1992 (2) TMI 123 - AT - Income Tax

Assessing Officer Assessment Proceedings Central Excise Rejection Of Accounts Show-cause Notice

Issues Involved:
1. Deletion of addition on account of suppression of production.
2. Disallowance from salary and perquisites of employee-directors under section 40(c) vs. section 40A(5).
3. Allowance of ex-gratia payment as a deduction.
4. Treatment of expenditure on stamp duty as revenue expenditure.

Detailed Analysis:

1. Deletion of Addition on Account of Suppression of Production:
The primary issue revolves around the deletion of an addition of Rs. 15,80,94,850 made by the Assessing Officer (AO) on grounds of alleged suppression of production by showing higher wastage of raw materials. The AO relied on a show-cause notice issued by the Central Excise Department, which alleged that the assessee had suppressed production of Partially Oriented Yarn (POY) by inflating wastage figures. The AO found the percentage of wastage to be abnormally high compared to subsequent years and concluded that the excess wastage represented unaccounted production sold outside the books.

The CIT(Appeals) deleted the addition, accepting the assessee's explanation that the high wastage was due to the initial phase of production, use of unskilled labor, and frequent power failures. The CIT(Appeals) also noted that the physical existence of the wastage was certified by the Central Excise authorities and that the sale of wastage, after payment of excise duty, was not considered by the AO.

The Tribunal upheld the CIT(Appeals)' decision, emphasizing that the AO did not conduct independent inquiries and relied solely on the show-cause notice. The Tribunal found that the high wastage was justified due to the initial production phase, use of DMT as raw material, and power failures. The Tribunal also noted that the physical existence of the wastage was authenticated by the Central Excise Department, and there was no evidence of suppressed production being sold outside the books.

2. Disallowance from Salary and Perquisites of Employee-Directors:
The second issue concerns whether the disallowance from salary and perquisites of employee-directors should be made under section 40(c) or section 40A(5) of the Income-tax Act. The CIT(Appeals) directed the AO to work out the disallowance under section 40(c), which pertains to the remuneration of directors, rather than under section 40A(5), which deals with the expenditure on employees.

The Tribunal found that the matter was covered in favor of the assessee by the decision of the Special Bench of the Tribunal in the case of Geoffrey Manners & Co. Ltd. v. ITO, which held that disallowance should be made under section 40(c). Therefore, the Tribunal rejected the revenue's appeal on this ground.

3. Allowance of Ex-Gratia Payment as a Deduction:
The third issue involves the allowance of an ex-gratia payment of Rs. 3,11,612 as a deduction. The AO disallowed the payment, considering it as a bonus not covered by the provisions of section 36(1)(ii) and section 23 of the Payment of Bonus Act. The CIT(Appeals) allowed the deduction, considering the payment as gratuity to employees who left the service before completing five years.

The Tribunal upheld the CIT(Appeals)' decision, noting that the payments were actual payments made by crossed cheques to employees who left the service before becoming eligible for gratuity. The Tribunal considered the payments as allowable deductions under section 37 of the Income-tax Act.

4. Treatment of Expenditure on Stamp Duty as Revenue Expenditure:
The fourth issue pertains to the treatment of an expenditure of Rs. 1,23,202 incurred on stamp duty and registration charges for the sale of property. The AO disallowed the expenditure, treating it as capital expenditure. The CIT(Appeals) allowed the deduction, considering the expenditure as related to the sale of a business asset, and the surplus was taxed under section 41(2) in the assessment year 1979-80.

The Tribunal upheld the CIT(Appeals)' decision, noting that the expenditure was incurred on the sale of property and not on the purchase. The Tribunal found the decision reasonable and confirmed the order of the CIT(Appeals).

Conclusion:
The Tribunal rejected the revenue's appeal on all grounds, upholding the CIT(Appeals)' decisions regarding the deletion of the addition for suppression of production, the treatment of disallowance from salary and perquisites, the allowance of ex-gratia payment, and the treatment of expenditure on stamp duty as revenue expenditure.

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