1981 (5) TMI 60 - AT - Income Tax

Issues Involved:
1. Disallowance of loss due to embezzlement.
2. Depreciation on temporary structures.
3. Disallowance of tractor running expenses.
4. Disallowance of commission paid to purchase agent.
5. Disallowance of wages paid to carpenters.
6. Depreciation on sheds.

Issue-wise Detailed Analysis:

1. Disallowance of Loss Due to Embezzlement:
The assessee firm claimed a loss of Rs. 10,000 due to embezzlement by its cashier, Shri G.C. Shrivastava. The Income Tax Officer (ITO) disallowed this claim, stating that no evidence was furnished to support the embezzlement. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, reasoning that the loss came to notice after the accounting year ended. However, the Tribunal found that the loss was incurred during the relevant accounting period and was incidental to the assessee's business. The Tribunal referenced the Punjab & Haryana High Court decision, which held that the pendency of a suit does not change the character of the loss. Consequently, the Tribunal allowed the deduction of Rs. 10,000 as a business loss.

2. Depreciation on Temporary Structures:
The assessee claimed 100% depreciation on temporary sheds costing Rs. 3,17,064. The ITO allowed only 10% depreciation, treating the structure as a permanent one. The CIT(A) increased the depreciation rate to 15%, classifying it as a third-class factory building. The Tribunal, however, agreed with the assessee that the shed was a temporary structure, as it was built under a temporary license from BHEL and could be dismantled within 24 hours. The Tribunal referenced a similar case decided by the ITAT Delhi Bench, which allowed 100% depreciation on temporary structures. Hence, the Tribunal allowed 100% depreciation on the sheds.

3. Disallowance of Tractor Running Expenses:
The assessee claimed Rs. 25,635 as tractor running expenses, out of which the ITO disallowed Rs. 10,000 due to unvouched expenses. The CIT(A) reduced the disallowance to Rs. 4,000. The Tribunal further reduced the disallowance to Rs. 2,800, as the assessee had vouchers for all expenses except Rs. 2,800.

4. Disallowance of Commission Paid to Purchase Agent:
The assessee paid Rs. 95,340 as commission to M/s National Timber Traders (NTT), which was disallowed by the ITO to the extent of Rs. 50,975, invoking Section 40A(2)(a) of the IT Act. The CIT(A) deleted the disallowance, stating that the commission was not excessive or unreasonable. The Tribunal upheld the CIT(A)'s decision, noting that the assessee derived certain advantages from NTT, such as better quality timber and interest-free credit. The overall cost of timber purchased from NTT was not unreasonably high compared to other suppliers. Therefore, the Tribunal concluded that the payment of commission was justified.

5. Disallowance of Wages Paid to Carpenters:
The assessee claimed Rs. 1,93,662 as wages to carpenters, which the ITO reduced by Rs. 1,10,000 based on statements from two carpenters. The CIT(A) deleted the disallowance, finding the statements unreliable and contradictory. The Tribunal agreed with the CIT(A), noting that the wages claimed were supported by vouchers and proper muster rolls. The Tribunal also observed that the wages were reasonable and aligned with the estimates by the BHEL Pricing Committee. Hence, the Tribunal upheld the deletion of the disallowance.

6. Depreciation on Sheds:
The Department contested the CIT(A)'s decision to allow 15% depreciation on sheds, treating them as third-class construction instead of the 10% allowed by the ITO. The Tribunal had already decided in favor of the assessee, allowing 100% depreciation on the sheds as temporary structures. Therefore, the Tribunal dismissed the Department's ground on this issue.

Conclusion:
The appeal filed by the assessee was partly allowed, granting deductions for the embezzlement loss, 100% depreciation on temporary sheds, and reducing the disallowance on tractor running expenses. The appeal filed by the Department was dismissed, upholding the CIT(A)'s decisions on commission payments, wages to carpenters, and depreciation on sheds.

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