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Income Tax Appellate Tribunal, “SMC” – ‘C’ BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश /O R D E R
This appeal by the assessee is directed against the order of the Commissioner of Income-tax(Appeals)-5, Chennai dated 07.10.2016 for assessment year 2012-13.
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The ground raised by the assessee in this appeal is as follows: “The CIT(Appeals) erred in sustaining the disallowance of the claim of deduction towards incurring of advertisement expenses to the tune of ₹ 13,98,067/- and consequently erred in confirming the assessment of such sum in the computation of taxable total income without assigning proper reasons and justification.”
The facts of the case are that the AO found that the assessee had claimed the advertisement expenses amounting to ₹13,98,067/-. In the trading account the assessee shows gross profit of ₹ 7,57,134/- at 2.6% on the total sales ₹ 2,88,40,749/-. During the course of hearing, the AR requested to explain the reasons for the huge expenditures incurred towards advertisement and the resultant gross profit is very low. Since, the assessee has not furnished any details as called for, show cause notice was issued to the assessee vide letter dated
- - 3 ITA 3372/Mds/16 24.2.2015 calling for the details and while the claim towards the advertisement expenditure should be disallowed.
3.1 In response to the notice, the assessee furnished letter dated 27.2.2015, wherein he has stated that the distributorship agreement, the monthly budget for the expenses will remain not more than ₹ 10 lakhs per month and the same would be reimbursed by the company on production of relevant documents. Further, he submitted that during the year, the assessee has incurred advertisement expenses amounting to ₹42,57,509/- out of which ₹ 28,29,442/- has been reimbursed by the company and the same has been credited to the advertisement expenditure account. Further, he stated that since the distributorship was obtained only on 17.1.2011 and financial year 2011-12 being the first full year of distributorship, the assessee was required to incur substantial/huge amounts on advertisement for the produce to be well known in the market and the same has resulted in substantial increase in the sales turnover in the subsequent years. Hence, the AR submitted that the said expenditure is genuine, which is incurred in due course
- - 4 ITA 3372/Mds/16 and for the purpose of the business.
3.2 The AO found that the business offer to the assessee is for distribution of products of BAN LABS Ltd. such as sesa rang and sesa coconut oil for the calendar period of 2011 only. In this connection, the assessee was requested to produce the renewal/further extension agreement, which was not furnished by the assessee for the calendar year 2012 till the business period from January 2012 to March 2012.
3.3 The AO observed that as per the agreement, to meet the expense mentioned as above, company will allow special margin as mentioned in the price list attached and the monthly budget for the expenses will remain not more than ₹ 10 lakhs per month.
At the beginning of each month, the assessee will submit all relevant documents/supporting vouchers for the expenses made by the assessee in previous month to the company, which will be adjusted against the special margin allotted to it through invoice and plus/minus whichever is applicable, will be carry forward accordingly. The AO observed that the reimbursement denotes
- - 5 ITA 3372/Mds/16 all expenses and not only for advertisement alone. The assessee was requested to produce the copy of the relevant documents / supporting vouchers for the expenses made and claim submitted to BAN LAB Ltd. for reimbursement, which was not furnished by the assessee. According to the assessee, TDS has been deducted for the advertisement for the claim of expenditure on the advertisement. According to the AO, mere deduction of TDS at 1% or 2% on the advertisement is not sufficient proof for claiming the expenditure and the assessee had not fulfilled the target of turn-over, say about 37 lakhs per month as per the terms of the agreement. The AO did not accept the explanation of the assessee and disallowed the advertisement expenses of ₹ 13,98,067/-. The AO observed that as per the terms of the agreement with BAN LABS, the assessee is supposed to receive all and any amounts spent on by him for the business and for the calendar year and the assessee’s claim that the same is expenditure in his hands is a clear misrepresentation of the facts of agreement entered into with BAN LABS. Aggrieved, the assessee went in appeal before the CIT(Appeals). Since, the assessee has not produced any bills
- - 6 ITA 3372/Mds/16 and vouchers relating to the expenditure and incurring of expenditure was not proved, the addition was sustained by the CIT(Appeals). Against this, the assessee is in appeal before us.
I have heard both the parties and perused the material on record before us. The contention of the ld.D.R is that the assessee is only trader, wherein buying and selling of branded goods as a distributor and no necessity of incurring expenditure on any advertisement, even if it is incurred, it would be reimbursed by the Principal. According to ld.A.R, the expenditure incurred for the purpose of business and all the expenses was not reimbursed by the Principal. The portion of the expenditure, which was not reimbursed, was claimed as deduction while computing the income of assessee and the ld.A.R prayed that an opportunity may be given to establish the incurring of expenditure and its genuineness. Considering the plea of the assessee, this issue in dispute is remitted to the file of ld. Assessing Officer for fresh consideration and the assessee has to prove that the expenditure was incurred wholly and exclusively for the purpose of business.
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In the result, the appeal of assessee is partly allowed for statistical purposes. Order pronounced on 21st August, 2017 at Chennai.