Tribunal disallows sales promotion expenses, aligns with Gujarat High Court decision for bogus purchases

The Tribunal allowed the Revenue's appeals, directing the disallowance of the entire sales promotion expenses of Rs. 85,78,200/- for A.Y. 2011-12. This decision extended to subsequent years, resulting in the allowance of all Revenue's appeals for A.Y. 2012-13, 2013-14, and 2014-15. The Tribunal emphasized that in cases of bogus purchases, the entire amount should be disallowed, aligning with the decision of the Hon'ble Gujarat High Court in a similar case.

---

---

Issues Involved:
1. Disallowance of sales promotion expenses as bogus.
2. Restriction of disallowance to 12.5% of the total expenses by CIT(A).
3. Determination of whether the entire amount of bogus purchases should be disallowed or only the profit element.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Promotion Expenses as Bogus:
The Revenue filed appeals against the orders of CIT(A) disallowing sales promotion expenses incurred by the assessee, which were found to be bogus. The Assessing Officer (AO) disallowed sales promotion expenses amounting to Rs. 85,78,200/- for A.Y. 2011-12, pertaining to transactions with M/s. Gajanand Traders and Devanand Enterprise. The AO's disallowance was based on the finding that these parties did not exist, and the transactions were bogus.

2. Restriction of Disallowance to 12.5% of the Total Expenses by CIT(A):
CIT(A) restricted the disallowance to 12.5% of the total sales promotion expenses, amounting to Rs. 10,72,275/-, and deleted the remaining disallowance of Rs. 75,05,925/-. This decision was based on the premise that the assessee did make purchases for sales promotion, though not from the parties recorded in the books but from other sources, and thus only the profit element embedded in the purchases should be added to the income.

3. Determination of Whether the Entire Amount of Bogus Purchases Should be Disallowed or Only the Profit Element:
The Tribunal noted that the CIT(A) had concurred with the AO's findings that the purchases were bogus. However, CIT(A) based his decision on the assumption that the assessee had made actual purchases from the grey market and distributed the items, thereby restricting the disallowance to the profit element. The Tribunal found this reasoning flawed, as there was no evidence to prove the distribution of these gift items. The stock register and receipts from recipients were considered self-serving documents without evidentiary value. Consequently, the Tribunal held that the entire amount of Rs. 85,78,200/- should be disallowed, aligning with the decision of the Hon'ble Gujarat High Court in the case of N.K. Industries Ltd., where it was held that the entire expenses need to be disallowed in such cases.

Conclusion:
The Tribunal allowed the appeals of the Revenue, directing the AO to disallow the entire sales promotion expenses of Rs. 85,78,200/- for A.Y. 2011-12. This decision applied mutatis mutandis to the subsequent years' appeals, resulting in the allowance of all the Revenue's appeals for A.Y. 2012-13, 2013-14, and 2014-15. The Tribunal pronounced the order in the open court on 22-07-2022.

---