ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1, PUDUCHERRY vs. HAPPEE WINES, PUDUCHERRY

4. The Assessing Officer has not rejected the books of accounts. On one hand the Assessing Officer accepts the book results but the other hand he has disallowed almost 75 (percentage) (50000000/66948093x100) of the sales promotions expenses claimed by the appellant. The appellant has maintained proper vouchers for the entire expenses claimed by the appellant Rs.6,69,48,093 towards sales promotion expenses. The appellant has reported a turnover of Rs.136,00,00,000 out of which the appellant has incurred Rs.6,69,48,093 towards Sales promotion expenses. This shows the appellant has incurred only 4.92 (percentage) towards sales promotion expenses. The sales promotion expenses are genuine and the appellant has to necessarily incur the above expenses for achieving the turnover of Rs.136,00,00,000. The appellant can achieve the above turnover by doing good marketing. Hence the appellant has to incur sales promotions expenses for marketing its products. 5. ln the case of appellant scrutiny assessment has been completed for the A.Y 2012- 13, A.Y 20 13-14 and A.Y 2014-15. While completing the assessment u/s.143(3) the Assessing Officer has completed the assessment by accepting the sales promotion expenses. No additions were made. towards sales promotion expenses for the above assessment years.

6. The Assessing Officer has made the above addition without any material evidence. The Assessing Officer has made a comment that vouchers for the month of July 2016 were self-made. Hence 75 (percentage) of the total expenses claimed under sales promotion expenses are disallowed. The Assessing Officer has made the addition towards sales promotion expenses by disallowing lump sum amount of Rs.5,00,00,000 by simply verifying some sample vouchers for the month of July. The Assessing Officer has not brought on record any material evidences to justify that the expenses claimed are not genuine or of personal in nature. Hence in the absence of all such evidences, disallowing 75(percentage) of expenses claimed are imaginary and erratic on the part of Assessing Officer.

1.3 The grounds taken by the Revenue read as under:-

1. 1. The order of the ld. CIT (A) contrary to the facts and circumstance of the case.

2. The ld. CIT (A) erred in restricting the disallowance made by the AO towards the sales promotion expenses, @25% of actual expenses debited in profit & loss account. 2.1. The ld. CIT (A) erred in restricting the disallowance made by the AO towards the sales promotion expenses @25% of actual expenses debited in profit & loss account without appreciating the true nature of the expenditure. 2.2. The ld. CIT (A) erred in restricting the disallowance made by the AO towards the sales promotion expenses @ 25% of actual expenses debited in profit & loss account without appreciating the provision explanation 1 to section 37 of the Act. 2.3. The ld. CIT (A) erred in restricting the disallowance made by the AO towards the sales promotion expenses @ 25% of actual expenses debited in profit & loss account without appreciating the fact that brands are promoted by the brand owners not by the retail and whole sale traders. The ld. CIT (A) erred in restricting the disallowance made by the AO towards the 2.4. sales promotion expenses @ 25% of actual expenses debited in profit & loss account without appreciating the fact that assessee is retail and whole sale traders and generally promotion of brands is done by brand owners not by traders.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored.

As is evident, the sole subject matter of appeal is disallowance of sales promotion expenses. 1.4 The Ld. AR advanced arguments and stated that the expenses were in the nature of petty incentives given to the employees of purchasers. It has been stated that expenditure is as per business practice and the claim has been allowed in earlier as well as subsequent years. The Ld. AR also stated that expenditure was commensurate with the sales turnover of the assessee. The Ld. AR did not press the grounds relating to chit loss. The Ld. Sr. DR, on the other hand, stated that expenses were not substantiated and the assessee could not have incurred such expenditure. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in wholesale and retail trading of IMFL. Proceedings before lower authorities 2.1 The Ld. AO noted that the assessee claimed expenditure of Rs.669.48 Lacs towards sales promotion expenses and accordingly, the assessee was directed to furnish evidences thereof. The assessee furnished payment vouchers for one-month on sample basis. However, since the vouchers were self-made vouchers, Ld. AO made adhoc disallowance of Rs.500 Lacs against the same. 2.2 During appellate proceedings, the assessee submitted that it claimed expenditure of Rs.400.24 Lacs only as sales promotion expenses and Ld. AO erred in taking the figures of Rs.669.48 Lacs. The same would show that the disallowance was made in a casual manner. It was also stated that the assessee was dealing in more than 150 to 200 brands. These were new brands and majority of the brands were non- popular brands. The assessee has to necessarily incur sales promotion expenses by way of tips for marketing of non-popular brands and new brands. It was pointed out that the books were subjected to Audit and the same were not rejected. The expenditure merely constitutes 2.94% of the sales turnover of the assessee. The assessee again furnished complete details of incentive paid along with quantitative details as well as the ledger extract of sales promotion expenses. Further, the assessment for AYs 2012-13 to 2014-15 was scrutinized wherein this claim was accepted and no such disallowance was made. No material was brought on record to establish that the claim as not genuine. 2.3 The Ld. CIT(A) observed that the assessee did not furnish party- wise details, confirmations etc. to justify claim of sales promotion expenses. From self-made vouchers, it could not be ascertained that the expenditure was incurred wholly and exclusively for the purposes of business. This onus was on assessee. Finally, Ld. CIT(A) directed Ld. AO to restrict the disallowance to 25% of the actual expenditure claimed after due verification thereof. The aforesaid adjudication has led to cross- appeal before us. Our findings and Adjudication 3. From the facts, it emerges that assessee is engaged in wholesale and retail trade of IMFL. The assessee is dealing in large number of brands. The business model of the assessee is such that it has to incur sales promotion expenses to promote the non-popular brands. The same are in the nature of tips for marketing of these brands. It could be seen that the complete details of the expenditure on sample basis for the month of July, 2016 was duly furnished by the assessee before both the authorities. It is undisputed fact that the assessee has incurred such expenditure in earlier years. The returns of income for AYs 2012-13 to 2014-15 were scrutinized wherein no such disallowance was made. No disallowance has apparently been made in subsequent years. It is also evident that the expenditure constitutes merely 2.94% of sales turnover of the assessee. As per chart placed before us, the percentage of such expenditure in AY 2018-19 is 2.93% whereas this percentage for AY 2019-20 is 3.26% of sales turnover. It is also discernible that the books of the assessee are subjected to Audit and the same has not been rejected. No defect has been pointed out in the books of accounts. Considering the entirety of facts and circumstances, the claim of expenditure has to be accepted in toto. In our opinion, the adhoc disallowances is without any sound bases and the same is, therefore, liable to be deleted. We order so.