Vimal Trading Company Vs ITO (ITAT Chennai)
The assessee, a partnership firm engaged in trading of Asafoetida (hing), filed its return for AY 2018-19 declaring income of ₹22.42 lakh and claimed sales promotion expenses of ₹2.37 crore for distribution of stainless steel vessels as free gifts to customers under a promotional scheme.
During assessment, the AO questioned the promotional scheme and observed discrepancies in purchase figures of vessels and the absence of advertisement for the scheme. Based on the assessee’s statement that vessels were given per kilogram of Asafoetida sold, the AO made a proportionate calculation of allowable expenses and disallowed ₹1,47,08,788. The CIT(A) confirmed the disallowance.
Before the ITAT, the assessee clarified that:
- The free vessel was given for every sale irrespective of quantity, not per kilogram of Asafoetida sold.
- Detailed purchase invoices, stock registers, and distribution records of vessels were maintained and produced.
- The discrepancy in purchase figures arose mainly due to GST-related reconciliation differences.
The Tribunal observed that:
- The AO did not reject the books of account nor dispute the genuineness of the purchases.
- The assessee had maintained detailed records of vessels purchased and distributed to customers.
- The disallowance was made solely on an incorrect assumption regarding the promotional scheme without properly examining the reconciliation and supporting documents.
Accordingly, the ITAT held that the sales promotion expenses were fully substantiated and incurred wholly for business purposes.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 18.09.2025 for Assessment Year (AY) 2018-19. The assessee raised the following ground of appeal:
“1. That the Ld. CIT(A), NFAC is not justified in sustaining the disallowance of Rs. 1,47,08,788/- made by the Assessing Officer on account of sales promotion expenses incurred for distribution of stainless steel vessels, without giving proper consideration to the evidence submitted by the appellant including ledgers, stock registers, invoices, and banking proofs.
2. That the Ld. CIT(A) is not justified in confirming the addition by relying on the AOs arbitrary calculation of allowable expenses based on assumptions regarding the number of vessels issued, without appreciating the actual business records and the documented promotional scheme followed by the appellant.
3. That the Ld. CIT(A) has failed to appreciate that all sales promotion expenses were incurred wholly and exclusively for business purposes, are supported by verifiable bank payments, and pertain fully to the relevant year, and hence are allowable under Section 37(1) of the Income Tax Act.
4. That the Ld. CIT(A) and the Ld. AO have erred in not considering the practical business reality where incurring such expense is the core requirement to run the business.
5. That the Ld. CIT(A) and the Ld. AO failed to appreciate that the appellant has consistently followed the same promotional policy year on year, in proportion to turnover, reflecting normal and reasonable business practice, and that penalizing the appellant for such expenditure is unjust and contrary to the principles of tax law.
6. That for these grounds and other reasons that may be adduced at the time of hearing, the Honble ITAT may delete the disallowance of Rs. 1,47,08,788/- made by the learned AO and sustained by the Learned CIT(A) and thus render justice.”
2. The assessee is a partnership firm engaged in the business of trading Asafoetida Hing. The assessee filed a return of income for AY 2018-19 on 23.8.2018 declaring total income of Rs.22,42,990/-. The assessee had claimed sales promotion expenses to the tune of Rs. 2,37,55,120/- towards providing stainless steel vessels to customers as part of promotional scheme whereby vessels are given free for purchase of Asafoetida. The A.O during the course of assessment called on assessee to furnish details of parties from whom the assessee has purchased the stainless steel vessels and based on the submissions noticed certain discrepancies. The A.O also called on the assessee to furnish proof of advertisements published on behalf of the promotional scheme. The assessee submitted that the promotional scheme of giving stainless steel vessel along with the Asafoetida sale runs throughout the year and the stainless steel vessel bears the logo of the brand as a measure of sales promotion. The assessee further stated that the stainless steel vessel is given for every kilo gram of Asafoetida sold. The A.O did not accept the submissions of the assessee and held that without advertisement of promotional scheme, the customers would not have known about the promotional scheme. The A.O calculated the quantum of Asafoetida sold and compared the same with the number of stainless steel vessel issued to various parties. The AO based on the working arrived at the allowable sales promotion expenses proportionate to the Asafoetida sold and accordingly made a disallowance of Rs. 1,47,08,788/-. Aggrieved, the assessee filed further appeal before the CIT(A), who confirmed the addition made by the A.O. The assessee is in appeal before the Tribunal against the order of the CIT(A).
