2012 (9) TMI 405 - HC - Income Tax

Disallowance of business expenditure - car hire, printing, hire of manpower and sampling and display of the goods dealt - Plea of violation of natural justice - Held that - As repeated opportunities to the appellant assessee to disclose the identity of the said entities and/or to bring them before the AO had yielded no result. Undoubtedly it was the initial burden of the assessee to establish the identity of such persons and/or to produce them to support its claim. The assessee having failed to do so the AO had no alternative but to make enquiries in the bank accounts of those entities to establish their identities. However, such effort also proved futile inasmuch as neither any address was given in the said account opening forms nor there was no introducer to such account. Thus it cannot be said that enquiries made by the inspector in respect of the bank accounts of those entities were in violation of principle of natural justice or caused any prejudiced to the assessee. As the assessee supplied cigarettes for display and sampling but had admitted they had no record of the individual shops where such distributions were made. If that is so, no purpose would be served in remanding the case after a lapse of almost two decades for production of self-same evidence which the assessee expressed inability to produce during the assessment proceeding - the issue as to whether such expenses were necessary or not in terms of the commercial expediency under section 37 (1) would arise only after the assessee had discharged its initial onus to prima facie establish such claim. If the assessee had failed to discharge its primary onus to establish such claim as in the present case, the question as to its commercial expediency does not arise at all - against assessee.

Issues Involved:
1. Justification of the tribunal in restoring the disallowance of business expenditure.
2. Violation of principles of natural justice by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Justification of the tribunal in restoring the disallowance of business expenditure:

The appellant assessee filed a return of income for the assessment year 1994-95, showing a total income of Rs. 15,464,906/-. The Assessing Officer (AO) scrutinized the return and noticed a steep rise in advertisement and sales promotion expenses compared to previous years. The AO questioned the necessity and authenticity of these expenses, particularly since the appellant did not provide a confirmation from its principal, ITC Ltd., regarding the need for such expenditures.

The AO conducted an enquiry and found discrepancies in the claimed expenses for car hire, printing, manpower hire, and sampling/display of goods. The AO disallowed these expenses, totaling Rs. 52,21,367/-, due to insufficient evidence and lack of proper documentation from the appellant.

The appellant appealed to the CIT (Appeals), who set aside the AO's disallowance, noting that payments were made via account payee cheques and the expenses should be considered genuine. The revenue then appealed to the tribunal, which had differing opinions among its members. The Judicial Member suggested a remand for fresh consideration, while the Accounting Member upheld the AO's disallowance, citing the appellant's failure to provide adequate evidence.

The matter was referred to a third member, who upheld the AO's disallowance, emphasizing that the appellant had adequate opportunities to rebut the materials collected against it but failed to discharge its initial onus to establish the claims for deduction.

2. Violation of principles of natural justice by the Assessing Officer:

The appellant argued that the AO violated the principles of natural justice by not providing a copy of the inspector's report and not allowing cross-examination of the persons interrogated by the inspector. The appellant also claimed that the AO conducted enquiries into the bank accounts of the entities behind its back.

The court examined whether the assessment proceedings were conducted fairly and in accordance with natural justice. It was found that the AO had communicated the substance of the inspector's report to the appellant and granted an adjournment to respond. The appellant's reply did not request a copy of the inspector's report or the opportunity to cross-examine the interrogated persons, indicating no prejudice was suffered.

The court concluded that the principles of natural justice were substantially complied with, as the appellant was given ample opportunity to respond to the materials collected against it. The enquiries into the bank accounts were necessary due to the appellant's failure to provide the identities of the entities involved.

The court held that the appellant's plea of violation of natural justice at the appellate stage was belated and an afterthought. The appellant did not suffer any prejudice in the manner the proceedings were conducted, and the remand of the case would serve no worthwhile purpose. The court confirmed the opinion of the third member of the tribunal, dismissing the appeal and answering the question in favor of the revenue.

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