1997 (9) TMI 141 - AT - Income Tax

Issues Involved:
1. Claim of bad debt of Rs. 9,18,750.
2. Addition of Rs. 8,68,941 on account of disallowance of washing loss and valuation of closing stock.
3. Disallowance of Rs. 2,65,400 claimed under the head commission and service charges on exports.
4. Disallowance of interest of Rs. 95,906.
5. Disallowance of Rs. 3,09,330 u/s 40A(2).
6. Disallowance of Rs. 14,375 u/s 37(2).

Summary:

1. Claim of Bad Debt of Rs. 9,18,750:
The assessee firm wrote off Rs. 9,18,750 as a bad debt due to non-payment by Rajasthan Export House (REH) for a salt shipment to Mauritius. The AO doubted the genuineness of the transaction, citing unsigned contracts and lack of legal action for recovery. However, the CIT(A) found the transaction genuine based on voluminous documentary evidence and allowed the bad debt claim, considering the debt irrecoverable and written off in the accounting period relevant to asst. yr. 1987-88.

2. Addition of Rs. 8,68,941 on Account of Disallowance of Washing Loss and Valuation of Closing Stock:
The AO disallowed a portion of the washing loss claimed and revalued the closing stock, resulting in an addition of Rs. 8,68,941. The CIT(A) deleted the addition, accepting the method of valuation consistently followed by the assessee and finding the washing loss reasonable compared to previous years. The CIT(A) also noted that the valuation of deteriorated stock at Rs. 10 per MT was justified.

3. Disallowance of Rs. 2,65,400 Claimed Under the Head Commission and Service Charges on Exports:
The AO disallowed the commission payment to Deepa Clearing Agency, doubting the genuineness of the services rendered. The CIT(A) deleted the disallowance, finding that the services were genuinely rendered, and the payment was justified as service charges for shipment.

4. Disallowance of Interest of Rs. 95,906:
The AO disallowed interest on borrowings, citing interest-free advances to related concerns and negative capital accounts of partners. The CIT(A) deleted the disallowance, noting no direct nexus between borrowings and interest-free advances and finding that the interest-bearing funds were used for business purposes.

5. Disallowance of Rs. 3,09,330 u/s 40A(2):
The AO disallowed the excessive amount paid for salt purchased from sister concerns, invoking s. 40A(2). The CIT(A) deleted the disallowance, accepting the assessee's explanation that the purchase was necessary to meet export commitments and the rate was justified given the circumstances and quality requirements.

6. Disallowance of Rs. 14,375 u/s 37(2):
The AO disallowed hotel expenses, treating them as entertainment expenses. The CIT(A) deleted the disallowance, accepting the explanation that the expenses were for auditors and salt brokers' stay, incurred wholly for business purposes. However, the Tribunal restored the AO's disallowance, finding the expenses caught by the mischief of Expln. 2 to sub-s. (2A) of s. 37.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, specifically restoring the disallowance of Rs. 14,375 u/s 37(2).

← Previous Next →