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Facts
The assessee, a wholesaler of Samsung mobile phones, incurred business promotion expenses and gave discounts to dealers. The AO disallowed a portion of these expenses and discounts for lack of full documentation, treating some as unexplained expenditure. The assessee appealed these disallowances.
Held
The Tribunal held that the disallowance of business promotion expenses of Rs. 1,25,852/- was not justified as the transactions were verifiable, even if not all bills were produced during the initial assessment. Similarly, the disallowance of cash discounts was also deleted as the AO's enquiry was selective and most transactions were found verifiable.
Key Issues
Whether disallowance of business promotion expenses and cash discounts is justified when transactions are found verifiable in remand proceedings, despite initial lack of complete documentation?
Sections Cited
133(6), 69C, 37(1)
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP & SHRI PRABHASH SHANKAR, AM
O R D E R Per Saktijit Dey, VP:
This is an appeal by the assessee against order dated 30.09.2024, passed by National Faceless Appeal Centre (NFAC for short), Delhi for the assessment year (A.Y.) 2012-13.
In ground no.1, the assessee has challenged the addition of Rs.1,25,852/-, incurred towards business promotion expenses.
Briefly, the facts are, the assessee, a resident corporate entity is an authorized wholesaler of Samsung mobile phones and accessories. The business activity of the assessee involves sales of mobile phones and accessories to dealers and distributors.
For the assessment year under dispute, the assessee filed its return of income on 28.09.2012, declaring total income of Rs.80,35,369/-. In course of assessment of Rs.1,09,79,713/- towards business promotion expenses. When called upon to justify the claim, the assessee furnished its reply with sample bills and ledger copy. Alleging that the assessee had not furnished all the bills to verify the expenses and the assessee also failed to justify incurring of such huge expenses, the A.O. disallowed an amount of Rs.30,93,914/-, being 30% of the expenses claimed.
Being aggrieved, the assessee contested the disallowance before the first appellate authority. In course of proceedings before the first appellate authority, the assessee furnished complete set of invoices and other documents as additional evidence in support of its claim. The evidences so furnished by the assessee were admitted by first appellate authority and forwarded to the A.O. for verification and comment. After verifying the additional evidences, the A.O., in the remand report, observed that the transactions entered into by the assessee were found to be verifiable. However, the A.O. observed that the assessee had not furnished all the bills for verification in course of assessment proceeding and, hence, disallowance may be restricted to Rs.1,25,852/- for which no bill was produced before the A.O. in course of assessment proceeding.
Relying upon such observations of the A.O. in the remand report, the first appellate authority restricted the disallowance to Rs.1,25,852/.
Before us, ld. Counsel appearing for the assessee submitted that in course of assessment proceeding, A.O. had called upon the assessee to furnish bills/invoices of transactions exceeding Rs.10,000/-. Therefore, complying with the query made by the A.O., the assessee furnished bills/invoices for transaction exceeding Rs.10,000/-. He A.O. had made an adhoc disallowance, alleging non furnishing of complete bills and invoices. Therefore, the assessee furnished the complete set of bills and invoices before the first appellate authority. He submitted, after verification the A.O. has accepted the transactions. Therefore, merely because complete set of bills/invoices were not furnished at the time of assessment proceeding, the amount of Rs.1,25,852/- should not be disallowed.
The learned Departmental Representative ('ld. DR' for short) relied upon the observations of the A.O. and first appellate authority.
We have considered rival submissions and perused the materials available on record. Facts on record reveal that in course of assessment proceeding, in response to specific query raised by the A.O., the assessee furnished bills/vouchers for transactions exceeding Rs.10,000/-. However, without pointing out any specific defect or deficiency in the supporting evidences, the A.O. disallowed 30% of the expenses claimed purely on adhoc basis. In course of proceedings before the first appellate authority, the assessee furnished complete set of bills and vouchers, representing business promotion expenses.
Notably, after verifying the bills and vouchers, the A.O., in the remand report, has very categorically observed that the transaction entered into by the assessee company with the parties were found to be verifiable. The following observations of the A.O. in the remand report are relevant:
8.4 It is submitted that details furnished by the assessee company to justify its transaction entered into in the course of appellate proceedings are carefully examined and verified. On examination, it is found hat transaction entered into by the assessee company with these parties are found verifiable. However, as noted by the A.O. assessee has not furnished all the bills for (A.Y. 2012-13) Fastlink Connections Private Limited vs. ITO verification in the course of assessment proceedings as such assessee’s contention that if at all disallowance is required to be made then the same may be restricted to Rs.1,25,852/-, the bill to that extent was not produced by the assessee company before the then A.O. in the course of assessment proceedings. In view of the above facts, admissibility of the evidences submitted by the assessee may be decided considering the facts & circumstances of the case as well as on merits of the case.
The aforesaid observations of the A.O. leaves no room for doubt that there is no dispute about the genuineness of the expenses claimed by the assessee. Merely because complete set of bills and vouchers were not produced before the A.O, in course of the assessment proceeding, an amount of Rs.1,25,852/- should not have been disallowed.
More so, keeping in view the fact that the business promotion expenses incurred by the assessee is very much reasonable, keeping in view the total sales turnover during the year of Rs.207,59,88,374/- and also the fact that this is the first year of business of the assessee. Therefore, we direct the A.O. to delete the disallowance of Rs.1,25,852/-.
In ground no. 2, the assessee had challenged disallowance of Rs.2,47,50,818/-, representing cash discount given to dealers and distributors.
Briefly, the facts are, in course of assessment proceedings, the A.O. noticed that the assessee had debited an amount of Rs.12,37,54,088/- towards discount. After getting the details of persons to whom such discount was given, the A.O. issued notices u/s. 133(6) of the Act on random basis to some of the persons seeking information. Alleging that replies were not received from many parties, the A.O. observed that the claim made by the assessee is not supported by evidence. Thereafter, the A.O. proceeded to disallow an amount of Rs.2,47,50,880/-, being 20% of the expenses claimed and treated it as unexplained expenditure u/s. 69C of the Act. furnished complete details of the discount given with supporting evidences. It was submitted by the assessee that discounts were given to 1,100 parties, whereas the A.O. had issued notices u/s. 133(6) of the Act only to 10 parties, out of which six parties have confirmed. Out of the remaining four parties who did not confirm, no sales were effected to two parties during the year under consideration, whereas, one of the party did not receive the notice u/s. 133(6) of the Act as it had shifted its shop from earlier address. However, confirmation from the said part was submitted before the A.O. during remand. It was submitted that one of the parties has closed down the business, hence, could not be found. However, the assessee submitted the ledger and sales invoice of the party. The submissions made and additional evidences furnished by the assessee were forwarded to the A.O. After verifying the evidences furnished by the assessee, the A.O. accepted that the transactions are verifiable. However, he observed that in absence of entire details, the claim of expenses could not be allowed. The A.O. further observed that while completing the assessment, the A.O. should have made the disallowance u/s. 37(1) of the Act. Based on the observations made by the A.O. in the remand report, the first appellate authority sustained the disallowance.
We have considered rival submissions and perused the materials on record. Facts on record reveal that in course of assessment proceeding, the A.O. conducted enquiry selectively by issuing notices u/s. 133(6) of the Act to ten parties. Whereas, sales were made to 1100 parties. It is further evident, out of 10 parties, six parties confirmed the transactions with the assessee. Whereas, the following four parties did not respond:
In course of remand proceeding, the assessee explained that in the year under consideration, it has not entered into any transaction with Mahavir Connection and Modern Telecom. Insofar as, Ashapura Electronics is concerned, the assessee submitted that it has shifted its shop to another address, because of which it could not respond. However, the assessee furnished the confirmation from the said party. Insofar as, Bholenath Enterprises is concerned, the assessee submitted that the said party is not traceable as it has closed down its business. In the remand report, the A.O. has made the following observations:
9.3 Comments of the Jurisdictional Assessing Officer (JAO):It is submitted that the submission put-forth by the assessee company before the appellate authority as well as in the course of remand proceedings was carefully perused and examined. The assessee company in its submission mainly contended that sales were made to various parties and there were 1100 such sales transaction entered into by the assessee company with the parties. It was submitted that discount to these parties were offered on the basis of business transaction entered into by the assessee company with these parties. The AO however, in the course of assessment proceeding had issued letter u/s 133(6) of the IT Act, 1961 calling confirmation of transaction entered into by the assessee company to only 10 parties. Out of these 10 parties only 6 parties confirm the transactions. The other parties who have not responded namely were (i) Mahavir Connection & (ii) Modern Telecom, but during the year under consideration no sales were made to these parties. The then AO however, selected these parties from list of parties to whom sales were made in earlier year. As regard, other parties i.e. (iii) Ashapura Electronics & (iv) Bholenath Enterprises, the party Ashapura Electronics had changed its shop address, whereas Bholenath Enterprises had shut down its shop. However, the then AO had not given an opportunity to explain these facts and had made addition of Rs.2,47,50,818/-. In the remand proceedings, it was contended that assessee company suo-moto collected confirmation from majority of the customers to whom sales were made during the year under consideration on which assessee company allowed certain discount. Assessee company in the course of remand proceedings submitted confirmation of 127 such parties along with ledgers of the parties, which were examined and found verifiable. It is submitted that considering the quantum of sales discount offered by the assessee and claimed as allowable expenses to the extent of Rs. 12,37,54,088/- on sales made during the year under consideration of Rs. 207,59,88,374/-, the sales discount allowed by the assessee to its customers worked out to about 5.96% of the total sales. Further, in the course of remand proceedings also assessee company could submit details of transaction entered into in respect of 127 parties with whom assessee entered into various transaction on which assessee company offered sales discount to these parties. However, in the absence of entire details the claim of expense made by the assessee company under this head is not fully found verifiable.
(A.Y. 2012-13) Fastlink Connections Private Limited vs. ITO It is further submitted that under this head the then AO ought to have made disallowance u/s 37(1) of the IT Act, 1961. However, the then AO made the disallowance u/s 69C of the IT Act, 1961. It is therefore, requested that while deciding this issue the AO may please be directed to make addition as per the provision of section 37(1) of the IT Act, 1961. This issue may therefore please be decided considering the facts and circumstances of the case and on merit of the
From the observations of the A.O. in the remand report, the following facts clearly emanates:
(i) Though the assessee had made sales to more than 1000 parties, however, the A.O. in the assessment proceedings has restricted his enquiry to only 10 parties.
(ii) Out of those 10 parties, 6 parties have confirmed the transaction in course of assessment proceeding itself, whereas with 2 parties, there was no sales transactions and one of the party, i.e., Ashapura Electronics has furnished the confirmation subsequently.
(iii) Only in respect of Bholenath Enterprises confirmation is wanting.
At the time of hearing, ld. Counsel of the assessee submitted that the quantum of transaction with Bholenath Enterprises is about Rs.3,500/-. Be that as it may, the observations of the A.O. in the remand report clearly establish that the assessee has furnished full supporting evidence to justify the expenditure claimed on account of discount. In fact, the A.O., after verifying the evidences has commented that on examination, the discount given to the parties were found to be verifiable. That being the fact on record, in our view, no disallowance, much less, disallowance on purely adhoc basis could have been made out of the expenses claimed. In our view, 20% disallowance made out of the expenditure claimed has no rational or sound basis, as it is not backed by any evidence. In view of the afore-said, we direct the assessee to delete the disallowance.
Ground is allowed.
Order pronounced in the open court on 25.03.2025 Sd/- Sd/- (Prabhash Shankar) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 25.03.2025 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,