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TMI Blog2012 (10) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee was picked up for scrutiny by issuing notice under S.143(2) of the Act. In the course of scrutiny, the Assessing Officer noticed that the assessee has claimed expenditure of ₹ 3,93,061 towards commission payment to non-whole time directors. The Assessing Officer further noticed from the annual report that commission to Director 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 payment, not being contractual, its allowability h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 6. 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. 7. 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 15,5,2002, which has been extracted in the impugned order of the CIT(A) provides for payment of remuneration/commission not exceeding 1% 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 nonwhole time director. The assessee has not produced any evidence before the lower aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dd 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 31.03.2005 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 copies. 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." 10. The Assessing Officer was not convinced with the explanation of the assessee. As the assessee did not furnish the details with the titles, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Mach pertains to the current year's printing, the stock is valued at 75% 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% 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% of the previous year's printing. 4) In addition, proportionate direct expenses pertaining to the full salaries of our Production personnel and fifty percent of the salaries of our Editorial personnel are taken into account while arriving at the valuation of our stock." 12. It was submitted by the assessee that a rider to the formula adopted for valuation of stock is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) also noticed that before the assessing officer, the assessee has submitted that the assessee has considered 63,28,674 copies covering 2445 titles for the purpose of valuation of closing stock arrived at ₹ 4,23,61,003. However, in the consolidated stock statement furnished at the first appellate stage, the closing stock valuation of ₹ 4,23,61,003 was shown to be for 26,18,572 number of books,. Due to the aforesaid differences and discrepancies, the CIT(A) 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 CIT(A) further did not consider the method adopted by the assessing officer to value the closing stock to be proper, since the assessing officer has presumed that the opening stock of the goods, are still lying with the assessee and the remaining closing stock alone is out of the current year's production. The CIT(A) also held that the assessing officer was not justified in adopting the average price of ₹ 4.28 in respect of opening stock and average price of ₹ 6.13 in respect of the closing stock when the stock with the assessee comprises of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tles printed about two years back, before the CIT(A), the assessee has submitted a different method of valuation, as per which stocks relating to current year's printing is valued at 75% of the cost, stock relating to previous year's printing is valued at 25% of the cost, and the stock relating to more than two years back is valued at 15% 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 fact that before the assessing officer, the assessee has stated the valuation of 63,28,674 copies at ₹ 4,23,61,003, whereas in the consolidated stock statement, the assessee has shown 26,18,572 copies for valuation of closing stock at the same figure of ₹ 4,23,61,003. The CIT(A) has also referred to specific instances of titles, which though were printed during the current year, while valuing the closings stock, the assessee has taken lesser number of books than what is actually available in stock. In the case of the title 'A Magic Place Teacher's Book', though the entire tock was printed during the current previous year, while valuing the closing stock, the assessee has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th regard to the value of the closing stock, duly reconciling the differences and discrepancies pointed out by the CIT(A), as noted above, and in accordance with law. 19. In the result, assessee's appeal is partly allowed for statistical purposes. REVENUE'S APPEAL ITA No.595/Hyd/2009 20. The only grievance of the Revenue in this appeal, as already noted above, relates to the relief granted by the CIT(A) in the matter of the addition made by the assessing officer on account of valuation of closing stock. In view of our decision on this very issue while dealing with the grounds of the assessee in relation to this very issue, whereby we have set aside the issue to the file of the assessing officer for fresh adjudication in accordance with law, after giving reasonable opportunity of hearing to the assessee, the grounds of the Revenue in this appeal need no separate adjudication, and they are also treated as allowed for statistical purposes. 21. In the result, Revenue's appeal is allowed for statistical purposes. 22. To sum up, while the assessee's appeal, ITA No529/Hyd/2009, is partly allowed for statistical purposes, Revenue's appeal, ITA No.595/Hyd/2009, is allowed for statist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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