2022 (8) TMI 782 - AT - Income Tax

Bogus sales promotion expenses - CIT(A) had restricted this disallowance to the extent of 12.5% of the sales promotion expenses - HELD THAT - As perused the contents of the copy of stock register of the assessee reveals is that it is a stock record of various items ranging from Pencil in CD Box, bottle opener, digital diary, Leather folder box and such other several items purportedly used for the purpose of gifting. The items have been recorded as In on the basis of purchase bills and Out on the basis of delivery challans. Both are internal documents of the assessee itself and have no evidentiary value therefore for the purpose of proving that gift items were actually distributed by the assessee. The Out entry, we have noted, also records the branch of the assessee, i.e. Punjab, Indore etc where issued or certain names against it, which the assessee pleads are those of its MR's some of whom have confirmed distributing gifts. Again all of these are of no assistance to the assessee being its own internal recordings and documents. As for confirmation/receipts from dealers receiving gift items, the same we have noted, was examined by the AO who had contended that the veracity of the said documents was not verifiable since they did not bear any address of the recipient. He also pointed out that even the nature of the article gifted was not mentioned in the said receipt. The details of MR's who distributed the gifts also therefore does not establish the fact of gift having been actually distributed by the assessee. These are only self serving documents and no cognizance of the same can be taken for finding whether the assessee had in fact distributed gift articles to its customers/clients. The bills being found bogus by the Ld. CIT(A) which finding has remained unchallenged before us, the stock record being a self serving document, the receipts from recipients of gifts not mentioning the goods received, there is nothing to even suggest what was actually purchased and distributed by the assessee as gift. There is no way to establish in this case that what was purchased was distributed by the assessee as gift. It is impossible to apply any profit theory in this situation, to restrict the disallowance to profit earned thereon, which theory, we have noted from the orders of the Hon'ble High Courts rests on the premise that the sale from the alleged bogus purchases being admitted, the purchases must have been made though from the grey market at comparatively lower rates saving taxes and duties thereon and hence earning extra profits in the process not disclosed in the books. The reasoning of the ld. CIT(A) therefore for restricting the disallowance to the extent of 12.5% of the total expenses is therefore we hold flawed, illogical and not sustainable. Since the ld. CIT(A) has himself found the entire purchases of sales promotion articles from these two parties as bogus, and there is no evidence to prove distribution of these gifts, there is no recourse left but to disallow the entire expenses. We draw support from the findings in this regard, the decision of N.K. Industries Ltd 2016 (6) TMI 1139 - GUJARAT HIGH COURT where in identical set of facts, held that there was no case for restricting the disallowance to a particular percentage and the entire expenses need to be disallowed. Thus we hold that the entire sales promotion expenses pertaining to these two parties M/s. Gajanand Traders and M/s. Devanand Enterprise need to be disallowed and direct the A.O. to do so. - Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance of sales promotion expenses as bogus.
2. Restriction of disallowance to 12.5% of the total expenses by CIT(A).
3. Determination of whether the entire amount of bogus purchases should be disallowed or only the profit element.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Promotion Expenses as Bogus:
The Revenue filed appeals against the orders of CIT(A) disallowing sales promotion expenses incurred by the assessee, which were found to be bogus. The Assessing Officer (AO) disallowed sales promotion expenses amounting to Rs. 85,78,200/- for A.Y. 2011-12, pertaining to transactions with M/s. Gajanand Traders and Devanand Enterprise. The AO's disallowance was based on the finding that these parties did not exist, and the transactions were bogus.

2. Restriction of Disallowance to 12.5% of the Total Expenses by CIT(A):
CIT(A) restricted the disallowance to 12.5% of the total sales promotion expenses, amounting to Rs. 10,72,275/-, and deleted the remaining disallowance of Rs. 75,05,925/-. This decision was based on the premise that the assessee did make purchases for sales promotion, though not from the parties recorded in the books but from other sources, and thus only the profit element embedded in the purchases should be added to the income.

3. Determination of Whether the Entire Amount of Bogus Purchases Should be Disallowed or Only the Profit Element:
The Tribunal noted that the CIT(A) had concurred with the AO's findings that the purchases were bogus. However, CIT(A) based his decision on the assumption that the assessee had made actual purchases from the grey market and distributed the items, thereby restricting the disallowance to the profit element. The Tribunal found this reasoning flawed, as there was no evidence to prove the distribution of these gift items. The stock register and receipts from recipients were considered self-serving documents without evidentiary value. Consequently, the Tribunal held that the entire amount of Rs. 85,78,200/- should be disallowed, aligning with the decision of the Hon'ble Gujarat High Court in the case of N.K. Industries Ltd., where it was held that the entire expenses need to be disallowed in such cases.

Conclusion:
The Tribunal allowed the appeals of the Revenue, directing the AO to disallow the entire sales promotion expenses of Rs. 85,78,200/- for A.Y. 2011-12. This decision applied mutatis mutandis to the subsequent years' appeals, resulting in the allowance of all the Revenue's appeals for A.Y. 2012-13, 2013-14, and 2014-15. The Tribunal pronounced the order in the open court on 22-07-2022.