Deputy Commissioner of Income Tax Vs. Hindustan Tobacco Co. - Court Judgment

Excerpt:

.....stated that the learned cit(a) was quite unjustified in allowing the same.18. the learned authorized representative contended that the assessee had claimed expenditure of rs. 1,12,500 only during the year to m/s market links. the same should not have been disallowed. on a careful consideration of the facts of the case and the rival submissions, we are of the opinion that the matter should go back to the ao who should find whether the amounts quoted by the ao related to the subsequent year if so, they should be considered in the subsequent year but the payment which has been made during the year under appeal should be allowed.19. as regards the expenditure incurred on advertisement amounting to rs. 86,760 through one m/s. reach advertising and marketing co. ltd., the learned departmental representative stated that there was no such concern at this address for the present but earlier it was found that there was a board of m/s reach advertising at this address a few years back but the same was removed in the year 1994.20. the learned departmental representative stated that the said firm was not a genuine business organisation which was just being used as conduit for routing bogus.....

Judgment:

1. The appeal filed by the Department is directed against the order dt.

13th April, 1998, passed by the CIT(A) for the asst. yr. 1994-95.

2. The Revenue has moved a petition dt. 16th July, 1998, praying for condonation of delay in filing the appeallate by four days. The reasons given in the petition are found to be satisfactory. So, after hearing both the sides, we condone the said delay and admit the appeal.

On the facts and in the circumstances of the case, the learned CIT(A) erred in directing deletion of total sales promotion and advertisement expenses of Rs. 58,12,463, which was disallowed in assessment in connection with 6 different parties and on account of display and sampling expenses, for detailed reasons discussed in the assessment order.

4. The facts of the case in short are that the assessee filed return on 28th Oct., 1994, disclosing a total income of Rs. 15,64,960 which was taken up for scrutiny. While completing the assessment, the AO found that the assessee has debited towards the advertisement and sales promotion Rs. 69,54,507. The AO asked the assessee to furnish necessary details and to explain as to how there was a high rise in the expenditure on account of advertisement and sales promotion in the instant year. The assessee stated before the AO that the sales had gone up nearly about 17 per cent in the year under consideration and such expenditure was inevitable. The controversy arises when the AO added back Rs. 58,12,463 in respect of sales promotion and advertisement expenses. The assessee carried the matter in applied before the CIT(A) who on the basis of the submission made before him deleted the addition made by the AO.5. The learned Departmental Representative stated that the assessee was asked to explain the necessity of a wholesale dealer in incurring expenditure on advertisement and sales promotion as normally it is seen that for the products of cigarettes, tobacco etc. it is the manufacturer who undertakes to advertise and promote the sale of his own products. The learned Departmental Representative brought to the notice of the Bench that in certain instant cases the dealer or the distributor has to undertake such exercises of advertisement and sale promotion activities to boost the sale of the products. But this is being done invariably in the cases where there is a condition stipulated in the agreement to the dealership/distributorship. The assessee was given an opportunity to submit the confirmation in this regard from the manufacturer i.e., ITC. which the assessee failed to comply with. The assessee submitted a reply from the manufacturer i.e., ITC. wherein it was categorically stated that the wholesale dealers were free to undertake such expenditure at their own discretion but were under no obligation to the company to do so. The learned Departmental Representative has further stated that for the asst. yrs.

1992-93 and 1993-94 the sales promotion expenses were disallowed on the ground that the assessee as a dealer was not expected or not under obligation by way of contract with the manufacturer to incur expenditure on advertisement and sales promotion. He has, therefore, highlighted that no investigation regarding the genuineness of the expenses was carried out in the assessment years mentioned above and it was decided by the AO to verify some of the items in the instant year.

The learned Departmental Representative has mentioned that the assessee has debited a total amount of Rs. 5,69,000 as payment to Graphic Circle who was providing vehicles to the assessee for the purpose of sales promotion. The AO had some doubt about the billing and deputed one of his Inspectors to make enquiries about the genuineness of the transaction. The Inspector who was deputed to verify the party at the given address could not find any organisation in the name and address given by the assessee. He has further collected information that M/s Graphic Circle was having a current account No. 284 at Punjab National Bank, Tangra branch, but it was seen that in the account opening form the name of the proprietor of M/s Graphic Circle was mentioned as P.Guha but no address had been given in the account opening form, nor has the account been introduced and the account was opened on 27th Aug., 1993 and closed on 11th Feb., 1995. The learned Departmental Representative has, therefore, informed the Bench that bank enquiry showed that no genuine business was being carried out by the party and the account had been opened for the simple purpose of encashing cheques issued by the assessee to M/s Graphic Circle. He has, therefore, reiterated that the AO was quite justified in disallowing the expenses which, according to him, was an arrangement to inflate the expenditure, 6. The learned authorized representative mentioned that the assessee made payment of Rs. 35,900 only to M/s Graphic Circle but it was wrongly mentioned as Rs. 5,60,000 by the AO and the payment made to M/s Graphic Circle was wholly and exclusively for the purpose of business and the payments made were fully verifiable. He has, therefore, asserted that the AO erred in disallowing the same by holding that the payment made was an arrangement to inflate the expenditure. He has further mentioned that the AO relied on the Inspector's report and certain individuals alleged to have been examined by the Inspector deputed by him in connection with the payment to M/s Graphic Circle without handing over a copy of the Inspector's report and without producing the other parties examined by the Inspector for cross-examination by the assessee. It was further brought to the notice of the Bench that the said M/s Graphic Circle had business relations from years back and all the details in possession and control of the assessee were furnished. It was, therefore, reiterated that the AO erred in disallowing the payment made to M/s Graphic Circle on irrelevant consideration and materials and in violation of natural justice.

7. We have heard the rival submissions and gone through the record. The learned counsel for the assessee mentioned before the Bench that no opportunity was given to them to rebut the Inspector's report and also the scope of cross-examining the other parties who have been examined by the Inspector. It was further mentioned before us that this is one of the grounds agitated before the CIT(A) that there is complete violation of principle of natural justice while making the assessment by the AO We have further noticed that the cheques were deposited in the bank in the account of M/s Graphic Circle and these were withdrawn almost on the very next day in cash. The account was opened on 27th Aug., 1993, in the Punjab National Bank, Tangra branch, and it stands closed on 11th Feb., 1995.

8. Having carefully considered the facts of the case and the materials, we are of the opinion that the matter should be sent back to the AO to verify in minute details whether the account was opened without any introduction or the proper addresses, etc. were not mentioned in the accounts opening form. If on verification it is found that it has been opened with proper information and introduction and the cheques were deposited in the account of Graphic Circle, then the AO should grant relief to the assessee as per law. The assessee should be given an opportunity to have a copy of the Inspector's report and also a reasonable opportunity to rebut/cross-examine the other parties who have been examined by the Inspector.

9. As regards expenditure incurred through M/s Universal Printer, the learned Departmental Representative stated that the two Inspectors were deputed to carry out necessary enquiries and they visited the spot on 4th March, 1997 and 6th March, 1997, but there was no such concern available in this area and the Inspector visited the adjacent address but the watchman mentioned to them that no such concern had ever existed in that given address. The AO has given many opportunities to the assessee to produce the party which they did not do and also summons under Section 131 could not be served as the party is not traceable at the address given by the assessee. He has, therefore, stated that the AO was quite justified in disallowing the expenditure.

10. The learned authorized representative contended that the expenses incurred on payment to M/s Universal Printer were wholly and exclusively for the purpose of the business and the payments made were fully verifiable. It was further brought to our notice that the AO totally relied on the Inspector's report and certain other individuals alleged to have (been) examined by the said Inspector in connection with that payment to M/s Universal Printer without giving copy of the Inspector's report and without producing other parties examined by the Inspector for cross-examination by the assessee.

11. We have heard both the sides and gone through the record. In this connection our observations in respect of payment made to M/s Graphic Circle should be followed. For the sake of brevity, we are not repeating the same.

12. As regards the payment to M/s Tara Enterprises, the learned Departmental Representative mentioned that the account of M/s Tara Enterprises which was also opened on the same date as of M/s Graphic Circle and both the accounts were closed on the same day i.e., 11th Feb., 1995. The learned Departmental Representative has further mentioned that the summons under Section 131 had been served by affixation only as the party was not traceable at the address given by the assessee and in view of the facts enumerated in respect of M/s Graphic Circle, he was of the firm opinion that the AO was quite justified in disallowing the expenditure on account of bill raised by M/s Tara Enterprises.

13. The learned counsel mentioned that the expenditure were incurred wholly and exclusively for the purpose of business and as the payments were made by account payee cheques, the AO was not justified at all in disallowing the same. It was further stated that the AO made enquiry into the bank account of M/s Tara Enterprises on the back of the assessee and drew adverse inference on the basis of the same without allowing the assessee any reasonable opportunity to rebut the same.

14. We have heard the rival submissions and gone through the records.

On a careful consideration of the facts of the case, we are of the opinion that the matter should be sent back to the AO with the direction to extend an opportunity of being heard to the assessee and decide the matter as per law.

15. As regards payment made to M/s Fleet who was supplying to M/s.

H.T.C. as well as other business concerns (sic) the learned Departmental Representative mentioned that .proprietor of M/s Fleet one Mr. Rahul Roy was summoned under Section 131 and examined on oath on 27th March, 1997, who appeared and stated that cash was supplied to H.T.C, on certain dates. Shri Roy when asked in respect of bill No.166A/1993-94 for Rs. 10,25,358 mentioned that the cars were supplied to M/s ITC Ltd. and for this originally the bill was raised on ITC and subsequently it was told to him by ITC that the said amount would be paid by M/s H.T.C. and hence a fresh consolidated bill of the said amount was raised on H.T.C. giving bill No. June/166A. The proprietor Shri Roy, further stated that the duty slip was signed by the ITC personnel and not by the people from H.T.C, On being asKed, Shri Roy produced the ledger for the financial year 1993-94 where it was seen on p. 200 bearing account of M/s ITC that the bill was originally raised on ITC and not on H.T.C. The Departmental Representative has, therefore, reiterated that the AO has rightly disallowed the expenses and added back the same in the total income of the assessee.

16. The learned authorized representative stated that the expenses incurred on payments to M/s Fleet amounting to Rs. 1,02,538 for hiring cars were wholly and exclusively for the purpose of business and the payments were fully verified by the AO. It was further stated that the AO erred in disallowing the payments to M/s Fleet, merely on the ground that originally the bills were raised on the principals i.e., ITC Ltd. and duty slips were signed by the ITC personnel but subsequently a fresh bill was raised in the name of the assessee. In this connection we have noticed from the order of the learned CIT(A) that the AO was told by the ITC that the said amount was paid by H.T.C. and hence a fresh consolidated bill of the said amount was raised on H.T.C, giving bill No. June/166A and the duty slips were signed, by the ITC personnel and not by the people from the H.T.C. In view of the above fact, we do not find any justification in interfering with the order of the learned CIT(A) which is, therefore, sustained on this point.

17. As regards the disallowance on account of expenses incurred through M/s Market Links Ltd., the learned Departmental Representative stated that the assessee was asked to explain the discrepancy vide show-cause letter dt. 12th March, 1997, and in reply, it was stated that the expenses pertain to the relevant previous year. But the AO could not accept the stand of the assessee as the date of debit notes pertains to the next financial year, He has, therefore, stated that the learned CIT(A) was quite unjustified in allowing the same.

18. The learned authorized representative contended that the assessee had claimed expenditure of Rs. 1,12,500 only during the year to M/s Market Links. The same should not have been disallowed. On a careful consideration of the facts of the case and the rival submissions, we are of the opinion that the matter should go back to the AO who should find whether the amounts quoted by the AO related to the subsequent year If so, they should be considered in the subsequent year but the payment which has been made during the year under appeal should be allowed.

19. As regards the expenditure incurred on advertisement amounting to Rs. 86,760 through one M/s. Reach Advertising and Marketing Co. Ltd., the learned Departmental Representative stated that there was no such concern at this address for the present but earlier it was found that there was a board of M/s Reach Advertising at this address a few years back but the same was removed in the year 1994.

20. The learned Departmental Representative stated that the said firm was not a genuine business organisation which was just being used as conduit for routing bogus transaction with a view to reducing taxable income.

21. The learned authorized representative, on the other hand, stated that the AO erred in making the disallowance on one of the grounds that the assessee failed to produce the said party. But the assessee was never given an opportunity to rebut the inference drawn.

22. We have heard the rival submissions and gone through the records.

We have noticed from the order of the AO that there was a board of M/s Reach Advertising & Market Co. at the given address a few years ago but the same was removed in the year 1994. In view of the above, an inference may be drawn that at the relevant time the firm was in existence. We have further observed from the order of the AO that the bank account in this case also had been closed. From the order of the AO it appears that he is admitting the fact that the bank account existed and the relevant cheques were encashed by the assessee. We do not, therefore, find any infirmity in the order of the learned CIT(A) which is, therefore, sustained.

23. As regards the disallowance of a sum of Rs. 27,68,607 under the head "display and sampling expenses", the learned Departmental Representative mentioned that the assessee could not produce the list of shops where the assessee distributed the packets of cigarettes throughout Calcutta for displaying as well as for sampling. He has, therefore, supported the view taken by the AO and stated that the learned CIT(A) was unjustified in reversing the order of the AO.24. The learned authorized representative for the assessee contended the displaying and sampling expenses amounting to Rs. 27,68,607 were made wholly and exclusively for the purpose of business and which were fully verifiable from the records of the assessee. He has, therefore, reiterated that the AO was not justified at all in disallowing the same without allowing the assessee any opportunity to rebut the same.

25. We have heard the rival submissions and on a careful consideration of the facts of the case, we feel in the interests of justice the matter should be remanded back to the AO who should give an opportunity to the assessee to file all the lists of shops where the assessee distributed the packets of cigarettes throughout Calcutta for displaying as well as sampling. The assessee should be allowed an opportunity of being beard and to produce all the documents and evidences in this regard, We, therefore, direct the AO to verify all the documents and evidence and decide the issue afresh as per law.

25. In the result, the Departmental appeal is partly allowed as indicated above.

26. I have carefully gone through the draft order authored by my learned colleague and have also had the opportunity of discussing the matter with him in detail. Much as I persuade myself to agree with the findings and conclusion arrived at by my learned colleague, I am unable to concur with him and my learned colleague is also not inclined to yield to my suggestions. Accordingly, to come out of this cul de sac and with the leave and consent of my Brother colleague, I proceed to write this separate and dissenting order.

27. Briefly, the material facts. The assessee is a wholesale dealer of the cigarettes manufactured by ITC Ltd. During the course of assessment proceedings, the AO noticed that during the relevant previous year, assessee's expenditure under the head 'sales promotion expenses' was Rs. 69,54,507, as against expenditure of Rs. 14,19,127 and Rs. 2,03,507, under the same head, in the previous years relevant to the asst. yrs. 1993-94 and 1992-93, respectively. In response to AO's query about reasons of such an unusual spurt in expenditure under this head, the assessee clarified that due to increase in turnover, which was 17 per cent in the relevant previous year vis-a-vis immediately preceding previous year, the expenses had substantially gone up. It was also claimed by the assessee that in certain circumstances, the dealer or distributor, as the case may be, is also required to incur expenditure on advertisement and sales promotion. It is not in dispute that when AO sought clarification on this point from ITC Ltd., it was stated that 'the wholesale dealers were free to undertake such expenditure at their own discretion but were under no obligation to the company to do so'.

28. Coming to more specific observations, AO noted that the assessee has debited a total amount of Rs. 5,60,000 as payment to one M/s Grafic Circle of 'Kudiram Bose Road, PO Hridyapur, 24 Parganas', ostensibly for car hire charges, but Inspector's spot enquiry report revealed that no such concern existed at the given address. Enquiries from the local residents and post office further revealed that there was no such concern in existence in past also. These facts are said to have been pointed out to the assessee vide order-sheet entry 11th March, 1997 and also by a letter dt. 12th March, 1997, (copy at pp. 24-27 of paper book) but all that the assessee had to say was that "we have furnished all information to you, which was in our possession and control i.e., we submitted to you copies of bills and payment details. We would bring to your kind attention that all payments were made by account payee cheques." The AO further made efforts to trace this M/s Grafic Circle by tracing the bank account details, through discharged cheques of the assessee, from records of the assessee's banker. This exercise revealed that M/s Grafic Circle was having a current account No. 284 with Punjab National Bank, Tangra branch, Calcutta, and name of the proprietor in this bank account was shown as P. Guha, but neither the account was opened through any introduction nor the account opening form had any address mentioned. It was also noticed that the account was opened on 27th Aug., 1993 and closed on 11th Feb., 1995, and that all the cheques received from the assessee were deposited in this account only to be withdrawn in cash on the next available working day. It was further noticed that on the same day on which this account was opened, another account by the name of M/s Ma Tara Enterprises, of somewhat identical nature and who also happened to be a supplier to the assessee, was also opened. It may also be stated that neither the assessee could produce anyone from this M/s Grafic Circle nor could a notice under Section 131 be served on this person. It was in the backdrop of these observations that the AO concluded that the payment of Rs. 5,60,000 was a bogus payment only to inflate expenditure and, thereby, artificially reduce the tax liability.

29. It was also noticed that the assessee had shown a payment of Rs. 15,40,658 to one M/s Universal Printers of '34/1 Ballygunge Circular Road, Calcutta 700019', ostensibly for printing of 'Gold flake' and 'Wills' show card, but spot enquiries conducted by the IT Inspectors revealed that the address was of a vacant plot, and that in fact there was no such firm in existence at this address. Local enquiries also confirmed that no such concern was ever in existence at this address or even near thereto. The IT Inspector nevertheless affixed notice under Section 131 at the adjacent building but there was no response. When these facts were communicated to the assessee through letter dt. 12th March, 1997, (referred to in para 28) the same reply was given. Efforts to trace this supplier, through discharged cheques in assessee's bank records, led to Punjab National Bank, Park Street branch. This account was operated by Shri Niranjan Paul but again the account was not properly introduced and, therefore, enquiries reached a blind alley. It was also noted that the operations in this account were also on the same pattern as in the case of M/s Grafic Circle inasmuch as all withdrawals were by cash. It was thus concluded that this payment was also a bogus payment only for the purpose of inflating the expenditure and, thereby reducing the tax liability.

30. The AO further noticed that payments of Rs. 5,93,900 were made to M/s Ma Tara Enterprises of '8 Ekdalia Road', ostensibly for the purpose of hiring persons for sales promotion drives. Again spot enquiries confirmed that no such concern existed at the given address and local enquiries revealed that no such concern was in existence at any point of time. These facts communicated to the assessee were met with assessee's response extracted in para 28 above, i.e., "we have furnished all information to you, which was in our possession and control i.e., we submitted to you copies of bills and payment details.

We would bring to your kind attention that all payments were made by account payee cheques." The AO further made efforts to trace this M/s Ma Tara Enterprises by tracing the bank account details, through discharged cheques of the assessee from records of the assessee's banker. This exercise revealed that M/s Ma Tara Enterprises was having a current account No. 285 with Punjab National Bank, Tangra branch, Calcutta and this account was operated by one Shri A. Halder, but neither the account was opened through any introduction nor the account opening form had any address mentioned. It was also noticed that the account was opened on 27th Aug., 1993 and closed on 11th Feb., 1995, and that all the cheques received from the assessee were deposited in this account only to be withdrawn in cash on the next available working day. As stated earlier, it was further noticed that on the same day on which this account was opened, another account by the name of M/s Grafic Circle, who also happened to be a supplier'to the assessee and whose case is discussed in para 28 earlier, was also opened. The assessee could not produce anyone from this M/s Ma Tara Enterprises nor could a notice under Section 131 be served on this person. It was then concluded that the payment of Rs. 5,93,900 was a bogus payment only to book fictitious expenditure.

31. The AO also took note of a payment of Rs. 1,02,538 to one M/s Fleet at 2/1B, Rustamji Street, Calcutta 700 019, for the purpose of car hire. In response to notice under Section 131, proprietor of this concern appeared and gave necessary details. It was, however, noted that duty slips for car hire were signed by ITC Ltd.'s officials and, therefore, the AO concluded that since this payment was for ITC Ltd.'s expenses, which was borne by the assessee, this expenditure cannot be allowed in the hands of the assessee. Expenditure of Rs 1,02,538 was thus disallowed.

32. The AO further noticed that the assessee had made payments aggregating to Rs 1,50,000 to one M/s Market Links, of 13C Everest Building, 46C, Chowringhee Road, Calcutta-700071, but enquiries made with this company revealed that while these debit notes were raised during May, 1994 to November, 1994, the assessee had claimed the related deduction for the asst. yr. 1994-95. The assessee's claim that these expenses pertained to the period April 1993 to March, 1994, was summarily rejected by the AO and thus disallowance of Rs. 1,50,000 was also made.

33. The AO further disallowed Rs. 86,760 on account of payment made to one M/s Reach Advertisement & Marketing Co. at 21A Palit Street, Calcutta. This disallowance was made on the ground that no such concern existed at the given address though the AO has also admitted that according to spot enquiries conducted through Inspector, such a concern did exist till 1994.

34. It was further noticed by the AO that the assessee claimed a deduction of Rs. 27,68,607 on account of sampling and display expenses.

According to the assessee, this amount represented distribution of cigarettes to various vendors for display and as free samples. It is an admitted position that despite several requisitions by the AO, the assessee was not in a position to even furnish the list of shops or any other register, report or even other document which could throw some light in the matter. In response to show-cause notice requiring the assessee to show-cause as to why in the absence of necessary clarifications and evidence to substantiate the claim, this expenditure of Rs. 28,68,607 should not be disallowed, the assessee, vide letter dt. 18th March, 1997 (copy at pp. 28-31) stated that "We would bring to your kind attention that sampling/display expenses have been genuinely incurred during the year from time to time which we have already explained to you. These cigarettes were distributed through hawkers, sales representatives. We have, however, not maintained the records in respect of distribution for each individual shop." The AO also got the field enquiries conducted in certain main commercial areas but none of the cigarette vendor corroborated the assessee's version. The AO, recording the position that 'assessee has flatly refused to co-operate and stated that no records have been maintained', disallowed the aforesaid amount of Rs. 27,68,607 as bogus expenditure.

35. Aggrieved by these disallowances, assessee carried the matter in the appeal before the CIT(A).

36. As for the payment of Rs. 5,60,000 to Grafic Circle, the CIT(A) noted that the actual debit to the P&L a/c for the relevant previous year was only Rs. 3,59,000, and, therefore, the disallowance could at best have been limited to this Rs. 3,59,000. He deleted even this amount by observing as follows: When the payment has been made by cheques and person in question accepted the money through his bank, the appellant is not at fault.

Assuming for a minute that M/s Grafic Circle could not be located, it is not a fault of the appellant that the party was not traceable after a long duration of the transaction of 3 1/2 years. One fact is clear that even according to the AO the transaction was done through bank by both the parties. There is no question of forming adverse inference on this ground.

37. As for payment of Rs. 15,40,658 to one M/s Universal Printers, learned CIT(A) observed as follows : On the same line of M/s Grafic Circle, no. adverse inference should be drawn. The AO's finding that the expenses claimed in regard to M/s Universal Printers is bogus and payment by cheques is an arrangement to inflate expenses is based on mere suspicion, conjectures and surmises. Therefore, no adverse inference should be drawn.

39. Coming to payment of Rs. 5,93,900 made to M/S Ma Tara Enterprises, learned CIT(A), after noting assessee's contentions, deleted the disallowance with a rather cryptic observation The transaction is proved. No adverse inference is to be drawn.

40. As for payment of Rs. 86,760 on account of payment made to one M/s Reach Advertisement & Marketing Co., CIT(A) deleted the aforesaid disallowance by noting that even as per the AO this firm was in existence since 1994 and that this company had the bank account.

41. Disallowance of Rs 1,02,538, on account of payment made to M/s Fleet, was deleted by the CIT(A) on the ground that once ITC Ltd. itself has confirmed that the payment was to be made by the assessee, the AO was not justified in deleting the same on the ground that duty slips were signed by ITC officials.

42. Regarding disallowance of Rs. 1,50,000 on account of payment made to M/s Market Links, the CIT(A) noted that the claim of the assessee was only Rs. 1,12,500 and complete details in respect of the same were duly furnished by the assessee but the AO, without considering the explanations of the assessee, disallowed Rs. 1,50,000. The CIT(A) thus deleted this disallowance also.

43. The CIT(A) then moved on to disallowance of Rs. 27,68,607 under the head 'Display and sampling expenses' and observed as follows : The AO's main grievance against the appellant is that when it had.

no contractual obligation from the manufacturer, it chose to spend over Rs. 28 lakhs for this expenses. The authorized representative argued that in the earlier year the entire expenditure under the sales promotion and advertisement expenses was allowed by the CIT(A). The authorized representative also cited several case laws in support of the claim. He has stated that the expression 'wholly and exclusively' in Section 37(1) does not mean 'necessarily'.

Originally, it is for the assessee to decide whether any expenditure should be encashed (incurred) or not in" the course of business.

Such expenditure may be incurred voluntarily and when in necessity and if it is incurred for moving the business and to earn profits, the assessee can claim deduction thereof under Section 37(1) even though there was no necessity to incur such expenditure. In this case, ITC itself has replied to the AO that the appellant can incur an expenditure on advertisement and sales promotion. So, the amount spent should not be a measurement of allowance or disallowance. In any case, the turnover has increased by Rs. 17 crores and so far as the requirements of the AO are concerned, the entire decision is based on Inspector's report. So far as addition made by the AO under the head 'advertisement and sales promotion' the first point that the expenditure is a sizable amount should not lead to conclusion that it is bogus or it is excessive or it is unverifiable. Hence, the addition made under the head 'Sales promotion and advertisement expenses' is deleted.

44. Aggrieved by CIT(A)'s deletion of disallowance of sales promotion and advertisement expenses, aggregating to Rs. 58,12,463, Revenue is in appeal before this Tribunal.

45. Rival contentions are conscientiously heard, orders of the authorities below carefully perused and applicable legal position duly deliberated upon.

46. As far as CIT(A)'s deletion of disallowances, with respect to payment of Rs. 1,02,538 to M/s Fleet, of Rs. 86,760 on account of payment made to one M/s Reach Advertisement & Marketing Co., of Rs 1,50,000 to M/s Market Links, is concerned, suffice to state that I agree with the conclusions arrived at by my learned colleague that no interference is called for. I am, therefore, not dealing with these issues in further details.

47. Regarding disallowance of Rs. 5,60,000 on account of payment of car hire charges to M/s Grafic Circle, it is noted that the actual debit to the P&L a/c is only Rs. 3,59,000, Therefore, the correct amount of disallowance can, as noted by the CIT(A), indeed be at best Rs. 3,59,000. I find that the details of this debit, as culled out from related bills, are as follows: Bill for car hire charges 4 cars daily X 20 days @ Rs 750 per car (including fuel, driver and all maintenance) Bill for car hire charges 4 cars daily X 20 days @ Rs 750 per car (including fuel, driver and all maintenance) Bill for car hire charges 4 cars daily X 20 days @ Rs 750 per car (including fuel, driver and all maintenance) Bill for car hire charges 4 cars daily X 20 days @ Rs 750 per car (including fuel, driver and all maintenance) Bill for car hire charges 7 cars daily X 20 days @ Rs 750 per car (including fuel, driver and all maintenance) 48. All these bills are drawn up on a format, which is not pre-numbered and does not even contain phone number of the concern, and states the names and address of this concern, besides stating "All kinds of printing, binding and general order suppliers". It is indeed unusual that a printer, binder and general order supplier is making available such a large number of cars to the assessee. It is also interesting to note that the address given in the bill is of a place outside the city and the assessee did not even bother to know phone number of a concern which is making available at least four, and at times as many as seven cars a day. There is no mention anywhere about the make of registration number of cars, said. There is not even circumstantial evidence about the use of these cars or any evidence by way of duty slips signed by those who used the cars. When during the course of hearing, this Bench desired to know use of these vehicles, learned counsel for the assessee gave a vague explanation that these cars were made available to marketing staff of ITC. I may also mention that there is no evidence at all about the factum of Grafic Circle having actually made available these cars and the use to which these cars were put. I have also noticed that the assessee could not produce the aforesaid party for verification and when asked for further details and confronted with Inspector's report, had only this to say.

We have furnished all information to you, which was in our possession and control i.e., we submitted to you copies of bills and payment details. We would bring to your kind attention that all payments were made by account payee cheques.

49. I may mention that mere fact that the payment is made by account payee cheques does not ipso facto entitle assessee's claim for deduction of that expenditure. In the case before us, AO has taken great pains in conducting spot enquiries, confronting the assessee with the same, tracing the destination of cheques through banking channels and even examining the bank account of the alleged recipient. The AO discovered that not only that Grafic Circle did not exist at the given address, local enquiries revealed that there was no such firm in existence at that address at any point of time. When the assessee was confronted with these findings of the enquiries, assessee did not have anything to say. I find it against the preponderance of probabilities that none in assessee's concern has any clue about where such a major supplier, who supplied several cars for months on almost continuous basis, disappeared. If there were actually any dealings with Grafic Circle, someone in the assesses-firm should have seen the place at which this supplier was conducting the business or should have at least known the telephone number on which supplier was contactable. Even this basic information could have led to tracing the supplier, but then the assessee did not furnish any information at all. It fails on the test of human probabilities that the assessee picks up a 'printer, binder and general order supplier' to supply large number of cars on somewhat continuous basis from a place far way from the city but does not even keep the b contact details of this major supplier. I find it difficult to believe this is a mere coincidence that only for this, and similar other suppliers of doubtful existence, cheques get encashed through unintroduced bank accounts which are used only for cash withdrawals of the account payee cheques so deposited. Elaborate exercise done by the AO shows that there is reasonable basis to believe that Grafic Circle did not at all exist, that account payee cheques were converted into cash in a fraudulent manner and that there is no evidence, direct or corroborative, that cars were actually made available to the assessee.

The disallowance is, therefore, justified on merits of the case. As has been observed by Hon'ble Supreme Court, in the landmark case of CIT v.Durga Prasad More (1971) 82 ITR 540 (SC), 'it is true that apparent must be considered real until it is shown that there are reasons to believe that apparent is not real but then 'the taxing authorities were not required to put on blinkers while looking at the documents produced before them'. Their Lordships have further observed that, "Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or a Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities." Examined in the light of this guidance also, I find it a fit case for AO's coming to the conclusion that the assessee's claim for expenditure was unsubstantiated, bogus and, therefore, only fit to be rejected. I may mention that the reasons on account of which CIT(A) has given relief in the matter, in my considered view, are superfluous since merely because a payment is made through banking channels does not mean that the expenditure incurred by the assessee is genuine expenditure. As for learned counsel's emphasis on 'commercial realities', which warrant and justify such payments, I may only mention that if there is indeed any evidence about the factum of services having been rendered and genuineness of expenditure is established, such an expenditure should indeed be allowable in the light of, as learned counsel has put it, 'commercial realities'.

However, it is not on the grounds of lack of business expediency per se that disallowance has been made and, in any event, this test could be decisive factor only when reality and genuineness of transaction is established. In the case before us, that stage has not come. I am, therefore, of the view that the deletion of disallowance by the CIT(A) should be reversed but, for the reason that actual debit to P&L a/c was only Rs. 3,59,000, the disallowance is restricted to the same.

50. I may, in this regard, refer to my learned colleague's observations in para 8 only to respectfully disassociate myself from the same. I am satisfied that the assessee was duly confronted with the Inspector's report (vide AO's letter dt. 12th March, 1997, copy placed at pp. 24-27 of the paper book) and assessee's comments thereon (copy at pp. 28-31 of the paper book) were duly considered by the AO. As for learned colleague's observation that "If on verification, it is found that it (bank account) has been opened with proper information and introduction and the cheques were deposited in the account of Grafic Circle, then the AO should grant relief to the assessee as per the law.", I am unable to understand what is the relief 'as per the law' in this context and I do not see any point in sending back the matter on this point when the assessee has not even challenged Revenue's finding that the account has been opened without proper introduction. I, therefore, regret my inability to subscribe to the views of the learned colleague.

51. As far as deduction for payment of Rs. 15,40,658 to M/s Universal Printers is concerned, I find that the actual debit to the P&L a/c is only Rs. 14,99,860, details of which are "as follows : Towards the cost of printing WILLS POP-UPs on V 290 gms. Super Lucky Art Board with lamination and base printed in 3 colours, etc.......@ Rs 9.20 per pc - 30,000 pcs + packing and transportation, etc.

Towards the cost of printing Gold Flake show card on 135 gms Super Lucky Art paper with lamination @ Rs 14 per piece - 80,000 pcs + packing and transportation, etc.

Towards the cost of refabrication of WILLS POP UP sticker, etc. + packing 11,200 pc 52. I have noted that once again the bill does not contain any phone number, sales-tax registration numbers, etc. and even the address given in the bill issued by Universal Printers turned out to be address of a vacant plot of land. The enquiries conducted by the IT Inspector state that no such concern ever existed in that area. When the assessee was confronted with Inspector's report revealing these facts, all that assessee had to say was that "We have furnished all information to you, which was in our possession and control i.e., we submitted to you copies of bills and payment details". I find it a very evasive reply.

Universal Printers was doing large jobs, valued at almost Rs. 15 lakhs for that year and it is difficult to believe that the assessee did not even realise that the address given by this concern was that of a vacant plot. A printing press capable of doing such sophisticated jobs, as was billed to the assessee, cannot disappear in thin air and some persons in the assessee-company should have had some further information about this concern. I have also noted that once again the account through which cheques are encashed was an unintroduced account and there were only cash withdrawals from that account. I have also noted that the assessee has not been able to give any evidence--direct or corroborative--about the factum of having received the printed material said to have been printed by Universal Printers, or about distribution of such material. All that the assessee has been able to produce is a bill which anyway contains a fake address--something which, in my view, is not sufficient to entitle the assessee for a claim for deduction. The bank account through which cheques are encashed is an account opened in clear violation of established banking practices. All these factors, taken together, justify AO's conclusions regarding the claim being not sustainable. As for learned CIT(A)'s observation that "the AO's finding that the expenses claimed in regard to M/s Universal Printers is bogus and payment by cheques is an arrangement to inflate expenses is based on mere suspicion, conjectures and surmise" based on which the disallowance is deleted, I may mention that, in my considered view, AO's conclusions are based on specific and cogent reasons placed on record and which, for the reasoning I have given, I approve. My observations in para 49 above also, broadly speaking, are relevant on this issue as well. In my view, mere payment through the banking channels per se cannot be a legally sustainable reason to hold that the expenditure was genuine, as is indeed done by the CIT(A). Accordingly, I deem it fit to vacate the order of the CIT(A) and restore the disallowance to the extent of, for the reasons stated earlier, Rs. 14,99,860.

53. As for the payment of Rs. 5,93,900 to M/s Ma Tara Enterprises, I find that the details of this expenditure, as culled out from copies of related bills, are : Sales promoters (Hired boys) 26 days X 40 boys per day @ Rs 130 per day per boy Sales promoters (Hired boys) 26 days X 40 boys per day @ Rs 130 per day per boy Sales promoters (Hired boys) 25 days X 40 boys per day @ Rs 130 per day per boy Sales promoters (Hired boys) 20 days X 40 boys per day @ Rs 130 per day per boy Sales promoters (Hired boys) 25 days X 92 boys per day @ Rs 130 per day per boy 54. I find that the details given above are insufficient inasmuch as there is nothing on record to show what job was done by them or any reports--of any kind whatsoever--about the actual work done by them.

The mere fact that the payment is made by account payee cheques cannot by itself entitle assessee's claim for deduction of that expenditure.

In the case before us, AO has taken great pains in conducting spot enquiries, confronting the assessee with the same, tracing the destination of cheques through banking channels and even examining the bank account of the alleged recipient. This elaborate exercise done by the AO shows that there is reasonable basis to believe that Ma Tara Enterprises also did not at all exist, account payee cheques were encashed through bank accounts which were opened in blatant deviation from normal banking practices, and that there is no evidence, direct or corroborative, that these so-called promoters or 'hired boys' were made available to the assessee. I have noted that in some cases as many as 92 boys were made available to the assessee-company but these persons would obviously require some kind of control or co-ordination. The assessee has not given any satisfactory details about this aspect of the matter, nor about precise nature of work done by these boys. In fact, there is no evidence at all, save and except for copy of bill on record, that services of these sales promoters was actually made available, that these sales promoters actually rendered any services at all, and that the organisation which claims to have supplied these personnel actually existed. I find it difficult to believe that none in the assessee concern has any clue about where this agency, which catered to such a large requirement of manpower, has vanished. The assessee does not even have the basic contact details of this concern.

I find it difficult to believe that it is a mere coincidence that only for this, and similar other supplies of doubtful existence, cheques get encashed through unintroduced bank accounts which are used only for cash withdrawals of the account payee cheques so deposited. Elaborate exercise done by the AO shows that there is reasonable basis to believe that Ma Tara Enterprises did not at all exist, that account payee cheques were converted into cash in a fraudulent manner, and that there is no evidence, direct or corroborative, that any manpower was actually supplied by this Ma Tara Enterprises to the assessee. There is no mention of phone numbers, etc. on the bill and the assessee has not been able to give any reasonable explanation of not being able to produce this concern or give further details about people manning this concern. Even the commercial expediency of this expenditure has not been justified but this aspect is not even relevant at this stage. My observations in para 49 above also, broadly speaking, are equally relevant on this disallowance as well. I may mention that the reasons on account of which CIT(A) has given relief in the matter, in my considered view, are superfluous since merely because a payment is made through banking channels does not mean that the expenditure incurred by the assessee is genuine expenditure. As for the CIT(A)'s observation that The transaction is proved. Mo adverse inference is to be drawn., I see no support for CIT(A)'s coming to this conclusion. I am, therefore, of the view that the deletion of this disallowance of Rs. 5,93,900 by the CIT(A) should be reversed and the order of the AO should be restored in this regard.

55. This takes me to the disallowance of Rs. 27,68,607 under the head 'Display and sampling expenses'. I find that the disallowance has been made for the proximate reason that the assessee has not been able to substantiate this expense, the assessee could not furnish list of persons to whom these free samples were distributed and the assessee could not give any evidence--direct or even corroborative--in support of the exercise of distribution of free samples having taken place. As a matter of fact, there was nothing more than bald statement of the assessee to support this claim of expenditure. The considerations of commercial expediency of free samples come to play only after the factum of free samples having been distributed is established, but in the present case, even this bridge is not crossed. I have taken note of the fact that assessee has accepted that he has no support for the samples having been distributed, and that the claim is made purely on the basis of self-made vouchers. In these circumstances and in the absence of reasonable evidence about the factum of such samples having actually been distributed, the claim of the assessee has been rightly rejected by the AO. As for learned CIT(A)'s observations about scope of Section 37(1), these observations are not really germane to the context because, as I have stated above, the question of principles governing admissibility of an expense would only come to play when the factum of expense having actually been incurred is established. The assessee's case fails on this preliminary ground itself. As for Inspector's report, it may have been one of the factors persuading AO to resort to disallowance but it was certainly not the proximate factor and even without that report, disallowance was fully justified. Accordingly, I am not inclined to go into that aspect of the matter. I have taken particular note of the fact that the assessee accepts that he is not in a position to give any specific details in support of the expenditure having been actually incurred and assessee's submissions, even before us, revolved around how expenditure on account of free samples could be justified on account of commercial expediency, When there is nothing in support of the fact about the expenditure having actually been incurred, discussions about commercial expediency of such an expenditure are not relevant. Keeping in view all these factors, as also entirety of the case, I deem it fit to restore the disallowance of Rs. 27,68,607, made by the AO under the head 'Display and sampling expenses'.

56. In my view, therefore, following disallowances made by the AO should be restored and, to that extent, order of the CIT(A) should be modified : 57. To sum up, the disallowance of sales promotion and advertisement expenses to the tune of Rs. 52,21,367 is restored.

As there is a difference of opinion between the JM and the AM, the matter is being referred to the Hon'ble President, Tribunal, with a request that the following questions may be referred to a Third Member or pass such orders as the Hon'ble President may kindly decide: 1. Whether, on the facts and in the circumstances of the case the Tribunal should have restored the matter regarding disallowances of following expenditure, to the file of the AO with a direction to find out whether the bank account of the recipient was opened with proper direction and, if so, allow the relief as per the law, and to decide the matter de novo after confronting the assessee with the Inspector's report, or whether the Tribunal should have restored the disallowances deleted by the CIT(A) :Payment to Grafic Circle for car hire Rs. 3,59,000Payment to Universal Printers for printing work Rs. 14,99,860 2. Whether, on the facts and in the circumstances of the case, the Tribunal should have restored the matter regarding disallowances of following expenditure, to the file of the AO with a direction to decide the matter de novo or whether the Tribunal should have restored the disallowances deleted by the CIT(A) :Payment to Ma Tara Enterprises for supply of temprorary Rs. 5,93,900workersSampling and display expenses for distribution of free Rs. 27,68,607cigarette samples 1. The appeal of the Revenue for the asst. yr. 1994-95 was heard by "C" Bench of the Tribunal. As a result of difference of opinion amongst the Members, the Hon'ble President has nominated me as Third Member in respect of the following points of difference : 1. Whether, on the facts and in the circumstances of the case, the Tribunal should have restored the matter regarding disallowances of following expenditure to the file of the AO with a direction to find out whether the bank account of the recipient was opened with proper direction and, if so, allow the relief as per the law, and to decide the matter de novo after confronting the assessee with the Inspector's report, or whether the Tribunal should have restored the disallowances deleted by the CIT(A) :Payment to Grafic Circle for car hire Rs.3,59,000Payment to Universal Printers for printing work Rs. 14,99,860 2. Whether, on the facts and in the circumstances of the case, the Tribunal should have restored the matter regarding disallowances of following expenditure to the file of the AO with a direction to decide the matter de novo or whether the Tribunal should have restored the disallowances deleted by the CIT(A) :Payment to Ma Tara Enterprises for supply Rs. 5,93,900of temporary workersSamping and display expenses for distribution of Rs. 27,68,607free cigarette samples 2. Parties have been heard and record perused. The relevant facts briefly stated are that the respondent is a wholesale dealer of cigarette manufactured by ITC Ltd. On scrutiny of accounts it was noticed by the AO that the expenditure under the head "sales promotion expenses" had considerably gone up to Rs. 69,54,507 as compared to Rs. 14,19,127 for asst. yr. 1993-94 and Rs. 2,03,507 for asst. yr. 1992-93.

The assessee was asked to explain the reasons for such unusual spurt in expenditure. It was claimed that in view of the increase in turnover by about 17 per cent in the relevant previous year from that of the preceding year, the expenses had substantially gone up. It was claimed by the assessee that the dealer or the distributor is also required to incur expenditure on advertisement and sales promotion. However, on enquiry by the AO it was clarified by ITC Ltd. that there was no obligation to the dealer or the distributor to incur any expenditure on advertisement and sales promotion, but they were free to undertake such expenditure at their own discretion. The AO, accordingly, resorted to deep scrutiny in regard to the expenses claimed under the heads "advertisement" and "sales promotion.

3. On enquiry, the AO found the following expenditure as bogus and, accordingly, disallowed the same : 4. The AO found that a sum of Rs. 5,60,000 was claimed to have been paid to one M/s Grafic Circle of Kudiram Bose Road, PO Hridyapur, 24-Parganas, purportedly as car hire charges. The AO had deputed the Inspector to verify the genuineness of the payment. The enquiry conducted by the Inspector revealed that no such concern existed at the given address. On further enquiry from local residents and Post Office, it was found that no such concern ever existed at the given address.

The assessee was informed about this information collected by the AO.The assessee, however, did not produce any satisfactory explanation or further evidence in support of the claim, The AO accordingly disallowed the claim. Similarly, in respect of the payment of Rs. 14,99,860 to M/s Universal Printers purportedly for printing works, on enquiry it was found that the address given was that of a vacant plot of land. The bills purportedly issued by M/s Universal Printers did not contain any phone No., sales-tax registration No., etc. On enquiry it was found that no such concern existed in that area. When the assessee was confronted about the results of the enquiry made by the AO, it was claimed that all the information which was in possession of the assessee had been furnished. The AO, accordingly, disallowed the claim.

5. In respect of the payment of Rs. 5,93,900 to M/s Ma Tara Enterprises for supply of temporary workers, party was not found at the given address. No details of the purported supply of the workers to the assessee were made available to the AO. The purpose for which the services of the persons were requires was also not established. The AO on enquiry found that the bank account had been opened in the name of the concern without any introduction and that the withdrawals had been made from the bank account immediately after deposit of the cheques. In this case also, there was no mention of the phone No., etc. in the bill. When the assessee was confronted it was simply stated that whatever evidence was available to the assessee had been produced and that the expenditure is genuine.

6. In regard to the display and sampling expenses of Rs. 27,68,607, the AO disallowed the claim for want of evidence. The assessee had claimed that free samples had been distributed of the total value of Rs. 27,68,607 in the year under appeal. The AO found that there was nothing more than the statement of the assessee to support the claim of the assessee. When asked to support the claim, it was admitted by the assessee that there is no supporting evidence. Even the names of the dealers to whom the free samples were purported to have been distributed were not made available to the AO.7. The CIT(A) has deleted the entire addition of Rs. 58,72,816 including the aforementioned items of expenditure mainly on the ground that the assessee has furnished supporting bills and the payments have been made by account payee cheques. According to the C!T(A), the expenditure claimed by the assessee is allowable in view of provisions of Section 37(1) of the IT Act, 1961.

8. The Revenue appealed to the Tribunal. The learned JM proposed an order by virtue of which the additions of Rs. 1,02,538 on account of expenses incurred on payments to M/s Fleet for hiring cars, Rs. 86,760 on account of expenditure incurred on advertisement through M/s Reach Advertising & Marketing Co. Ltd. and Rs. 1,50,000 on account of expenses incurred through M/s Market Links were held to have rightly been deleted by the CIT(A). In regard to the addition of Rs. 3,59,000 out of Rs. 5,60,000 on account of car hire charges to M/s Grafic Circle and Rs. 14,99,860 on account of payment to M/s Universal Printers for printing works, the learned JM restored the issue to the file of the AO with a direction to find out whether the bank accounts of the parties were opened with proper direction and, if so, allow the relief as per law and to decide the matter de novo after giving the assessee the copy of Inspector's report. The additions of Rs. 5,93,900 on account of payment to M/s Ma Tara Enterprises purportedly for supply of temporary workers and Rs. 27,68,607 on account of expenses for sampling and display for distribution of cigarettes to various vendors were also proposed to be remitted back to the AO for fresh decision in accordance with law.

9. Whereas the learned AM agreed with the view of the learned JM in regard to the deletion of additions of Rs. 1,02,538, Rs. 86,760 and Rs. 1,50,000, he found no justification for the CIT(A) having deleted the additions of Rs. 3,59,000 on account of payment to M/s Grafic Circle for car hire, Rs. 14,99,860 on account of payment to M/s Universal Printers for printing works, Rs. 5,93,900 on account of payment to M/s Ma Tara Enterprises for supply of temporary workers and Rs. 27,68,607 on account of distribution of free cigarettes samples and for sampling and display. These four additions are restored as per the order of the learned AM. Thus, the difference of opinion is confined to the disallowances of Rs. 3,59,000, Rs. 14,99,860, Rs. 5,93,900 and Rs. 27,68,607 being items No. (a), (b), (c) and (g) in para 3 above.

10. The learned Departmental Representative contended that the order of the learned AM is based on facts and is in accordance with law and accordingly same view may be adopted. However, on the other hand, the learned counsel for the assessee sought to support the order of the learned JM. The contentions advanced before the Division Bench have been reiterated before me by the parties.

11. Having given my careful consideration to the rival contentions and material on record, I am of the considered view that the crux of this appeal is as to whether the respondent had discharged the onus of justifying substantial increase in the expenses on account of advertisement and sales promotion and whether the expenses qualify for deduction. As against expenses of Rs. 2,03,507 in asst. yr. 1992-93 and Rs. 14,19,127 in asst. yr. 1993-94, there was an increase of about 500 per cent in respect of the aforementioned expenses in the year under appeal. As pointed out elsewhere in this order, the assessee had claimed expenses of Rs. 69,54,507 in the year under appeal under the head 'sales promotion expenses' as against Rs. 14,19,127 in asst. yr.

1993-94. The AO was, therefore, duty bound to properly scrutinize the claim. It is evident from record that the AO has made thorough enquiry and as a result of the enquiry and scrutiny, he came to the conclusion that the amount of expenditure aggregating to Rs. 58,72,816 was bogus.

Out of total claim of Rs. 69,54,507, the AO had allowed a deduction of Rs. 10,81,691. As a result of unanimity of opinion between the learned Members of the Division Bench, the assessee will get a further relief of Rs. 3,39,298. Thus, the claim to the extent of Rs. 14,20,989 stands allowed. This is more or less equivalent to the claim of the assessee for asst. yr. 1993-94.

12. Now the question for consideration is as to whether the facts and circumstances of the case justify the additions of Rs. 3,59,000, Rs. 14,99,860, Rs. 5,93,900 and Rs. 27,68,607 to be re-examined in the light of the directions of the learned JM or the additions deserve to be restored, as suggested by the learned AM, for want of supportive evidence.

13. I have given my careful considerations to the rival contentions and the material on record including the orders of the learned Members of the Division Bench. In order to appreciate the controversy, it would be relevant to consider the scheme of taxation under the IT Act, 1961. Any assessee whose income exceeds the maximum amount not chargeable to tax is required to file the return declaring the income in the prescribed form and verified in the prescribed manner. Once the return of income is filed by the assessee, the AO may issue a notice to the assessee under Section 143(2) requiring the assessee to produce any evidence to support the return of income. The AO has the power to issue a notice under Section 142(1) for the purpose of production of specific documents and evidence. The AO is also empowered to make enquiries from third parties and after giving an opportunity of being heard to the assessee, make an assessment on the basis of the material produced by the assessee and/or the material gathered by the AO.14. Section 145 of the IT Act, 1961, provides for making of an assessment in the case of an assessee deriving income from profits and gains of business in accordance with the method of accounting regularly followed by the assessee. In this case, the assessee has produced the books of account before the AO and also produced prima facie evidence in support of the claim of expenditure. The AO found unusual spurt in various expenses. To be precise, as against the expenditure of Rs. 14,19,127 in asst. yr. 1993-94 and Rs. 2,03,507 in asst. yr. 1992-93, the assessee had claimed expenses of Rs. 69,54,507 under the head "sales promotion expenses". In view of the considerable increase in the claim of sales promotion expenses, the AO was duty-bound to ask the assessee to support the claim. The assessee furnished evidence in the form of bills from the parties. It was also stated that the payments had been made by means of crossed cheques. If the AO had not made any enquiry in regard to the evidence furnished by the assessee, perhaps the claim could be allowed on the basis of the prima facie evidence furnished by the assessee. So, however, in this case the AO thought it prudent to make enquiry as a result of increase of more than 500 per cent in regard to the sales promotion expenses as compared with the expenses claimed in the preceding years. The results of the enquiry revealed that the evidence produced by the assessee was not reliable.

The results of the enquiry conducted by the AO through his Inspector were brought to the notice of the assessee. The assessee did nothing to substantiate the genuineness of the claim made under the head "sales promotion expenses". It is in the light of these facts I am required to consider as to whether the assessee had discharged the burden to support the claim of sales promotion expenses and whether the AO was duty-bound to furnish copy of the report of the Inspector to the assessee and, if so, whether the issue requires reconsideration at the level of the AO, It would, therefore, be necessary to consider the enquiry made by the AO in regard to the four items of expenditure referred to above.

15. I first take up the claim in regard to the payment for car hire charges made to M/s Grafic Circle of Rs. 3,59,000, In respect of the expenditure on account of car hire charges there was a credit of Rs. 5,60,000 to M/s Grafic Circle reflected in the books of accounts.

However, the actual debit to the P&L a/c for the relevant assessment year was only for Rs. 3,59,000. The assessee had furnished bills purportedly issued by M/s Grafic Circle of Kudiram Bose Road, PO Hridyapur, 24-Parganas. The AO made spot enquiry through Inspector which revealed that no such concern existed at the given address.

Enquiries from ' local residents as well as from Post Office also revealed that no such concern existed even in past. The assessee was informed by the AO about the results of the enquiry vide order-sheet entry dt. 11th March, 1997, followed' by a letter dt. 12th March, 1997.

In response, the assessee stated that all the information which was in possession and control of the assessee, such as copies of the bills and payment details, have been furnished and that the payments have been made by account payee cheques and that the assessee can furnish no further information or evidence. On further enquiry the AO found a current account No. 284 with Punjab National Bank (PNB), Tangra branch, Kolkata and the name of the account-holder was shown as P, Guha. The AO strangely found that the bank account had not been opened through any introduction, nor was any address given in the account opening form.

The account in the name of M/s Grafic Circle had been opened on 27th Aug., 1993, and the same had been closed on 12th Feb., 1995. All the cheques issued by the assessee in the name of M/s Grafic Circle had been deposited in the said account. However, the withdrawal had been made in the next available working day. The assessee was asked to produce any person from M/s Grafic Circle, but no one was produced. A notice under Section 131 could not be served for want of correct address. It was in the light of these facts that the AO came to the conclusion that the assessee had claimed a bogus payment to inflate the expenditure and to reduce the tax liability.

16. As is evident from the facts stated above, the evidence produced by the assessee by way of bills from M/s Grafic Circle and the fact of payment by account payees cheques, did not support the claim of the assessee in view of the enquiry conducted by the AO. The AO, as already pointed out, did not find M/s Grafic Circle in existence at the given address. Sometimes it is quite possible that the business place is shifted from one place to another. But in this case the AO collected information that no such concern ever existed at the given address. The assessee having been confronted with the results of the enquiry and the assessee having expressed their inability to produce any further evidence in support of the claim the only consequence in my view that would follow is the disallowance of the claim. As already pointed out, the burden to establish that the expenditure has genuinely been incurred is upon the assessee. By producing prima facie evidence by way of bills and the payment by account payee cheques, the burden shifted to the AO. In turn the AO made enquiries and on the basis of the enquiry it was found that no such concern existed. The concern was not found to exist at the given address. The opening of the bank account with PNB was also shrouded in mystery insofar as nobody has introduced the party in contravention of the banking rules and that the cheques had been deposited and withdrawals made immediately thereafter. The bank account had also been closed within a short period of time. The material collected by the AO was sufficient to cloud the authenticity of the bills produced by the assessee in support of the claim. In the light of above facts, we as appellate authority are required to test the reliability of the evidence on record by applying the test of human probabilities. Judging the evidence on record by the test of preponderance of probabilities, it cannot be said that the assessee has discharged the onus of supporting the claim by satisfactory evidence.

The only consequence that should follow the finding of assessee's failure to support the claim is to disallow the claim. There is no justification, in my humble view, to restore the issue to the file of the AO for the purpose of making enquiry about the bank account opened in the name of M/s Grafic Circle and providing a copy of the Inspector's report. It has not been the grievance of the assessee that they were not provided with reasonable opportunity of being heard. The AO, as pointed out earlier, is empowered to make enquiry and collect information for and against the assessee. In this case it is not disputed that the information was collected by the AO through his Inspector. The assessee at no stage demanded copy of the report of the Inspector. The Inspector assists the AO in making enquiries for the purpose of assessment. Since the evidence collected by the AO was disclosed to the assessee and reasonable opportunity given for rebuttal, there is no reason for restoring the issue to the file of the AO for fresh decision. The CIT(A) has unjustifiably deleted the addition merely because the payment made to the party was by way of account payees cheques. It is settled law that the mere payment by account payee cheques is not sufficient to discharge the onus that rests on the assessee. As is observed in this case, it is not difficult for anyone to open a bank account in any name. The bankers were not required to make any enquiry about the correctness of the address given in the account opening form. In this case, strangely no one had introduced M/s Grafic Circle for opening the bank account. The address of M/s Grafic Circle was not also mentioned in the account opening form. It is quite possible to open such an account if any party is known to the bankers. Since the burden of proof that rested upon the assessee was not discharged, it was not necessary for the AO to prove the negative. In my considered view, it was also not necessary for the AO to ascertain the real owner of the bank account. It was sufficient for the AO to verify whether the account in the name of M/s Grafic Circle was genuine. Since the assessee had dealings with the payee, it would not have been difficult for them to produce evidence to establish the existence of the party and rendering of services for which the payment was claimed to have been made. The decision of the CIT(A) that the payment having been made by account payees cheques was sufficient for allowance of the claim is contrary to the decision of the Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd. (1994) 208 ITR 465 (Cal) where the issue related to cash credits and the burden of proof was to be discharged by the assessee. Their Lordships of the Calcutta High Court held that mere furnishing of the particulars is not enough and mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. In the light of the decision of the jurisdictional High Court in regard to the weightage to be given in respect of account payee cheques in the matter of evaluating the evidence, the decision of the CIT(A) in deleting the addition was unwarranted and bad in law. The assessee having failed to support the claim of expenditure by satisfactory evidence, the claim is liable to be disallowed and the CIT(A) was not justified in deleting the same. There is also no justification to restore the issue for further enquiry for proving the negative.

17. Similarly, in respect of the payment of Rs. 14,19,127 to M/s Universal Printers for printing works, the assessee had debited the amount purportedly for printing of 'Gold Flake' and 'Wills' show card.

On enquiry, it was found by the AO that the address given in the bill of M/s Universal Printers was that of a vacant plot. The assessee was informed by the AO about the results of the enquiry. However, the assessee relied upon the evidence that was furnished before the AO and claimed that there was no other evidence that could be produced. The AO made enquiries from PNB, Park Street branch. It was strange coincidence that in this case also the account opened by Sri Niranjan Pal was opened without any introduction against the bank rules. The pattern of deposits of cheques and withdrawals from bank account was found similar with the pattern in the case of M/s Grafic Circle. The assessee on being confronted with results of enquiry stated that they are relying on the evidence on record. The AO, on the basis of the enquiry made, held that the assessee had made a claim of bogus expenditure.

18. The principles relating to the burden of proof have been specified above. The initial burden to establish the genuineness of the expenditure and to support the expenditure by necessary evidence was upon the assessee. The assessee furnished bills but on enquiry it was found that the address given on the bills was a fake address. The assessee was confronted. No further evidence was produced, except claiming that the payment had been made by account payee cheques. As pointed out above, mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine, as held by their Lordships of the Calcutta High Court in the case of CIT v.Precision Finance (P) Ltd. (supra). Thus, the evidence furnished by the assessee in the light of enquiry made by the AO was not sufficient to support the claim of the assessee. The deletion of the addition by the CIT(A) on the ground of the payment having been made by account payee cheques is contrary to the decision of the Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd. (supra) and thus the disallowance made by the AO of Rs. 14,99,860 requires to be restored.

There is no justification for remanding the issue to the file of the AO for the purpose of providing a copy of the report of the Inspector to the assessee and also tracing of the real owner of the bank account. In my considered view, the non-furnishing of the report of the Inspector to the assessee in the absence of any demand by the assessee in this regard is of no consequence, It is well-settled principle of law that the AO is empowered to gather evidence from third parties and the requirement of principles of natural justice is that the party is confronted with the material which is collected from third parties. It is not necessary for the AO to disclose the source of the material. The source through which the material/evidence has been collected is also not required to be disclosed to the assessee. In the light of this well-settled principle of law, there is no justification for remanding the matter to the file of the AO for the purpose of providing report of the Inspector to the assessee and also tracing the real owner of the bank account. As far as the present assessee is concerned, it is not necessary for the Department to establish the real owner of the bank account opened in the name of M/s Universal Printers. It was sufficient for the AO to know that the bank account in the name of M/s Universal Printers was not a genuine bank account. It is not a case where complete address of the party was provided to the AO and the AO failed to make enquiries from the payee. In this case, the address given by the assessee was found to be fake and no address of the party was available in the bank where account was opened. In such circumstances, no useful purpose will be served to make enquiry about the real owner of the bank account. Assuming for argument sake that assessee is not found to be the real beneficiary of the bank account opened in the name of M/s Universal Printers, but that by itself may not be sufficient for allowance of deduction in respect of the claim of Rs. 14,99,860 debited in the account of M/s Universal Printers purportedly for printing of 'Gold Flake and 'Wills' show card. In my considered view the disallowance of Rs. 14,99,860 made by the AO for want of evidence is justified on the facts and in the circumstances of the case and there is no justification for remanding the matter to the file of the AO. The addition of Rs. 14,99,860 deleted by the CIT(A) is thus required to be restored.

19. Now I take up the disallowance of Rs. 5,93,900 on account of payment to M/s Ma Tara Enterprises purportedly on account of supply of temporary workers. The assessee furnished five bills for the aggregate amount of Rs. 5,93,900. The particulars provided in the bills were in regard to number of boys and number of days and the rate per boy. The payments had been made by account payee cheques, In this case also on the basis of the enquiry made by the AO, the party was not found to exist at the given address, There was similarity in the opening of the bank accounts in respect of M/s Universal Printers and M/s Grafic Circle. No details or evidence was available to establish that the services of the workers were utilized for business purposes, It is strange that the assessee does not know whereabouts of the agency which is supposed to arrange the supply of manpower. The assessee does not have any basic contact details of this concern. There was no evidence to establish that any manpower was actually supplied by M/s Ma Tara Enterprises. There are no phone Nos. mentioned on the bills purported to have been issued by M/s Ma Tara Enterprises. Even commercial expediency has not been established. It is strange coincidence that the bank account in this case also has been opened without any introduction by any known person. In the light of lack of evidence in support of the claim, the CIT(A) was not justified in allowing relief to the assessee merely because the payment made to the party is by means of account payee cheques. The decision of the CIT(A) is contrary to the decision of the jurisdictional High Court in the case of CIT v. Precision Finance (P) Ltd. (supra) and since sufficient opportunity of being heard was given to the assessee for substantiating the claim, there is no justification for remanding the matter to the file of the AO for the purpose of fresh decision in accordance with law. The assessee at no stage claimed that reasonable opportunity for supporting the claim was not provided by the AO. In this view of the matter, there is no justification for remanding the matter to the file of the AO. The claim not having been supported by necessary evidence, the addition made by the AO of Rs. 5,93,900 deserves to be restored. I direct accordingly.

20. This takes me to the addition of Rs. 27,68,607. Before referring to the evidence produced by the assessee and the enquiry made by the AO in regard to this claim of display and sampling expenses, it would be relevant to bear in mind that the assessee is engaged in the business and it had no contractual obligation from the manufacturer to spend any amount on display and sampling. However, a businessman decides to spend over Rs. 28 lacs without there being any contractual obligation from the manufacturer is baffling and not appearing to commonsense. It is also noteworthy that there is no past history of such expenditure having been incurred by the assessee. The assessee's representative had vehemently argued before the authorities that the expenditure incurred by the assessee falls within the ambit of Section 37(1) as an expenditure having been incurred 'wholly and exclusively' for the purpose of business. It had been claimed that the wholly and exclusively mentioned in Section 37(1) does not mean 'necessarily' and that ordinarily it is for the assessee to decide whether any expenditure should be incurred or not for the purpose of business. It was also claimed that the assessee may incur expenditure voluntarily for moving the business and not necessarily to earn the profits.

Reference was also made to the letter of the ITC which confirmed that the assessee was at liberty to incur expenditure on advertisement and sales promotion. This contention advanced on behalf of the assessee has appealed to the CIT(A) and he has, accordingly, deleted the addition.

21. In regard to this expenditure, the AO had asked the assessee to furnish the details of the persons to whom the free samples were distributed. However, the assessee failed to give even the names of the persons to whom free samples were distributed. The only evidence in support of the claim of a huge amount of Rs. 27,68,607 is the statement of the assessee that the expenditure was incurred on considerations of commercial expediency. As rightly held by the learned AM, the consideration of commercial expediency will arise only when the expenditure is established to have been incurred. The assessee has failed to furnish necessary evidence to support the claim that the expenditure to the tune of Rs. 27,68,607 was incurred. The foundation for the claim to be on account of commercial expediency would be the incurring of the expenditure. The AO has disallowed the claim on the ground of the same not having been supported by any evidence. Whether the expenditure has been incurred for the purposes of business or not in the light of the finding of the AO that such a claim is a bogus claim, is of no relevance. As far as the Inspector's report is concerned, contents of the report are immaterial insofar as the result of the enquiry has been duly communicated to the assessee. In the absence of necessary details, evidence and the results of an independent enquiry made by the AO, there is no justification for the (sic-deletion of the) addition. Accordingly, the assessee having failed to discharge the onus, the AO was justified in making the addition. The CIT(A) has ignored the fundamental aspect on which the addition is based. As pointed out earlier, the issue of commercial expediency would arise only when the assessee establishes the incurring of the expenditure, Mere entries made in the books of account coupled with no obligation of the assessee to incur such expenditure does not warrant allowance of the claim as a deduction. The mere fact that the AO utilized the services of the Inspector to make enquiry about the genuineness of the claim does not advance the case of the assessee. The AO was not required to make available the copy of the report of the Inspector to the assessee in so far as the assessee was informed about the results of the enquiry and given reasonable opportunity to furnish necessary evidence in support of the genuineness of the claim, The assessee having failed to furnish necessary evidence to support the claim, the disallowance made by the AO is fully justified. The addition of Rs. 27,68,607 is thus required to be restored. I direct accordingly.

There is no justification for remanding the matter to the AO.22. To sum up, claim made by the assessee in the year under appeal under the head "sales promotion expenses" was more than 500 per cent than the claim made in the preceding year. The claim in asst. yr.

1992-93 under the head 'sales promotion expenses' was about Rs. 2 lacs only and for 1993-94 Rs. 14,19,127 only. In the light of disparity of the claim when compared with the claim made for preceding years, the AO was duty-bound to make enquiries and demand necessary evidence in support of the claim. The evidence furnished by the assessee having been found to be unreliable, the AO was justified to disallow the claim. As held by their Lordships of the Supreme Court in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC)-- "Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal, Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities." This view has been reiterated by their Lordships of the Supreme Court in the case of Sumati Dayal v. CIT (1995), 214 ITR 801 (SC). Tested in the light of the above principle of law laid down by their Lordships of the Supreme Court, there is no escape from the conclusion that the AO was justified in holding that the assessee has failed to support the claim. The various important factors as discussed by me in this order may thus be summed up as under : (i) That the assessee had no obligation from the manufacturer to incur any expenditure on account of sales promotion expenses.

(ii) That the expenditure under the head 'sales promotion expenses' for asst. yr. 1992-93 was Rs. 2,03,507 and for asst. yr. 1993-94 Rs. 14,19,127. As against that, there was unusual spurt in expenditure under this head in the year under appeal to Rs. 69,54,507 (iii) That all the four parties were not found to exist at the given address, (iv) That bank accounts in respect of all the four parties were found to have been opened without introduction of any known person.

(v) That the deposits of account payee cheques were followed with immediate withdrawals from the bank accounts in respect of all the four parties.

(vi) That no telephone numbers/sales-tax registration numbers or other details are available in the bills issued by the parties.

(vii) That the assessee does not know the whereabouts of these parties.

(viii) That the assessee does not have any details about the temporary workers supplied by the party.

(ix) That the assessee does not have the details of dealers to whom the free samples have been distributed without there being any obligation from the manufacturer.

(x) That the assessee was confronted with the results of the enquiry conducted by the AO about the genuineness of the parties and no evidence in rebuttal was furnished.

(xi) That it is not the claim of the assessee that reasonable opportunity of being heard was not allowed or that the non-furnishing of the report of the Inspector regarding the results of the enquiry has resulted in any prejudice to the assessee.

23. Taking the totality of the facts and circumstances of this case into consideration, I am of the considered view that the AO was justified in disallowing the claim of Rs. 3,59,000, Rs. 14,99,860, Rs. 5,93,900 and Rs. 27,68,607 out of the total claim of Rs. 69,54,507 under the head 'sales promotion expenses". I, therefore, concur with the finding of the learned AM and I am unable to persuade myself to agree with the learned JM for sending the issues back to the AO for fresh decision in accordance with the directions contained in the order of the learned JM.24. Let the matter be placed before the regular Bench for passing the consequential order in accordance with the majority view.

1. The appeal of the Revenue for the asst. yr. 1994-95 was heard by "C" Bench of the Tribunal. As a result of difference of opinion amongst the Members, the Hon'ble President had nominated the Hon'ble Vice-President (KZ) as Third Member in respect of the following points of difference : 1. Whether, on the facts and in the circumstances of the case, the Tribunal should have restored the matter regarding disallowances of following expenditure to the file of the AO with a direction to find out whether the bank account of the recipient was opened with proper direction and, if so, allow the relief as per the laws, and to decide the matter de novo after confronting the assessee with the Inspector's report, or whether the Tribunal should have restored the disallowances deleted by the CIT(A) :Payment to Grafic Circle for car hire.

Rs. 3,59,000Payment to Universal Printers for printing work Rs. 14,99,960 2. Whether, on the facts and in the circumstances of the case, the Tribunal should have restored the matter regarding disallowances of following expenditure to the file of the AO with a direction to decide the matter de novo or whether the Tribunal should have restored the disallowances deleted by the CIT(A) ;Payment to Ma Tara Enterprises for supply of Rs. 5,93,900temporary workers.Sampling and display expenses for distribution of free Rs. 27,68,607cigarette samples 2. The Hon'ble Third Member adjudicated the issue arising out of the question for consideration as to whether the facts and circumstances of the case justify the additions of Rs. 3,59,000; Rs. 14,99,860; Rs. 5,93,900 and Rs. 27,68,607 to be re-examined in the light of the direction of the learned JM or the additions deserve to. be sustained restoring the view taken by the AO as opined by learned AM for want of supporting evidence.

3. After considering the issue threadbare, the Hon'ble Third Member came to the view that the AO was justified in disallowing the claim of Rs. 3,59,000, Rs. 14,99,860, Rs. 5,93,900 and Rs. .27,68,607 out of the total claim of Rs. 69,54,507 under the head "Sales promotion expenses".

With these remarks, the Hon'ble Third Member concurred with the view of AM against the view of the Hon'ble JM who recommended sending the issue back to the AO for fresh decision in accordance with the direction contained in his order.

4. In view of the aforesaid facts on record, by majority view, the additions of Rs. 3 59.000; Rs. 14,99,860; Rs. 5,93,900 and Rs. 27,68,607 are sustained and to that extent the appeal of the Revenue succeeds.

5. In the result, the appeal of the Revenue is allowed as indicated above.