1981 (2) TMI 120 - AT - Income Tax

Issues Involved:

1. Addition of Rs. 2,20,000 as inflation in purchase and deletion of Rs. 1,90,000 by the AAC.
2. Application of Section 144B procedures and assessment limitation.
3. Disallowance of Rs. 6,000 salary to Anandan.
4. Disallowance of provision for wages payable as on 31st March, 1974, amounting to Rs. 46,980.

Detailed Analysis:

1. Addition of Rs. 2,20,000 as inflation in purchase and deletion of Rs. 1,90,000 by the AAC:

The primary issue in this case was the addition of Rs. 2,20,000 by the Income Tax Officer (ITO) as inflation in purchase costs, which was later reduced by Rs. 1,90,000 by the Assistant Appellate Commissioner (AAC). The assessee, a cashew exporter, claimed processing charges of Rs. 6,72,001.50 for cashew processed by outsiders. However, discrepancies were found in the day book and ledger, particularly concerning the number of bags processed and the rate per bag. The ITO estimated the outside processing costs at Rs. 4,39,538, leading to an addition of Rs. 2,20,000 after allowing Rs. 12,000 for some work done by outside factories. The AAC, however, found Rs. 32.50 per bag reasonable and reduced the addition to Rs. 30,000. The Tribunal noted that the ITO accepted the total figure of 19,979 bags processed and the payment of Rs. 1,32,330 to Suresh Babu. The Tribunal found no conclusive evidence that the initial entry of 6015 bags processed by Suresh Babu was correct and accepted the assessee's claim of 4010 bags. Consequently, the Tribunal deleted the entire addition, finding the rate of Rs. 33 per bag reasonable.

2. Application of Section 144B procedures and assessment limitation:

The assessee argued that Section 144B proceedings do not apply to the assessment year 1974-75, and hence the assessment was barred by limitation. The Tribunal noted that Section 144B is procedural and applies to all returns pending as of the commencement date. The return was filed on 8th June 1976, and the normal period of limitation expired on 8th June 1977. The assessment order was passed on 21st September 1977. The ITO did not make the additions in the draft assessment but did so under the directions of the IAC under Section 144A. The Tribunal agreed with the assessee that the additions should have been made before 8th June 1977 and were thus barred by limitation. The Tribunal rejected the argument that the extended period for concealment applied, as the ITO did not indicate that the assessment was being made under the extended period for concealment.

3. Disallowance of Rs. 6,000 salary to Anandan:

The ITO disallowed Rs. 6,000 shown as payable to Anandan on 31st March 1974, based on a sworn statement from Anandan denying receipt of salary. The assessee was not given an opportunity to cross-examine Anandan. The Tribunal found that the disallowance was made on illegal principles, as the opportunity for cross-examination is a fundamental principle of natural justice. Without cross-examination, the deposition was excluded, and there was no material to dispute the genuineness of the liability. The Tribunal canceled the disallowance of Rs. 6,000.

4. Disallowance of provision for wages payable as on 31st March, 1974, amounting to Rs. 46,980:

The ITO proposed disallowance of Rs. 46,980, reasoning that the liability to pay this amount had not been proved, as the processing season ended by December 1973. The AAC confirmed the disallowance. The Tribunal found no reason to doubt the genuineness of the liability, noting that some wages for the last week of March were paid in the first week of April, indicating that the factory operated in March 1974. The Tribunal found the provision for wages genuine and deleted the addition.

Conclusion:

The Tribunal dismissed the departmental appeal and allowed the assessee's appeal, deleting the additions and disallowances made by the ITO and sustained by the AAC.

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