FLAT WORLD PROCESSES P.LTD,MUMBAI vs. ITO 8(1)(4), MUMBAI

The grounds of appeal read as under:-

The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of advertisement expenditure amounting to Rs. 2,32,58,826/-.

Brief facts of the case during assessment proceedings, the AO called the details with necessary supporting evidences regarding expenditure claimed by the assessee. Prom the details collected by the AO, it was revealed that the assessee company had paid an amount of Rs.2,32,58,826/- to M/s. Ventures Advertising Pvt. Ltd. towards advertisement expenses on various dates. The Ld. AO conducted various enquiries u/s. 133(6) and 131 of the Income Tax Act, 1961 and concluded that the assessee company had not taken any services for advertising form M/s, Venture Advertising Pvt. Ltd., in relation to its own business. It was further pointed out that the assessee company had only accepted bills from the said entity and accordingly, released the payments. The various specimens of advertisement given in newspapers, magazines etc were collected by the AO from which it was evident that the assessee company did not make any advertisement for itself, but money was spent for advertisement of third parties.

During the course of assessment proceedings the assessing officer obtained a statement from Shri. Chetan Shah Director of MS ventures advertising private limited. In the said a statement Mr Shah accepted that he had not received any order from the assessee company. That he had received the advertising order from M/s. Arshiya international Ltd (for short AIL) and the payment also from the same company. That on instruction of AIL bills were issued In the name of the assessee. The advertisement company which had already received payment from M/s AIL returned the payments to M/s AIL and thereafter receive payments from the assessee, It was further found that the advertisement was in no way connected to the assessee , but was related to the business activity of M/s. AIL. Assessing officer further found that all the work has been done by the advertising company for AIL and the payments have been received from the assessee which is operating from the 2 same address with the common director i.e. Shri Sandesh Chonkar. Thereafter assessing officer issued show cause notice to the assessee. The assessee responded that the said expenditure has been incurred for the purpose of business. That proper TDS has been deducted. However the assessing officer was not satisfied. He disallowed the above said expenditure holding that it to be not for the business of the assessee. The assessing officer held as under; 5.9 The submission of the assessee has been considered, however, the same is not acceptable because of the following: In the accounts the assessee has claimed expenditure on account of advertisement' of Rs.2,32,58,826/- in the name of M/s. Venture Advertising Pvt. Ltd., Mumbai. However, Shri Chetan Shah, Director of M/s. Ventures Advertising Pvt. Ltd., in his sworn statement recorded u/s.131 of the Act dated 22-01- 2014 categorically admitted that it has not provided any : advertisement services to the assessee company, but raised the tax invoices / bills on the instruction of M/s, Arshiya International Ltd., in the name of assessee company and accordingly, received the payments from the assessee company. This statement of Shri Chetan Shah, establishes the fact of acceptance of bogus bill under the garb of' advertisement expenses' : and accordingly, made the payments for which there is no business exigency. This fact was brought on record, after making the field enquiries by the Department and by recording the sworn statement discussed supra. When this fact was brought to the notice of the assessee for proper justification it has simply argued that it has already submitted the information / documents in connection with the said expenditure and accordingly, argued that it has incurred such expenses for the purpose of business and hence no disallowance is applicable to it. The argument of the assessee in this regard is not acceptable, as the assessee failed to justify it claim with any proper evidences. More importantly, it has not demonstrated that the said expenditure is necessary for running its business, which should duly be supported by documentary evidences. The assessee has, however, also failed to rebut the statement of Shri Chetan Shah, who in his sworn statement categorically admitted that it has not provided any services but issued bills and accordingly received payments. In fact, even the advertisement clippings obtained from M/s. Ventures Advertising Private Limited, also indicate that this advertisement is pertains to M/s Arshiya International limited only. For ready reference few of newspaper clippings, as produced by Shri Chetan Shah, Director of M/s. Venture Advertising Pvt. Ltd., is enclosed as Annexure 'A (containing 3 pages) and forms part of this order. Merely filing the tax invoices and the ledger extract of the party to whom such payments have been made does not suffice the purpose of 3 I.T.A. No.56/Mum/2015 genuineness of the payment of advertisement expenses. It is upon the assessee to justify its genuineness by filing the relevant evidences, which the assessee failed to do so. In absence of any explanation and also considering the sworn statement of Shri Chetan Shah, Director of M/s. Ventures Advertising Pvt. Ltd. the advertisement expenditure claimed is not wholly and exclusively for the purpose of business and hence the same is not allowable. Importantly, the assessee simply relied upon the tax invoices issued by M/s. Ventures Advertising Pvt. Ltd., however, failed to justify as to how the said expenditure has been wholly and exclusively incurred for the purpose of business, when the director of the said company in his sworn statement: admitted that it not rendered any services but only issued bills on instruction clearly establishes that the assessee has incurred expenditure which is not wholly and exclusively for the purpose of business. Further, the assessee M/s. Flat World Processes Pvt. Ltd., is only one client i.e:, M/s. Arshiya International Ltd.. hence, it not need any advertisement. Thus, the expenditure accounts is not allowable and hence rejected. The claim made by the assessee, stating that it had effected TDS on the payments made to the advertising company and therefore that the claim of expenditure is allowable does not hold deduction of tax at source is only an indicator of does not in any way prove conclusively that the expenditure was genuinely incurred for business purposes. Reliance of the assessee on the Ledger account of the advertising company in its books of accounts also does not help the cause of the assessee, since these are produced from the books of accounts maintained by the assessee which are self serving documents created by the assessee to substantiate its claim whereas such Ledger account is neither indicating nor conclusive of the incurring of expenditure. The debit of expenditure on account of advertisement is about '92% of the total receipts which is unheard of in any business, leave alone that of the assessee. It is evident from the statement of Shri Chetan Shah, Director of M/s Ventures Advertising private limited and the documents submitted by him, that the expenditure was in respect of the business of M/s Arshiya International Ltd. The statement of Shri Chetan Shah is corroborated further, by the copies of the advertisement clippings produced by him. The assessee has not even vaguely attempted to rebut this piece of evidence gathered against it, though opportunity to this effect was granted to it, in line with the principles of natural Justice. 5.10 Apart from the above, it is worth mentioning here that the assessee had debited expenditure on account of advertising in its books of accounts in respect of which it was claimed that payments were made to the advertising company namely M/s Ventures Advertising Private Limited. In order to prove its claim, the assessee filed copies of the bills raised on it, details of TDS effected by it and details of payments made by it to the company offering advertising services to it, With this the assessee had discharge the initial onus cast on it. Subsequently, during the course of the proceedings, statement on oath of Shri Chetan Shah, Director of M/s Ventures Advertising Private Limited was recorded which revealed that the claim of the assessee was blatantly incorrect. Documents to this effect were also collected by the Department which were brought to the notice of the assessee for 4 I.T.A. No.56/Mum/2015 rebuttal- The onus at this stage, thus shifted back to the assessee and now it was a response vide of the assessee to prove the correctness of its claim and also to disprove the material gathered by the Department against it. The assessee, however, only made a submission to the effect that it had incurred expenditure and claimed that this was corroborated by its act of deduction of tax at source, as also by the bank statements indicating proof of payment to M/s Ventures Advertising Private Limited. 5.11 Expenditure under the head 'Income from Business arid Profession' ease governed by the provisions of section 30 to 37 of the Income Tax Act, 1961. For this purpose it is to be established beyond reasonable doubt that the expenditure debited in the books of accounts was incurred wholly and exclusively for the purpose of ihe business of the assessee. The assessee failed to prove this. On the contrary evidences have been gathered against the assessee, as discussed above, which clearly go to prove that the expenses debited by the assessee were not for the purpose of its business. Hence the conditions laid down in the Income Tax Act were not fulfilled and therefore, the claim of expenditure on account of advertising was not allowable, to the assessee. 5.12 It is settled law that once the onus shifts back on the assessee, it has to prove its claim with positive material and not just make plain claims on the basis of self made documents which are not conclusive. Thus in the instant case the assessee has Tailed to discharge the onus cast on it with regard to proving, with documentary evidence its claim of having incurred expenditure on account of advertising, which it debited in its books of -accounts and which it had all along been claiming as having been incurred wholly and exclusively for the purpose of its business, 5.13 From the above, it is clear that the assessee failed to justify its claim of expenditure on account of 'advertisement' as being wholly and exclusively for the purpose of business. Further, the assessee also failed to discharge onus in respect of expenditure claimed in the accounts on account of 'advertisement', when that on the basis of documentary evidences it was laid bare before the assessee that its claim regarding the genuineness of the expenses for the purpose of its business was falsehood. Thus, in the first instance discharge the burden lies on it and secondly failed to prove the said expenditure has been wholly and exclusively for the purpose of business. Therefore, the expenditure claimed on account of advertisement of Rs.2,32,58,826/- is disallowed and added to the total income. Thus, an addition of Rs.2,32,58,826/- is made to the total income of the assessee. 5.14 It is evident from the above discussion, that the evidence is gathered during the course of the assessment to the effect that the claim of expenditure in respect of advertisement debited by the assessee was not incurred for, the purpose of business of the assessee. On the Contrary the expenditure claimed by the assessee was incurred in respect of M/s Arshiya International Ltd, a related/group company of the assessee- The assessee has furnished inaccurate particulars of income by claiming excessive expenditure, knowing full well that such expenditure was not at all for the purpose of its business.

Against above order assessee appealed before the learned CIT-A

Before the learned CIT-A assessee filed a copy of agreement dated 3/10/2010 entered with M/s. AIL. The said agreement was for providing retainership services for advising on Maharashtra value added tax and rules, the central sales tax and rules the finance act and rules, SEZ act etc. In lieu of advice the assessee company was to receive monthly consultancy charges of Rs.50 lacks. When the learned CIT-A confronted the assessee's counsel with the fact that when the agreement was for tax consultancy, how the assessee was making payments for advertisement .on behalf of M/s. AIL, the assessee is counsel sought an adjournment and at the next hearing brought a further agreement on plain paper which was not registered with any authority. The said plain paper content referred to the above said agreement and mentioned that assessee was also to make advertisement in newspapers on behalf of AIL. There was no mention of any additional payment/remuneration for this. It was stated that the monthly consultancy charges of Rs.50 lack will remain the same. The learned CIT-A found the said paper to be an afterthought devoid of any merit. He observed that the said paper was not produced earlier, and it was an unregistered document. The learned CIT-A also mentioned that the assessee company is not having any expertise in the work of advertisement Ld. CIT-A proceeded to refer to the provisions of section 37(1). He also referred to several case laws in this regard that the expenditure under this section cannot be allowed unless it was incurred for the purpose of the business. The Ld. CIT-A conformed the order of the Assessing Officer by concluding as under:-

Against above order assessee is in appeal before us.

We have heard both the counsel and perused the records. Learned counsel of the assessee reiterated the submissions made before the learned CIT-A. He submitted that all the documentary evidence showing the genuineness of the expenditure are on record. That the payment was made for the business of the assessee for which proper agreement was there. He submitted that the expenditure cannot be disallowed under section 37(l). 9. Ld counsel in this regard placed reliance upon case laws for the proposition that the revenue should not sit into the shoes of a businessman. That business expediency should be given due importance. That when tax has been deducted at source the payment should be allowed. He further submitted that authorities below have erred in making inference that there was any scheme of tax avoidance. 10. Per Contra learned departmental representative placed reliance upon the order's of the authorities below. 11. Up on careful consideration we find that assessee company is engaged into the business of consultancy. It had entered into an agreement with M/s AIL for providing tax consultancy services. The said M/s. AIL gave an advertisement contract/order to the advertisement company. Thereafter the said M/s. AIL also made payment to the said advertisement company. The advertisement done also related to the business of M/s. AIL. 12. Subsequently M/s. AIL asked for the refund of payment from the advertisement co. It also asked the said advertiser to raise bills over the assessee for the said advertisement done for M/s. AIL. Thereafter the assessee made payment to the advertiser. The assessee also claimed the payment of Rs. 2,32,58,826/- as its advertisement expenditure in the profit I.T.A. No.56/Mum/2015 and loss account. This claim on the facts and circumstances of the case has rightly been disallowed by the assessing officer as the expenditure did not relate to the business of the assessee.

Before the learned CIT-A assessee produced the agreement with AIL for consultancy services regarding tax matters on a monthly remuneration of Rs.50 lacks. When the learned CIT-A pointed out that the said contract/agreement was for consultancy in tax matters and not for advertisement, the assessee produced a plain paper addendum to the agreement produced earlier. This addendum without any further remuneration also provided that the assessee will make advertisement for M/s. AIL. This plain paper content has rightly been rejected by the learned CIT(A) as an afterthought.

We further note that the advertisement order was given by M/s. AIL to the advertisement company. The advertisement also related to the business of M/s. AIL. The bills were raised by the advertisement company on AIL and payment received. Thereafter M/s. AIL instructed the advertisement company to refund the payment and raise Bill for the same advertisement on the assessee. Thereafter the assessee made payment to the advertisement company and claimed the entire payment as its advertisement expenditure.

The facts and circumstances narrated above clearly prove that the said advertisement was done by M/s. AIL for its own business. Bills were duly raised by the advertisement company on M/s. AIL which also made payment for the same. Thereafter for reasons best known to the parties M/s. AIL got the refund of money paid to the advertisement company. It also got the bills changed to the name of the assessee and the advertisement company raised the Bills on the assessee which made the payment. It may I.T.A. No.56/Mum/2015