2011 (10) TMI 457 - HC - Income Tax

Disallowance of business promotion expenses - Assessee claimed expenses relate to the gift items for presentation - CIT(A) restricted disallowances only to 10% to the total expenditure - Tribunal affirmed CIT - Revenue further appealed - Held That - Tribunal has not considered the issue properly. High Turnover of 16.13 Crores & interest income of 5.35 Crores cannot be the ground to allow whatever expenditure is claimed by the assessee as business promotion expenses. Further the purchases were in the name of directors and not assessee. Order of Tribunal is set aside and case remitted back to AO.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal was correct in deleting the addition/disallowance made by the AO in respect of business promotion expenses amounting to Rs.27,19,769?

Detailed Analysis:
The case involves the assessment of business promotion expenses incurred by a company in the assessment year 2005-06. The company, engaged in leasing, financing, and trading in shares and debentures, declared a loss of Rs.2,76,44,115. During the assessment proceedings, it was noted that the company claimed business promotion expenses of Rs.27.19 lacs for gift items distributed, but failed to substantiate the nature of these expenses for business purposes. The Assessing Officer (AO) disallowed the expenses as the bills were not in the name of the company, and the company provided insufficient details regarding the nature and purpose of the gifts.

The company appealed to the CIT(A), which partially allowed the appeal by restricting the disallowance to 10% of the total expenditure. Both the Revenue and the company appealed against this decision, with the Revenue challenging the allowance of any deduction for the expenses and the company seeking 100% deduction, claiming the entire expense was a business expense.

The Income Tax Appellate Tribunal upheld the CIT(A)'s decision, stating that the gifts were customary in the company's business practices, and the expenses were related to promoting the business. The Tribunal found no evidence to suggest the expenses were not genuine and directed a 10% disallowance due to improper maintenance of bills. The Revenue appealed this decision.

The High Court observed that the Tribunal did not adequately address the issue, emphasizing that the high turnover achieved by the company should not be the sole basis for allowing all claimed business promotion expenses. The Court noted that the purchases for gifts were not made in the company's name but in the name of directors, raising doubts about the genuineness and purpose of the expenses. The Court set aside the Tribunal's order and remitted the case back to the AO to allow the company to prove the gifts purchased by the director were indeed for the company's business and solely utilized for business promotion.

In conclusion, the High Court overturned the Tribunal's decision, highlighting the importance of establishing the genuineness and business purpose of expenses, especially when bills are not in the company's name. The Court emphasized the need for proper verification and directed a reassessment by the AO to validate the business promotion expenses claimed by the company.