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2013 (9) TMI 360 - AT - Income TaxRejection of books of account - accounting for scrap - AO rejected the books of account by invoking provisions of Section 145(3) on the plea that method of valuation of closing stock as adopted by the assessee was not within the accepted principle of account - Part Deletion of addition on Difference Between Generation of Scrap and Average Rate of Scrap Sale - Held that:- Periodically when the waste material accumulated, it was sorted out by the shop floor technical persons and segregated - If there was no possibility of using it that material was segregated and entered in the excise register after such segregation and then only it was sold to the scrap dealer - The price varies from item to item as well as material to material. There is a difference in selling price of stainless steel (SS) scrap, mild steel (MS) scrap, copper scrap, tube scrap etc. – no discrepancy was found in the books of account, therefore, the Assessing Officer was not justified in rejecting books of account - After giving detailed reasoning with regard to the quantum of scrap generated and the value for which it can be sold vis-à-vis valuation arrived at by the DVO, after recording detailed finding, as reproduced hereinabove, the ld. CIT(A) deleted the substantial part of the addition on account of scrap sale. - Decided in favor of assessee. The assessee was engaged in business of manufacturing and fabrication of engineering items on the basis of specific orders from its customers - Variety of raw materials were used by the assessee - The valuation of the inventory done by the DVO was much less than the valuation done by the assessee - Even the Assessing Officer has accepted the assessee’s valuation, which clearly show that DVO’s report suffers from inconsistency, mis-classification and defects and discrepancies - Even during course of valuation and assessment proceedings, the assessee has highlighted discrepancies in adoption of valuation rates of various materials including scrap by the DVO, but the same was not taken care of - When no defect was pointed out in the books of account even during the course of scrutiny assessment and when the valuer’s report was not accepted by the Assessing Officer, there was no reason for rejection of books of account u/s 145(3) and the CIT(A) had correctly observed that the Assessing Officer was not justified in rejecting the books of account u/s 145(3) - Even during the course of search, no documents or papers were found by the Assessing Officer to indicate that there was any scrap sale outside the books of account, whereas addition has been made by the Assessing Officer in all the assessment years under consideration on account of unaccounted sale of scrap, which is not only based on the estimate but also without any corroborative evidence - during scrutiny assessment, no addition was made on account of such generation of scrap and sale outside books of account. Disallowance of salary u/s 40A(2)(b) - Excessive salary - Held that:- The disallowance of salary was restricted to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine – Mrs. Irene Valentine was a qualified engineer and experience in business and salary paid to her was commensurate with qualification and the services provided to the assessee company - neither there was excessive payment nor unreasonable payment was made to Irena Valentine looking to her qualification, experience and services so provided to the assessee company. The onus was on the Revenue to show that payment so made were not as per legitimate needs of the business or the benefits derived from such payment, was not according to the services so rendered - the Assessing Officer had disallowed the payment by observing that services rendered by Mrs. Irene Valentine was not substantially proved alongwith the documentary evidence - As per provisions of Section 40A(2)(a), where the assessee incurs any expenditure in respect of which payment has been made to a person referred to in clause (b) of Section 40A(2) - Keeping in to view these findings of CIT(A) vis-à-vis observation of the Assessing Officer, we direct to restrict disallowance of salary to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine. - Decided partly in favor of revenue.
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