1981 (6) TMI 63 - AT - Income Tax

Summary

Issues:
1. Validity of ignoring the revised return filed by the assessee.
2. Consideration of weighted deduction claim in the revised return.
3. Challenge against the add backs made by the ITO.
4. Adjudication of the claim to weighted deduction.
5. Disallowance of expenditure on salary and commission.
6. Allowability of interest on credit balances of the Karta and his wife.

Issue 1: Validity of ignoring the revised return:
The appeal was filed by the assessee against the IAC of Income-tax's order. The main dispute was regarding the ITO's decision to ignore the revised return filed by the assessee after receiving the draft order. The ITO completed the assessment before considering the revised return, leading to a challenge by the assessee in the first appeal. The Commissioner held that the assessment was valid as the revised return was filed after the deadline for completion of assessment under s. 153(1)(a)(iii). However, the ITAT disagreed, stating that the assessment was not complete when the revised return was filed, remanding the matter to the ITO to consider the revised return.

Issue 2: Consideration of weighted deduction claim:
The assessee raised a claim to weighted deduction in the revised return, which was contested in the first appeal. The ITAT directed the ITO to appropriately deal with this claim in the fresh assessment to be made after the remand.

Issue 3: Challenge against the add backs made by the ITO:
The assessee challenged four items of add backs made by the ITO, including expenses on salary and commission. The ITO disallowed a significant portion of the expenditure, citing lack of proper agreement and legitimate business need. The AAC confirmed the ITO's findings.

Issue 4: Adjudication of the claim to weighted deduction:
The claim to weighted deduction in respect of certain items was included in the revised return. The ITAT directed the ITO to address this claim in the fresh assessment following the remand.

Issue 5: Disallowance of expenditure on salary and commission:
The ITO disallowed a substantial portion of the expenditure on salary and commission, questioning the legitimacy and business need for such payments. The ITAT, considering various aspects including the return on capital investment and absence of managerial staff, allowed the expenditure as a deduction.

Issue 6: Allowability of interest on credit balances:
The assessee had debited an amount as payable to the Karta and his wife by way of interest on unwithdrawn portions of their salary and commission. The ITO allowed interest only on the portion of salary deemed allowable. The ITAT found the expenditure to be reasonable in light of the business needs and allowed the interest on the credit balances.

In conclusion, the ITAT allowed the appeal partially, remanding the matter to the ITO for a fresh assessment considering the revised return and addressing the claims and deductions in accordance with the findings.