2019 (3) TMI 551 - AT - Income Tax

Disallowance u/s. 37(1) - expenses incurred for purchase of gift items - assessee has failed to even disclose the identity of the recipient of gifts either during the assessment proceedings or during the appellate proceedings - HELD THAT - The assessee has also not furnished any substantial evidence as to the persons to whom such gifts given were actually fruitful towards promoting the business profits of the assessee. CIT(A) in the impugned order has categorically observed that the assessee has failed to even disclose the identity of the recipient of gifts either during the assessment proceedings or during the appellate proceedings. CIT(A) has also examined the records and found that the assessee also failed to establish the business exigencies of the appellant vis-a-vis the aforesaid gifts. AR could not be able to controvert these findings of the CIT(A) by submitting any evidences before us contrary to it. Therefore, in absence of any nexus between the gifts and the business of the appellant company, the findings reached by the CIT(A) cannot be said to be without any basis and as such, involvement of non-business use in the present case cannot be ruled out at all, as is evident from the nature of gifts noted by the AO in the assessment order. Bills and vouchers of the gifts purchased were mostly found in the name of the assessee and some of the bills, some names were written by hand, which nowhere suggest to place credence on the contention of the assessee that these gifts were given to its customers even. Disallowance have a history in assessee s favour - We have gone through respective orders of the aforesaid years and we find that in A.Y. 2006-07, such expenses were allowed on the premise that those expenses had been subjected to Fringe Benefit Tax. So is the position with respect to A.Y. 2008-09. For A.Y. 2007-08, no scrutiny assessment was made u/s. 143(3) of the Act. In A.Y. 2008-09, the Tribunal while deciding this issue had disallowed substantial part of such expenditure and rest of the expenditure were remanded to AO for verification. In A.Y. 2010-11, the similar disallowances were deleted by Tribunal. Therefore, from the above series of facts, it is evident that the history of the assessee has not been so glorious as claimed by the assessee, but the disallowances have been dealt with by various authorities in view of the attending facts of each year, as noted above. Therefore, in our opinion, the previous history does not render any help to the assessee. The assessee has not been able to establish that the expenditure claimed as above were laid wholly or exclusively for the purpose of business or that the same were open for verification so as to ascertain that the impugned gifts were given for business promotion of assessee. Therefore, we find no infirmity in the order of the CIT(A) while disallowing the claim of the assessee made u/s. 37(1) - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of entertainment expenses claimed as business expenses.
2. Consistency in the treatment of similar expenses in previous assessment years.

Issue-wise Detailed Analysis:

1. Disallowance of Entertainment Expenses Claimed as Business Expenses:
The assessee filed a return of income declaring a loss, which included a substantial amount debited as entertainment expenses. The Assessing Officer (AO) observed that some of these expenses were for personal gifts, which were not for legitimate business needs. Referring to a previous ITAT order, the AO added a portion of these expenses to the income of the assessee. The CIT(A) upheld this addition, noting that the assessee failed to demonstrate that the expenses were "wholly and exclusively for the purpose of the business." The CIT(A) emphasized that the identity of the gift recipients was not disclosed, and the business exigency was not established. The tribunal concurred, stating that the assessee did not provide sufficient evidence to prove that the gifts were given to identifiable customers for business promotion. The tribunal highlighted that the expenses were not verifiable and could not be conclusively linked to business promotion, thus affirming the disallowance under Section 37(1) of the Income Tax Act.

2. Consistency in the Treatment of Similar Expenses in Previous Assessment Years:
The assessee argued that similar expenses had been historically allowed in previous years, suggesting a need for consistency. The tribunal reviewed the records for assessment years 2006-07 to 2010-11. It was found that in some years, such expenses were allowed due to their subjection to Fringe Benefit Tax, while in other years, the expenses were disallowed or remanded for verification. The tribunal noted that the history of the assessee’s claims was not consistently favorable and that each year's facts were considered individually by the authorities. Therefore, the tribunal rejected the argument for consistency, stating that the assessee failed to establish that the expenses were incurred wholly and exclusively for business purposes in the year under consideration.

Conclusion:
The tribunal dismissed the appeal, concluding that the assessee did not provide adequate evidence to support the claim that the entertainment expenses were for business promotion. The tribunal upheld the CIT(A)'s decision to disallow the expenses under Section 37(1), emphasizing the lack of verifiable evidence and the failure to establish a clear business nexus for the incurred expenses.