Gift not deductible as Business Expense in absence of business exigencies & failure to disclose identity of gift recipient

BMG enterprises Ltd. Vs ITO (ITAT Delhi)

we observe that it is, no doubt, customary in our country to give gifts to clients which serve as expenses on business promotion. However, while examining such deduction of expenses of this nature, it is to be kept in mind that these deductions are prohibited if they are presumptive of tax evasion and meant to reduce the business profits. In the instant case, the assessee has not been able to submitted any evidences in support of its contention that the gifts were given to its various identifiable customers. So the same also remains unverified. 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. The ld. 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. The ld. 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. The ld. AR could not be able to controvert these findings of the ld. CIT(A) by submitting any evidences before us contrary to it. Therefore, in our opinion, in absence of any nexus between the gifts and the business of the appellant company, the findings reached by the ld. 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 Assessing Officer 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.

The next contention of the assessee is that such disallowances have a history in assessee’s favour. He has referred to assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, when it is stated that such disallowances have been deleted or not made by the Assessing Officer itself. It is also submitted that therefore rule of consistency should be followed by the authorities below. 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 the Assessing Officer 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. In view of the above discussion, we observe that 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 ld. CIT(A) while disallowing the claim of the assessee made u/s. 3 7(1) of the Act.

FULL TEXT OF THE ITAT JUDGMENT

This appeal filed by the assessee is directed against the order of ld. CIT(A)-14, New Delhi dated 02.03.20 15 for the assessment year 2011-12.

2. The brief facts of the case are that the assessee filed return of income on 23.09.2011 declaring loss of Rs.20,90,618/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee derived income from representation and consultancy in the field of aviation. In the assessment proceedings, the Assessing Officer observed that the assessee has debited a sum of Rs.24,42,554/- under the head entertainment expenses. On being asked for the details of this claim, the assessee submitted the details of these expenses. The Assessing Officer observed that some of the expenses have been incurred for purchase of gift items and as such these gifts were purely personal in nature and not for legitimate business needs of the assessee company. The Assessing Officer further observed that for the assessment year 2 008-09, the ITAT in appeal No. 2366/Del/2012 vide order dated 14.06.2013 has confirmed the major part of the gift expenses claimed by the assessee. Accordingly, he added a sum of Rs.4,58,170/- to the income of the assessee. In appeal before the ld. CIT(A), the assessee also filed bills/invoices before the ld. CIT(A) and the ld. CIT(A), after considering the submissions of the assessee and order of the Assessing Officer, upheld the action of the Assessing Officer holding as under :

5. I have carefully considered the submission made by the A.R of the appellant and have gone through the assessment order. I have also perused the bills/invoices of the purchase of the above mentioned gift items. Most of the bills are in the name of appellant company except the invoices for the purchase of Mont blank pen which bears no name of the purchaser. As per section 37(1) of the Income Tax Act, any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession. In this case, the appellant has not brought any material on record to show that the expenses on account of aforesaid gifts were made wholly and exclusively for the purpose of its business. The identity of the recipient of gifts has not been disclosed either during the assessment proceedings or during the appellate proceedings. Further, the business exigencies of the appellant company viz a viz the aforesaid gifts has not been established by the appellant company. In the absence of any nexus between the gifts and the business of the appellant company, in my opinion, the Assessing Officer has rightly disallowed the aforesaid expenditure of Rs. 4,58,170/-, and therefore , the impugned addition made by the Assessing Officer is hereby confirmed.”

3. The ld. AR submitted a paper book containing 38 pages, which is placed on record. He also submitted a written synopsis, which reads as under :

This appeal has been filed by the assessee against the Order of the CIT(A) upholding the action of the Assessing Officer in disallowing a sum of Rs.4,58,170/- on account of gifts etc. made to the representatives of the principals of the assessee.

The details of such gifts are given at Page-2 of the Assessment Order. The Assessing Officer simply relied upon the Order of the Hon’ble ITAT in assessee’s own case for the Assessment Year 2008-09 in which part of the gift expenses were held to be not allowable by the Hon’ble ITAT. Copy of ITAT Order in Assessment Year 2008-09 is enclosed at Pages 07 to 11 of these synopsis.

The learned CIT(A) has confirmed the disallowance in Para-5 of his Order by holding that the assessee has not brought any material on record to show that the expenses on account of aforesaid gifts are made wholly and exclusively for the purpose of business. Further, the CIT(A) has erroneously held that the identity of the recipient of gifts has not been disclosed either during the assessment proceedings or during the appellate proceedings. The CIT(A) has further held that business exigencies of the appellant company has not been established and the nexus between the gifts and the business has not been established.

It would be appropriate at this stage to clarify that as observed by the CIT(A) as also by the Assessing Officer at Page-1 of the respective order that the assessee is engaged in the business of providing consultancy and technical services in the field of aviation and aeronautics under the name of ‘Indian Avitron”. It was amongst other submitted and as observed by the CIT(A) in Para-4.

“that the appellant submitted during the course of assessment proceedings, the complete details of gifts together with the names of persons to whom the gifts were made were furnished before the Assessing Officer. Being a consultant, in the field of Aviation and Aeronautics, the assessee requires maintaining personal contacts and goodwill with foreign principals and their representative in India. Whenever the foreign principals and their representatives visit in India for business discussions, they have to be properly looked after and entertained for maintaining good business relations. The foreign principals have to be presented with expensive gifts so that the assessee can get business. Therefore, these business development expenses are essential in the field of the business of the assessee. The nature of expenses incurred by the assessee is directly related to the nature of activities in which the assessee is engaged. Since the expenses have been incurred wholly and exclusively for the business purposes, there was absolutely no justification for the Assessing Officer to make disallowance of such expenses. “

The bills of these gifts were also submitted by the assessee before the CIT(A) and the Assessing Officer as noted by CIT(A) in Para-5 that most of the bills are in the name of the appellant company. Copies of such bills where the name of the representative of the foreign principals to whom such gifts were given is also mentioned had been submitted both during the assessment or during the appellant proceedings. The business exigency and also the fact that such expenses are incurred wholly and exclusively for the purpose of business has been established by the assessee before the CIT(A). Therefore, observations of the learned CIT(A) while upholding the above disallowance are factually incorrect, it is respectfully submitted. Copies of bills of gifts are enclosed at Pages 29 to 38 of these synopsis.

The assessee has been historically incurring such business expenses which have always been allowed year after year as per the details hereunder:

1. Assessment Year 2006-07

A disallowance of Rs.4,43,5 137- out of above was made which was allowed by the CIT(A) as per the copy of the Order enclosed at Pages 23to

2. Assessment Year 2007-08

No disallowance/no scrutiny assessment Pages 21 to 22.

3. Assessment Year 2008-09

Disallowance of Rs. 18,80,3267- was made out of which the disallowance of Rs.11,51,260/- was upheld because this amount was incurred on expensive gifts such as diamonds, gold bangles and Hon’ble ITAT has held that the nature of items were of very personal nature. However, for the balance amount of Rs.6,95,578/-, the matter was restored to the file of the Assessing Officer, who has still to decide about the disallowance. Copy of Order of Hon’ble ITAT on this is enclosed at Pages 07 to 11 of these synopsis.

4. Assessment Year 2009-10

No disallowance, remains after Order of CIT(A) – copy enclosed at Pages 12 to 20 of these synopsis.

5. Assessment Year 2010-11 

The Assessing Officer has disallowed the amount but the same was allowed by the CIT(A) and the Departmental Appeal in ITAT was dismissed as per the copy of the Order enclosed for your ready reference and records at Pages 01 to 06 of these synopsis.

Historically it will be observed that the assessee has been generally incurring these expenses on normal gifts which have always been allowed and only in Assessment Year 2008-09 certain items of gifts which were of gold and diamond were disallowed by the Hon’ble ITAT. Therefore, Assessing Officer’s reliance on ITAT Order for the Assessment Year 2008-09 is misplaced as that order was on peculiar facts that items of gifts disallowed were of diamond and jewellery.

Otherwise also if seen with reference to the total gross receipts of the assessee, as per the chart given above, the expenses during the year under consideration are only 1.42% of its gross receipts as against as high as 4.4% in Assessment Year 2006- 07 which had been subject to scrutiny and ultimately allowed.

As already clarified, these type of expenses have always been accepted to have been incurred wholly and exclusively for the purpose of business and keeping in view the complete history of these expenses, the expenses during the year under consideration being the lowest of all the years which has so far been examined, may kindly be held to be allowable to the assessee.

4. The ld. DR relied on the orders of the authorities below.

5. After hearing both the sides and perusing the entire materials on record, we observe that it is, no doubt, customary in our country to give gifts to clients which serve as expenses on business promotion. However, while examining such deduction of expenses of this nature, it is to be kept in mind that these deductions are prohibited if they are presumptive of tax evasion and meant to reduce the business profits. In the instant case, the assessee has not been able to submitted any evidences in support of its contention that the gifts were given to its various identifiable customers. So the same also remains unverified. 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. The ld. 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. The ld. 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. The ld. AR could not be able to controvert these findings of the ld. CIT(A) by submitting any evidences before us contrary to it. Therefore, in our opinion, in absence of any nexus between the gifts and the business of the appellant company, the findings reached by the ld. 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 Assessing Officer 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.

6. The next contention of the assessee is that such disallowances have a history in assessee’s favour. He has referred to assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, when it is stated that such disallowances have been deleted or not made by the Assessing Officer itself. It is also submitted that therefore rule of consistency should be followed by the authorities below. 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 the Assessing Officer 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. In view of the above discussion, we observe that 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 ld. CIT(A) while disallowing the claim of the assessee made u/s. 3 7(1) of the Act. Accordingly, the appeal of the assessee is found to have no merit and is liable to fail.

7. In the result, the appeal is dismissed.

Order pronounced in the open court on 23^rd July, 2018.