2013 (6) TMI 438 - AT - Income Tax

Expenditure owing to distribution of gifts to members/staff - whether be considered as incurred for the purpose of business? - Held that - If any expenditure is wholly or exclusively incurred by on assessee-businessman with a view to preserving and augmenting his business prospects in future, such expenditure would be an allowable, expenditure as per section 37. The assessee co-operative bank has distributed gifts to the children of its members such distribution of gifts was allowable as business expenditure as decided in Karajan Co-operative Cotton Sales (1992 (1) TMI 39 - GUJARAT High Court). Thus expenditure was allowed. In favour of assessee.

Summary

Issues:
- Deduction of expenditure owing to distribution of gifts to members/staff for the purpose of business.
- Applicability of judgments in the case of Karjan Co.op Cotton Sales (199 ITR 17) to a banking business.

Analysis:
1. The Revenue appealed against the CIT(A)'s decision allowing the deduction of expenditure of Rs. 15,83,750 for distributing gifts to members/staff, contending it was not incurred for the business purpose. The Assessing Officer disallowed the expenditure, stating it was not directly related to the business. The assessee argued that the gifts were distributed to maintain goodwill, generate goodwill, and ensure business continuity. However, the Revenue argued that as a bank, the expenditure was extra-commercial and not solely for business purposes, unlike the cited judgments of cooperative societies. The Tribunal found the assessee's argument unconvincing due to the nature of the banking business, thus disallowing the expenditure.

2. The CIT(A) reversed the disallowance, relying on the decision of the Jurisdictional High Court in the case of Karjan Co-op. Cotton Sales (199 ITR 17). The High Court held that if expenditure is wholly or exclusively incurred to preserve and enhance business prospects, it is allowable under section 37. The Court emphasized the importance of maintaining goodwill and business relationships, especially in competitive environments. The Court found the expenditure prudent for business management, leading to future profits. It clarified that the society, as a separate legal entity, could incur such expenditure for business purposes. As the CIT(A) followed this decision, the Tribunal upheld the order, dismissing the Revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision to allow the deduction of expenditure for distributing gifts to members/staff, based on the principles outlined in the Karjan Co-op. Cotton Sales case. The judgment emphasized the importance of maintaining business relationships and goodwill for future business prospects, especially in competitive environments.