2021 (4) TMI 910 - AT - Income Tax

Disallowance on account of commission paid to 5 persons - assessee is engaged in trading in gold, silver and diamond jewellery. The assessee company has franchisee of Tanishq - HELD THAT - It is true that all the five ladies are residents of Hisar and three ladies live at the adjacent building of the business premises of the assessee. It is also a fact that the two ladies did appear before the AO whose statements were recorded by him and they have confirmed the receipt of sales commission. Since the two ladies have confirmed the transactions by statements recorded by the Assessing Officer, we do not find any reason why addition should be made. We, accordingly, direct the Assessing Officer to delete the addition of commission paid to 2 persons / ladies. In respect of the other 3 ladies, they may have been married, but nothing prevented them to furnish their statements by way of affidavits. Merely because the payments have been made through account payee cheques would not justify the rendition of services since no evidences have been furnished before us except for the bald statement that the ladies are now married and do not reside in Hisar. Contention of the assessee that since out of the 5 ladies, 2 have confirmed the transactions, therefore by preponderance of probabilities it can be safely presumed that the transactions with other 3 ladies were also genuine is not acceptable. Since no evidence has been furnished towards rendition of services by 3 ladies, disallowance of commission paid to them is hereby confirmed which means Ground No. 1 is partly allowed. Addition on account of alleged under valuation of closing stock of gold and silver coins - Valuation of the closing stock on the basis of average of opening stock and cost price - assessee has been consistently following the cost or market price, whichever is lower method of accounting for valuation of closing stock - HELD THAT - CIT(A), in his order, has mentioned that the assessee itself has claimed in the appellate proceedings that it is valuing closing stock at average cost. Before us, the ld. counsel for the assessee vehemently stated that the observations of the ld. CIT(A) are against the facts and the assessee has never made such submission. Since there are conflicting submissions emanating from the orders of the authorities below, we deem it fit to restore this issue to the file of the Assessing Officer. The assessee is directed to demonstrate that the stock has been valued at cost price which is in consistence with its practice in earlier year and the Assessing Officer is directed to examine the details afresh and if satisfied that the assessee has been consistently valuing its stock at cost or market price, whichever is less, then no addition needs to be made on this account. If the Assessing Officer is not satisfied with the details of the assessee, he may decide the issue afresh as per provisions of law. Accordingly, Ground No. 2 is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of commission paid to 5 persons
2. Addition on account of alleged undervaluation of closing stock of gold and silver coins

Disallowance of Commission Paid to 5 Persons:
The assessee challenged the disallowance of commission paid to 5 persons, amounting to ?7,91,634. The Assessing Officer observed that three of the ladies who received the commission were relatives of the Director and resided at the same address adjacent to the business premises. The Assessing Officer made the disallowance as the assessee failed to produce the ladies for examination and did not provide details of the commission rates. The ld. CIT(A) upheld the disallowance. However, in the appeal before ITAT, it was argued that two ladies confirmed the transactions, but the other three could not be contacted due to marriage. ITAT directed the deletion of the addition for the two confirmed transactions but upheld the disallowance for the other three ladies due to lack of evidence supporting the services rendered by them.

Addition on Account of Alleged Undervaluation of Closing Stock:
The Assessing Officer added ?4,88,592 on account of alleged undervaluation of closing stock of gold and silver coins. The assessee claimed to value the stock at cost or net realizable value, whichever is lower. However, the Assessing Officer recalculated the value based on the average of opening stock and cost price. The ld. CIT(A) mentioned that the assessee claimed to value the closing stock at average cost. The ITAT found conflicting submissions and decided to restore the issue to the Assessing Officer for re-examination. The Assessing Officer was directed to verify if the stock valuation was consistent with the assessee's practice in previous years. If satisfied, no addition was required; otherwise, the issue was to be decided afresh. ITAT allowed Ground No. 2 for statistical purposes.

In conclusion, the ITAT partly allowed the appeal for statistical purposes, directing the Assessing Officer to delete the addition for confirmed transactions of commission and re-examine the valuation of closing stock based on consistent practices.