ITAT allows Sales Promotion Expenses and Discount Provisions, Citing Minimal Impact on Revenue and Proper Documentation [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal(ITAT) allowed sales promotion expenses and discount provisions citing their minimal impact on the company’s revenue and the proper documentation provided.

Rushil Décor Ltd.,appellant-assessee,a manufacturer of laminates, incurred sales promotion expenses of Rs. 48,28,256 during the assessment year (AY) 2016-17, which were mistakenly grouped under “sales commission expenses.” In response to the Assessing Officer(AO)’s notice, the assessee explained that this grouping error had been due to a clerical mistake.

Law and Procedure for Filing of Appeals

The assessee had submitted vouchers and invoices to support the claim, but the AO disallowed the entire amount for several reasons. These included the failure to provide original invoices or bills, the inclusion of a significant portion of expenses on stationery deemed unrelated to sales promotion, the improper grouping of expenses under “sales commission,” and the disallowance of provisions for an annual discount scheme and credit notes totaling Rs. 22,21,300/-, as they did not represent actual expenses.

The assessee, aggrieved by the AO’s order, appealed before the tribunal. The Commissioner of Income Tax(Appeals)[CIT(A)] partially allowed the appeal, granting Rs.10,08,769/- of the sales promotion expenses, as the assessee had provided vouchers for this portion.

Law and Procedure for Filing of Appeals

However, the CIT(A) upheld the disallowance of the remaining amount of Rs. 15,25,187/- (which should be Rs. 15,97,187/-) and confirmed the disallowance of Rs. 22,21,300/- related to provisions for the annual discount scheme and credit notes. Thus, the CIT(A) allowed part of the claim but upheld the AO’s disallowance of the rest.

The assessee appealed against the CIT(A)’s order before the tribunal. Regarding the disallowance of Rs. 15,97,187/-, the counsel argued that the expenses were legitimate, with part already allowed by the CIT(A). The AO had overlooked the submitted vouchers, leading to the full disallowance. The counsel pointed out that the disallowed amount was only 0.05% of total revenue and should be fully reversed or reduced to a token amount.

For the disallowance of Rs. 22,21,300/-, the counsel explained that it related to provisions for the annual discount scheme and credit notes, based on past experience and the mercantile accounting system. Given that these provisions were small (0.07% of revenue) and necessary, the counsel requested the full amount be deleted.

Law and Procedure for Filing of Appeals

The two member bench comprising Siddhartha Nautiyal(Judicial Member) and Annapurna Gupta(Accountant Member) reviewed the arguments and the case records. Considering the small proportion of the disallowed expenses to the company’s total turnover and the absence of any cash expense allegations, it found no basis for further disallowance.

The CIT(A) had not requested the remaining invoices before confirming the addition. Based on these factors, the appellate tribunal concluded that no disallowance was necessary.

In short,the appeal filed by the assessee was allowed.

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