2013 (9) TMI 360 - AT - Income Tax

Rejection of books of account - accounting for scrap - AO rejected the books of account by invoking provisions of Section 145(3) on the plea that method of valuation of closing stock as adopted by the assessee was not within the accepted principle of account - Part Deletion of addition on Difference Between Generation of Scrap and Average Rate of Scrap Sale - Held that - Periodically when the waste material accumulated, it was sorted out by the shop floor technical persons and segregated - If there was no possibility of using it that material was segregated and entered in the excise register after such segregation and then only it was sold to the scrap dealer - The price varies from item to item as well as material to material. There is a difference in selling price of stainless steel (SS) scrap, mild steel (MS) scrap, copper scrap, tube scrap etc. no discrepancy was found in the books of account, therefore, the Assessing Officer was not justified in rejecting books of account - After giving detailed reasoning with regard to the quantum of scrap generated and the value for which it can be sold vis- -vis valuation arrived at by the DVO, after recording detailed finding, as reproduced hereinabove, the ld. CIT(A) deleted the substantial part of the addition on account of scrap sale. - Decided in favor of assessee. The assessee was engaged in business of manufacturing and fabrication of engineering items on the basis of specific orders from its customers - Variety of raw materials were used by the assessee - The valuation of the inventory done by the DVO was much less than the valuation done by the assessee - Even the Assessing Officer has accepted the assessee s valuation, which clearly show that DVO s report suffers from inconsistency, mis-classification and defects and discrepancies - Even during course of valuation and assessment proceedings, the assessee has highlighted discrepancies in adoption of valuation rates of various materials including scrap by the DVO, but the same was not taken care of - When no defect was pointed out in the books of account even during the course of scrutiny assessment and when the valuer s report was not accepted by the Assessing Officer, there was no reason for rejection of books of account u/s 145(3) and the CIT(A) had correctly observed that the Assessing Officer was not justified in rejecting the books of account u/s 145(3) - Even during the course of search, no documents or papers were found by the Assessing Officer to indicate that there was any scrap sale outside the books of account, whereas addition has been made by the Assessing Officer in all the assessment years under consideration on account of unaccounted sale of scrap, which is not only based on the estimate but also without any corroborative evidence - during scrutiny assessment, no addition was made on account of such generation of scrap and sale outside books of account. Disallowance of salary u/s 40A(2)(b) - Excessive salary - Held that - The disallowance of salary was restricted to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine Mrs. Irene Valentine was a qualified engineer and experience in business and salary paid to her was commensurate with qualification and the services provided to the assessee company - neither there was excessive payment nor unreasonable payment was made to Irena Valentine looking to her qualification, experience and services so provided to the assessee company. The onus was on the Revenue to show that payment so made were not as per legitimate needs of the business or the benefits derived from such payment, was not according to the services so rendered - the Assessing Officer had disallowed the payment by observing that services rendered by Mrs. Irene Valentine was not substantially proved alongwith the documentary evidence - As per provisions of Section 40A(2)(a), where the assessee incurs any expenditure in respect of which payment has been made to a person referred to in clause (b) of Section 40A(2) - Keeping in to view these findings of CIT(A) vis- -vis observation of the Assessing Officer, we direct to restrict disallowance of salary to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine. - Decided partly in favor of revenue.

Summary

Issues Involved:
1. Part deletion of addition by the CIT(A) on account of difference worked out between generation of scrap and average rate of scrap sale.
2. Deletion of disallowance made by the Assessing Officer on account of salary paid to Irene Valentine under Section 40A(2)(b) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Part Deletion of Addition on Account of Scrap Generation and Sale

Background:
The appeals filed by the Revenue and cross objections by the assessee pertain to the assessment years 2001-02 to 2007-08. The common grievance relates to the part deletion of addition by the CIT(A) made by the Assessing Officer due to the difference between the generation of scrap and the average rate of scrap sale. The Assessing Officer invoked Section 145(3) of the Income-tax Act, 1961, rejecting the books of account on the grounds that the method of valuation of closing stock was not within accepted accounting principles and that the assessee was generating and selling scrap outside the books of account.

CIT(A) Observations:
The CIT(A) held that the Assessing Officer was not justified in invoking Section 145(3) as no material defects were specified in the books of account. The CIT(A) noted that the valuation report by the Departmental Valuer was flawed due to misclassification and discrepancies. The CIT(A) emphasized that the accounting system of the assessee, including the maintenance of bin cards for raw materials and the lack of stock registers for work in progress and finished goods, was consistent and accepted in previous years.

Findings:
- The CIT(A) found that the valuation of inventory by the DVO was much less than the valuation done by the assessee, and even the Assessing Officer accepted the assessee's valuation.
- The CIT(A) noted that the scrap sales were subject to excise duty and sales tax, and the accounting policy of recognizing income at the time of scrap sale was consistently followed by the assessee.
- The CIT(A) partially sustained the additions made by the Assessing Officer to meet the ends of justice, considering the quantity of scrap generated and the rate at which it was sold.

Conclusion:
The Tribunal found no reason to interfere with the CIT(A)'s findings and conclusions, as they were based on material placed on record. The appeals by the Revenue and the cross objections by the assessee regarding the addition made on account of scrap sale were dismissed.

Issue 2: Deletion of Disallowance of Salary Paid to Irene Valentine under Section 40A(2)(b)

Background:
The Assessing Officer disallowed the salary paid to Irene Valentine, a Director of the assessee company, by invoking Section 40A(2)(b) of the Income-tax Act, 1961, on the grounds that the payment was excessive and unreasonable.

CIT(A) Observations:
The CIT(A) deleted the disallowance, noting that the appointment and remuneration of Irene Valentine were approved in the annual general meeting of the public limited company. The salary was paid after deducting TDS, and the income was offered in her income tax returns. The CIT(A) found that the salary paid was commensurate with her qualifications and experience.

Findings:
- The Tribunal observed that the onus was on the Revenue to show that the payment was not as per the legitimate needs of the business or the benefits derived from such payment.
- The Tribunal noted that the Assessing Officer did not state that Irene Valentine did not render any services or that her qualifications and experience were not commensurate with the services provided.
- The Tribunal directed to restrict the disallowance of salary to 50% of the remuneration paid, considering the findings of the CIT(A) and the observations of the Assessing Officer.

Conclusion:
The Tribunal partially allowed the appeal of the Revenue by restricting the disallowance of salary to 50% of the remuneration paid to Irene Valentine. The cross objections filed by the assessee were dismissed.

Final Judgment:
The appeals of the Revenue were allowed in part, whereas all the cross objections filed by the assessee for the assessment years under consideration were dismissed.