2018 (12) TMI 180 - AT - Income Tax

Allowable business expense u/s 37 - gift amount as paid out of commercial expediency to strengthen the relationship with employees - Held that - In the instant case the assessee has claimed gift expenses of ₹ 35,000/- by debiting it to its P&L account. This is purely personal expense of the assessee. If the assessee chooses to make such gifts out of the income received by the assessee in the course of his business, he can do so, but cannot claim it as a legitimate expenditure while computing the income for the purpose of taxation as held in CIT v. Jeevandas Laljee & Sons (1998 (11) TMI 32 - MADRAS HIGH COURT). Ground of appeal are dismissed. Expenses incurred for business purposes - expenses quite nominal compared to the turnover of the assessee and hence the disallowance is excessive - Held that - The assessee could file before the Ld. CIT(A) the ledger account of expenses to suggest that all the expenses are for regular business purposes. Before us, the Ld. counsel could not find fault with the findings of the CIT(A). However, we find that the disallowance made by the AO and confirmed by the Ld. CIT(A) at 15% of expenses of ₹ 18,31,221/- is on a higher side.Considering the facts and circumstances of the case, we direct the AO to restrict the disallowance to 10% of the aforesaid expenses of ₹ 18,31,221/- in place of 15% made by him.

Summary

Issues:
1. Disallowance of gift expenses under section 37 of the Income Tax Act.
2. Disallowance of various business expenses due to lack of verifiable evidence.

Analysis:

*Issue 1: Disallowance of gift expenses under section 37 of the Income Tax Act*

In this case, the assessee appealed against the addition of ?35,000 as a gift expense, claiming it was a business expense under section 37 of the Act. The Assessing Officer (AO) disallowed the amount, considering it a personal expense. The Commissioner of Income Tax (Appeals) also upheld the disallowance, stating that the gift was not part of the salary and did not constitute a business expense. The Appellate Tribunal concurred, citing that the gift was a personal expense, not directly related to the income-generating apparatus of the assessee. The Tribunal dismissed the appeal, emphasizing that personal gifts cannot be claimed as legitimate business expenditure for tax purposes.

*Issue 2: Disallowance of various business expenses due to lack of verifiable evidence*

The AO disallowed a portion of various business expenses totaling ?18,31,221, including traveling, telephone, vehicle, and miscellaneous expenses, due to lack of verifiable evidence. The AO made an ad hoc disallowance of 15% of the expenses, amounting to ?2,74,683. The CIT(A) upheld the disallowance, noting discrepancies in the ledger accounts and lack of proper evidence for the expenses. The Appellate Tribunal acknowledged the business nature of the expenses but found the disallowance excessive. The Tribunal directed the AO to restrict the disallowance to 10% of the total expenses, considering the facts and circumstances of the case. Consequently, the appeal was partly allowed, reducing the disallowance percentage.

In conclusion, the Appellate Tribunal upheld the disallowance of gift expenses as personal rather than business expenditures. However, it partially allowed the appeal regarding the disallowance of various business expenses, reducing the percentage of disallowance based on the circumstances of the case.