Plainly because only 2 out of 17 parties failed to respond to the notice sent under section 133(6) of the Income Tax Act, the Mumbai Income Tax Appellate Tribunal (ITAT) instructed the Assessing Officer (AO) to delete the addition of Rs. 22,43,401 made on marketing expenses.
The well-known hotel chains India M/s EHL Ltd and The Lalit Golf & Spa Resort are the 2 parties who failed to respond to the notice.
The fact is that assessee, Sonicwall Technology System India, engaged in the development of software filed its return. It was observed from the profit and loss account that an amount of Rs. 2,17,52,924 on account of marketing expenses was debited.
Further, to verify the genuineness of the aforesaid payment, information was called under section 133(6) of Income Tax Act. Ultimately, only two parties, namely, M/s EIH Ltd and The Lalit Golf and Spa Resort failed to respond to the notices.
The assessee submitted the Company’s bank account statements evidencing the transactions and also the Permanent Account Number number of these entities.
The panel underlined that AO had ruled that a transaction could not be considered legitimate just because money had flowed through a bank channel and the parties involved had organised the necessary paperwork.
Further noting the AO’s conclusion that the assessee had failed to prove the validity of the marketing payments made to M/s EIH Ltd and The Lalit Golf and Spa Resort, the assessee disallowed the Rs. 22,43,401 in marketing expenses under section 37(1) of the Income Tax Act by classifying them as non-genuine/non-business transactions or expenditures.
The bench of Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that it is no doubt true that payment through the bank channel is not conclusive proof of the transaction.
However, at the same time, when the assessee has provided all the information available with it regarding the transaction, merely on the basis that the entity has not responded to notice issued under section 133 (6) of Income Tax Act the transaction cannot be doubted and be treated as non-genuine, particularly when the same has been entered into with entities which are well-known Hotel chains in India.
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