Facts of the Case

The assessee company claimed deduction of substantial expenditure incurred under the head of sales promotion and related activities at various locations as business expenditure under Section 37(1) of the Income-tax Act.

During the assessment proceedings, the Assessing Officer examined the claim and found that the assessee failed to furnish sufficient supporting evidence establishing the genuineness and business nexus of such expenses. Consequently, the expenditure was disallowed.

Issues Involved

  1. Whether the sales promotion and related expenses qualified as deductible business expenditure under Section 37(1).
  2. Whether the assessee discharged the burden of proving that the expenditure was incurred wholly and exclusively for business purposes.
  3. Whether disallowance was justified due to lack of documentary evidence establishing business nexus.

Petitioner’s Arguments (Assessee)

  • The expenditure was incurred in the normal course of business to promote products and expand market reach.
  • Such promotional expenses are common and necessary in competitive trade.
  • The Assessing Officer failed to appreciate the commercial realities of business operations.
  • The expenses were duly recorded in the books of account and were genuine.

Respondent’s Arguments (Revenue)

  • The assessee failed to produce adequate documentary evidence supporting the claim.
  • Mere accounting entries do not establish allowability under Section 37(1).
  • The burden of proof lies on the assessee to demonstrate that the expenditure was wholly and exclusively for business purposes.
  • Therefore, the disallowance made by the Assessing Officer was justified.

Court Order / Findings (ITAT)

  • Deduction under Section 37(1) is admissible only when the assessee establishes that the expenditure was incurred wholly and exclusively for business purposes.
  • The primary burden of proof lies on the assessee.
  • Sales promotion expenses incurred across different locations must be supported by credible evidence showing direct business connection.
  • In absence of adequate substantiation, the claim cannot be automatically allowed.

Important Clarification

  • Section 37(1) permits deduction only for expenses incurred wholly and exclusively for business purposes.
  • The onus of proof rests entirely on the taxpayer.
  • Unsupported or inadequately documented promotional expenses may be disallowed.
  • Remand does not amount to acceptance of the claim; it merely provides an opportunity for reconsideration based on evidence.

Link to download the order –

https://itat.gov.in/public/files/upload/1615372138-66%20&%20153%20Alld%20Bhola%20Food%20Products%20P.%20Ltd..pdf

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