2012 (1) TMI 256 - AT - Income Tax

Addition of advertisement expenses - Held that - AO is not justified in disallowing 30% of the advertisement expenses

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of low gross profit margin.
2. Deletion of addition made by the Assessing Officer on account of advertisement expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Low Gross Profit Margin:

The Revenue's appeal contested the deletion of an addition of Rs. 1,36,64,513/- made by the Assessing Officer (AO) due to a low gross profit (GP) margin. The AO noted the assessee's GP for the year was 33.9%, significantly lower than previous years (49.01% in AY 2001-02, 45.79% in AY 2002-03, and 38.98% in AY 2003-04). The AO attributed the GP decline to various factors, including increased raw material costs and changes in product mix, but found these explanations insufficient. The AO made an addition of 2.8% of sales, amounting to Rs. 1,03,00,744/-, and after considering disallowed expenses, a net addition of Rs. 69,33,898/-. For AY 2004-05, the AO added 3.87% of sales, totaling Rs. 1,36,64,513/-.

The assessee appealed, and the learned CIT(A) deleted the addition, stating the GP estimation was solely based on previous years' findings, which were not upheld by the predecessor. The Tribunal noted that since the issues for AY 2003-04 were restored to the AO for fresh adjudication, the same should apply for AY 2004-05. Thus, the issue was restored to the AO for fresh adjudication, and the ground raised by the Revenue was allowed for statistical purposes.

2. Deletion of Addition on Account of Advertisement Expenses:

The AO disallowed 30% of the advertisement expenses (Rs. 5,90,85,614/-), amounting to Rs. 1,77,25,684/-, on the grounds that part of the expenses created brand value for "Rasna" (capital in nature) and benefited other manufacturers of Rasna products. The AO argued that these expenses were not wholly and exclusively for the assessee's business.

The assessee appealed, and the learned CIT(A) deleted the addition, citing decisions from the Mumbai and Delhi Benches of ITAT. The CIT(A) emphasized that Section 37 of the IT Act allows expenses incurred wholly and exclusively for business purposes, and the AO's interpretation added an unnecessary "necessarily" condition. The CIT(A) referred to cases like Star India (P) Ltd. and Nestle India Ltd., where similar disallowances were overturned, establishing that expenses benefiting both the assessee and third parties could still be deductible if incurred for the assessee's business.

The Tribunal upheld the CIT(A)'s order, noting the Revenue did not provide contrary decisions. Thus, the ground raised by the Revenue was dismissed.

Conclusion:

The Tribunal's judgment resulted in the Revenue's appeal being partly allowed for statistical purposes. The issue of low gross profit margin was remanded to the AO for fresh adjudication, while the deletion of the addition on advertisement expenses was upheld. The order was pronounced on 31-01-2012.