2016 (12) TMI 1611 - AT - Income Tax

Expenditure towards gift to Doctors disallowed - allowable business expenditure - Held that - In the present case the assessee was required to demonstrate the expenditure in relation to business. So far the reasoning given by the AO that the expenditures were prohibited by law, in our considered view, the issue requires fresh consideration by the AO. We, thus set aside the order of ld. CIT (A) and restore the issue to the file of AO for decision afresh. Disallowance of dealer entertainment expenses - expenses are disallowed on the basis that the personal element in such expenses cannot be denied - Held that - We find that the AO has not demonstrated as to how the personal element is involved in these expenses. Therefore, the action of the ld. CIT (A) confirming the finding of the AO is not justified. We, therefore, direct the AO to delete this disallowance. This ground of the assessee is allowed.

Summary

Issues:
1. Disallowance of expenditure on sales & business promotion and advertisement.
2. Disallowance of dealer entertainment expenses.

Issue 1: Disallowance of Expenditure on Sales & Business Promotion and Advertisement:

The appeal challenged the order of the ld. CIT (A) regarding the disallowance of expenses amounting to &8377; 6,87,833/- on sales & business promotion and &8377; 1500/- on advertisement for A.Y. 2011-12. The assessee contended that the CBDT Circular did not apply to pharmaceutical companies and that the expenditures were allowable under section 37(1) of the IT Act. The authorities had disallowed the expenses based on the explanation to section 37(1), which states that any expenditure incurred for an offense or prohibited by law shall not be deemed to have been incurred for business purposes. The Tribunal found that the expenses were not related to the business of the assessee and lacked a direct nexus with business promotion. The assessee failed to demonstrate how the expenditures benefited the business. The Tribunal set aside the order of the ld. CIT (A) and remanded the issue to the AO for fresh consideration.

Issue 2: Disallowance of Dealer Entertainment Expenses:

The appeal contested the confirmation of disallowance of &8377; 19,286/- out of dealer entertainment expenses. The assessee argued that the disallowance was unjustified and excessive, emphasizing that there was no personal element involved in these expenses incurred by employees/medical representatives for meeting dealers. The Tribunal noted that the AO failed to specify how a personal element was present in the expenses and directed the AO to delete the disallowance. Consequently, the Tribunal allowed this ground of the assessee.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, setting aside the disallowance of dealer entertainment expenses and remanding the issue of disallowance of expenditure on sales & business promotion and advertisement back to the AO for fresh consideration.