SRI RANGANATH PUTTA,KADAPA vs. DCIT, CIRCLE-1, NELLORE

The brief facts of the case are that, the assessee filed return of income for the A.Y. 2018-19 declaring total income of Rs. 20,98,310/-. Subsequently, the case of the assessee was selected for Limited Scrutiny under CASS for the reason of “large sales promotion expenses vis-à-vis gross receipts”. Accordingly, notice under Section 143(2) of the Income-tax Act, 1961, dated 28.09.2019 was issued and thereafter notices under Section 142(1) were also issued from time to time. In response thereto, the assessee furnished partial replies along with certain vouchers and bills in support of sales promotion expenditure claimed during the year under consideration.

During the course of assessment proceedings, the A.O. observed that, the assessee had claimed sales promotion expenditure of Rs. 21,16,540/- and stated that, the said expenditure was incurred in cash for procuring business during the relevant previous year. The A.O. required the assessee to furnish supporting evidences such as cash book, cash flow statement, bank account statement, source of cash payments, cash vouchers and ledgers so as to verify the genuineness and source of the expenditure claimed. However, according to the A.O., except furnishing certain vouchers/bills, the assessee failed to furnish the primary supporting evidences called for. The A.O. further observed that, the vouchers furnished were self-made and unverifiable in nature and, therefore, held that the assessee had failed to discharge the burden cast upon him to establish the genuineness and source of expenditure claimed. Consequently, invoking the provisions of Section 69C of the Act, the A.O. disallowed sales promotion expenditure of Rs. 21,16,540/- and added the same to the total income of the assessee while completing assessment under Section 143(3) r.w.s. 143(3A) and 143(3B) of the Act determining total income at Rs. 42,14,850/-.

Aggrieved by the assessment order, the assessee carried the matter in appeal before the Ld. CIT(A). During the appellate proceedings, the assessee contended that, the sales promotion expenditure of Rs. 21,16,540/- was incurred wholly and exclusively for business purposes and the source for such expenditure was out of gross business receipts declared during the year under consideration. The assessee further submitted that, the provisions of Section 69C of the Act, were not applicable to the facts of the case and also submitted that the A.O. travelled beyond the scope of Limited Scrutiny while making the impugned addition.

The Ld. CIT(A) after considering the submissions of the assessee and also taking note of the reasons given by the A.O. for disallowing sales promotion expenditure under Section 69C of the Act, observed that, although the assessee claimed that the expenditure was incurred wholly and exclusively for business purposes out of business receipts, the assessee failed to furnish supporting evidences such as cash book, cash flow statement, bank account statement, source of cash payments and ledgers during the course of assessment proceedings. The Ld. CIT(A) further observed that, the vouchers and bills furnished by the assessee were self-made and unverifiable in nature and, therefore, the genuineness of expenditure could not be established. The Ld. CIT(A) also observed that, the issue examined by the A.O. was within the scope of Limited Scrutiny since the case was selected specifically for verification of large sales promotion expenses vis-à-vis gross receipts. The Ld. CIT(A) further observed that, the assessee has failed to discharge the burden cast upon him to substantiate the genuineness and source of expenditure claimed in cash. Therefore, the Ld. CIT(A) rejected the explanation of the assessee and sustained the addition made by the A.O. under Section 69C of the Act.

Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal.

The learned counsel for the assessee, Shri K. Surya Bhagwan, Advocate, submitted that, the A.O. erred in disallowing sales promotion expenditure of Rs. 21,16,540/- under Section 69C of the Act, even though the expenditure was incurred for the purpose of business and duly recorded in the books of account maintained by the assessee. The learned counsel for the assessee further submitted that the assessee had furnished bills and vouchers in support of expenditure and also explained the source for such expenditure. Therefore, he submitted that the addition made by the A.O. and sustained by the Ld. CIT(A) should be deleted.

The learned Senior A.R. for the Revenue, Ms. Aditi Goyal, on the other hand, supporting the orders of the lower authorities submitted that, the assessee failed to furnish supporting evidences such as cash book, bank statements, source of cash payments and ledgers to substantiate the genuineness and source of expenditure claimed under the head sales promotion expenses. The learned Senior A.R. for the Revenue further submitted that, the vouchers furnished by the assessee were self-made and unverifiable in nature and, therefore, the A.O. has rightly invoked the provisions of Section 69C of the Act, to disallow the expenditure. Therefore, she submitted that, the order of the Ld. CIT(A) should be upheld.

I have heard both sides and considered the relevant reasons given by the A.O. to disallow the entire sales promotion expenses of Rs.21,16,540/-. The A.O. disallowed sales promotion expenses only on the ground that, except furnishing the vouchers and bills, the assessee has not furnished further evidences and therefore, disallowed expenditure under Section 69C of the Income Tax Act, 1961. It was the argument of the learned counsel for the assessee that, the expenditure incurred by the assessee is wholly and exclusively for the purpose of business and revenue in nature and the assessee has also explained the source by recording the expenditure in the books of account. I find that, the assessee has furnished bills and vouchers in respect of the said expenditure and also explained that, the expenditure was incurred for the purpose of business. Once the expenditure has been recorded in the books of account and the assessee offers explanation about the source, then merely for the reason of not submitting further supporting evidences, the A.O. cannot disallow the entire expenditure incurred by the assessee by holding that, the assessee has not explained the source. Since the expenditure incurred by the assessee was part of the books of account maintained for his business, in my considered view, the addition made by the A.O. by disallowing the sales promotion expenditure of Rs.21,16,540/- is contrary to the evidence available on record and cannot be accepted. The Ld. CIT(A), without appreciating the relevant facts, simply sustained the addition made by the A.O. Thus, I set aside the order of the Ld. CIT(A) and direct the A.O. to delete the addition made towards disallowance of sales promotion expenses.

In the result, the appeal of the assessee is allowed.

The Principal Commissioner of Income Tax, Tirupati. 4. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 5. गधर्ाफ़धईल / Guard file