2016 (1) TMI 78 - AT - Income Tax

Ad hoc disallowance of advertisement and sales promotion expenses - Held that - It is undisputed fact that percentage of expenses on advertisement and sales promotion with reference to sale of substantial increase compared to preceding year. In immediate preceding year, these expenses were at 10.96% on sale and in current year it increases at 14.11% on sale. The reply submitted by the assessee further shows that in A.Y. 2006-07 and this ratio has increased at 16.05% but no disallowance has been made by the Assessing Officer. Even the assessee s sale has gone down from ₹ 454 crores in preceding year i.e. 2005-06 to ₹ 412 crores in A.Y. 2006-07. Therefore, there is no correlation between the expenses incurred and sale increased or decreased. The assessee incurred these expenses for penetration of the market and to increase the sale with the help of experts in the line of marketing. It is not necessary that the expert opinion always worked in positive line. The assessee is a multinational company and their share holders are not directly involved in the ordinarily activity of the business of the company. The assessee has submitted all the details of advertisement and sales promotion expenses in CD form and in form of hard copy it was rendering into around 600 pages on for details. Each and every voucher has been maintained by the assessed as there is an audit has been made by the auditor and not qualifying comment had been made by him under this head. The ld Assessing Officer also even not made any addition in A.Y. 2006-07 under this head where the ratio of expenses increased up to 16.05%. In other year also i.e. A.Y. 2007-08 and 2009-10, the ld Assessing Officer has not disallowed any amount from this head on the ground that the assessee had not incurred these expenses wholly and exclusively for the business purposes - Decided in favour of assessee.

Summary

Issues:
Appeal against ad hoc disallowance of advertisement and sales promotion expenses.

Detailed Analysis:

1. Background: The appeal was filed against the order of the CIT(A) confirming the ad hoc disallowance of Rs. 50 lakhs out of advertisement and sales promotion expenses for A.Y. 2005-06.

2. ITAT's Previous Order: The ITAT had set aside the issue to the AO for re-verification due to substantial increase in expenses without a clear explanation. The AO was directed to examine the issue afresh after providing the assessee with an opportunity to be heard.

3. Assessing Officer's Decision: The AO, after providing a fresh opportunity to the assessee, disallowed Rs. 50 lakhs of the claimed expenses. The AO found the increase in expenses unjustified, as complete bills and vouchers were not provided to establish the expenses were wholly and exclusively for business purposes.

4. CIT(A)'s Confirmation: The CIT(A) upheld the AO's decision, noting that the appellant failed to justify the expenses adequately. The percentage of expenses to sales had significantly increased, and the appellant's submissions were considered insufficient to counter the AO's findings.

5. Appellant's Arguments: The appellant argued that complete details of expenses were provided in CD format and hard copy, totaling over 30,000 entries. The appellant contended that all expenses were for business purposes, supported by proper documentation and statutory auditor verification.

6. ITAT's Decision: After considering both parties' contentions, ITAT found the increase in expenses reasonable for market penetration and sales increase. The lack of disallowance in previous years with similar or higher expense ratios supported the appellant's case. The ITAT allowed the appeal, emphasizing the necessity and exclusivity of the expenses for business purposes.

7. Conclusion: The ITAT allowed the appeal, overturning the ad hoc disallowance of advertisement and sales promotion expenses, citing the appellant's detailed documentation and lack of disallowance in previous years with similar expense ratios.

This comprehensive analysis outlines the progression of the case, the arguments presented by both parties, and the final decision of the ITAT in favor of the appellant.