firm, the AO noted that the relevant books were lost and thus added Rs. 5,31,780. The CIT(A) confirmed the addition for the first three parties but deleted the addition for Madhu Trading Corporation. The Tribunal upheld the CIT(A)'s decision regarding the first three parties but set aside the addition for Madhu Trading Corporation for fresh adjudication by the AO after providing due opportunity to the assessee.

2. Disallowance under Section 40A(3):
The AO disallowed Rs. 62,000 under Section 40A(3) for payments exceeding Rs. 2,500 not made through account payee cheques or drafts. The CIT(A) confirmed the disallowance of Rs. 12,000 paid to Imprint, Calcutta, but deleted the disallowance of Rs. 50,000 paid to Knitman, Ludhiana, based on a Board's circular. The Tribunal upheld the CIT(A)'s decision regarding the Rs. 12,000 disallowance but reversed the deletion of Rs. 50,000, restoring the AO's order.

3. Disallowance of Staff Welfare Expenses:
The AO disallowed Rs. 3,970 under staff welfare expenses, finding the claimed daily expenditure of Rs. 40 per day on tea and snacks for 26 laborers as inflated. The CIT(A) confirmed this disallowance, and the Tribunal upheld the CIT(A)'s decision.

4. Disallowance of Tour and Consultancy Expenses:
The AO disallowed Rs. 15,044 towards tour expenses and Rs. 12,000 as consultancy charges paid to Sh. Ashok Kumar, son of the Managing Director, who was neither an employee nor a director and had no agreement or proof of services rendered. The CIT(A) confirmed these disallowances, and the Tribunal upheld the CIT(A)'s decision.

5. Disallowance of Salary and Meeting Fees to Directors:
The CIT(A) directed the AO to allow relief on disallowance of Rs. 24,000 salary and Rs. 6,000 meeting fee to directors, following the earlier year's order. The Tribunal, following its decision for the earlier assessment year 1984-85, rejected the assessee's claim, confirming the disallowance.

6. Disallowance of Interest on Debit Balance:
The CIT(A) followed her order for assessment year 1984-85, disallowing interest on the debit balance in the account of M/s. JN. Mohindra & Co. The Tribunal confirmed the CIT(A)'s action, following its earlier decision.

7. Disallowance of Interest on Amount Advanced to Managing Director:
The AO disallowed Rs. 4,950 interest on the amount advanced to Sh. Abhay Kumar Jain, Managing Director, from the company's overdraft. The CIT(A) confirmed this disallowance, and the Tribunal upheld the CIT(A)'s decision.

8. Non-chargeability of Interest under Sections 139(8) and 215/217:
The Tribunal directed consequential relief for non-chargeability of interest under Sections 139(8) and 215/217, following the earlier year's order.

9. Deletion of Addition in Trading Account:
The AO added Rs. 1,50,000 in the trading account, holding that it was not verifiable in the absence of a stock register. The CIT(A) deleted this addition, stating that the GP automatically increased to cover the low GP rate on suppression of sales. The Tribunal upheld the CIT(A)'s decision, finding no justification to interfere.

Separate Judgments:
The Judicial Member confirmed the addition of Rs. 4,96,755 and set aside the addition of Rs. 5,31,780 for fresh adjudication. The Accountant Member disagreed, suggesting that the entire addition of Rs. 10,28,835 be restored to the AO for fresh adjudication. The Third Member approved the view of the Accountant Member, restoring the addition of Rs. 4,96,755 to the AO for fresh adjudication. The matter was referred back to the Division Bench to pass an order in conformity with the majority opinion.

Conclusion:
The assessee's appeal was dismissed, and the revenue's appeal was partly allowed. The issue of bogus purchases was remanded for fresh adjudication, while other disallowances and additions were upheld as per the CIT(A)'s and Tribunal's decisions.