2012 (12) TMI 277 - AT - Income Tax

Disallowance of commission Held that - No TDS has been deducted on the commission payment and assessee was unable to substantiate the extra services rendered by Kapil Sarin, in addition to the services for which he was paid salary, disallowance of commission was justified Regarding payment of salary is concerned Held that - Shri Kapil Sarin is a qualified and experienced person, who worked for 8 years with leading Pharma company and he was independently handling sales and marketing operations of the assessee in the Western Region from Pune - no justification for disallowance of salary of Rs. 45,000/- paid to Shri Kapil Sarin. Disallowance of payment of sales tax incentive Held that - Assessing Officer has not disputed the duties and responsibility of all the three. Each of the person possessed the required qualification and work experience for the functions performed by them, which was commensurate with the compensation so paid. The sales incentive so paid was confirming part of their over all compensation as employees. Nowhere the Assessing Officer has alleged that payment to them was in excess of the fair market value of the services so rendered by them - Assessing Officer to restrict the disallowance of incentive to the extent of 25%. Disallowance of depreciation - assessee has purchased assets for new Branch Office opened at Pune, which started functioning in the next assessment year 2004-05 and that assessee had not shown any sales through Pune Office Held that - New office at Pune was purchased on 19.9.2002 and a regular pharmacists joined the Pune Office w.e.f. 17.1.2003 i.e. during the year under consideration - Merely because the actual operation started in the next assessment year, the fact that preparatory steps for starting business operation was duly undertaken during the year under consideration. There is no valid reason for disallowance of depreciation on the assets - Assessing Officer is directed to delete the disallowance of depreciation With regard to disallowance of depreciation of car, repairs and maintenance of vehicles and plea of personal use, AO directed to restrict the disallowance to 1/10th on the plea of personal use. Regarding Diwali expenses Held that - Assessee has produced vouchers for purchase of Raymond s shop. The CIT(A) has confirmed the disallowance on the plea that the assessee has not given the names of the persons to whom such gifts have been distributed - no justification on the part of the lower authorities for decline of genuine claim of expenditure, which is essentially incurred for the purpose of business - These are the customary expenses, which in the present scenario is normally incurred to boost the business and to have a healthy relations with the employees

Issues Involved:
1. Sustaining parts of the assessment order.
2. Disallowance of commission payments.
3. Disallowance of supervision charges and telephone expenses.
4. Disallowance of rent payments.
5. Disallowance of salary and commission payments.
6. Addition related to business of M/s. Worldwide Products.
7. Disallowance of foreign tour expenses.
8. Disallowance of sales promotion expenses.
9. Disallowance of personal use expenses on telephone, conveyance, vehicle repairs, and maintenance.
10. Gross profit estimation and rejection of books of accounts.
11. Disallowance of sales tax incentive payments.
12. Disallowance of depreciation on business assets.
13. Disallowance of Diwali expenses.

Detailed Analysis:

1. Sustaining Parts of the Assessment Order:
The appellant contested the CIT(A)'s decision to sustain parts of the assessment order, arguing it was contrary to the facts on record and law. The tribunal reviewed the rival submissions and records, noting the appellant's engagement in the business of trading specialized veterinary medicines and surgical instruments.

2. Disallowance of Commission Payments:
The Assessing Officer (AO) disallowed commission payments to Shri S.C. Mehra and Shri S.K. Khanna, citing lack of TDS deduction and failure to substantiate services rendered. The tribunal upheld these disallowances, confirming the lower authorities' findings that the commission payments were not genuine and were aimed at reducing tax liability.

3. Disallowance of Supervision Charges and Telephone Expenses:
The AO disallowed supervision charges and telephone expenses reimbursed to Shri S.K. Khanna. The tribunal found that Shri S.K. Khanna supervised business transactions and incurred telephone expenses for business purposes. Thus, these disallowances were reversed, allowing the expenses as legitimate business expenditures.

4. Disallowance of Rent Payments:
The AO disallowed rent payments to Shri Sumit Khanna, arguing the flat was partially used by another business. The tribunal reversed this disallowance, finding that the major part of the flat was used for the appellant's business, and the rent payment was justified.

5. Disallowance of Salary and Commission Payments:
The AO disallowed salary and commission payments to Shri Kapil Sarin, citing lack of TDS deduction and failure to substantiate additional services. The tribunal upheld the commission disallowance but allowed the salary payment, noting Shri Kapil Sarin's qualifications and role in handling sales and marketing operations.

6. Addition Related to Business of M/s. Worldwide Products:
The AO added 10% of purchases from M/s. Worldwide Products, alleging it was a benami concern of the appellant. The tribunal found M/s. Worldwide Products to be a separate entity and directed the AO to restrict the addition to Rs. 45,000, as per the consignment agreement.

7. Disallowance of Foreign Tour Expenses:
The AO disallowed foreign tour expenses of Shri S.C. Mehra, questioning the business purpose and actual travel. The tribunal restored this issue to the AO for verification of travel through passport checks and to decide afresh after giving the appellant an opportunity to present evidence.

8. Disallowance of Sales Promotion Expenses:
The AO disallowed sales promotion expenses, citing lack of details on recipients. The tribunal found the expenses justified for business promotion but directed a 10% disallowance to account for personal elements.

9. Disallowance of Personal Use Expenses:
The AO disallowed 1/5th of expenses on telephone, conveyance, and vehicle repairs for personal use. The tribunal found the appellant had personal telephone and vehicle arrangements and directed the AO to restrict the disallowance to 1/10th of the expenses.

10. Gross Profit Estimation and Rejection of Books of Accounts:
The AO rejected the books of accounts, estimating a gross profit of 40%. The tribunal found the appellant's detailed invoice analysis showing a 36.5% gross profit and directed the AO to restrict the addition by taking a 38% gross profit rate.

11. Disallowance of Sales Tax Incentive Payments:
The AO disallowed sales tax incentive payments to close relatives. The tribunal found the payments commensurate with the services rendered and directed the AO to restrict the disallowance to 25%.

12. Disallowance of Depreciation on Business Assets:
The AO disallowed depreciation on assets purchased for the Pune office, arguing the office started functioning in the next assessment year. The tribunal found preparatory steps for business operations were undertaken during the year and directed the AO to allow the depreciation.

13. Disallowance of Diwali Expenses:
The AO disallowed Diwali expenses, citing lack of details on recipients. The tribunal found the expenses customary and necessary for business relations, reversing the disallowance.

Conclusion:
The tribunal allowed the appeals in part, providing detailed directions on each issue, including reversing some disallowances, confirming others, and remanding specific issues for further verification. The judgment emphasized the importance of substantiating business expenses and adhering to tax regulations.

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