2015 (9) TMI 848 - HC - Income Tax

Disallowance made on account of business promotion expenses u/s 37(1) - ITAT deleted the addition - Held that - The Tribunal has recorded a factual finding that most of the items were found from the books of accounts not to be personal expenditure, but to be business promotion expenses. Therefore, the first question of law raised by the Revenue does not arise for consideration in the light of the factual finding that the expenses were found to be business promotion expenses. - Decided against revenue. Diversion of profits - raw material supplied to sister concern were at a lower rate when compared to others - ITAT deleted the addition - Whether the finding of the Tribunal that the disallowance made under Section 40A(2)(b) is not attracted especially when the assessee had supplied its entire product to its sister concerns at exorbitant price thus bring down the profit of the assessee company? - Held that - In this case, the Tribunal found that the only reason as to why the Assessing Officer came to a conclusion about the excessive or unreasonable nature of the expenditure was on the basis that the net profit amounted to only 0.13% of a massive turnover of about ₹ 103 crores. On such a premise, the conclusion that the expenses incurred were excessive or unreasonable could not have been arrived at. This is why, the Tribunal pointed out there are no materials to come to the conclusion that any particular item of expenditure was expensive or unreasonable. - No substantial questions of law raised - Decided against revenue.

Summary

Issues:
1. Disallowance of business promotion expenses under Section 37(1) of the Income Tax Act.
2. Disallowance of additional amount due to supplying raw material to sister concern at a lower rate.
3. Disallowance under Section 40A(2)(b) regarding excessive or unreasonable expenditure.

Issue 1: Disallowance of business promotion expenses under Section 37(1) of the Income Tax Act:
The Tribunal found that the expenses in question were business promotion expenses and not personal expenditure, as contended by the Revenue. Therefore, the Tribunal concluded that the first issue raised by the Revenue did not arise for consideration due to the factual finding that the expenses were indeed related to business promotion.

Issue 2: Disallowance of additional amount due to supplying raw material to sister concern at a lower rate:
The Assessing Officer disallowed an additional amount of Rs. 50 lakhs, alleging that the assessee diverted its profit to its sister concern by supplying raw material at a lower rate. However, the Tribunal found that there were no specific materials to support the conclusion that the expenditure was excessive or unreasonable. The Tribunal highlighted that the Assessing Officer's decision was solely based on the low net profit percentage in relation to the turnover, which was not sufficient to deem the expenses as unreasonable. Consequently, the Tribunal dismissed this issue raised by the Revenue.

Issue 3: Disallowance under Section 40A(2)(b) regarding excessive or unreasonable expenditure:
The Tribunal addressed the disallowance under Section 40A(2)(b) and emphasized that the Assessing Officer's conclusion of excessive or unreasonable expenditure was solely based on the low net profit percentage compared to the turnover. The Tribunal noted that this reasoning was insufficient to establish that the expenses were excessive or unreasonable. Without specific evidence to support the claim of excessive expenditure, the Tribunal held that the disallowance under Section 40A(2)(b) was not justified. Therefore, the Tribunal dismissed the appeal of the Revenue on this issue as well.

In conclusion, the High Court dismissed both appeals by the Revenue as the factual findings by the Tribunal did not give rise to the legal questions raised. The Court reiterated that the expenses in question were found to be business promotion expenses and that the Assessing Officer's conclusions regarding excessive expenditure lacked proper justification. Consequently, the appeals were dismissed, and the connected miscellaneous petition was closed without costs.