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2021 (6) TMI 204 - AT - Income TaxDisallowance made out of marketing, sales and distribution expenses - CIT-A deleted the addition - HELD THAT - There is no dispute about the basic fact that the assessee had indeed paid the impugned sum to its sister concern and that too, without even applying for the relevant sanction containing the approval dated 4.1.2012 qua to the period of 4 years from 7.7.2010 to 31.3.2014 only whereas we are in FY 2009-10 having accounting period up to 31.3.2010. CIT(A) s impugned reasoning is not found to be sustainable therefore. Coupled with this, there is also no material as to whether the assessee had in fact applied for the necessary approval regarding its transactions/payments to its sister concern executed between 1.4.2009 to 31.3.2010. We thus find no reason to uphold the CIT(A) s impugned reasoning to this effect. This Revenue s argument is accepted in principle. Yet another equally important aspect of interplay of section 292/ 297 of the Companies Act vis- -vis sec.40A(2)(b) of the Act dealing with expenses or payments made to the interested parties. It is not in dispute that this issue has nowhere been examined. The same is restored to the CIT(A) therefore to be adjudicated afresh within three effective opportunities of hearing. Revenue s appeal accepted for statistical purposes. CIT(A) s action upholding the disallowance relevant to the current year and not related to FY 2009-10 on account of its failure in filing the corresponding details in remand proceedings - Assessing officer had disallowed an amount @ 20% as claimed at assessee s behest. The CIT(A) s lower appellate order under challenge has resulted in enhancement thereof in above terms; and that too, without even issuing corresponding notice stipulated in sec.251 (1)(a) of the Act. We thus reverse the CIT(A) s impugned directions and restrict the impugned disallowance to the extent of ₹ 21,45,440/- only in these facts and circumstances. Assessee s cross appeal partly accepted.
Issues Involved:
1. Disallowance of marketing, sales, and distribution expenses. 2. Enhancement of disallowance without issuing a corresponding notice. 3. Verification exercise resulting in enhancement of disallowance. Detailed Analysis: 1. Disallowance of Marketing, Sales, and Distribution Expenses: The primary issue revolves around the disallowance of ?17,35,51,214/- incurred by the assessee towards marketing, sales, and distribution expenses paid to its sister concern, Inbev India International Pvt. Ltd. The Assessing Officer disallowed this expenditure due to the lack of prior approval from the Central Government as mandated by Section 297 of the Companies Act, 1956. The assessee argued that the expenses were necessary for business operations and that the approval was a technical formality which was later rectified. The CIT(A) deleted the disallowance, reasoning that the non-approval was a technical issue and considering the post facto approval received on 04.01.2012. The CIT(A) relied on the Delhi ITAT's ruling in Jain Surgicals Ltd. Vs. ACIT, which stated that procedural non-compliance does not render the expenditure unlawful if it is otherwise lawful and not prohibited by law. However, the Tribunal found the CIT(A)’s reasoning unsustainable, noting the lack of evidence that the assessee had applied for the necessary approval for the transactions during the relevant period (FY 2009-10). The Tribunal accepted the Revenue's argument in principle and restored the matter to the CIT(A) for fresh adjudication, considering the interplay of Section 297 of the Companies Act vis-à-vis Section 40A(2)(b) of the Income Tax Act. 2. Enhancement of Disallowance Without Issuing a Corresponding Notice: In the assessee’s cross appeal for AY 2010-11 (ITA 632/Hyd/17), the issue was the CIT(A)’s action in upholding the disallowance of ?64,09,908/- relevant to the current year and ?4,226/- not related to FY 2009-10. The Assessing Officer had initially disallowed ?21,45,440/- @ 20% of ?1,07,27,201/- claimed by the assessee. The CIT(A) enhanced the disallowance without issuing the mandatory notice under Section 251(1)(a) of the Act. The Tribunal reversed the CIT(A)’s directions and restricted the disallowance to ?21,45,440/-. 3. Verification Exercise Resulting in Enhancement of Disallowance: For AY 2011-12 (ITA 633/Hyd/17), the CIT(A)’s verification exercise led to the enhancement of the disallowance from ?9,37,270/- to ?44,24,555/- out of the total amount of ?2,26,42,910/-. The Tribunal directed the Assessing Officer to restrict the disallowance to ?9,37,270/-. Conclusion: - Revenue’s appeal ITA 589/Hyd/2017 is allowed for statistical purposes. - Assessee’s appeals ITA Nos. 632 and 633/Hyd/2017 are partly allowed. - The CIT(A) is to re-adjudicate the issues within three effective opportunities of hearing. Pronounced in Open Court on 28th May, 2021.
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