2016 (7) TMI 536 - AT - Income Tax

Genuineness of expenditure - Disallowance of business promotion expenses as revenue expenditure - Held that - The manner in which the transactions has been executed in a regular interval over a period of time clearly gives an impression that these payments were made as well as received back as a part of accommodation to the sister concern. The CIT(A) has demonstrated in its order that the building permission was granted by the HMDA on 25.09.2012 i.e., much later to the MOU giving raise to the purported obligation of sales promotion expenses. We do not find any answer to the purport of incurring such huge expenses as claimed at the stage when the project itself is yet to make any serious headway. The facts do not coincide. The assessee could not support the need for such exorbitant expenditure at the stage when no permission for construction was available at its disposal. Some meager expenditure of ₹ 7.7 lakhs and ₹ 6.06 lakhs have been stated to be actually incurred in the subsequent years. In the circumstances, a mere journal entry and MOU with sister concern to convert advance already lying with the sister concern into revenue expenditure of this magnitude is highly unpalatable. We find ourselves in complete agreement with the observations and findings of the CIT(A) for dismissal of the claim of the assessee. The assessee has neither demonstrated the necessity to incur this expenditure to establish bonafide nor has demonstrated the actual expenditure incurred. Notwithstanding, the aforesaid claim in the nature of revenue expenditure when the project itself has apparently not commenced cannot be approved. - Decided against assessee

Summary

Issues Involved:
1. Disallowance of ?1,50,00,000 claimed as revenue expenditure towards business promotion expenses.
2. Whether the payment was genuinely incurred for business promotion or was an attempt to reduce taxable profits.

Detailed Analysis:

1. Disallowance of ?1,50,00,000 Claimed as Revenue Expenditure:

The assessee, engaged in logistics and real estate development, claimed ?1,50,00,000 as business promotion expenses for the A.Y. 2010-2011. The Assessing Officer (A.O.) disallowed this expense, observing that the amount was paid to M/s. Nivee Property Developers P. Ltd. (NPDPL) by a journal entry on 31.03.2010. The A.O. noted the absence of detailed utilization of the amount and the fact that the property development had not commenced, questioning the necessity of such an expense.

The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the payment was made as per a Memorandum of Understanding (MOU) dated 23.12.2009, which required an upfront payment for business promotion. The assessee argued that the payment was part of a long-term investment and that the project had incurred initial expenses since 2007. However, the CIT(A) found no formal agreement attributing advances to the development project and noted discrepancies in the accounts maintained by NPDPL.

2. Whether the Payment was Genuinely Incurred for Business Promotion:

The CIT(A) confirmed the A.O.'s disallowance, citing several reasons:
- The building permission was obtained in September 2012, questioning the necessity of the payment in 2009.
- The appellant failed to provide details on whether the ?1.5 crores was spent for intended purposes.
- The project was still incomplete, and the journal entry seemed to be made to reduce profits artificially.
- The payment was made from the investment account, indicating a diversion of funds to reduce taxable profits.

The Tribunal upheld the CIT(A)'s decision, agreeing that the transactions between the assessee and NPDPL appeared to be accommodations between sister concerns. The Tribunal noted that the payments and receipts were frequent and resembled a mutual and current account. The Tribunal found no justification for such a significant expenditure when the project had not made substantial progress, and the assessee could not demonstrate the necessity or actual incurrence of the expenses.

Conclusion:

The Tribunal dismissed the appeal, concluding that the assessee's claim of ?1,50,00,000 as business promotion expenses lacked merit. The Tribunal found the expenditure unsubstantiated and an attempt to reduce taxable profits. The order was pronounced in the open Court on 06th July, 2016.