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TMI Blog2013 (9) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer noticed that the assessee has claimed expenditure of Rs. 3,93,061 towards commission to non-whole time directors. The Assessing Officer further noticed from the annual report that commission to directors was paid as a percentage of net profit. The Assessing Officer therefore, requested the assessee to furnish the agreement with the directors, the details of services rendered by the directors, and whether such services were covered by the terms of employment. In response to the query made by the Assessing Officer, the assessee submitted that the commission payment to non-whole time directors was approved by a resolution of the Board and as per the provisions of the Companies Act, 1956. The assessee further clarified that no agreement was entered into with the directors in respect of commission payment. The Assessing Officer, after examining the Board's resolution, was of the view that the non-whole time directors had no contract of employment with the company. Therefore, the commission, not being contractual, its allowability has to be considered as per the provisions of section 37 of the Income-tax Act. The Assessing Officer observing that the assessee has failed to bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the board of directors take crucial decisions collectively and also responsible for the growth of the company. Therefore, the payment of commission as a percentage of profit, having been approved by the board cannot be disallowed. The learned Departmental representative submitted that the assessee since has failed to provide any evidence to prove the fact that the payment of commission was wholly and exclusively for the purpose of business, the disallowance of expenditure was justified. He therefore, urged for sustaining the addition. We heard rival submissions and perused the materials on record. It is seen from the material on record that there is no contract of employment between the assessee-company and non-whole time directors. They were also not paid any fixed remuneration. The Board's resolution dated May 15, 2002, which has been extracted in the impugned order of the Commissioner of Income-tax (Appeals) provides for payment of remuneration/ commission not exceeding one percent of the net profit of the company. The resolution does not however, fix any particular service, for the performance of which commission is paid to non-whole time director. The assessee has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious years and expected future sales. Out competitors tried to add new chapters to get their books prescribed stating that their books is better than others. To withstand such competition, there is need to add new chapter for us as well. Once a new chapter is added the old books becomes redundant. While assessing future sales, we look into the factors which influence the future sales such as : 1. Change in syllabi 2. Competitors titles 3. Piracy 4. No/slow moving titles 5. Change in education policy 6. Political uncertainty, etc. Taking all these factors into account, the valuation of stock is done. This is the method generally followed in the publishing industry world over and in the same method followed by us. The actual stock as on March 31, 2005 for all our 3121 titles is 69,06,786 copies. The titles considered for valuation based on the factors stated above are 2445 and the copies considered for valuation are 63,28,674. There was no sale in 2004-05 for 675 titles printed about 2 years back and therefore we have not considered stock representing to these titles for valuation." The Assessing Officer was not convinced with the explanation of the assessee. As the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that excepting in cases where the books are printed during the year end, the value of inventory is equal to scrap value of the books. Therefore, taking all these factors into consideration on a title to title basis, the valuation of stock is made based on past years' sales as well as expected future sales. The stock of each title is verified and value evaluated on a title-wise basis for the entire inventory. It was further submitted that the assessee is valuing its closing stock at the year end by applying a formula which has been followed by the assessee consistently. The formula followed by the assessee for valuation of closing stock is "(1) If stock in hand as on 31st March pertains to the current year's printing, the stock is valued at 75 percent of the current year's printing. (2) If the stock in hand includes/pertains to the previous year's stock, the stock is valued at 25 percent of the previous year's printing. (3) If the stock in hand includes/pertains to the stock printed over two years but less than three years, the stock pertaining to over two years will be valued at 15 percent of the previous year's printing. (4) In addition, proportionate dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tales", "Robinson Crusoe" and "A Tale of Two Cities", while valuing the closing stock, the assessee has taken lesser number of books than what has been printed during the current previous year and actually lying in stock. In respect of eight titles under the name, "A Magic Place Teacher's Book", though the entire stock arises from current previous year's printing, but while valuing the closing stock, not a single piece has been taken into account. The Commissioner of Income-tax (Appeals) also noticed that before the Assessing Officer, the assessee has submitted that the assessee has considered 63,28,674 copies covering 2,445 titles for the purpose of valuation of closing stock arrived at Rs. 4,23,61,003. However, in the consolidated stock statement furnished at the first appellate stage, the closing stock valuation of Rs. 4,23,61,003 was shown to be for 26,18,572 number of books. Due to the aforesaid differences and discrepancies, the Commissioner of Income-tax (Appeals) held that the valuation of closing stock made by the assessee cannot be accepted, and to arrive at the value of the closing stock, estimation has to be made. The Commissioner of Income-tax (Appeals) further did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. As such, the Commissioner of Income-tax (Appeals) was not justified in granting any relief to the assessee, and therefore, the addition thus made by the Assessing Officer should be restored. We have heard the rival submissions and perused the materials on record. After going through the orders of the lower authorities, we find it quite clear that the assessee has taken a prevaricated stand with regard to the valuation of closing stock. While before the Assessing Officer, the assessee has stated that it has considered for valuation 2,445 titles running into 63,28,674 copies for valuation, and it has not considered 675 titles printed about two years back, before the Commissioner of Income-tax (Appeals), the assessee has submitted a different method of valuation, as per which stocks relating to current year's printing is valued at 75 percent of the cost, stock relating to previous year's printing is valued at 25 percent of the cost, and the stock relating to more than two years back is valued at 15 percent of the cost. The assessee has prescribed further rider that stock quantity of different titles is restricted to sale quantity of that title in the year. It is also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r's printing, when the assessee himself has adopted a formula, as per which the current year's printing is valued at 75 percent of the cost. The assessee is also required to reconcile the discrepancy between the number of copies considered for arriving at the closing stock figure of Rs. 4,23,61,003 as per the consolidated stock statement submitted before the Commissioner of Income-tax (Appeals) and the details given before the Assessing Officer. For the aforesaid reasons, we deem it proper to set aside the impugned order of the Commissioner of Income-tax (Appeals) and remit the matter to the file of the Assessing Officer for fresh determination of the issue relating to valuation of closing stock. The Assessing Officer shall consider this issue afresh in accordance with law, after giving reasonable opportunity to the assessee to substantiate its claim with regard to the value of the closing stock, duly reconciling the differences and discrepancies pointed out by the Commissioner of Income-tax (Appeals), as noted above, and in accordance with law. In the result, the assessee's appeal is partly allowed for statistical purposes. The Revenue's appeal I. T. A. No. 595/Hyd/2009 T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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