2006 (11) TMI 266 - AT - Income Tax

Disallowance u/s 37 - Payment of salary - salary paid was excessive - HELD THAT - We are of the opinion that there is no infirmity in the finding of learned CIT(A). The assessee has shown better GP rate and has explained the payment of salary. The suspicion of AO that higher salary has been paid on account of relations is not founded on rational reasons. Both these payees are income-tax assessees and have declared the same. Salaries having received by them, which have been accepted by the AO. Both of them were engaged in touring for obtaining orders and the sales have definitely increased. Thus salary of Rs. 5,000 per month to each of them cannot be stated to be on the higher side. In the earlier year, the salary was paid only for 3 months and the salary was Rs. 15,000 for these months to each of them. Anil Kumar has also done similar work for the assessee. Therefore, deletion of disallowance of salary is hereby confirmed. Unexplained cash credits - genuineness of credits made in three creditors not proved - HELD THAT - All the three creditors are trade creditors. All of them are income-tax assessees and they have confirmed this fact by filing their affidavits. All the three have been examined by the AO. In their statements recorded by AO, they have categorically deposed that they had received goods from other concerns against deposits in those concerns and the goods so received have been given to the assessee. We have also gone through their statements, copies of which are placed on the record. In the face of such evidences, we are of the opinion that the rejection of the explanation of assessee by learned AO is unjustified. There is force in the submission of ld AR that the trading result has been accepted by the AO and the purchases and sales have also been accepted and that no sales can be made without any purchase and these three parties have deposited the ground (sic) which have been sold by the assessee and in case the amount of Rs. 5,90,579 (cash credits) is added in the income of the assessee, the GP will give a rate of percentage of 31.86 per cent which is never possible in the business of cloth. This contention of the assessee seems to be logical. In our opinion, nothing more is required in proof from the assessee. Therefore, we confirm the impugned findings and dismiss this ground of appeal. Both the amounts have been correctly deleted. Additions on shop expenses and travelling expenses - vouchers for payment of rent - HELD THAT - We are of the considered opinion that the sales of the assessee have increased considerably in this year and the shops were utilized by the assessee. M/s Taparia Enterprises has not done the business during this year. Although in the previous year M/s Taparia Enterprises had used these shops. The AO did not investigate into this claim of the assessee that these shops were used and utilized exclusively for his business although the vouchers were issued in M/s Taparia Enterprises' name Keeping in view the entire facts of enormous increase in assessee's business and that the AO did not make further enquiries despite the clear stand taken by the assessee with regard to use of these shops for his business, we are of the considered opinion that this expenditure which related wholly and exclusively to the business of the assessee has to be allowed. Therefore, we delete the addition and partly allow the cross-objection. In the result, the appeal of the Revenue is dismissed and the cross-objection is partly allowed.

Issues Involved:
1. Disallowance of salary payments.
2. Addition on account of low household withdrawals.
3. Addition on account of unexplained cash credits and interest thereon.
4. Disallowance of office, traveling, and shop rent expenses.

Detailed Analysis:

1. Disallowance of Salary Payments:
The assessee, engaged in cloth trading, declared a Gross Profit (GP) rate of 16.90% on total sales of Rs. 39,48,545 for the assessment year 2001-02, compared to a GP rate of 11.72% in the previous year. The Assessing Officer (AO) noted a significant increase in the salary payments from Rs. 80,533 to Rs. 2,10,170 and disallowed Rs. 60,000, deeming the salary paid to the assessee's brothers as excessive. The CIT(A) deleted this addition, accepting the assessee's explanation that the salary was paid for twelve months in the current year compared to three months the previous year. The Tribunal upheld the CIT(A)'s decision, stating that the AO's suspicion was not based on rational reasons and that the salaries were justified as both payees were income-tax assessees and had declared the same income.

2. Addition on Account of Low Household Withdrawals:
The AO added Rs. 28,000 to the assessee's income, estimating household expenditure at Rs. 5,000 per month for a family of five, which the assessee had shown as Rs. 17,000. The CIT(A) deleted this addition, and the Tribunal agreed, noting that the assessee had explained total withdrawals of Rs. 32,000 and that the AO's estimation based on family size and living standard was not a valid basis for the addition.

3. Addition on Account of Unexplained Cash Credits and Interest Thereon:
The AO added Rs. 5,99,585 as unexplained cash credits and Rs. 71,950 as interest thereon, questioning the genuineness of deposits in the names of Smt. Sunita Devi, Rekha Devi, Uma Devi, and Surendra Taparia. The CIT(A) deleted these additions, and the Tribunal upheld this decision. The Tribunal emphasized that all creditors were income-tax assessees, had filed affidavits confirming the transactions, and the AO had accepted the trading results. The Tribunal discussed the legal framework under Section 68 of the IT Act, 1961, and concluded that the assessee had satisfactorily explained the nature and source of the cash credits.

4. Disallowance of Office, Traveling, and Shop Rent Expenses:
The AO disallowed Rs. 2,000 out of shop expenses, Rs. 4,000 out of traveling expenses, and Rs. 14,520 out of shop rent expenses, citing lack of proper vouchers. The CIT(A) confirmed these disallowances except for the shop rent, which was fully disallowed. The Tribunal upheld the disallowances of shop and traveling expenses but allowed the shop rent expense, noting that the shops were used exclusively for the assessee's business, and the AO did not investigate the assessee's claim adequately.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection, confirming the CIT(A)'s deletions of salary disallowance, household withdrawals addition, and unexplained cash credits addition, while allowing the shop rent expense and upholding the disallowances of shop and traveling expenses.

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