1990 (12) TMI 133 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of conveyance expenses.
2. Addition of cash credits in the accounts of two individuals.
3. Disallowance of salary paid to a partner's son.

Issue-Wise Detailed Analysis:

1. Disallowance of Conveyance Expenses:

The assessee's first grievance is that the CIT(A) erred in restricting the disallowance of conveyance expenses to 1/6th of the expenditure without appreciating that in the assessment year 1982-83 it was restricted to 1/12th. The assessee claimed conveyance expenses of Rs. 5,052, and the ITO restricted the disallowance to Rs. 1,263, being 1/4th of the conveyance expenses for personal use of the partners. The CIT(A), considering the nominal nature of the expenses relative to the company's turnover and the previous year's disallowance, restricted the disallowance to 1/6th of the total expenses. The Tribunal, keeping in view the fact that in the assessment year 1982-83, the disallowance was reduced to 1/12th by the CIT(A), modified the order of the CIT(A) and restricted the disallowance to 1/12th of the total expenses.

2. Addition of Cash Credits in the Accounts of Two Individuals:

The main ground of the assessee's appeal was the confirmation of the addition of Rs. 69,517, which included cash credits in the accounts of two individuals and the interest on these deposits. The ITO examined the genuineness of the cash credits and found several inconsistencies and lack of credible evidence regarding the sources of income of the individuals involved. The ITO concluded that the deposits were not genuine and treated them as the secreted income of the firm ploughed back in the names of the individuals.

On appeal, the CIT(A) further analyzed the evidence and upheld the ITO's findings, concluding that the assessee had not been able to prove the creditworthiness and capacity of the individuals in whose names the cash credits appeared. The Tribunal agreed with the CIT(A)'s findings, noting that the individuals had failed to provide credible evidence of their income sources. The Tribunal emphasized that the assessee is required to prove the identity, capacity, and genuineness of the transactions, and in this case, the creditworthiness and capacity of the creditors were not proved. The Tribunal rejected the assessee's contention that the Department had accepted the income sources of these individuals in their tax assessments, stating that the assessment orders were not conclusive proof of their income sources in the present case.

3. Disallowance of Salary Paid to a Partner's Son:

The last ground of the assessee's appeal was the disallowance of the salary of Rs. 15,180 paid to Shri Rajesh Kumar Jain, son of a partner. The assessee argued that Shri Rajesh Kumar was a well-qualified individual who worked as a Supervisor for the firm, and the salary paid to him was justified. The ITO disallowed Rs. 12,000 under section 40A(2)(a) of the IT Act, holding that the payment was excessive and was made to divert the firm's income to the partner's son. The CIT(A) confirmed the ITO's finding.

The Tribunal considered the qualifications and work details of Shri Rajesh Kumar and concluded that the payment made to him was genuine and reasonable. The Tribunal noted that the salary was paid based on the time devoted by Shri Rajesh Kumar to the firm's business, and the relationship with a partner did not justify disallowing the payment. The Tribunal set aside the CIT(A)'s order on this point and directed the ITO to allow the expenditure as reasonable and wholly for the purpose of business.

Conclusion:

The appeal of the assessee was partly allowed. The disallowance of conveyance expenses was restricted to 1/12th of the total expenses, the addition of cash credits was upheld, and the disallowance of the salary paid to the partner's son was set aside.