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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI PARTHA SARATHI CHAUDHURY & DR. MITHA LAL MEENA
आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM :
This appeal preferred by the assessee emanates from the order of the Ld. CIT(Appeals)-1, Raipur dated 01.03.2016 for the assessment year 2012- 13 as per the following grounds of appeal on record:
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“1. That on the facts and on the circumstances of the case Ld. CIT(A) has made addition on the basis of notice dated 05.02.2016 alleged to have been served on assessee demanding explanation for increase under various expenses. The notice was not duly served on the assessee. Thus, enhancement of disallowance made on the strength of the un-served notice is against law of natural justice, bad in law and may kindly be deleted. 2. That on the facts and on the circumstances of the case Ld. CIT(A) erred in enhancing the disallowance by Rs.1,58,49,223/- under various heads arbitrarily on ad-hoc basis. Enhancement made by the Ld.CIT(A) is not justified, against law of natural justice & may kindly be deleted. 3. That on the facts and on the circumstances of the case the Ld.CIT(A) erred in sustaining the disallowance of Rs.6,00,000/- made by the Ld. AO under the head Sales Promotion Expenses and Display charges arbitrarily on ad-hoc basis in spite of overall decrease in Sales Promotion expenses to 20.72% as compared to 20.90% incurred in the immediate preceding previous year. Disallowance made by the Ld. AO & sustained by the Ld.CIT(A) is not justified, against law of natural justice and may kindly be deleted. 4. That on the facts and in the circumstances of the case, the order appealed against is opposed to facts and law on several grounds and hence the same may very kindly be quashed. 5. The assessee craves leave to add, urge, alter or withdraw any ground/s before or at the time of hearing of this appeal. III . Relief Sought : That above mentioned additions amounting to Rs.1,64,49,223/- made by the Learned CIT(A) on ad-hoc basis may kindly be deleted.”
Referring to the grounds of appeal, we find that the Assessing Officer had made ad-hoc disallowance of Rs.6,00,000/- under the head of Sales Promotion Expenses and display charges and further, the Ld. CIT(Appeals) enhanced the disallowance to Rs.1,58,49,223/-.
The brief facts in this case are that the assessee debited Rs.3,92,92,300/- for sales promotion scheme, Rs.4,25,95,478/- for display charges to the profit and loss account. Previous year these expenses were Rs.77,81,071/- and Rs.3,47,60,360/- under respective heads of income. The Ld. Assessing Officer observed that these expenses had steeply increased as compared with previous year expenses. The reasons for increase were
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explained to the Assessing Officer that there is considerable increase in turnover and cost of corresponding expenses has increased under these heads. The explanation of the assessee was considered and verified from the books of account. It was noticed that the turnover is increased from Rs.31,35,38,049/- to Rs.47,79,23,546/-. The increase in expenses as compared with the turnover of previous year were found disproportionate and excessive by the Assessing Officer especially in sales promotion scheme. The Ld. Assessing Officer observed that excessive or unreasonable expenses are inadmissible expenses as provided in Section 37 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Considering the facts on records and documentary evidences and explanation Rs.6,00,000/- was found as unreasonable expenses and were added to the total income of the assessee.
When the matter travelled before the Ld.CIT(Appeals), he confirmed the disallowance made by the Assessing Officer and also enhanced the disallowance as per detailed reasoning and observation as appearing in his order. While undertaking such exercise, the observation of the Ld. CIT(Appeals) was that although the total expenses is comparable with the last year expenses, however, under various heads the expenses have increased disproportionately as compared to the increase in the turnover of the assessee. Just because overall business results are comparable with last year’s results, it does not make the assessee immune from scrutiny. It was observed by the Ld. CIT(Appeals) that ledger copy of expenses on Sales Promotions were not filed before the Revenue Authorities.
At the time of hearing, the Ld. AR of the assessee vehemently argued that the relevant year under consideration is Assessment Year 2012-13 where the Ld.CIT(Appeals) had not only sustained the ad-hoc addition made
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by the Assessing Officer but also enhanced such disallowance. Whereas, for Assessment Year 2011-12, the Ld.CIT(Appeals) has deleted the ad-hoc addition of Rs.6.19 Lakhs under various heads and also for Assessment year 2013-14, the Ld. CIT(Appeals) had deleted ad-hoc addition of Rs.5.20 Lakhs. Therefore, the similar additions which are done on ad-hoc basis for the Assessment Year under consideration, this should also be deleted.
5.1 The Ld. AR of the assessee further submitted that the observation of the Ld.CIT(Appeals) as that the ledger copy of expenses were not submitted, this observation is not correct since the facts on records as evident from the order of the Assessing Officer, it is stated therein that books of accounts and other relevant documents produced were examined through test check method. Explanation to the query was discussed and explanation were considered and verified through evidences from time to time and placed on records, where needed. It is also mentioned in the Assessing Officer’s order that the assessee maintained books of accounts in electronic form and produced hard copy in spiral winding book. He maintained cash book, ledger, bill book, purchase and sale register and other subsidiary accounts. He got his books of accounts audited. He followed mercantile system and denied to have any change in the accounting method during the year. The Assessing Officer has further observed that maintenance of books of accounts is examined in view of accounting standard as prescribed and as provided in section 44AA and AB of the Income Tax Act, 1961 and no adverse finding is noticed. Therefore, interference is not made in maintenance of books of account.
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The Assessing Officer has also mentioned in his order the GP and NP ratio on the basis of ratio analysis as given in the audited report which is as under:
S.N A.Y. Turnover Gross Ratio Net profit Ratio Profit 1 2012-13 47,79,23,546.00 4,48,80,370.00 9.39% 25,02,345.00 0.52% 2 2011-12 31,35,38,049.00 2,64,27,009.00 8.43% 12,18,720.00 0.39%
That on the basis of this chart, it is accepted by the Department that in the relevant year both GP and NP ratio was better than the previous year ratio.
5.2 The Ld. AR of the assessee further reiterated the submissions made before the Assessing Officer as well as the Ld.CIT(Appeals) and mentioned particulars by providing a chart giving details of expenses which is as under:
S. No. Particulars Amount Amount (Current Year) (Preceding Year) 1 Sales 477923546.00 313538049.00 Total 477923546.00 313538049.00
1 Commission Exp. 5556222.00 10865140.00 2 Display charges 42595478.00 34760360.00 3 Sales Promotion 39292300.00 7781071.00 Exp. 4. Turnover 11628300.00 12116550.00 Discount Total : 99042300.00 65523121.00 Percentage of 20.72% 20.90% total Sales Promotion Exp. with respect to sale.
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That the Sales Promotion is directly attributed to increase in Sales and thereby to the profitability of the assessee. That in percentage terms expenditure incurred in sales Promotion has decreased from 20.90% in the preceding previous year to 20.72% in the year under consideration. In view of these factual statistics, the Ld. AR of the assessee contended that the addition made by the Assessing Officer is ad-hoc, unreasonable and arbitrary since the expenses have actually decreased in the year under consideration.
5.3 The Ld. AR of the assessee in support of his submissions has placed reliance on the following decisions:
i) Indwell Construction Vs. CIT (1999) 151 CTR 207 (A.P)
ii) CIT Vs. Banwari Lal Banshidhar (1998) 148 CTR (All.) 533
The legal proposition from these judgments is that when the reasonableness of GP and NP was not disputed by the Assessing Officer, the genuineness and quantum of the expenses relatable to such GP and NP, were deemed to have been undisputedly accepted. The Assessing Officer accepted the GP and NP shown as per audited books of accounts. In view of such acceptance the disallowances made on expenses which are directly related to GP and NP, it amounts to ad-hoc disallowance which is not permissible within the scheme of Income Tax Act, 1961. For this proposition, the Ld. AR of the assessee has also placed reliance on the decision in the case of ITO Vs. Bajrang Trading Company (2011) Tax World Vol. XLV Part-1, Page-33 (January, 11).
Per contra, the Ld.DR has placed strong reliance on the orders of the Sub-ordinate Authorities. The Ld.DR submitted that even though books of accounts have been produced before the Assessing Officer but still it was duty
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of the assessee to produce books of account before the Ld. CIT(Appeals) as and when it was called for. The Ld. DR prayed that the disallowance made in this case may be sustained.
We have perused the case records and heard the rival contentions. We have also given considerable thought to the facts and circumstances in this case. The Revenue has observed that there has been steep rise in the sales promotion expenses and advertisement expenses in the case of the assessee which is not justifiable. Therefore, the disallowance was made and relevant addition affected in the hands of the assessee.
Per contra, the Ld. AR of the assessee submitted that the assessee is a liquor trader in whose case direct advertisement is not permissible such as advertisement in television etc. Therefore, heads of advertisement are done pertaining to banners, hoarding and other modes of advertisement as the assessee feels it correct in perspective of his business so that the business may generate income. It is also contented by the assessee that before Revenue Authorities, there were four ledger copies of expenditures in relation to advertisement wherein they only considered those two heads where sales promotion expenses have increased whereas other two heads where the promotional expenses have decreased, was not taken into consideration. It is the expenses as a whole which has to be taken into consideration in its entirety by the Revenue Authorities.
We observe that whether certain expenditure is justifiable needs to be considered from the point of view of commercial expediency and principle of original commercial trading. In every case, it is a question of fact. The assessee has liquor trading business and he has different heads in which
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advertisement expenses are undertaken which is for commercial expediency of his business. This view has been upheld by the Hon'ble Apex Court in the case of Commissioner of Income Tax Vs. Chandulal Keshavlal & Co. reported as 38 ITR 601 (SC).
Further, we find in the case of Commissioner Of Income Tax Vs Delhi Safe Deposit Co. Ltd reported in 133 ITR 756 (SC), it has been opined by the Hon'ble Apex Court that considering as to what would be the true test of expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and of making it pay.
We further observe as per Explanation inserted by the Finance (2) Act, 1998 w.e.f. 01.04.1962 to sub-section 37(1) that the expenditure deductable should be as per law and as per public policy. In the case of Brihan Maharashtra Sugar Syndicate vs. Commissioner of Income-Tax reported as 28 DTR 265, where the assessee instead of distributing free sample of liquor for promoting its sale to the defence establishment used to reimburse the payment made by the defence establishment to the CSD stores for the purchase of liquor, the amount of such reimbursement was held to be a deductible expenditure as the same was neither against the public policy nor against the law.
Reverting to the facts of the present case, whatever promotional expenses has been undertaken by the assessee not only it is for commercial expediency generating income but also as per law and in accordance with public policy.
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We also find in the case of Spice Communications reported at 35 SOT 78, it has been observed that by incurring expenditure on advertisement and sales promotion, the assessee has not acquired any fixed capital asset but these expenditures were incurred for earning better profit and for facilitating assessee’s business. That in the instant case before us, the expenses which are based on commercial consideration and business expediency and at the same time does not acquire any fixed capital asset, in such scenario, no interference is warranted and it is an allowable expenditure as held by the Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Vs. Udaipur Distillery Co. Ltd. reported as 224 CTR 32.
The Ld. AR of the assessee has provided in his written submission the break-up of the ledger copy of expenses of the four heads of the advertisement and according to the submissions, if all these heads are taken in their entirety and considered by the Revenue then in effect sales promotion expenses have not increased rather it has come down in the relevant year. It was further contended by the Ld. AR of the assessee that a businessman has to decide the way in which business has to be conducted and it is the prerogative of such businessman and Revenue cannot direct the assessee as to how the business has to be done.
In the case of the Commissioner of Income Tax Vs. Dhanrajgiri Raja Narasingirji (1973) 91 ITR 544 (SC), the Hon'ble Apex Court has held that it was for the assessee to decide how best to protect his own interest. It is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Further, in the case of the J.K. Woollen Manufacturers Vs. Commissioner Of Income-Tax reported as (1969) 72 ITR 612(SC), it was held that
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reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income-tax Department.
Reverting to the facts of the present case, it is an undisputed fact as demonstrated in the records itself that entire books of account in the form of spiral winding have been submitted before the Revenue Authority which the Ld. CIT(Appeals) should have taken note off. Calling for documents which are already placed on records does not provide any justification for not adjudicating the issue in the present case. We further observe that the Assessing Officer accepted both GP and NP ratio as provided in the audited books of account by the assessee and it has been observed that such ratio shown was better than the previous year ratio. It is already examined that since the assessee is in the business of liquor trading, he cannot do direct advertisement and has to resort to Sales Promotion generally by banners, hoarding etc. Therefore, the expenses are incurred for promotional purposes on different heads and directly relatable to the increase in the GP and NP ratio. The Assessing Officer nor the Ld. CIT(Appeals) has provided any specific reason as to why the GP and NP ratio are accepted but relatable expenses are considered excess and hence, was disallowed. There is no cogent reasoning arrived at in the orders of the Revenue Authorities. There is a chart submitted before the Ld. CIT(Appeals) by the assessee wherein he has demonstrated that the totality of the expenses in the preceding year, the sales promotion expenses percentage was 20.90% whereas in the current year the percentage is 20.72% and therefore, expenses have actually decreased in the year under consideration.
The Ld. DR before us has not controverted/opposed/denied these facts and neither has brought any evidences on record in support of the Revenue. The Ld. AR also appraised the Bench about the table appearing at
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the last page of the Ld. CIT(Appeals)’s order wherein enhancement/increase percentage is mentioned. He submitted that some heads of expenses as bottle fees, royalty are Govt. payments. The Ld. DR could not bring out any facts either from order of the Ld. CIT(Appeals) or Assessing Officer whether they have categorized/segregated these Govt. payments made by assessee before such disallowance.
In view of the aforesaid examination of facts on records and judicial pronouncements placed before us, we set aside the order of the Ld. CIT(Appeals) and allow the appeal of the assessee.
In the result, appeal of the assessee is allowed.
Sd/- Sd/- MITHA LAL MEENA PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER रायऩुर/ RAIPUR ; ददनाांक / Dated : 27th June, 2019. SB आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : 1. अऩीऱाथी / The Appellant. 2. प्रत्यथी / The Respondent. 3. The CIT(Appeals)-1, Raipur. 4. The Pr. CIT-1, Raipur. 5. ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण,रायऩुर बेंच, रायऩुर / DR, ITAT, Raipur Bench, Raipur. गार्ड फ़ाइऱ / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
तनजी सधचव / Private Secretary आयकर अऩीऱीय अधधकरण, रायऩुर / ITAT, Raipur.