2011 (12) TMI 544 - AT - Income Tax

Allowability of business claim - wholly and exclusively for business claim - expenditure may be incurred voluntarily and without any necessity

Summary

Issues Involved:
1. Disallowance of advertising expenses by the Assessing Officer (AO).
2. Confirmation and modification of the disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Appeals by both the assessee and the Revenue against the CIT(A)'s order.

Issue-wise Detailed Analysis:

1. Disallowance of Advertising Expenses by the AO:
The AO observed that the assessee, engaged in trading hearing aids and allied instruments, claimed advertising expenses amounting to Rs. 2,74,78,793. The AO noted a significant increase in advertising expenses compared to the previous year, with payments made to M/s Buzz Inc. and M/s Ad-Line. The AO disallowed Rs. 1,00,00,000 of these expenses, citing the disproportionate increase and the inability to verify the genuineness of the expenses. The AO relied on the judgment in CIT vs. S.P. Nayak & Ramesh M. Sree Ganesh Transports, which allows the assessing authority to estimate allowable expenditure if the assessee fails to produce cogent evidence.

2. Confirmation and Modification of the Disallowance by the CIT(A):
The CIT(A) reviewed the details of the advertising expenses provided by the assessee and found substance in the AO's findings regarding the significant increase in expenses. However, the CIT(A) disagreed with the quantum of the disallowance made by the AO, deeming it arbitrary. Instead, the CIT(A) restricted the disallowance to 10% of the total advertising expenses, amounting to Rs. 27,47,880, thus granting the assessee a relief of Rs. 72,52,120.

3. Appeals by Both the Assessee and the Revenue Against the CIT(A)'s Order:
Both the assessee and the Revenue appealed to the Tribunal. The assessee argued that the disallowance was made without pointing out any specific defects in the books of accounts or vouchers, which were audited and provided in detail. The assessee contended that the AO's reliance on CIT vs. S.P. Nayak & Ramesh M. Sree Ganesh Transports was misplaced and that ad hoc disallowances based on surmises were contrary to settled legal principles. The Revenue, on the other hand, supported the AO's disallowance, arguing that the significant increase in expenses warranted verification, which the AO found impossible due to the nature of the expenses.

The Tribunal, after hearing both parties, concluded that the AO and CIT(A) had not provided specific reasons or evidence to justify the disallowance. The Tribunal noted that the assessee had provided detailed vouchers and that the AO had not utilized available powers to verify the genuineness of the expenses. The Tribunal emphasized that suspicion without evidence could not justify disallowance and that the AO should have taken steps to verify the expenses if they were in doubt. The Tribunal also referenced settled legal principles that allow the assessee to decide their business expenditures and that such expenditures, if incurred for business purposes, should be allowed under Section 37(1) of the IT Act.

Conclusion:
The Tribunal allowed the assessee's appeal, stating that the disallowance made by the AO and sustained by the CIT(A) was based on general suspicion without specific evidence. The Tribunal dismissed the Revenue's appeal and upheld that the assessee's claim for advertising expenses should be allowed in full.