1988 (3) TMI 121 - AT - Income Tax

Summary

Issues Involved:
1. Gross profit rate and trading addition.
2. Addition of lease rent expenditure.
3. Deduction of the value of earth used in the manufacture of bricks.

Issue-wise Detailed Analysis:

1. Gross Profit Rate and Trading Addition:
The primary issue was the gross profit rate of 17% shown by the assessee, which was lower than the previous year's 22%. The Income Tax Officer (ITO) considered this low and attributed it to unrecorded sales due to excessive damage of bricks caused by rains. The ITO added Rs. 51,675 to the trading account, suspecting unrecorded sales. The CIT(A) reduced this addition to Rs. 43,827, applying a gross profit rate of 20%, without fully considering the evidence of excessive rains provided by the assessee. The Tribunal held that the burden of proof had shifted to the revenue to disprove the assessee's claim of extra damage due to rains. The Tribunal concluded that no addition should be made for the alleged extra shortage of bricks, thus deleting the Rs. 51,675 addition.

2. Addition of Lease Rent Expenditure:
The assessee had debited Rs. 2,000 as lease rent expenditure, which the ITO disallowed, suspecting it was not genuine since the lease money was credited to the landlord's account annually and accumulated to Rs. 14,000. The CIT(A) upheld this disallowance. However, the Tribunal found that the lease existed and the expenditure had been allowed in the past. Therefore, the Tribunal deleted the Rs. 2,000 addition, finding no justification for its disallowance.

3. Deduction of the Value of Earth Used in the Manufacture of Bricks:
The assessee claimed Rs. 47,164 as the value of earth used in brick manufacturing, calculated at Rs. 4 per thousand bricks, based on the rate charged by the Delhi Development Authority (DDA). The ITO and CIT(A) disallowed this, considering it an imaginary expenditure since the land belonged to the assessee. The Tribunal noted that in the past, such expenditure had been allowed and that the cost of earth was a necessary part of manufacturing bricks. The Judicial Member proposed to disallow the expenditure, arguing that no actual payment was made and the land was not treated as stock-in-trade in the trading account. The Accountant Member disagreed, citing judicial discipline and a Supreme Court precedent, arguing that the cost should be allowed as it represents a diminution in the land's value. The Third Member, agreeing with the Accountant Member, noted that the deduction had been consistently allowed in previous years and should be allowed in the current year as well. The matter was referred back to the original Bench to pass an order in conformity with the majority view, allowing the Rs. 47,164 deduction.

Conclusion:
The Tribunal's final order partly allowed the assessee's appeal. It deleted the Rs. 2,000 addition for lease rent and the Rs. 51,675 trading addition, while confirming the Rs. 47,164 deduction for the value of earth used in brick manufacturing.