2004 (2) TMI 311 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance/Deletion of Commission Expenses.
2. Deletion of Trading Addition.

Detailed Analysis:

1. Sustenance/Deletion of Commission Expenses:

The only issue raised by the assessee and ground No. 2 in the departmental appeal relate to the sustenance/deletion of commission expenses. The assessee was engaged in the business of processing cloth and paid brokerage/commission of Rs. 7,29,602 to M/s Hindustan Textile Agency, a sister concern, at 3.5% of the sales. The AO applied the provisions of s. 40(a)(2) and disallowed part of the commission, allowing only 2.75%, resulting in a disallowance of Rs. 1,65,515. The AO's decision was based on the fact that in the subsequent year, the commission rate was reduced to 2.75%.

Before the CIT(A), the assessee argued that the commission paid was in line with industry standards and had been consistently accepted in previous years. The CIT(A) observed that the reduction in commission in subsequent years was due to the agent taking on another agency, which affected their interest in selling the assessee's goods. Despite this, the CIT(A) sustained an addition of Rs. 65,515 but allowed a relief of Rs. 1,00,000.

The Department appealed against the relief, while the assessee appealed against the sustenance of Rs. 65,515. The Tribunal noted that the commission at 3.5% was consistently paid from the beginning and no disallowance was made in prior years. The reduction to 2.75% in the subsequent year was due to the agent taking on another agency. The Tribunal found no justification for the CIT(A)'s action and deleted the addition sustained by the CIT(A), thus rejecting the departmental appeal and accepting the assessee's appeal.

2. Deletion of Trading Addition:

The AO made a trading addition of Rs. 5,51,000 due to an inability to reconcile the consumption of color and chemicals with the cloth processed. The AO estimated production based on various factors, leading to an under-production calculation of 65,636 meters valued at Rs. 5,12,000. Additionally, the AO applied a higher Gross Profit rate of 13.95%, resulting in a difference of Rs. 5,90,000. The average of these figures led to the addition of Rs. 5,51,000.

Before the CIT(A), the assessee argued that the AO did not use a specific formula and that production could not be directly linked to raw material consumption due to varying quality and quantity requirements. The CIT(A) agreed, noting the lack of a scientific method or technical data to support the AO's conclusions and deleted the addition.

The Department's appeal argued that the trading results were not comparable with other years, justifying the AO's addition. The Tribunal, however, found that the AO's calculations were hypothetical and not based on a scientific method. The AO did not reject the book results or point out specific defects in the assessee's records. The Tribunal upheld the CIT(A)'s decision, confirming the deletion of the trading addition.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal regarding the commission expenses, rejecting the departmental appeal. It also confirmed the CIT(A)'s deletion of the trading addition, dismissing the Department's appeal on this issue.