1994 (2) TMI 110 - AT - Income Tax

Issues Involved:
1. Disallowance of annual discount under Section 40A(2)(a) of the IT Act.
2. Alleged bogus purchases from M/s Ess Kay Enterprises.
3. Addition due to low Gross Profit (G.P.) rate.
4. Disallowance of trade discount given to M/s Wadhwa Sons Sales Corporation (WSC).
5. Disallowance of sales-tax payable under Section 43B.
6. Charging of interest under Sections 139(8), 215, and 217.
7. Reopening of assessment for the assessment year 1985-86.
8. Addition under Section 40A(3) for payments to karigars.
9. Disallowance on car maintenance and depreciation.

Detailed Analysis:

1. Disallowance of Annual Discount:
The primary issue was the disallowance of annual discount at 3% given by the assessee to M/s Paris Beauty Sales Co. (PBSC) under Section 40A(2)(a). The Assessing Officer (AO) disallowed the additional discount, asserting it was not justified and attributing the increase in sales to the diversion of the assessee's own sales. The Tribunal, however, found that the discount was commercially expedient and necessary, noting that the agreement with PBSC was genuine and the sales had increased due to PBSC's efforts. The Tribunal deleted the disallowance for the assessment years 1985-86, 1986-87, and 1988-89, providing relief to the assessee.

2. Alleged Bogus Purchases:
The AO added Rs. 23,284 as alleged bogus purchases from M/s Ess Kay Enterprises, questioning the genuineness of the purchases due to lack of freight and cartage expenses. The Tribunal found that the purchases were properly vouched and supported by necessary evidence, including purchase bills and stock records. The addition was deleted.

3. Addition Due to Low Gross Profit Rate:
The AO made an addition of Rs. 69,058 due to a lower G.P. rate disclosed by the assessee, citing incomplete details of goods in fabrication. The Tribunal held that the method of accounting followed by the assessee was consistent and reasonable, and the G.P. rate was comparable to previous years. The addition was deleted.

4. Disallowance of Trade Discount to WSC:
The AO disallowed additional trade discount given to M/s Wadhwa Sons Sales Corporation (WSC) under Section 40A(2)(a), arguing it was excessive. The Tribunal found that the discount was justified due to the nature of sales (second quality and rejects) and the expenses incurred by WSC. The disallowance was deleted for the assessment years 1985-86 and 1988-89.

5. Disallowance of Sales-Tax Payable:
The AO disallowed Rs. 3,049 as sales-tax payable under Section 43B, as it was not paid during the relevant previous year. The Tribunal upheld the disallowance, citing the jurisdictional High Court's judgment in Sanghi Motors vs. Union of India.

6. Charging of Interest:
Interest under Section 217 was directed to be recomputed by the AO while giving effect to the Tribunal's order. For interest under Section 215, the Tribunal noted that it could not be levied in a reassessment case, following the jurisdictional High Court's ruling in CIT vs. Pratap Singh of Nabha.

7. Reopening of Assessment:
The assessee contested the reopening of the assessment for the year 1985-86, arguing that the purchases from M/s Ess Kay Enterprises were genuine. The Tribunal, having deleted the additions made during reassessment, did not find it necessary to address this ground separately.

8. Addition Under Section 40A(3):
The AO added Rs. 14,652 for payments to karigars in violation of Section 40A(3). The Tribunal found that the payments were justified due to the nature of the business and the small-time operators involved. The addition was deleted.

9. Disallowance on Car Maintenance and Depreciation:
The Tribunal directed the disallowance on car maintenance and depreciation to be reduced to 1/6th after hearing both parties.

Conclusion:
The appeals were allowed in favor of the assessee, with the Tribunal deleting several additions and disallowances made by the AO, and directing the recomputation of interest.

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