2014 (10) TMI 490 - AT - Income Tax

Provisional commission not ascertained AO treated as contingent liability Held that - The assessee has been paying commission on a certain percentage to the agents on the exports sales made - the assessee has been paying commission @ 2% to 3% - For most of the invoices the commission has been paid before 31st March 2007 - Only for the past of the sum aggregating ₹ 9,22,777, the commission on the sale made remained payable for which the assessee has made a provision, which too has been quantified on the basis of fixed rate and part practice - otherwise also, it is a genuine business expenditure which is allowable as deduction and the same has been quantified on the basis of certain percentage even though it has been discharged in a near future date - There is a reasonable certainty in the quantification of the commission payable and such a provision is to be allowed in this year only - in the subsequent year such a payment has been accepted by the AO thus, the order of the CIT(A) is upheld Decided against revenue. Suppression of burning loss Held that - The assessee s contention that it has shown the sale of scrap generated during the course of process has not been rebutted and such a sale has been allocated on pro rata basis on production - The finding of the CIT(A) that if the scrap sale of 240.740 MTs is reduced from the shortage shown then the assessee s irrecoverable loss is only 2.02% which is much below the 3.74% worked out by the AO has not been disputed - such an addition cannot be sustained without finding any defect either in the production record or in the books of account or in the scrap sales shown and adjusted by the assessee, then there is no justification of making any addition simply on ad hoc manner as done by the AO by holding that 0.74% of the loss claimed by the assessee is excessive the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:
1. Deletion of addition of Rs. 9,22,777 as provisional commission.
2. Deletion of addition of Rs. 9,76,821 on account of wastage/shortage in the manufacturing process.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 9,22,777 as Provisional Commission:

The Revenue contended that the learned CIT(A) erred in deleting the addition of Rs. 9,22,777 made by the Assessing Officer (AO) as provisional commission. The AO had treated this amount as a contingent liability, not an ascertained one, and disallowed it based on the Supreme Court's decision in Shree Sajjan Mills Ltd. v/s CIT. The AO argued that mere provision without finalization and quantification of expenses does not constitute an ascertained liability, thus no deduction is allowable.

The assessee, a partnership firm engaged in trading, manufacturing, and exporting steel products, had included Rs. 9,22,777 in the form of provision for commission for March 2007. The assessee submitted that this provision was based on actual exports during the financial year 2006-07 and was made on a firm and realistic basis. The actual payment of commission was made in the subsequent financial year, and documentary evidence was provided.

The learned CIT(A) found that the commission payment became payable on the exports made by the assessee during the relevant financial year, thus constituting an ascertained liability. The CIT(A) relied on the Supreme Court's decision in Bharat Earth Movers v/s CIT, which allowed such liabilities on an accrual basis. The CIT(A) noted that the commission was around 2% of the sales and was paid in the next financial year, thus deleting the disallowance.

Upon review, the Tribunal found that the assessee had consistently paid commission at a certain percentage on export sales. The provision for Rs. 9,22,777 was quantified based on a fixed rate and past practice, and it was a genuine business expenditure. The Tribunal affirmed the CIT(A)'s finding that the provision was reasonably certain and should be allowed in the relevant year. Consequently, the Tribunal dismissed the Revenue's ground on this issue.

2. Deletion of Addition of Rs. 9,76,821 on Account of Wastage/Shortage in Manufacturing Process:

The Revenue argued that the learned CIT(A) erred in deleting the addition of Rs. 9,76,821 made by the AO due to wastage/shortage claimed by the assessee in the manufacturing process of S.S. Billets. The AO observed that the assessee used S.S. Billets as raw material, and during the rolling process, there should be minimal wastage as scrap could be reused. The AO required the assessee to justify the wastage, which was claimed to be 5.43%, but the AO allowed only 3%, disallowing 0.74%.

The assessee explained that wastage occurred due to burning loss and scrap from end cutting, which was retained by job workers. The burning loss was approximately 3.74%. The assessee provided detailed workings of the loss and argued that the scrap was sold and included in local sales, with excise duty paid.

The learned CIT(A) reviewed the remand report and the assessee's objections, finding that the assessee's claim regarding scrap sales was correct and supported by evidence. The CIT(A) noted that the actual irrecoverable loss was 2.02% after considering the scrap sales, which was lower than the 3.74% calculated by the AO. The CIT(A) held that the AO did not point out any defects in the books of account or production records, thus deleting the addition.

The Tribunal agreed with the CIT(A) that the assessee's contention about scrap sales was not rebutted and the irrecoverable loss was only 2.02%. The Tribunal found no justification for the AO's ad-hoc addition without finding defects in the records. Therefore, the Tribunal affirmed the deletion of the addition of Rs. 9,76,821 and dismissed the Revenue's ground on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order on both issues. The additions made by the AO for provisional commission and wastage/shortage in the manufacturing process were deleted, as the liabilities were ascertained and supported by evidence. The Tribunal upheld the CIT(A)'s findings and rationale, resulting in the dismissal of the Revenue's appeal.

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