Tribunal directs reassessment of disallowed expenses, limits enhanced disallowance, and grants partial relief.

The Tribunal found the CIT(A)'s reasoning unsustainable regarding the disallowance of marketing, sales, and distribution expenses, restoring the matter for fresh adjudication. The Tribunal restricted the enhanced disallowance without issuing a corresponding notice and directed the Assessing Officer to limit the disallowance following a verification exercise. The Revenue's appeal was allowed for statistical purposes, and the Assessee's appeals were partly allowed, with the CIT(A) instructed to re-adjudicate within three opportunities of hearing.

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Issues Involved:
1. Disallowance of marketing, sales, and distribution expenses.
2. Enhancement of disallowance without issuing a corresponding notice.
3. Verification exercise resulting in enhancement of disallowance.

Detailed Analysis:

1. Disallowance of Marketing, Sales, and Distribution Expenses:

The primary issue revolves around the disallowance of Rs. 17,35,51,214/- incurred by the assessee towards marketing, sales, and distribution expenses paid to its sister concern, Inbev India International Pvt. Ltd. The Assessing Officer disallowed this expenditure due to the lack of prior approval from the Central Government as mandated by Section 297 of the Companies Act, 1956. The assessee argued that the expenses were necessary for business operations and that the approval was a technical formality which was later rectified.

The CIT(A) deleted the disallowance, reasoning that the non-approval was a technical issue and considering the post facto approval received on 04.01.2012. The CIT(A) relied on the Delhi ITAT's ruling in Jain Surgicals Ltd. Vs. ACIT, which stated that procedural non-compliance does not render the expenditure unlawful if it is otherwise lawful and not prohibited by law.

However, the Tribunal found the CIT(A)’s reasoning unsustainable, noting the lack of evidence that the assessee had applied for the necessary approval for the transactions during the relevant period (FY 2009-10). The Tribunal accepted the Revenue's argument in principle and restored the matter to the CIT(A) for fresh adjudication, considering the interplay of Section 297 of the Companies Act vis-à-vis Section 40A(2)(b) of the Income Tax Act.

2. Enhancement of Disallowance Without Issuing a Corresponding Notice:

In the assessee’s cross appeal for AY 2010-11 (ITA 632/Hyd/17), the issue was the CIT(A)’s action in upholding the disallowance of Rs. 64,09,908/- relevant to the current year and Rs. 4,226/- not related to FY 2009-10. The Assessing Officer had initially disallowed Rs. 21,45,440/- @ 20% of Rs. 1,07,27,201/- claimed by the assessee. The CIT(A) enhanced the disallowance without issuing the mandatory notice under Section 251(1)(a) of the Act. The Tribunal reversed the CIT(A)’s directions and restricted the disallowance to Rs. 21,45,440/-.

3. Verification Exercise Resulting in Enhancement of Disallowance:

For AY 2011-12 (ITA 633/Hyd/17), the CIT(A)’s verification exercise led to the enhancement of the disallowance from Rs. 9,37,270/- to Rs. 44,24,555/- out of the total amount of Rs. 2,26,42,910/-. The Tribunal directed the Assessing Officer to restrict the disallowance to Rs. 9,37,270/-.

Conclusion:

- Revenue’s appeal ITA 589/Hyd/2017 is allowed for statistical purposes.
- Assessee’s appeals ITA Nos. 632 and 633/Hyd/2017 are partly allowed.
- The CIT(A) is to re-adjudicate the issues within three effective opportunities of hearing.

Pronounced in Open Court on 28th May, 2021.

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