2016 (8) TMI 760 - AT - Income Tax

Disallowance on account of Sales Promotion expenses - Held that - Since the transactions are recorded in the books of accounts of the assessee, unless there is a fact to contradict such transactions, disallowances cannot be made on the basis of certain assumptions. It is a normal practice in business that expenses are incurred as incentive to the dealers against bulk orders to push sales. Such endeavor of the assessee can be seen as successful in increase of the turnover. The action of the AO to make the addition just for the sake of the addition ignoring all the material facts brought into the assessment proceedings by the assessee is not justified and hence addition made was deleted and this ground of appeal was allowed. In view of the aforesaid discussions and precedent relied, we are of the considered view that transactions were recorded in the books of accounts of the assessee and unless there is a fact to contradict such transactions, the disallowance cannot be made on the basis of assumptions. Moreover, it is noted that it is a normal practice in the business that expenses are incurred as incentive to the dealers against bulk orders to push sales which can be seen from the increase turnover of the assessee. Therefore, the Ld. First Appellate Authority has rightly deleted the addition in dispute and there is no need to interfere in the well reasoned finding given by the ld. First Appellate Authority, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute and decide the same in favour of the Assessee and against the Revenue. Addition u/s. 40A(2)(b) - Held that - Nature of transaction is genuine and in the absence of any revenue loss, and rightly deleted the disallowance by passing a well reasoned order which does not need any interference on our part, hence, we uphold the same. Accordingly, this ground raised by the Revenue is decided in favour of the Assessee and against the Revenue.

Summary

Issues Involved:
1. Deletion of disallowance of ?4,21,394/- on account of Sales Promotion expenses.
2. Deletion of disallowance of ?1,07,87,411/- under Section 40A(2)(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of ?4,21,394/- on account of Sales Promotion expenses:

The Revenue contested the deletion of ?4,21,394/- made by the Assessing Officer (AO) on account of Sales Promotion expenses. The AO noted that the assessee incurred these expenses without any purchase of gift items as reflected in the bank book. The assessee explained that these expenses were incurred as per business and management decisions to increase sales. However, the AO did not accept this explanation due to the absence of evidence regarding the genuineness of the claim and added the amount as unexplained expenses.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that the AO had not brought any contrary facts. The CIT(A) relied on the case law of Upper India Publishing House Vs. CIT, which stated that whether payment is excessive or reasonable is a question of fact. The CIT(A) noted that the transactions were recorded in the books of accounts of the assessee and disallowances cannot be made based on assumptions. The CIT(A) further observed that it is normal in business to incur expenses as incentives to dealers against bulk orders to push sales, which was evident from the increased turnover of the assessee.

The Tribunal upheld the CIT(A)'s order, agreeing that the transactions were recorded in the books of accounts and there was no contrary fact to disallow the expenses. It was also noted that such expenses are common in business to incentivize dealers and push sales. Thus, the deletion of the addition was justified, and the ground was decided in favor of the assessee and against the Revenue.

2. Deletion of disallowance of ?1,07,87,411/- under Section 40A(2)(b) of the Income Tax Act, 1961:

The AO noted that the auditors mentioned a payment of ?1,07,87,411/- as rebate and discount to a sister concern of the assessee, M/s Media Industries Ltd. The assessee submitted that these expenses were incurred as per commercial expediency to increase sales and similar rebates and discounts were offered to other dealers. The assessee also argued that there was no advantage in transferring profit from one company to another when both were earning profit and paying tax at the same maximum marginal rate.

The CIT(A) deleted the disallowance, noting that the assessee had provided documentary evidence justifying the expenses. The AO did not ascertain the Fair Market Value (FMV) of the services to establish that the payments were unreasonable. The CIT(A) emphasized that the intention behind Section 40A(2)(a) is to prevent tax liability reduction by diverting business profits to related parties. Since both companies were paying tax at the same rate, there was no tax evasion plan. The CIT(A) relied on judicial pronouncements, including the case of CIT Vs. Gautam Motor and Glaxo Smith Kline Asia Pvt. Ltd., which supported the deletion of the disallowance in the absence of revenue loss and genuine transactions.

The Tribunal upheld the CIT(A)'s order, agreeing that the AO did not provide evidence to prove the payments were unreasonable. The Tribunal noted that the intention behind Section 40A(2)(a) is to prevent tax evasion, which was not evident in this case. Both companies were paying tax at the same rate, and the transactions were genuine. The Tribunal also cited the case of CIT Vs. Excel Industries Ltd., where it was held that the AO should be pragmatic and not pedantic. Thus, the deletion of the disallowance was justified, and the ground was decided in favor of the assessee and against the Revenue.

Conclusion:

In conclusion, the Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s order on both issues. The deletions of the disallowances were justified based on the genuineness of the transactions, the absence of tax evasion, and adherence to judicial precedents. The Tribunal emphasized that disallowances cannot be made based on assumptions without contrary evidence.