TaxTMI 
TaxTMI 
2011 (12) TMI 544
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....s and in law in arbitrarily upholding the disallowance @ 10 per cent without pointing out any specific expenditure not eligible for deduction. (iii) That the abovesaid disallowance has been upheld merely on surmises and conjectures. 3. That the appellant craves leave to add, amend or alter any of the grounds of appeal." 2.1 The Departmental ground is reproduced hereunder : "On the facts and circumstances of the case, the learned CIT(A) has erred in restricting the disallowance of Rs. 1,00,00,000 made out of advertisement expenses to only Rs. 27,47,880 at a random rate of 10 per cent of such expense claims in spite of admitting in his own order that there was sum and substance in the findings of the AO and that there was tremendous increase in the advertisement expense claims in comparison to the preceding year." 3. The relevant facts emerging from the assessment order are that the assessee is in the business of trading in hearing aids and allied instruments which are mostly imported from its AE M/s Widex Corporation, Copenhagen, Norway. 3.1 The subject-matter of appeal before us is the assessee's claim of expenses amounting to Rs. 2,74,78,793 towards advertisi....
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....is the duty of the assessing authority to assess the allowable part of the expenditure to the best of judgment. However, ratio of disallowance arrived at by the AO has not been worked out properly as to how she has disallowed a sum of Rs. 1,00,00,000 out of total advertisement expenses of Rs. 2,74,78,793. It is also very true that there is tremendous increase in the advertisement expenses as compared to last year as it has gone up by 200 per cent from the immediately preceding year as is observed by the AO. So, in my considered view it would be reasonable to restrict disallowance to the extent of 10 per cent of total advertisement expenses. Thus, a disallowance of Rs. 27,47,880 is confirmed. The assessee gets a relief of Rs. 72,52,120 on this account." 7. Aggrieved by this, both the assessee and the Revenue are in appeal before the Tribunal. 8. It was the common stand of the parties before the Bench that arguments in the cross-appeals would be led by the learned Authorised Representative. Accordingly, in the context of the above facts it was contended by the learned Authorised Representative that the assessee has been in this line of business and has been claiming advertiseme....
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....much expenditure is to be incurred for advertisement and the AO cannot sit over in judgment over this decision of an assessee, especially in a case where the books of accounts have been accepted. 8.1 On the basis of the facts available on record and the position of law, it was contended that the CIT(A) was not justified in estimating the quantity of disallowance to be made as there was no basis available on the basis of which AO had estimated the disallowance. Responding to the query from the Bench that the AO has made the observation that due to the nature of the expenditure genuineness could not be verified, it was his submission that if the AO had any doubts on genuineness, he could have issued summons under s. 133 to the parties to whom payments have been made as the addresses of the parties concerned are available in the vouchers. It was argued that no such query was raised by the AO. It was stated that neither the AO made his own efforts nor did he ask the assessee to explain something which was not clear to the AO. All the details and vouchers were available before him and he has not chosen to point out what was not verifiable. No specific instances for making the ad hoc ....
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....rious orders of the Tribunal on which reliance has been placed by the Authorised Representative it was his submission that they are not in the context of inordinate increase in the advertisement expenses as such not relevant. 10.1 It was further submitted by him that even if the argument of launch of a product is accepted, even then the expenditure incurred is to the tune of Rs. 30 lacs odd for this reason which still does not explain the inordinate increase. It was his submission that he has seen from the paper book that some of the bills are running into 15 pages and it is not possible to say specifically as to which portion is not verifiable. It was argued that the said finding of the AO has been accepted by the CIT(A) as both the authorities have held that expenses are not capable of being verified and the difference is only on the quantum. In the circumstances a prayer was made that for this purpose so that specific instance of non-verifiable expenses be identified, the issue should be sent back to the file of the AO for verification on facts, let the AO look into the same again and point out the specific instances. 11. In reply, the learned Authorised Representative str....
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....t the expenses are not genuine. The general observation of the AO that it is not possible to verify the genuineness cannot be accepted. The reason for coming to the said conclusion has to be set out in the order. It is seen that no reason has been given either by the AO nor by the CIT(A). If the increase in expenditure alarmed the AO then he should have called the assessee to get confirmation from the party or directly called the party to be examined. There are ample powers with the AO to cross-check the genuineness. No such effort is available on record. Suspicion backed by no evidence cannot be a cogent reason. The reason for increase in expenditure has been given by the assessee before the CIT(A) and reiterated before us. It is seen that in the year under consideration the assessee had launched a new product and apart from that there were inauguration expenses, business promotion expenses, expenses on account of general advertising expenses, packaging charges, P.R. services and expenses on account of brand ambassador etc. The expenses are duly vouched and the audited accounts duly supported by vouchers have been made available to the AO who has not rejected the books of accounts....
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....escribed in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." 12.3 The expression 'wholly and exclusively' used in s. 37(1) of the IT Act has been the subject-matter of discussion by the apex Court in the case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383: (1979) 118 ITR 261(SC). The apex Court in the said judgment interpreting the expression "wholly and exclusively" as used in s. 10(2)(xv) of the IT Act, 1922 held that it does not mean "necessarily". Their Lordships have held that ordinarily it was for the assessee to decide what expenditure should be incurred in the course of his or its business, their Lordships have held that such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, their Lordships have held that the assessee can claim deduction under the said section even though there was no compelling &#....
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....us between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. (Emphasis, italicized in print, provided by the Bench) 12.7 Considering the settled legal position it is clear that while considering the claim of allowable expenditure within the meaning of s. 37(1) it is to be seen that the money paid is (a) wholly and exclusively for the purposes of business or profession; and further (b) must not be (i) a capital expenditure; or (ii) a personal expense; and also (iii) should not be expenditure of the nature prescribed in ss. 30 to 36. In the facts of the present case it is no one's case that the expenses are capital or personal in nature or for that matter are of the character prescribed under ss. 30 to 36 of the Act. The expenditure claimed is stated to be wholly and exclusively for the purpose of the business. Th....