Widex India (P) Ltd. v. Dy. CIT

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The Tax Publishers2012 TaxPub(DT) 0888 (Del-Trib) : (2012) 066 DTR 0057 INCOME TAX ACT, 1961 --Business expenditure --AllowabilityDisallowance of advertisement expenses on estimated basis--The relevant facts emerging from the assessment order are that the assessee was in the business of trading in hearing aids and allied instruments which are mostly imported from its AE M/s. W Corporation, Copenhagen, Norway. The subject-matter of appeal was the assessee's claim of expenses amounting to Rs. 2,74,78,793 towards advertising expenses. The AO observed that out of this, Rs. 96,97,561 had been paid to one M/s. B for release of various advertisements in newspapers all over India. He also observed that apart from this a further amount of Rs. 45,03,206 had been claimed to have been paid to M/s. A for hoardings, bus ads and pillar ads. In the circumstances, the AO made an addition of Rs. 1,00,00,000. Before the Commissioner (Appeals), it was canvassed that the details of advertising expenses were made available before the AO, despite that the addition was made. A perusal of para No. 4.1 of the impugned order further shows that the details of advertisement expenses were submitted before the Commissioner (Appeals) in the paper book filed before the said authority and were available before him from p. 64 onwards. Held: It is seen that it was not a case that the assessee was relying upon the audited books of accounts and has not supported the same by way of vouchers. It is seen that no defect in the vouchers has been pointed out by the AO. It was also seen that the parties to whom payments have been made their names, addresses are fully available in the vouchers relied upon by the assessee and made available both to the AO as well as to the Commissioner (Appeals). The Commissioner (Appeals), it is seen, has chosen to reduce the addition made by way of reducing the disallowance, however, the reason for resorting to making a disallowance has not been separately addressed by him and he has merely upheld the finding of the AO. The said finding as observed earlier was without any reason and is purely based on suspicion. The said action cannot be upheld. The courts have repeatedly held that the reasoning for conclusion is imperative as without reasoning the conclusion arrived at is open to the allegations of arbitrariness which cannot be upheld. Neither the AO nor the Commissioner (Appeals) has made out the case that full facts and particulars were not disclosed by the assessee. The books of accounts of the assessee admittedly have not been rejected. Further, it is seen that it is not a case that the assessee is relying upon the audited books of accounts and has not supported the same by way of vouchers. It is seen that no defect in the vouchers has been pointed out by the AO. It is also seen that the parties to whom payments have been made their names, addresses are fully available in the vouchers relied upon by the assessee and made available both to the AO as well as to the Commissioner (Appeals). No steps have been taken by the AO to show that 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 Commissioner (Appeals). 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 Commissioner (Appeals) and reiterated. 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. In these peculiar facts the AO was not justified in estimating the disallowance to be made as apart from general suspicion there is no material or fact on record. The Commissioner (Appeals), it is seen, has chosen to reduce the addition made by way of reducing the disallowance, however, the reason for resorting to making a disallowance has not been separately addressed by him and he has merely upheld the finding of the AO. The said finding as observed earlier is without any reason and is purely based on suspicion. The said action cannot be upheld. The Courts have repeatedly held that the reasoning for conclusion is imperative as without reasoning the conclusion arrived at is open to the allegations of arbitrariness which cannot be upheld. [Para 12] It is a settled legal position that it is not for the department to dictate what is the amount of expenditure the assessee should incur for advertising its business. The expenditure which an assessee may incur for the running of his business necessarily as per the scheme of the Act can be claimed as a deduction under section 37(1). [Para 12.2] Considering the settled legal position, it is clear that while considering the claim of allowable expenditure within the meaning of section 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 sections 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 sections 30 to 36. The expenditure claimed is stated to be wholly and exclusively for the purpose of the business. The AO had not doubted the claim he has merely made general observations while making an ad hoc disallowance holding that the extent of the claim was to be limited on an estimate basis without rejecting the accounts and without caring to point out deficiencies in the vouchers produced. The said approach is against the settled judicial principles and cannot be accepted. The action of the Commissioner (Appeals) in sustaining the same also suffers from this deficiency. The prayer of the Departmental Representative that the issue should go back to the file of AO also does not find favour to the Tribunal as it was not a case where something new was placed by the assessee or there has been a failure on the part of the assessee to lead necessary evidences or satisfy the AO in regard to the nature and extent of the claim when the assessee was specifically called for to do so. No such case was made out. All the facts were available before the AO and the Commissioner (Appeals). No doubt, the auditors do not comment upon the genuineness of the transactions and they are only required to audit the accounts as per the vouchers available and even after their certification the genuineness can still be looked into by the AO. For this specific purpose all evidences were available before the AO who made no effort to point any specific defect. Disallowances purely on estimates cannot be upheld. In the facts, it was seen that no such effort has been done and at this stage there is no good reason as to why this Tribunal should restore the issue back to the file of AO as no deficiency on the part of the assessee has been pointed out by the Department. The argument that it is for the AO to consider the genuineness cannot be faulted, however, the AO is to consider the evidences as per settled principles of law and not in an ad hoc manner based on suspicion. [Para 12] In the aforementioned peculiar facts and circumstances of the case, keeping in view the provisions of the Act, and the position of law, the claim of assessee is to be allowed. [Para 13] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0888 (Del-Trib) : (2012) 066 DTR 0057

INCOME TAX ACT, 1961

--Business expenditure --AllowabilityDisallowance of advertisement expenses on estimated basis--The relevant facts emerging from the assessment order are that the assessee was in the business of trading in hearing aids and allied instruments which are mostly imported from its AE M/s. W Corporation, Copenhagen, Norway. The subject-matter of appeal was the assessee's claim of expenses amounting to Rs. 2,74,78,793 towards advertising expenses. The AO observed that out of this, Rs. 96,97,561 had been paid to one M/s. B for release of various advertisements in newspapers all over India. He also observed that apart from this a further amount of Rs. 45,03,206 had been claimed to have been paid to M/s. A for hoardings, bus ads and pillar ads. In the circumstances, the AO made an addition of Rs. 1,00,00,000. Before the Commissioner (Appeals), it was canvassed that the details of advertising expenses were made available before the AO, despite that the addition was made. A perusal of para No. 4.1 of the impugned order further shows that the details of advertisement expenses were submitted before the Commissioner (Appeals) in the paper book filed before the said authority and were available before him from p. 64 onwards. Held: It is seen that it was not a case that the assessee was relying upon the audited books of accounts and has not supported the same by way of vouchers. It is seen that no defect in the vouchers has been pointed out by the AO. It was also seen that the parties to whom payments have been made their names, addresses are fully available in the vouchers relied upon by the assessee and made available both to the AO as well as to the Commissioner (Appeals). The Commissioner (Appeals), it is seen, has chosen to reduce the addition made by way of reducing the disallowance, however, the reason for resorting to making a disallowance has not been separately addressed by him and he has merely upheld the finding of the AO. The said finding as observed earlier was without any reason and is purely based on suspicion. The said action cannot be upheld. The courts have repeatedly held that the reasoning for conclusion is imperative as without reasoning the conclusion arrived at is open to the allegations of arbitrariness which cannot be upheld.

Neither the AO nor the Commissioner (Appeals) has made out the case that full facts and particulars were not disclosed by the assessee. The books of accounts of the assessee admittedly have not been rejected. Further, it is seen that it is not a case that the assessee is relying upon the audited books of accounts and has not supported the same by way of vouchers. It is seen that no defect in the vouchers has been pointed out by the AO. It is also seen that the parties to whom payments have been made their names, addresses are fully available in the vouchers relied upon by the assessee and made available both to the AO as well as to the Commissioner (Appeals). No steps have been taken by the AO to show that 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 Commissioner (Appeals). 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 Commissioner (Appeals) and reiterated. 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. In these peculiar facts the AO was not justified in estimating the disallowance to be made as apart from general suspicion there is no material or fact on record. The Commissioner (Appeals), it is seen, has chosen to reduce the addition made by way of reducing the disallowance, however, the reason for resorting to making a disallowance has not been separately addressed by him and he has merely upheld the finding of the AO. The said finding as observed earlier is without any reason and is purely based on suspicion. The said action cannot be upheld. The Courts have repeatedly held that the reasoning for conclusion is imperative as without reasoning the conclusion arrived at is open to the allegations of arbitrariness which cannot be upheld. [Para 12] It is a settled legal position that it is not for the department to dictate what is the amount of expenditure the assessee should incur for advertising its business. The expenditure which an assessee may incur for the running of his business necessarily as per the scheme of the Act can be claimed as a deduction under section 37(1). [Para 12.2] Considering the settled legal position, it is clear that while considering the claim of allowable expenditure within the meaning of section 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 sections 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 sections 30 to 36. The expenditure claimed is stated to be wholly and exclusively for the purpose of the business. The AO had not doubted the claim he has merely made general observations while making an ad hoc disallowance holding that the extent of the claim was to be limited on an estimate basis without rejecting the accounts and without caring to point out deficiencies in the vouchers produced. The said approach is against the settled judicial principles and cannot be accepted. The action of the Commissioner (Appeals) in sustaining the same also suffers from this deficiency. The prayer of the Departmental Representative that the issue should go back to the file of AO also does not find favour to the Tribunal as it was not a case where something new was placed by the assessee or there has been a failure on the part of the assessee to lead necessary evidences or satisfy the AO in regard to the nature and extent of the claim when the assessee was specifically called for to do so. No such case was made out. All the facts were available before the AO and the Commissioner (Appeals). No doubt, the auditors do not comment upon the genuineness of the transactions and they are only required to audit the accounts as per the vouchers available and even after their certification the genuineness can still be looked into by the AO. For this specific purpose all evidences were available before the AO who made no effort to point any specific defect. Disallowances purely on estimates cannot be upheld. In the facts, it was seen that no such effort has been done and at this stage there is no good reason as to why this Tribunal should restore the issue back to the file of AO as no deficiency on the part of the assessee has been pointed out by the Department. The argument that it is for the AO to consider the genuineness cannot be faulted, however, the AO is to consider the evidences as per settled principles of law and not in an ad hoc manner based on suspicion. [Para 12] In the aforementioned peculiar facts and circumstances of the case, keeping in view the provisions of the Act, and the position of law, the claim of assessee is to be allowed. [Para 13]