ITAT: Tax Authorities are Justified in Making Disallowances/Additions if Taxpayers Fails to Substantiate Claims with Sufficient Evidence

ITAT: Tax Authorities are Justified in Making Disallowances/Additions if Taxpayers Fails to Substantiate Claims with Sufficient Evidence

The Income Tax Appellate Tribunal (ITAT), Delhi, coram comprising of Chandra Mohan Garg (Judicial Member) and M. Balaganesh (Accountant Member) while upholding the decision passed by the Commissioner of Income Tax (Appeals) (CIT [A]) regarding the addition made to the income of HPL Additives Ltd. (assessee), emphasized that it is a well settled principal of tax jurisprudence that taxpayers have the obligation to substantiate their claims and if they fail to provide sufficient evidence, the tax authorities are justified in making disallowances or additions, as the case may be.

In the present case, the assessee contended that the CIT(A) made an error by increasing the disallowance of Advertisement & Marketing Expenses from Rs 3,00,000 to Rs 18,18,624 without considering the business requirements and without recognizing that the expenses were incurred solely for the purpose of the business.

The assessee further contended that the CIT(A) failed to acknowledge that the expenses incurred through the director's credit card during a foreign visit, which included purchases of gifts and dinners with clients, were customary and aimed at promoting the export business of the company. The assessee asserted that there was no personal element involved in these expenses, as individual credit cards were commonly used, and any personal expenses were accounted for separately and not claimed as business expenses.

The Tribunal noted that the CIT(A) had accepted the explanation provided by the assessee regarding payment made to non-residents for their services rendered in an exhibition held in Germany. However, when it came to examining the credit card expenses incurred on advertisement and marketing, the CIT(A) found the assessee's explanation vague and inconclusive.

The CIT(A) noted that the assessee failed to provide specific details or the names of Indian clients who received the gifts, parties, and lunches. Moreover, the CIT(A) observed that the purchases of branded apparels and luxury items seemed to be more suited for personal use rather than as gifts for organizations or customers.

The Tribunal further noted that the CIT(A) had disallowed 25 per cent of the credit card expenses.

The CIT(A) after carefully considering the explanation provided by the assessee, found that the genuineness of the expenses incurred on dinner meetings with domestic and international customers, claimed to be for business purposes, was not substantiated due to the absence of supporting bills and vouchers.

Besides, ITAT noted that the assessee had failed to provide evidence regarding the identity of the customers for whom such substantial expenses were incurred both in India and abroad.

Additionally, the assessee could not establish the identity of the individuals on whom the expenses were charged through the credit card.

The bench noted that upon reviewing the credit card statement, the CIT(A) found that a significant portion of the expenses consisted of personal items such as apparels, electronic items, shoes, and sunglasses, suggesting that they were not incurred for business purposes.

Therefore, the ITAT opined, “We are unable to find any fault in the conclusion derived by the ld. CIT(A) in this regard as the ld. counsel of assessee could not substantiate that the expenses incurred by the assessee through credit card was for the purpose of business of assessee and there was no element of personal purpose or non-business purpose.”

Accordingly, the ITAT did not see any valid reason to interfere with the findings arrived by the ld. CIT(A) and hence upheld the same.