2021 (8) TMI 562 - AT - Income Tax

Enhancement of assessment - disallowance of sales promotion expenditure - HELD THAT - The implication of proposed action of CIT(Appeals) was brought to the notice of assessee at the time of proceedings before the CIT(A).Therefore, it is not correct to say that the CIT(Appeals) has not issued any show cause notice before making enhancement of disallowance. Since there is no statutory notice prescribed under the Act and the assessee has been allowed full opportunity of hearing before enhancing the addition, there is no illegality in the action of the CIT(Appeals). Law only requires the assessee must be made aware of the proposed action of the CIT(Appeals) in enhancing the addition and explanation to be obtained and considered. In our opinion, the assessee has not brought anything to show that the enhancement of addition as made unilaterally by the CIT(Appeals). Thus, it has to be inferred that the assessee was duly put to notice before making the enhancement of income. Accordingly, this plea of the assessee is rejected. Whether sales promotion expenditure was incurred wholly and exclusively for the purpose of business? - The assessee submitted list of 320 persons stating that they are employees of the assessee company and went to Sri Lanka to launch the product of the company. However, there is no documentary evidence to show that 320 persons are employed by the assessee as the assessee has not filed any appointment orders or any correspondence of these persons stated to be employees of assessee company. We failed to find out names of persons in this bill in the list of 320 persons submitted by the assessee. Further it is to be noted that the assessee has not been able to lead any evidence and explain what is the product launched by the assessee with reference to sales bill raised by the assessee in subsequent sales. There is no evidence about the enquiries received for the product during the course of launch or any product sold in that region subsequent to this launch. In such circumstances, it could not be presumed that the assessee has sold any product in this region where the alleged product launch took place. There is nothing on record to show that any sales increased during this alleged launch of product in Sri Lanka. There does not appear to be any trade practice undertaken by the assessee to launch the assessee s product in Sri Lanka. Since the assessee failed to establish that expenditure was incurred wholly and exclusively for the purpose of business, the same could not be allowed as business expenditure. In the absence of any evidence and material on record, we are of the view that the assessee made attempts to claim some expenditure in Sri Lanka for some obvious purpose as sales promotion expenditure which cannot be allowed. - Decided against assessee.

Issues Involved:
1. Disallowance of sales promotion expenditure.
2. Nexus between the expenditure and the business purpose.
3. Adequacy and reasonableness of the sales promotion expenditure.
4. Enhancement of disallowance by the CIT(Appeals) without statutory notice.
5. Verification of documentary evidence supporting the expenditure.

Detailed Analysis:

1. Disallowance of Sales Promotion Expenditure:
The appellant claimed an expenditure of ?1,04,23,246 towards 'sales promotion,' debited to the Profit and Loss account. The Assessing Officer (AO) allowed only 25% of this expenditure as deduction, treating 75% as preoperative expenses since the business activities commenced on 21.12.2011, and the claimed expenditure appeared excessive for the short period post-commencement. The AO allowed 1/5th of the pre-operative expenses as revenue expenditure, resulting in a net disallowance of ?62,53,938.

2. Nexus Between the Expenditure and the Business Purpose:
The appellant argued that the expenditure was incurred under an agreement with the holding company for marketing and sales promotion, including a sales promotion meeting in Sri Lanka. However, the CIT(Appeals) observed that the function in Sri Lanka had no clear nexus with the appellant's business purpose. The appellant failed to substantiate the specific services rendered by the holding company, and the basis for reimbursing the expenditure at ?350 per point was not established.

3. Adequacy and Reasonableness of the Sales Promotion Expenditure:
The CIT(Appeals) found the sales promotion expenditure disproportionate compared to the total sales turnover. For the year ending 31.03.2012, the appellant's total sales were ?3.85 crores, and the claimed sales promotion expenditure was ?1,04,23,246, accounting for 26.70% of the total sales. The CIT(Appeals) deemed 5% of the sales turnover as a reasonable allowance for sales promotion expenditure, resulting in an allowable amount of ?19,28,480 and an excess disallowance of ?84,94,766.

4. Enhancement of Disallowance by the CIT(Appeals) Without Statutory Notice:
The appellant contended that the enhancement of disallowance by the CIT(Appeals) amounted to an illegal enhancement of assessment without statutory notice. However, it was noted that the CIT(Appeals) had brought the proposed action to the appellant's notice during the proceedings, and the appellant had been given a full opportunity to present its case. Therefore, the enhancement was deemed legal and valid.

5. Verification of Documentary Evidence Supporting the Expenditure:
The appellant failed to provide sufficient documentary evidence to substantiate the claimed expenditure. The CIT(Appeals) and the tribunal noted inconsistencies and lack of evidence regarding the specific activities, services rendered, and the genuineness of the expenses. The appellant could not demonstrate that the expenditure was incurred wholly and exclusively for business purposes. The tribunal observed that the evidence provided, such as hotel and car hire bills, did not correlate with the claimed business activities, and there was no proof of increased sales or successful product launch in Sri Lanka.

Conclusion:
The tribunal upheld the CIT(Appeals)'s decision to disallow the excessive sales promotion expenditure, rejecting the appellant's grounds of appeal. The appeal was dismissed, and the enhancement of disallowance by the CIT(Appeals) was confirmed as valid and justified. The appellant failed to establish the business purpose and genuineness of the claimed expenditure, leading to the conclusion that the expenditure was not incurred wholly and exclusively for business purposes.

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