2019 (10) TMI 603 - AT - Income Tax

Under valuation of closing stock of Guar Seeds - AO adopted cost price @19.15 per kg. presuming that goods purchased on 30.07.2009 @ 22.11 per kg. have been sold out and goods out of opening stock were remained in closing stock - HELD THAT - We are of the considered view that it would be reasonable and justifiable if average rate were applied for valuation of closing stock. We find that rate of opening stock was at ₹ 19.15 per kg. whereas closing stock was at ₹ 9.49 per kg. The average realization value is at ₹ 17.75 per kg. therefore, it would meet end of justice if average of 19.15 9.49 17.15 46.14/3 15.83 per kg. may be adopted for valuation of closing stock as on 31.03.2010. Accordingly, the AO is directed to recalculate the closing stock by taking rate of ₹ 15.83 per kg. Thus, the Ground No. 1to 4 are partly allowed. So far, Ground No. 5 is concerned, since the closing stock is opening stock for next year. Therefore, as a corollary to increase in closing stock would lead to increase in opening stock of next year, therefore, the AO would take opening stock as on 1st April of next financial year as worked out on the basis of average rate as per our observation given herein above. Accordingly, this ground is allowed. Disallowance of salary payment in respect of person specified under section 40A(2)(b) - HELD THAT - Recipient of remuneration are have requisite qualification and rendered service for handling of banking services, moreover, as the AO has accepted part payment reasonable, meaning thereby that they have rendered some services. If that is so, then, no disallowance under section 40A (2) (b) could be made as the recipient and payer are assessed to tax at same rate, hence, there is no evasion of tax. The copy of acknowledgement of return of income filed showed that both the person specified under section 40A (2) (b) of the Act are assessed at maximum marginal rate. Therefore, the issue is covered by the decision of Tribunal in the case of H.C. Sons v. ACIT Circle -12 Ahmedabad 2017 (1) TMI 1688 - ITAT AHMEDABAD wherein following the ratio laid of PWS Engineers Limited v. DCIT 2016 (6) TMI 596 - GUJARAT HIGH COURT held as long as the amount paid by the assessee to specific persons are taxed in the hands of specific persons at the same rate , disallowance under section 40A(2)(b) will be meaningless inasmuch as permitting the Revenue to tax the same income again at the same rate in the hand of principal payer would amount to double taxation . We are of the considered opinion that disallowance made under section 40A(2)(b) of the Act are not justified. Hence, same are directed to be deleted

Summary

Issues:
1. Valuation of closing stock - under valuation dispute
2. Treatment of salary payment to specified persons under section 40A(2)(b) of the Act

Valuation of Closing Stock:
The appeal by the Assessee challenged the addition of ?79,93,072 on account of under valuation of closing stock of Guar Seeds. The Assessing Officer (AO) noted discrepancies in the valuation method used by the Assessee, leading to a trading loss. The AO adopted a higher cost price for valuation, resulting in the addition. The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing the lack of evidence supporting the Assessee's claims. The Tribunal considered the facts and case laws presented by both parties. It was observed that the average realization value and market rates indicated a different valuation approach should be adopted. The Tribunal directed the AO to recalculate the closing stock valuation based on a reasonable average rate, partially allowing the appeal.

Treatment of Salary Payment:
The dispute revolved around the disallowance of salary payment to specified persons under section 40A(2)(b) of the Act. The AO found the payments excessive and disallowed a portion under the provision. The Assessee contended that the recipients provided services and were assessed at the maximum marginal rate, justifying the payments. Citing relevant case laws, the Tribunal noted that as long as the payments were taxed in the hands of the recipients at the same rate, disallowance under section 40A(2)(b) would lead to double taxation. The Tribunal, therefore, directed the deletion of the disallowance, as the issue was covered by previous decisions and the payments were deemed reasonable.

In conclusion, the Tribunal partly allowed the Assessee's appeal concerning the valuation of closing stock and fully allowed the appeal regarding the disallowance of salary payments to specified persons under section 40A(2)(b) of the Act. The judgment provided detailed analysis and considerations of facts, case laws, and relevant provisions to arrive at a reasoned decision in each issue presented before the Tribunal.