2016 (11) TMI 363 - AT - Income Tax

Disallowance on account of sales promotion expenses - Held that - Expenditure so incurred was wholly and exclusively for the purpose of assessee s business. The relevant assessment years under consideration are A.Ys.2010-2011 & 2011-2012 during which there was no CBDT Circular as referred by AO for making disallowance by branding the expenditure as covered by Explanation to Section 37(1) of the Act. We found that the expenditures were incurred wholly and exclusively for the purpose of business, therefore, same cannot be disallowed by applying CBDT Circular dated 1-8-2012 in respect of years under consideration. In the instant case before us the relevant assessment years are A.Y.2010-2011 & 2011-2012 during which this CBDT Circular was not applicable. As per the details of expenses placed on record, we found that same was in the nature of sales promotion. Neither the AO nor the CIT(A) had doubted genuineness of the expenses nor there is any allegation to the effect that expenses were not incurred for the purpose of business. Even the G.P. and N.P. rate shown by assessee nowhere indicates that assessee had claimed any excessive expenditure under the head sales promotion. No justification in the orders of lower authorities for disallowing sales promotion expenses under Explanation to Section 37(1) during the assessment year 2010-11 and 2011-12 under consideration. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of sales promotion expenses under Section 37(1) based on CBDT Circular dated 1-8-2012 for assessment years 2010-11 & 2011-12.

Analysis:
The appeals were filed by the assessee against the CIT(A)'s order for the assessment years 2010-11 & 2011-12, concerning the disallowance of sales promotion expenses. The assessee, engaged in pharmaceutical products manufacturing, incurred such expenses, including payments for promotional items, freebies to medical practitioners, and field staff expenses. The AO disallowed part of these expenses citing the CBDT Circular No.05/2012 dated 1-8-2012, which restricted certain expenditures under Explanation to Section 37(1).

The CIT(A) upheld the AO's decision, prompting the assessee to appeal further. The assessee argued that the CBDT Circular dated 1-8-2012 was prospective and not applicable for the years under consideration. Referring to a coordinate bench decision, the assessee contended that the Circular was effective from the assessment year 2013-14 onwards. The DR, while acknowledging the coordinate bench's decision, failed to provide any contradictory judgment.

Upon review, the Tribunal found that the nature of expenses incurred was for legitimate business purposes during the assessment years 2010-11 & 2011-12, predating the CBDT Circular's applicability. Relying on the Syncom Formulations case, the Tribunal held that the Circular was not in force during the relevant assessment years. The Tribunal emphasized that the expenses were genuine and necessary for business promotion, as evidenced by the lack of excessive claims or doubts on the expenses' authenticity. Consequently, the disallowance of sales promotion expenses under Explanation to Section 37(1) was deemed unjustified for the said assessment years.

In conclusion, the Tribunal allowed both appeals of the assessee, emphasizing that the sales promotion expenses were legitimate and incurred for business purposes during the assessment years 2010-11 & 2011-12, where the CBDT Circular dated 1-8-2012 was not applicable.