2002 (2) TMI 321 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 41,32,250 claimed as advertisement expenses.
2. Disallowance of telephone expenses, car expenses, and car depreciation for non-business purposes.

Detailed Analysis:

1. Disallowance of Rs. 41,32,250 claimed as advertisement expenses:

The assessee, a firm with two partners, had an agreement with the Government of Manipur for the sole distribution of Manipur Government State lotteries across India. Due to the ban on lottery sales in certain states, the assessee entered stockiest arrangements with six parties for distribution in permissible areas. The assessee incurred advertisement expenses, debiting Rs. 41,84,925 to the P&L account, with Rs. 41,32,250 paid to M/s Popular Advertisement Co.

The AO investigated the genuineness of these expenses, noting discrepancies and contradictions in the statements and documentation provided by Shri Naresh Kumar, proprietor of M/s Popular Advertisement Co. These included inconsistencies in residential address, unexplained sources of expenditure, lack of a telephone, contradictions in income tax details, and discrepancies in bank account information. The AO concluded that Shri Naresh Kumar was a "name lender" and disallowed the entire claim of Rs. 41,32,250 as bogus advertisement expenses.

The CIT(A) upheld the AO's disallowance, reiterating the lack of genuineness in the transactions and the expenditure not being for business purposes. The assessee appealed, arguing that the onus under s. 37(1) of the Act was met by proving the expenditure was bona fide and related to the business. The assessee produced certificates from stockists confirming the advertisement work by M/s Popular Advertisement Co., and Shri Naresh Kumar confirmed the transactions and payments through affidavits and personal appearances.

The tribunal examined whether the expenditure was laid out wholly and exclusively for business purposes. The assessee, as the sole distributor with a turnover exceeding Rs. 1,500 crores, had to advertise to boost sales. The tribunal found that the AO's doubts were based on suspicions and conjectures without substantive evidence. The tribunal noted that the payee confirmed the transactions, and the stockists corroborated the advertisement activities. The tribunal held that the assessee had discharged its onus, and the Department failed to provide contrary evidence. Therefore, the claim of advertisement expenses was deemed genuine and allowable.

2. Disallowance of telephone expenses, car expenses, and car depreciation for non-business purposes:

The AO and CIT(A) disallowed 1/10th of the telephone expenses and a part of car expenses and car depreciation, attributing them to non-business purposes. The tribunal, after considering the rival submissions, found the disallowance reasonable and upheld the CIT(A)'s decision, dismissing the grounds of appeal raised by the assessee on this issue.

Conclusion:

The appeal filed by the assessee was partly allowed. The tribunal deleted the addition sustained by the CIT(A) under the head of advertisement expenses, finding the claim genuine and allowable. However, the disallowance of telephone expenses, car expenses, and car depreciation was upheld as reasonable.