2013 (9) TMI 75 - AT - Income Tax

Tribunal Upholds Deduction of Sales Promotion and Foreign Travel Expenses

The Tribunal upheld the Commissioner of Income-tax (Appeals) decisions, allowing the deduction of sales promotion expenses and a portion of foreign travel ... Allowability of business expenditure under section 37(1) - Testing genuineness of expenditure versus additions under section 68 - Effect of reimbursement from clients on claimed expenses - Documentary evidence: account payee cheques and invoices as proof of payment - Assessment of supplier credentials and purchaser's liability for seller's non compliance - Allowability of foreign travel expenses as business expenditureAllowability of business expenditure under section 37(1) - Effect of reimbursement from clients on claimed expenses - Documentary evidence: account payee cheques and invoices as proof of payment - Assessment of supplier credentials and purchaser's liability for seller's non compliance - Testing genuineness of expenditure versus additions under section 68 - Claim of sales promotion expenses disallowed by the Assessing Officer was held to be allowable on the facts and was deleted by the Tribunal, confirming the CIT(A). - HELD THAT: - The Assessing Officer disallowed amounts paid to five parties as not genuine, relying on discrepancies in proprietor names and addresses, non filing of sales tax returns by suppliers, unusual banking transactions and alleged fabrication of invoices, and added the reimbursement amounts as part of the disallowance. The Tribunal examined the books and records and noted that the assessee had debited a net amount as sales promotion expenses after deduction of scheme reimbursements which were supported by ledger entries and reimbursements from major clients (e.g., Cadbury, Colgate, Timex, UDV). Payments were made by account payee cheque and supported by invoices and ledger accounts. The Tribunal held that such evidence could not be brushed aside and that the proper test was under section 37(1) (whether expenditure was laid out wholly and exclusively for business) rather than treating the case as one of unexplained credits under section 68. The Tribunal further observed that a purchaser cannot be held responsible for the seller's failure to comply with sales tax formalities, found the quantum and nature of the promotional items reasonable on per outlet averages, and followed the decision in CIT v. C.B.K.R. Enterprises where similar promotion expenses were allowed. In view of these factors, the Tribunal concluded that the assessee had established the genuineness and business expediency of the sales promotion expenses and that the Assessing Officer's disallowance was not sustainable.Addition of Rs. 3,75,49,810 on account of sales promotion expenses deleted and the claim allowed.Allowability of foreign travel expenses as business expenditure - Documentary evidence: appellate finding accepted on record - Partial allowance of foreign travel expenses by the Commissioner (Appeals) was upheld by the Tribunal. - HELD THAT: - The Assessing Officer had disallowed the entire foreign travel expenditure. The Commissioner (Appeals) allowed a portion (Rs. 1,33,852) as incurred for business purposes. On appeal, no new evidence or convincing argument was presented by the Revenue to overturn the reasoned finding of the Commissioner (Appeals). The Tribunal accepted the appellate authority's conclusion that part of the foreign travel was for business and found no reason to interfere.Tribunal confirmed allowance of foreign travel expenses to the extent found by the Commissioner (Appeals).Final Conclusion: Revenue appeals for assessment years 2003-04 to 2006-07 are dismissed; the Commissioner (Appeals)'s deletion of the addition relating to sales promotion expenses is confirmed and the partial allowance of foreign travel expenses is upheld. Issues Involved:1. Deduction on account of sales promotion expenses.2. Allowability of foreign travel expenses.Issue-wise Detailed Analysis:1. Deduction on Account of Sales Promotion Expenses:The Revenue appealed against the Commissioner of Income-tax (Appeals) decision to allow the deduction of sales promotion expenses amounting to Rs. 3,75,49,810 under section 37(1) of the Income-tax Act. The Assessing Officer (AO) had disallowed these expenses due to doubts about their genuineness, citing discrepancies in the addresses and names of the proprietors, non-filing of sales tax returns by the parties, and suspicious bank transactions. The AO also noted that the invoices appeared to be prepared during the assessment proceedings.The Commissioner of Income-tax (Appeals) observed that the AO failed to appreciate the nature of the assessee's business, which involves marketing consumer products for multinational companies to institutions like canteen stores departments. The Commissioner noted that the expenses were supported by account payee cheques and proper invoices, and the assessee had filed confirmations from the parties involved. The Commissioner concluded that the expenses were genuine and allowable under section 37(1), leading to the deletion of the disallowance.Upon appeal, the Tribunal examined the rival submissions and found that the AO did not properly appreciate the facts. The Tribunal noted that the assessee had received reimbursements from reputable companies like Cadbury (India) Ltd. and Colgate Palmolive (India) Ltd., indicating that the expenses were indeed incurred. The Tribunal also pointed out that the AO erred in adding the reimbursement amount to the disallowed expenses and that the assessee could not be held responsible for the sellers' non-compliance with sales tax provisions. The Tribunal upheld the Commissioner of Income-tax (Appeals) decision, confirming that the sales promotion expenses were genuine and allowable.2. Allowability of Foreign Travel Expenses:The Revenue also contested the Commissioner of Income-tax (Appeals) decision to allow Rs. 1,33,852 out of the total foreign travel expenses of Rs. 8,10,520 claimed by the assessee. The AO had disallowed the entire amount, questioning the business feasibility of such expenses.The Commissioner of Income-tax (Appeals) allowed a portion of the expenses, finding them to be incurred for business purposes. The Tribunal reviewed the findings and noted that neither the assessee's representative nor the Departmental representative provided additional evidence to challenge the Commissioner's decision. Consequently, the Tribunal upheld the Commissioner of Income-tax (Appeals) decision to allow Rs. 1,33,852 as business expenses.Similar Appeals for Different Assessment Years:The Tribunal also dealt with similar appeals for the assessment years 2003-04, 2005-06, and 2006-07, where the issues were identical, though the amounts differed. Following the same reasoning as in the 2004-05 case, the Tribunal dismissed the Revenue's appeals for these years as well.Conclusion:The Tribunal confirmed the Commissioner of Income-tax (Appeals) decisions, allowing the sales promotion expenses and a portion of the foreign travel expenses, dismissing the Revenue's appeals for all the assessment years in question. The order was pronounced on August 31, 2012.