1986 (9) TMI 124 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of advertising expenditure claimed by the assessee.
2. Disallowance under section 40A(5) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Advertising Expenditure:
The primary issue in both appeals was whether the advertising expenditures of Rs. 60,000 for the assessment year 1979-80 and Rs. 94,500 for the assessment year 1980-81, claimed to have been paid to Maud Advertising Services and Rita Advertising Agency respectively, were genuine and allowable as business expenditures.

Evidence and Statements:
- Mr. J.D. Fernandes, proprietor of Maud Advertising Services, initially stated on 14-4-1981 that all transactions were genuine. However, later the same day, he claimed these transactions were bogus, admitting to issuing havala bills and returning 90% of the amounts to the assessee.
- Mr. Fernandes' second statement was considered unreliable due to contradictions and lack of corroborative evidence. He admitted to not maintaining regular books of accounts and inflating expenses to cover up clandestine income.
- Mr. Jalan, regional manager of the assessee-company, denied receiving any money back from Mr. Fernandes and asserted that payments were made by account payee cheques.
- Mr. Shankerlal Sinwal, an accountant in the assessee's company, also refuted Mr. Fernandes' claims of returning money.

Commissioner (Appeals) Findings:
- The Commissioner (Appeals) found that the payments were made by account payee cheques and that the withdrawal of 90% of the amounts did not conclusively prove the assessee's complicity in the alleged havala transactions.
- The Commissioner (Appeals) noted discrepancies in Mr. Fernandes' statements and the lack of corroborative evidence, leading to the conclusion that the payments were genuine business expenditures.

Tribunal's Analysis:
- The Tribunal considered the contradictory statements of Mr. Fernandes and the lack of concrete evidence supporting the havala transactions.
- It was noted that the withdrawal of 90% of the amounts could be explained by payments to sub-contractors or other advertising agencies.
- The Tribunal emphasized that unless the assessee-company had knowledge of the bogus transactions, the amounts paid towards advertising could not be disallowed.
- The Tribunal also considered the possibility that Maud Advertising Services could have hired premises from other advertising agencies for performing its services.

Conclusion:
The Tribunal upheld the Commissioner (Appeals) decision, allowing the advertising expenditures of Rs. 60,000 and Rs. 94,500 as genuine business expenditures. The Tribunal also stated that even if the transactions were considered havala, the amounts would still be allowable as trading losses under section 28 of the Income-tax Act.

2. Disallowance under Section 40A(5):
The second issue was the disallowance made by the ITO under section 40A(5) of the Income-tax Act, amounting to Rs. 60,215 for the assessment year 1979-80 and Rs. 1,11,764 for the assessment year 1980-81.

Commissioner (Appeals) Findings:
- The Commissioner (Appeals) set aside the disallowance, referencing the Tribunal's decision in the assessee's case for an earlier assessment year.

Tribunal's Analysis:
- Both parties agreed that the matter was covered by the Tribunal's earlier decision dated 19-7-1984 for the assessment year 1976-77.
- The Tribunal also referenced the Andhra Pradesh High Court decision in CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24 and the Gujarat High Court decision in CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633, supporting the Commissioner (Appeals) decision.

Conclusion:
The Tribunal upheld the Commissioner (Appeals) decision, rejecting the disallowance under section 40A(5) for both assessment years.

Summary:
The Tribunal affirmed the Commissioner (Appeals) orders, allowing the advertising expenditures claimed by the assessee and setting aside the disallowance under section 40A(5). The Tribunal found no conclusive evidence of havala transactions and emphasized the lack of corroborative evidence to disprove the genuineness of the advertising expenditures.