2020 (7) TMI 101 - AT - Income Tax

Disallowance of business promotion expenditure - AO observed that the explanation of the assessee was not found acceptable as the assessee was unable to establish that these business promotion expenses has helped in promoting business - assessee has neither submitted the details of customers to whom these gifts were given and against which what was the quantum of the sales - HELD THAT - It is the opinion of the lower authorities that the assessee could not establish a link between the gifts given and the sales orders received. It may not be practically possible for all businesses to maintain a complete list of the gifts given to their various customers and demonstrate that a particular sales order was received as a result of a particular gift. Act also does not prescribe demonstrating such live linkage. There is no denial b the department that the assessee has been carrying on business regularly, the department also does not allege that there is any personal element involved in the impugned expenditure. It is also an accepted business practice in India that customary gifts are usually handed out during festive occasions. Although, handing out gold items or semi-precious items may be frowned upon by the revenue authorities, all the same it cannot be a reason for disallowing the expenditure, especially when it is settled law that the revenue cannot step into the shoes of a businessman and direct how the business should be conducted. Reasonableness of quantum of expenditure vis a vis the turnover would have to be justifiable. Accordingly, it is our considered opinion that interest of justice would be served if the disallowance is restricted to 40% of the initial total disallowance. Appeal of the assessee stands partly allowed.

Summary

Issues involved:
Assessment of business promotion expenses and disallowance by the Assessing Officer (AO), appeal against the order to the Ld. Commissioner of Income Tax (CIT), further appeal to the ITAT challenging the part confirmation of the addition, grounds of appeal raised by the assessee, consideration of turnover and net profit, discrepancies in expenditure details, observations and findings of lower authorities, justification of disallowance, reasonableness of expenditure, business nexus of expenses, relevance of gifts in business promotion, quantum of disallowance, final decision and outcome of the appeal.

Analysis:

Assessment of Business Promotion Expenses and Disallowance:
The assessee, engaged in trading and installation of scientific instruments, filed a return of income for the assessment year 2012-13. The AO observed a significant amount debited as business promotion expenses, including purchases of precious and gold items, and cash payments for gift items. The AO disallowed a substantial portion of the expenses, adding it to the assessable income.

Appeals Process:
The assessee appealed to the Ld. CIT (A), who partly allowed the appeal by restricting the disallowance. Subsequently, the assessee approached the ITAT challenging the part confirmation of the addition, raising various grounds of appeal related to the justification of the disallowance.

Arguments and Submissions:
The assessee contended that the expenses were incurred exclusively for business purposes, leading to increased turnover and net profit. The Ld. AR highlighted the audited accounts, turnover growth, and the necessity of business promotion expenses in a competitive environment. In contrast, the Ld. Sr. DR emphasized the genuineness and relevance of the expenditure, stressing the need for a nexus between expenses and business activities.

Judicial Analysis and Decision:
Both the AO and the Ld. CIT (A) upheld the disallowance concerning jewellery and semi-precious items due to the lack of demonstrated reasonableness and business nexus. The Ld. CIT (A) raised concerns about offering expensive gifts as potential bribery. However, the ITAT acknowledged the increasing turnover and profit of the assessee but noted the failure to establish a clear link between gifts and sales orders. The ITAT recognized the customary practice of giving gifts but restricted the disallowance to 40% of the initial amount, emphasizing the justifiability of expenditure relative to turnover.

Final Outcome:
The ITAT partly allowed the appeal, directing a reduced disallowance of business promotion expenses. The decision aimed to balance the necessity of expenses for business promotion with the reasonableness of the quantum in relation to turnover.

This detailed analysis of the judgment highlights the key issues, arguments presented, judicial considerations, and the final decision regarding the assessment and disallowance of business promotion expenses in the given legal case.