RENE PHARMACEUTICALS PRIVATE LIMITED,MUMBAI vs. DCIT 13(3)(2), MUMBAI

The assessee has raised various grounds of appeal challenging the action of the lower authorities in sustaining the disallowance of sales promotion/business promotion expenditure amounting to Rs.22,13,691/-, levy of consequential interest and initiation of penalty proceedings. However, the principal issue which falls for our consideration is whether the authorities below were justified in treating the expenditure of Rs.22,13,691/- incurred through M/s DNA Distributors as non-genuine and consequently disallowing the same under the provisions of the Act.

Briefly stated, the facts borne out from the assessment records are that the assessee is a private limited company engaged in the business of medical supplies, agencies and stores. It filed its return of income for the year under consideration on 24.10.2018 declaring total income of Rs.78,25,210/-. The return was initially processed under section 143(1) and thereafter the case was selected for limited scrutiny under the E-assessment Scheme, 2019, inter alia, on the issues of compliance with TDS provisions on payments outside India and verification of business expenses. During the course of assessment proceedings, the Assessing Officer noticed from the Profit and Loss Account that the assessee had debited an aggregate amount of Rs.1,34,51,433/- under the head “Sales Promotion including Publicity”, which comprised business promotion expenses of Rs.1,03,39,433/- and sales promotion expenses of Rs.31,12,000/-.

On examination of the party-wise details furnished by the assessee, it was observed by the Assessing Officer that an aggregate amount of Rs.72,13,691/- had been paid to M/s DNA Distributors. Out of the said amount, a sum of Rs.50,00,000/- represented payment towards sales and marketing activities undertaken by the said concern under a contractual arrangement with the assessee, whereas the balance amount of Rs.22,13,691/- was claimed to represent reimbursement of business promotion expenses allegedly incurred by M/s DNA Distributors through Customer Relationship Managers for promotion of the assessee’s products and business activities. In order to verify the genuineness of the expenditure, the Assessing Officer issued notices under section 133(6) to M/s DNA Distributors.

In response thereto, M/s DNA Distributors confirmed receipt of Rs.50,00,000/- towards sales and marketing services rendered to the assessee. However, according to the Assessing Officer, there was no specific confirmation in respect of the balance amount of Rs.22,13,691/-. A further notice under section 133(6) was thereafter issued seeking confirmation regarding the said amount, but no response was received from the concerned party. The assessee explained before the Assessing Officer that the impugned amount represented reimbursement or adjustment through the running account maintained with the distributor and therefore no separate banking transaction existed in respect of the same. The Assessing Officer, however, was not convinced with the explanation and observed that no independent evidence

Being aggrieved, the assessee preferred an appeal before the learned CIT(A). It was contended that the impugned expenditure was duly recorded in the books of account maintained in the regular course of business; that the books were duly audited; that ledger accounts and relevant details had been furnished before the Assessing Officer; and that the entire disallowance had been made merely because the third party did not specifically confirm the reimbursement component. It was further contended that once the primary transaction and business relationship with M/s DNA Distributors stood accepted by the Assessing Officer himself, no adverse inference could be drawn merely on account of non- response or incomplete response by a third party over whom the assessee had no control. The learned CIT(A), however, upheld the action of the Assessing Officer holding that the assessee had failed to establish the genuineness of the expenditure through independent documentary evidence and accordingly confirmed the addition.

Before us, the learned counsel for the assessee reiterated the submissions made before the lower authorities and invited our attention to the fact that the Assessing Officer himself has accepted the existence of the business relationship between the assessee and M/s DNA Distributors and has also accepted the

The learned Departmental Representative, on the other hand, strongly relied upon the orders of the Assessing Officer and the learned CIT(A). According to him, the burden to establish the genuineness of the expenditure squarely rested upon the assessee and since the specific amount of Rs.22,13,691/- could not be independently substantiated either through confirmation from the concerned party or through separate documentary evidence, the authorities below were fully justified in disallowing the claim.

We have carefully considered the rival submissions, perused the orders of the authorities below and examined the material placed on record. The solitary dispute requiring adjudication relates to the disallowance of Rs.22,13,691/- claimed by the assessee as

A careful reading of the assessment order reveals that the Assessing Officer has nowhere doubted the existence of M/s DNA Distributors, nor has he questioned the business relationship between the assessee and the said concern. The contractual arrangement itself has been accepted and a substantial payment of Rs.50,00,000/- under the very same arrangement has also been accepted as genuine. There is further no finding that the books of account maintained by the assessee are unreliable, incomplete or liable to rejection. The impugned addition has essentially been made because while responding to the notice issued under section 133(6), the third party confirmed receipt of Rs.50,00,000/- but did not specifically confirm the additional amount of Rs.22,13,691/-

In our considered opinion, the aforesaid circumstance by itself could not have constituted sufficient basis for disallowing the expenditure. It is a settled proposition that an assessee can only be expected to furnish primary evidences in support of its claim and once such details are placed on record, no adverse inference can ordinarily be drawn merely because a third party either fails to respond or furnishes an incomplete response to a statutory notice issued by the Department. The powers available to the Assessing Officer under section 133(6) are essentially investigative in nature and the outcome of such enquiry must ultimately lead to some tangible material demonstrating the falsity or non-genuineness of the assessee’s claim. Mere absence of confirmation, without anything more, cannot automatically convert a duly recorded business expenditure into a bogus expenditure.

We further find that apart from the non-confirmation by the third party, no independent material has been brought on record by the Assessing Officer to establish that the impugned expenditure was fictitious, sham or not incurred wholly and exclusively for the purposes of business. There is no allegation that the amount had come back to the assessee. There is no finding that the services allegedly rendered through Customer Relationship Managers were never provided. There is also no material suggesting that the expenditure was incurred for any purpose other than the business of the assessee. In fact,

Another important aspect which weighs heavily with us is that the Assessing Officer himself has accepted the principal transaction of Rs.50,00,000/- entered into with the same party under the same commercial arrangement. Once the existence of the business relationship and the underlying transaction has been accepted as genuine, selective rejection of a part of the expenditure arising from the very same course of dealings would require cogent and convincing evidence. The Revenue cannot accept one part of the transaction as genuine and reject another connected part merely on the basis of absence of confirmation, particularly when no positive evidence has been gathered to establish that the disputed component is fictitious or fabricated.

We also find merit in the contention of the assessee that the amount represented reimbursement or adjustment through a running account maintained between the parties. In commercial transactions involving distributors, agents and marketing intermediaries, it is not uncommon for certain expenses incurred on behalf of the principal to be adjusted through ledger accounts rather than being settled through independent banking

The learned CIT(A), while confirming the addition, has substantially reiterated the reasoning adopted by the Assessing Officer and has not independently examined whether any material existed on record to demonstrate that the expenditure was not genuine. The appellate authority has also not adequately addressed the fundamental contention of the assessee that non- compliance or incomplete compliance by a third party cannot, by itself, become the sole basis for sustaining a disallowance in the hands of the assessee. In our view, both the authorities below have proceeded more on presumption than on evidence.

Having regard to the entirety of facts, the nature of the business carried on by the assessee, the accepted commercial relationship with M/s DNA Distributors, the acceptance of the principal transaction of Rs.50,00,000/-, the absence of any adverse material indicating that the expenditure is bogus or fictitious, and keeping in mind the settled principle that suspicion, however strong, cannot take the place of evidence, we are unable to uphold the disallowance of Rs.22,13,691/-. The addition, in our considered opinion, has been sustained merely on account of non- confirmation by a third party and not on the basis of any

The ground relating to levy of interest under sections 234A, 234B and 234C is consequential in nature and the Assessing Officer shall recompute the same while giving effect to this order.

So far as the ground relating to initiation of penalty proceedings under section 270A is concerned, the same is merely consequential and premature at this stage and therefore does not call for any separate adjudication.

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