2015 (1) TMI 98 - AT - Income Tax

Validity of order passed u/s 153A - Payment of commission on sale or purchase Held that - The commission paid to the parties have been challenged by the department - it is total contradictory on part of the revenue that in one case, they are accepting these above parties as genuine and in another non-genuine - the assessee had deducted TDS, payments were made through account payee cheques, given PAN number of the parties and confirmed the commission payment - the law does not require from the assessee to enter in agreement on stamp paper for claiming commission as held in the case of Chicago Pneumatic India Ltd. Vs. Dy. CIT 2007 (3) TMI 409 - ITAT MUMBAI - the books of account are audited which has been accepted by the AO, sale and purchase have been treated genuine, but doubted the commission payment and the AO made addition on surmises and conjectures - commission paid by the assessee either on sale and purchase are allowable as the expenses incurred wholly and exclusively for the purpose of business U/s 37 of the Act. Addition of unexplained investment in excess stock Held that - The assessee contended that it has maintained/recorded/received/issued the stock of raw material by weight and there is no concept of per piece or standard/averaging of weight per piece the authorized officer gave the copy of panchnama at the end of search, but no copy of statement and copy of stock inventory taken at the time of search, which was asked to supply by the appellant on 06/9/2010 - when the scrutiny assessment proceedings were started by the AO, he supplied the copy of statement along with copy of inventory and copy of statement of various persons on 13/09/2010 - AO as well as CIT(A) has considered the assessee s reply but which was not found convincing to them - it is also difficult for the authorized officer to weigh the stock lying in the factory premises on weighing machine but the item is excisable and is required to be inspected spontaneously by the excise authority when entry of the raw material in the factory and dispatch of the final product from the factory premises - Further the Director of the company has not able to explain the difference during the course of recording of statement U/s 132(4) of the Act and stated that he would explain the difference later on. Authorised officer has taken closing stock on the basis of counting of M.S. Ingots/TMT Saria/CTD on the basis of rows and pieces - the size of the ingots also was not same of every piece - the assessee purchased the raw material from the primary source i.e. material made out of scrap and not from the virgin metal and therefore, the standard of M.S. ingots is not same in form of size and volume - The method of the stock taking adopted by the search party was eye estimation counting bundles in rows and then multiplying the same with the standard weight of a bundle in scissors of bundles - These items of stock are heavy in weight and it can be displaced with the help of crane - The total stock found during the course of search was also in volume and in size, the time taken by the authorized officer for verifying the closing stock was very short as search was concluded on 18/09/2008 i.e. second day of search - no incriminating documents regarding purchase of raw material and sales of goods outside the book was found and seized by the authorized officer, which supports the assessee s claim that weighment done by the authorized officer was not scientific to arrive the correct discrepancy in the stock of the appellant company assessee rightly relied upon Utkal Alloys (P.) Ltd. Versus Deputy Commissioner Of Income-Tax 2002 (3) TMI 215 - ITAT CUTTACK and addition in the stock on the basis of sampling method without physically weighing - AO was not justified in making addition on account of excess stock as stocks were checked by the Central Excise authorities from time to time - there is no revenue loss as such except shifting of the revenue from year under consideration to subsequent year - valuation made by the authorized officer was not scientific and had not arrived at right conclusion, thus, the order of the CIT(A) is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and validity of the order passed under Section 153A of the Income Tax Act, 1961.
2. Disallowance of commission expenses on sales and purchases under Section 37(1) of the Income Tax Act, 1961.
3. Addition on account of unexplained investment in excess stock.

Issue-wise Analysis:

1. Legality and Validity of the Order under Section 153A:
The assessee challenged the validity of the orders passed under Section 153A, contending that the disallowances were made without any material found during the course of the search. However, this ground was not pressed by the assessee during the appeal, leading to its dismissal as not pressed.

2. Disallowance of Commission Expenses on Sales and Purchases:
Commission on Sales:
The Assessing Officer (AO) disallowed the commission expenses on sales, arguing that the payments were not wholly and exclusively for the purpose of business. The AO observed discrepancies such as common addresses of brokers, lack of direct evidence of services rendered, and payments made at the end of the financial year. The learned CIT(A) partly upheld the AO's disallowance but allowed commission payments to brokers who had executed agreements on stamp paper or had been working with the assessee for several years.

The Tribunal noted that the assessee provided confirmations, PAN numbers, copies of returns, TDS certificates, and bank statements to substantiate the commission payments. The Tribunal also observed that similar payments were accepted as genuine in the case of M/s Kamdhenu Ispat Ltd., a related entity. Consequently, the Tribunal allowed the commission expenses on sales, holding that the assessee had discharged its onus.

Commission on Purchases:
The AO disallowed commission expenses on purchases, citing reasons such as lack of direct evidence, brokers not having expertise in the iron and steel business, and discrepancies in the stock register. The CIT(A) partly upheld the disallowance, allowing expenses where brokers had confirmed transactions or had been working with the assessee for several years.

The Tribunal found that the assessee provided sufficient evidence, including confirmations, PAN numbers, TDS certificates, and bank statements, to substantiate the commission payments. The Tribunal held that the commission payments were incurred wholly and exclusively for the purpose of business and allowed the expenses.

3. Addition on Account of Unexplained Investment in Excess Stock:
The AO made an addition for unexplained investment in excess stock found during the search, based on the inventory prepared by the search team. The assessee argued that the stock was taken on an estimated basis and not through actual weighment. The CIT(A) upheld the addition, stating that the inventory was prepared with the assistance of the assessee's staff and directors.

The Tribunal observed that the stock was subject to verification by excise authorities and that the method of stock-taking during the search was not scientific. The Tribunal relied on the decision in Utkal Steels Ltd. vs. Dy.CIT, where it was held that no addition could be made based on stock estimated by sampling method. The Tribunal deleted the addition, holding that the valuation made by the search team was not reliable.

Conclusion:
The Tribunal allowed the appeals of the assessee partly, confirming the genuineness of commission expenses on sales and purchases and deleting the addition on account of unexplained investment in excess stock. The cross-appeals of the Revenue were dismissed.