1983 (7) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Excessive shortage claim by the assessee.
2. Addition on account of excess stock.
3. Disallowance of bundling and sorting expenses and weighing charges.
4. Disallowance of interest under Section 40(b).

Detailed Analysis:

1. Excessive Shortage Claim by the Assessee:
The first issue concerns whether the shortage claimed by the assessee was excessive. The assessee, engaged in the business of rerolling steel, claimed a shortage of 6.9% in the first period and 6.3% in the second period. The Income Tax Officer (ITO) initially considered a 3% shortage reasonable, but the Inspecting Assistant Commissioner (IAC) later deemed a 5% shortage reasonable. Consequently, the ITO adopted a 5% shortage rate, resulting in an addition of Rs. 36,800 for the second period. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision. However, the assessee presented comparative data showing higher shortages in previous years and a certification from the Iron & Steel Controller indicating wastage between 10% to 20%. Based on this evidence, the tribunal found the assessee's claim reasonable and deleted the addition of Rs. 36,800.

2. Addition on Account of Excess Stock:
The second issue involves the addition of Rs. 2,31,965 on account of excess stock found during a survey conducted under Section 133A. The ITO identified an excess stock of 170.686 tons based on physical verification and valued it at Rs. 2,31,965. The CIT(A) modified the excess stock valuation to Rs. 1,49,070, granting relief of Rs. 82,895. The assessee contended that the stock was estimated and not scientifically weighed. The tribunal examined the inventory records and found inconsistencies, concluding that the weighment was done on an estimated basis rather than scientifically. Consequently, the tribunal deleted the addition of Rs. 1,49,070, rendering the revenue's grounds for appeal moot.

3. Disallowance of Bundling and Sorting Expenses and Weighing Charges:
The third issue pertains to the disallowance of Rs. 35,506 for bundling and sorting expenses and Rs. 16,123 for weighing charges. The ITO disallowed these expenses, citing that payments were made to a sister concern. The CIT(A) upheld this disallowance. The assessee argued that these tasks were essential for its business and were previously performed by its own labor. The tribunal found merit in the assessee's argument and remanded the issue back to the CIT(A) for a clear finding on whether the work was outsourced and the payments were genuinely made. If no evidence was provided, an estimate would be allowed.

4. Disallowance of Interest Under Section 40(b):
The final issue involves the disallowance of interest amounting to Rs. 15,330 under Section 40(b). The assessee conceded that the interest was paid to partners in their individual capacity. Consequently, the tribunal upheld the CIT(A)'s decision that the interest was rightly disallowed under Section 40(b).

Conclusion:
The appeal of the assessee is partly allowed, and the appeal of the revenue is dismissed. The tribunal deleted the addition of Rs. 36,800 for excessive shortage and Rs. 1,49,070 for excess stock. The issue of bundling and sorting expenses and weighing charges was remanded for further consideration, while the disallowance of interest under Section 40(b) was upheld.