ORDER
N.K. Karhail, J.M.
These are the cross-appeals filed by the assessee and the revenue against order dated 1-8-1996, passed by the Commissioner (Appeals)-II, Agra for assessment year 1993-94.
2. We first take the appeal of the assessee.
3. The grounds of appeal read as under :
“(1) Because the learned Commissioner (Appeals)-II, Agra, has ened in law as well as on facts in. applying gross profit rate at 15.25 per cent as against 13.64 per cent shown by the appellant-firm.
(2) Because in view of the comparative cases GP rate which being lower than shown by the appellant-firm, the application of GP rate at 15.25 per cent on the enhanced turnover is wrong and unjustified.”
4. Briefly stated, facts are that the assessee carries on the business of manufacturing and sale of generators and alternators. In the Trading and P&L a/c, the assessee had shown sales of Rs. 88,82,885, spare parts purchases at Rs. 73,70,185 and opening stock of Rs. 23,726 and closing stock of Rs. 1,22,645 and the GP rate had been worked out at Rs. 12,12,321 which gave a GP rate of 13.65 per cent. The assessing officer examined the past results of the assessee as below :
Asst. Yr.
Sales
GP
GP rate
1993-94
88,82,885
12,12,321
13.65 %
1992-93 (II Pd.)
15,15,549
5,41,427
35.72 %
1992-93 (1st Pd.)
64,14,582
6,40,697
9.99%
1991-92
61,312,078
9,35,630
15.26%
5. Thus, he noticed that there was a drastic fall in GP rate as compared to the GP rate of 2nd period. The assessment of assessment year 1992-93 was not made under section 143(3) of the Income Tax Act, 1961. ‘thus, the assessee was required to explain why the books of account may not be rejected since (a) the quantitative details of consumption (of raw material) and production have not been filed (b) no stock register of consumption of spares was maintaiied and (c) the stock was not verifiable from any records. The assessee was also required to justify the profit rate shown. The basis of closing stock was also required to be given. The assessing officer also mentioned that the assessee had not maintained any record of consumption of spare parts, which was a major part of the expenditure of trading account nor any day-to-day production record has been maintained. The assessing officer, after having considered the explanation of the assessee in this regard, rejected the books of accounts of the assessee under section 145(2) of the Act. The assessing officer further mentioned that the assessee had shown GP rate of 35.72 per cent in the second period of assessment year 1992-93 when the turnover was Rs. 15, 15,549 and the GP rate at 15.26 per cent had been shown in the assessment year 1991-92 on total sales of Rs. 61,32,078. Since no assessment under section 143(3) of the Act was made for assessment year 1992-93, GP rate shown in the first period was not being considered. The assessing officer applied the GP rate of 30 per cent and estimated sales of Rs. 90,00,000 which gave a GP of Rs. 27,00,000 as against Rs. 12,12,321 shown by the assessee. Thus, he made addition of Rs. 14,87,679 to the trading account.
6. On appeal the learned Commissioner (Appeals) has held thus :
“On consideration of submissions, I find that the assessing officer was not justified in applying GP rate of 30 per cent on the basis of 2nd part of the assessment year 1992-93 for which it was duly explained before him that the abnormal GP was earned due to lower valuation of closing stock of 1st period which resulted in higher profits in 2nd period and for assessment year 1993-94, there was no opening stock of finished goods as all the finished goods which were received in the 2nd period relevant to assessment year 1992-93 were disposed of in that year itself. Furthermore, he failed to consider the explanation that items were manufactured as per specifications of consumers which were sold at higher price in 1992-93 (2nd part). He could have at the most applied the normal GP rate earned which ranged between 14.3 per cent in 1990-91 and 15.25 per cent in 1991-92 and 14.9 per cent (overall) in assessment year 1992-93 in the case of the appellant himself. I, therefore, direct him to apply GP rate of 15.25 Per cent (maximum earned in assessment year 1991-92) on estimated sales of Rs. 90 lakhs as done by him and work out the addition accordingly.”
7. Before us the learned counsel for the assessee has submitted that the assessee has maintained stock tally in respect of major spares consumed as also finished goods namely generators and alternators. It is not possible to maintain a stock tally for each and every item as there are innumerable parts used in the manufacture of end product. The assessee has been following the same system of accounting and results declared stand accepted more or less. He has further submitted that the assessee has duly maintained finished goods register and production register in the shape of stock register. Day-to-day purchase and sales were also recorded in purchases and sales journals and ledger which are duly verifiable with reference to vouchers for purchases and sales. He has further submitted that the decline in GP was duly explained and was justified. Further, the assessing officer without citing any comparable cases, agreed to apply GP rate shown in the 2nd part of the relevant assessment year 1992-93 which was shown at abnormal and excessive rate due to specific circumstances and special reasons. Whereas overall GP for that year for the single assessment that has been completed for two periods has worked out to only 14.9 per cent the assessing officer wrongly applied GP rate of 30 per cent shown in the second period relevant to assessment year 1992-93. According to the learned counsel, the GP rate applied by the learned Commissioner (Appeals) at 15.25 per cent on enhanced turnover is also not justified keeping in view the facts and circumstances of the case,
8. On the other hand, the learned Departmental Representative has submitted that the assessing officer was justified to apply GP rate of 30 per cent as the assessee himself had shown GP rate of 35 per cent for the second period of immediately preceding year, i.e., 1992-93, and for that year no assessment was made under section 143(3) of the Act. Thus, he has supported the order passed by the assessing officer and has urged that the order of the Commissioner (Appeals) may be set aside and that of the assessing officer be restored.
9. We have heard the parties and perused the records of the case. The perusal of the comparable case as extracted at p. 5 of Commissioner (Appeals)’s order shows that for the year under consideration the assessee has shown the lower GP rate of 13.65 per cent. The GP shown, by the assessee as compared to its own case for earlier year is also on lower side. The defects pointed out by the assessing officer justified the rejection of books of accounts. However, we find that the learned Commissioner (Appeals) has assigned justifiable reasons in directing to apply the GP of 15.25 per cent on estimated sale of Rs. 90 lakhs made by the assessing officer. In the facts and circumstances of the case, we find no reason to interfere with the impugned order passed in this regard. We therefore, uphold the same.
10. Now we take the appeal of the revenue.
11. The first ground of appeal states that the learned Commissioner (Appeals) has erred in law and on facts in reducing the GP rate of 30 per cent applied on estimated sales to 15.25 per cent, thereby giving a relief of Rs. 13,27,499, without appreciating the fact that the assessee himself had shown a GP rate of 35 per cent for the second period of the immediately preceding assessment year 1992-93 and that the case for assessment year 1992-93 was only processed under section 143(l)(a) and no assessment was made.
12. For the reasons stated in the assessee’s appeal in this regard, we dismiss this ground of appeal of the revenue.
13. The second ground of appeal states that the learned Commissioner (Appeals) has erred in law and on facts in deleting interest of Rs. 1, 17,600 without appreciating the fact that the assessee had failed to prove the genuineness of the loans received from various creditors.
14. Briefly stated, facts are that the assessing officer noted that the assessee has shown a sum of Rs. 9,80,000 on account of loans. No confirmations of these loans were available on file nor any confirmations had been filed during the course of assessment proceedings. Hence, interest debited on account of these loans which amounted to Rs. 17,600 were disallowed and added to the income of the assessee.
15. On appeal before the Commissioner (Appeals), it was submitted that the assessing officer wrongly held that no confirmations were filed. In fact there were no new loans and these pertained to the period 1983-89 and earlier years when these were duly examined. Thus, the learned Commissioner (Appeals) has held that the assessing officer had acted on whims in making the disallowance. Hence, he directed to delete the same.
16. We after having heard the parties, find no infirmity in the order passed by the Commissioner (Appeals) inasmuch as the revenue has placed no material to rebut that these loans pertained to the year under consideration and not to the period prior to the year under consideration. In view thereof, we uphold the order passed by the Commissioner (Appeals).
17. The ground No. 3 states that the learned Commissioner (Appeals) has erred in law and on facts in allowing relief of Rs. 9,694 out of salary paid to one of the partners without appreciating the fact that it attracted the provisions of section 40A(2) of the Income Tax Act, 1961.
18. Briefly stated, facts are that a sum of Rs. 48,472 were debited as remuneration to the partners. The assessing officer noted that one of the working partners has been allowed remuneration of Rs. 19,389 (Shri G.K. Agarwal) whereas the other partner Shri A.K. Agarwal had been allowed remuneration of Rs. 29,083. The assessee was, therefore, required to justify this in view of the provisions of section 40A(2) of the Act. The assessing officer after having considered the explanation of the assessee in this regard held that the assessee has not justified the extra payment of remuneration to’Shri A.K. Agarwal, nor the details of extra work done by him were filed. Since salary of Rs. 19,389 had been paid to Shri G.K. Agarwal, out of the salary of Rs. 29,083 debited in the name of Shri A.K. Agarwal, a sum of Rs. 9,694 was disallowed under section 40A(2) of the Act and added to the income of the assessee.
19. On appeal before the Commissioner (Appeals), it was submitted that as per terms of the partnership deed read with provisions of section 40(b)(iv) and (v) as amended with effect from 1-4-1992, the remuneration paid to Shri A.K. Agarwal was justified. It was further submitted that the said partner was looking after the production and sales whereas the other partners who had been paid lesser salary was looking after general administration. Therefore, the salaries could not be compared in view of different nature of duties performed. The learned Commissioner (Appeals), after having considered the facts and submissions of the assessee, found that the assessing officer had not given cogent reasons for making the disallowance. Hence, he directed to delete the same.
20. We have hpard the parties and perused the records of the case. The issue whether section 40A(2) has application to a case of remuneration paid to working partners which is governed by section 40(b)(v) of the Act came up for consideration before the Tribunal, Ahmedabad Bench, in the case of Chhajed Steel Corporation v. Assistant Commissioner (2001) 77 ITD 419 (Ahd) has held thus
“It is thus clear from the above decisions that section 40(b) and 40A(2) are/were operating in different fields. In the light of total prohibition under section 40(b) on the allowance of salary, bonus, commission, etc. to the partner by the firm, the other provision of section 40A where reasonableness and market value of services offered would apply only in a field or cases where section 40(b) had no application. Therefore, it is not right to contend that provision of section 40A must override provisions of section 40(b) of the Income Tax Act. The provisions of section 40(b) were amended by Finance Act, 1992 with effect from 1-4-1993 and remuneration paid by a firm to its working partner has been allowed as a deduction provided it is within the limit prescribed. The relevant sub-clause (v) of clause (b) of section 40 is as under.”
21. The Ahmedabad Bench has further held as under :
“In the light of language and context of the provision introduced with effect from 1-4-1993, there is no scope to argue that assessing officer has power to go into the question of reasonableness of remuneration paid to a partner. Of course, he can only examine whether the remuneration paid is not exceeding the prescribed limits of the book profit. But he has no power to scale it down from the above percentage by saying that working partner did not render services to earn profit. of the partnership. Accordingly, we hold that provision of section 40A had no application to a case governed by section 40(b) of the Income Tax Act. This intention is more clearly manifested after amendment of above provision with effect from 1-4-1993. Even otherwise, section 40(b) is applicable only to the payment made by a firm to its partner whereas provision of section 40A(2) is of general nature applicable to several situations. It is settled law that a special provision governing a special situation has to be applied when that situation arises and not a general provision which governs several fields.
It is, however, true that for getting deduction of remuneration paid to partner, the following condition’s must be satisfied:
(i) The partner entitled to remuneration must be a working partner.
(ii) The payment of remuneration should be authorised.by terms of partnership deed for the period for which remuneration is claimed.
(iii) The remuneration should not exceed the amount provided in the provision.
22. In view of the above decision of Ahmedabad Bench, we are of the view that the matter needs to be examined in the light of the observations made by Tribunal, Ahmedabad Bench. We, therefore, set aside the impugned order and restore the same to the file of assessing officer who may examine and decide the issue in view of the decision given by the Ahmedabad Bench in the case of Chhajed Steel Corporation (supra).
23. The fourth ground of appeal states , that the learned Commissioner (Appeals) has erred in law and on facts in giving a relief of Rs. 25,472 in the operative portion of the order, completely ignoring the fact that no finding, whatsoever, has been given in the body of the order of the learned Commissioner (Appeals).
24. During course of hearing it was pointed out that the Commissioner (Appeals) has shown the figure of Rs. 25,472 as the, relief allowed by her in the impugned order. However, there has been, no discussion for allowing the same. In the circumstances, we set aside the impugned order and restore . to the file- of Commissioner (Appeals) who may examine the matter afresh after affording reasonable opportunity of being heard to the assessee.
25. The fifth ground of appeal states that the learned Commissioner (Appeals) has erred in law and on facts in deleting a sum of Rs. 26,772, completely ignoring the fact that the actual addition made by the assessing officer on account of petrol expenses and depreciation amounted to Rs. 2,677 only.
26. Briefly stated, facts are that a sum of Rs. 10,706 were debited on account of petrol expenses. The assessing officer disallowed 1/4th of the said expenses on account of personal use of the vehicle by partners and also disallowed 1/4th of depreciation on vehicle for the same reason. Thus, the actual addition made on account of petrol expenses and depreciation amounted to Rs. 2,677 whereas the learned Commissioner (Appeals) in the impugned order has given relief of Rs. 26,772. As this figure found place in the operative portion of allowing relief to the assessee, there appears to be typographical error. Therefore, we direct to rectify this mistake accordingly. This issue is also set aside to the file of Commissioner (Appeals) for necessary rectification.
27. In the result, appeal of the assessee is dismissed and that of the revenue is partly allowed for statistical purposes.