Reasonable amount of expense towards gifts for dealers is allowable

ACIT Vs Atlas Cycles (ITAT Delhi)

ITAT Delhi held that a reasonable amount of expenditure towards distribution of gifts amongst the dealers is allowable expenditure.

Facts-

AO disallowed a sum of 2,00,000/- out of Sales Promotions / Business Promotion A/c.

It was submitted that the assessee company has over 4000 dealers nationwide along with various other worldwide buyers and company executives need to visit, entertain these dealers from time to time to keep them happy since companies products can only be sold through network of these dealers. It is essential need for the growth of the company and its survival through competition to be in constant touch with them so as to motivate them to achieve the desired sales.

Conclusion-

Held that these gifts are distributed among dealers who are selling the product of the company and are its lifeline. A reasonable amount spent on distribution of some gifts to them certainly promotes goodwill and enhances business interests. The above payments are made as gifts to dealers and shagun on the marriage of dealers and staff which is an effective tool for Business promotion as well as staff welfare.

Held that the issue has been decided in favour of the assessee by the Co­ordinate Bench of ITAT for A.Y. 2012-13. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeals have been filed by the Revenue against the orders of the ld. CIT(A), Rohtak dated 24.07.2018 for Assessment Year 2015-16 and 31.10.2019 for Assessment Year 2016-17.

2. he revenue has raised the following grounds of appeal for Assessment Year 2015-16:-

“1. The Ld. CIT(A) has erred in law and in facts in deleting the addition of Rs. 1,60,88,065/- was made by the A.O. on account of interest attributable to interest free advance of Rs. 13,40,67,214/- made to Sh. Arun Kapoor out of interest bearing funds of the company.

2. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 45,900/- under the sub-head marriage gift expenses as the assessee failed to explain the nature of expenditure carried out .

3. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 6,41,397/- under the sub head subscription expenses account under the head miscellaneous expenses as the assessee failed to justify that the same were incurred for the business purpose.

4. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 3,00,000/- was made by the A.O. on account of consultancy expenses as these amounts were paid to different persons on various dates and the assessee has failed to establish the details of services obtained there from and the rate of payment.

5. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 2,97,597/- made by the A.O. out of the Advertisement in newspaper expenses as theassessee failed to explain that the expenditure incurred on account of Advertisement in Newspaper was incurred wholly and exclusively for the business purposes.

6. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 4,93,692/- was made by the A.O. on account of Glow Sign Board Expenses since the Glow Sign Boards are having longer life and therefore, whole of the expenses cannot be debited/consider for one year.

7. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 2,00,000/- was made by the A.O. on account of staff welfare expenses as some of the expenses incurred for staff and workers welfare were not fully vouched and are inadmissible in nature.

8. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 5,00,000/- was made by the A.O. on account of Foreign Travel Expense as the foreign expenses were not incurred wholly and exclusively for business purposes and an element of personal in nature is involved

9. The Ld. CIT(A) has erred in law and fact in deleting mthe addition of Rs. 1,01,859/- under the head “Entertainment Wine & Beer” as the assessee has failed to justify on which dealers/business associates these expenses were incurred and has neither produced bills /vouchers.

10. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 3,50,000/- made by the A.O. under the head “Sales Promotion/Business Promotion expenses” as the expenses made on Sales Promotion/ Business Promotion were either found unvouched and inadmissible in nature for which no justification was submitted by the assesse.

11. The Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 2,00,577/- under the head “Prize & Rewards” as the assessee failed to explain the expenses on account of Prize & Rewards.”

3. The revenue has raised the following grounds of appeal for Assessment Year 20 16-17:-

“(i) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 1,60,88,065/-. Whereas the assessee has diverted its interest bearing funds for non business purposes and no interest has been charged, the addition was aptly made by the A.O.

(ii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 55,700/- which was aptly made by the O. under the sub-head marriage gift expenses on account of the being personal in nature

(iii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 3,59,573/- which was aptly made by the A.O. out of subscription expenses under the head miscellaneous expenses.

(iv) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 3,09,624/- which was aptly made by the A.O. on account of advertisement published in Hindustan Times under the head ‘Advertisement and Sales Promotion Head.’

(v) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 2,00,000/- which was aptly made by the A.O. on account of staff welfare expenses under the head “Workers and Staff Welfare” for which no bills and vouchers were produced.

(vi) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 5,00,000/- out of total of Rs. 558.38 lakhs made on foreign travel expenses on a/c disallowance aptly made by the A.O. stating that the entire foreign travel expenses cannot be said to be exclusively for business purpose.

(vii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 19,25,000/- made under the head “ Excess depreciation claimed.”

(viii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition of Rs. 2,00,000/- which was aptly made by the A.O. under the head “Sales Promotion/Business Promotion expenses” which remained un-explained and un­vouched during the assessment proceedings.”

4. The return   of income declaring total loss at Rs.1,08,55,973/- was filed on 10.10.2016 electronically. The  assessee company has filed  a revised return  on 24.10.2017 declaring total loss of Rs.89,30,973/-.

5. Addition of Rs.1,60,88,065/- was made by the AO as interest attributable @ 12%  p.a. on Rs.13,40,67,214/-, addition of Rs.55,700/- was  made out of marriage gift expenses under head miscellaneous expenses, addition     of Rs.3,59,573/- was made out of subscription expenses under head miscellaneous expenses,  addition of Rs 3,09,624/- made out of advertisement in newspaper expenses under head advertisement & sales promotion, addition  of Rs.2,00,000/- made   out of    workers and staff  welfare
expenses on ad-hoc basis, addition of Rs.5,00,000/- made out of foreign visit expenses under head travelling expenses on ad-hoc basis, addition of Rs.2,00,000/- made out of sales promotion/business promotion expenses on ad‑ hoc basis, addition of Rs.19,25,000/- made being excess depreciation claimed in original return however the assessee has already revised its return and added back the same suo moto.

A.Y. 2016-17

Disallowance of Interest:

6. This ground relates to disallowance  of  Rs 1,60,88,065/- as interest attributable @ 12% p.a. on Rs 13,40,67,214/- of advance shown as recoverable. The Assessee company has shown Rs. 5,95,18,000/- as amount recoverable in cash  or in kind    and Rs. 7,45,49,226/-    as amount recoverable from Mr.   Arun Kapur. Both  of these amounts pertain to embezzlement perpetrated by Sh. Arun Kapur who was the, then Malanpur Unit head. Mr. Arun Kapur has willfully and fraudulently siphoned off the above funds from the company against which Two FIRs had already been filed by the company (FIR No. 56/03 for Rs. 5.95 crores and FIR No. 57/03 for Rs. 8.95 crores) and legal cases are under progress in the court of law. Copy of FIR attached before the ld. CIT(A).

7. It was argued that company has not willfully given these funds to Sh. Arun Kapur and in fact these are taken out fraudulently by Sh. Arun Kapur and it was beyond the control of the assessee company to recover these amounts from Sh. Arun Kapur and these could only be recovered through court of law.

8. The AO interpreted that these amounts have been diverted by the company out of interest bearing funds for non business purposes.

9. It is a fact on record that the company has taken strict actions against Mr. Arun Kapur  and terminated his services and taken all possible legal measures to resolve the matter. Even otherwise, these misappropriated funds cannot be assumed to be from the interest bearing funds since in the relevant year (as on 31st March, 2002), company had following interest free funds:

(i) Share Capital                                              Rs.3.25 Crore

(ii) Securities Premium                                 Rs. 6.06 Crore

(iii) Free Reserves                                          Rs. 44.46 Crore

(iv) Debenture Redemption Reserve         Rs.8.25 Crore

(v) Accumulated Depreciation Reserve    Rs. 43.92 Crore

Total Interest Free Funds                       Rs.105.94 Crore

Therefore, it was argued that no disallowance can be made.

10. The ld. CIT(A) held that the assessee had shown an advance of Rs 13,40,67,226/- to Sh. Arun Kapur who has supposedly embezzled these funds and documentary evidence was given to show that it was beyond the control of assessee company to recover the same and deleted the addition.

11. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011- 12, 2012-13, 2013-14 , 2014-15 and 2015-16 by the ld. CIT (Appeals), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AYs. 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011-12 and 2012-13.

12. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Marriage Gift Expenses:

13. The Assessing Officer made disallowance of Rs. 55,700/- incurred as Marriage Gift Expenses under the head Misc. Expenses.

14. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the AY 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-16 by the ld. CIT (Appeal), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AY 2006-07, 2007-08, 2008-09, 2009-10, 20 10- 11, 2011-12 and 2012-13.

15. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Subscription Expenses:

16. The Assessing Officer has disallowed a sum of Rs. 3,59,573/- out of “Subscription Fee Expenses” under the head Misc. Expenses.

17. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the AY 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-16 by the ld. CIT (Appeal), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AY 2006-07, 2007-08, 2008-09, 2009-10, 20 10- 11, 2011-12 and 2012-13.

18. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Advertisement Expenses:

19. The Assessing Officer disallowed a sum of Rs. 3,09,624/- out of the Advertisement in newspaper expenses under the head Advertisement and Sales Promotion Head.

20. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the AY 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-16 by the ld. CIT (Appeal), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AY 2006-07, 2007-08, 2008-09, 2009-10, 20 10- 11, 2011-12 and 2012-13.

Staff Welfare Expenses:

21. The A.O disallowed a sum of Rs 2,00,000/- out of staff welfare Expenses under the head workers welfare. The A.O has made this addition on adhoc and Lump sum basis without pinpointing specific vouchers or bills of inadmissible in nature.

22. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the AY 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-16 by the ld. CIT (Appeal), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AY 2006-07, 2007-08, 2008-09, 2009-10, 20 10- 11, 2011-12 and 2012-13.

24. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Foreign Travel Expenses:

25. The Assessing Officer disallowed a sum of Rs.5,00,000/-out of Foreign Travel expense under the head Traveling expense. It was argued that these expenses are exclusively for business purposes and quantum of expenses is in line  with the previous years which is evident from below given figures:

26. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee for the AY 2006-07, 2007-08, 2008-09, 2009- 10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-16 by the ld. CIT (Appeal), Rohtak and also upheld by the Co-ordinate Bench of ITAT for AY 2006-07, 2007-08, 2008-09, 2009-10, 20 10- 11, 2011-12 and 2012-13.

27. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Excess Depreciation:

28. The Assessing Officer disallowed a sum of Rs. 19,25,000/- being excess Depreciation claimed in original Return however the assessee has already revised its return and added back the same suo moto. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Sales Promotion Expenses:

29. The Assessing Officer disallowed a sum of 2,00,000/-out of Sales Promotions / Business Promotion A/c. The assessee company has over 4000 dealers nationwide along with various other worldwide buyers and company executives need to visit, entertain these dealers from time to time to keep them happy since companies products can only be sold through network of these dealers. It is essential need for the growth of the company and its survival through competition to be in constant touch with them so as to motivate them to achieve the desired sales. These gifts are distributed among dealers who are selling the product of the company and are its lifeline. A reasonable amount spent on distribution of some gifts to them certainly promotes goodwill and enhances business interests. The above payments are made as gifts to dealers and shagun on the marriage of dealers and staff which is an effective tool for Business promotion as well as staff welfare. The A.O has made this addition on ad-hoc and Lump sum basis.

30. At the outset, it was brought to our notice that the issue has been decided in favour of the assessee by the Co­ordinate Bench of ITAT for A.Y. 2012-13.

31. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

A.Y. 2015-16:

Glow Sign Board Expenses:

32. This issue stands squarely covered by the order of the Tribunal in the previous year wherein it was treated that since the “glow sign boards” are not owned by the assessee they cannot be treated as capital expenditure. Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.

Wine & Beer Expenses:

33. These expenses are not required for conducting of business and it can be held that failure to offer wine & beer would in any way impede the business operations of the assessee and they cannot be treated as allowable expenses u/s 37(1) of the I.T. Act.

34. In the result, the appeals of the revenue are dismissed.

Order Pronounced in the Open Court on 28/12/2022.