S. 37 Expenses on gifts distributed among members & staff in the course of business is allowable

The stand of the revenue that expenditure incurred by the society on giving presents to as own members would amount to expenditure on itself or application of its income to its members also could not be countenanced as the society was entirely a separate entity functioning under the provisions of the Gujarat Co-operative Societies Act, 1961 and was distinct from its members.

As per section 96 of the said Act, disputes can be contemplated even between the society, on the one hand, and its members, on the other. Thus, a society is a separate legal entity having its own business and business income. In the course of augmenting its business and maintaining it, if the society as a corporate body decided to give presents to its members and to commemorate Silver Jubilee Celebrations, it could not be said that the society was not doing something as a prudent businessman.

Consequently, the aforesaid expenditure was allowable business expenditure under section 37.

INCOME TAX APPELLATE TRIBUNAL
AT AHMEDABAD “A” BENCH

Before: Shri D.K. Tyagi Judicial Member and
Shri A.K. Garodia Accountant Member

ITA Nos. 1899/Ahd/2012 A.Y. : -2009-10

ACIT Vs. The Gujrat State Co-op Bank Ltd.

Date of hearing  : 29-01-20 13

Date of pronouncement : 31-01-2013

ORDERPER : D.K TYAGI, JUDICIAL MEMBER:-

This is the Revenue’s appeal arising out from the order of Ld. CIT(A)-6 Ahmedabad dated 04/07/2012.

2. The Revenue has taken following effective grounds of appeal:-

“1. That ld. CIT(A) has erred in law and on facts in allowing the deduction of expenditure of Rs. 15,83,750/- owing to distribution of gifts to members/staff which cannot be considered as incurred for the purpose of business.

2. That the ld. CIT(A) has erred in law and on facts in replying on the judgment in the case of Karjan Co.op Cotton Sales (199 ITR 17) in which the assessee was involved in ginning/pressing of cotton solely supplied by farmers/members to whom gifts were distributed. The facts of this judgment are not comparable to the assessee who is in banking business.”

3. The Assessing Officer while making dis allowance of Rs. 15,83,750/- on account of gifts distributed to the share holders has observed as under:-

“On going through the P & L A/c, the assessee has debited general meeting expenses of Rs. 25,00,000/- (Appendix-IV). The analysis of above expenses, it was seen that the assessee bank has given gift of Dinning Set (350 set of Thali) to the share-holders. Since the gift expense were not directly related with business. The assessee was asked why the expenditure should not be disallowed.?

In this regard, a show cause notice u/s 142(1) of the Act was issued (on 1 6/11/2011). In response to notice the A.R. of the assessee has contended that

“On the occasion of Golden Jubilee Year, assessee Bank had distributed the gift Articles to its Members and Staff members. It is submitted that the expenditure is incurred for keeping alive good image among members, for generating goodwill and for ensuring continuity of business with members, and also to maintain cordial relations with Staff Members. As the said expenditure is incurred wholly and exclusively for the purpose of business and is allowable u/s. 37. In this respect assessee is relying on the judgment of Hon. Gujrat High Court in the case of CIT v/s. Dascroi taluka Co-op. Union Ltd.(126 ITR 413) and Karajan Co. Op. Cotton Sales vs. CIT (Gujrat) (199 ITR 17).

The copies of the above judgments are already submitted along with our submission dated 21/09/2011.

It is further respectfully submitted that above gift articles are purchased from M/s Krishana Metal Corporation vide bill No. 19 dated 07/07/2008 and complete details with copies of bills are already submitted with our submission dated 12/09/2011. The amounts are also paid by Account Payee cheque on dated. 1 3/05/2008 of Rs. 10,00,000/- and on 09/07/2008 of Rs. 5,83,750/-.”

The contention of the assessee is not acceptable, because the assessee is a bank and the nature of business of the assessee is banking business. The assessee ’s argument could not be accepted that the expenditure was incurred simply for keeping alive good image among members, for generating goodwill and for ensuring continuity of business with members and also to maintain cordial relation with staff members.

The assessee has relied upon the judgment of the Hon ’ble Guj. High Court in the case of CIT v/s. Dacroi Taluka Co. Union Ltd. and Karanjan Co. Op Cotton Sales v/s CIT (Gujrat) (199/ITR/1 7). The judgment of the jurisdictional High Court is not applicable in this case. The fact of this case is totally different. Since the assessee is engaged in the business of Banking, the expenses seems to be extra commercial consideration.

The assessee quoted jurisdictional High Court’s verdict is quite different. The case law which is supporting assessee ’s views is co­operative society while the present case; the assessee is a banking co­operative entity. Therefore, the expenditure incurred is disallowed and added back to total income of the assessee.”

4. Ld. CIT(A) has deleted this dis allowance by placing reliance on the decision of Jurisdictional High Court in the case of Karajan Co-op. Cotton Sales (199 ITR 17) wherein on identical facts following was held:-

“It is a well-settled legal position that if any expenditure is wholly or exclusively incurred by on assessee-businessman with a view to preserving and augmenting his business prospects in future, such expenditure would be an allowable, expenditure as per section 37. The view taken by the Division Bench of this Court in Dascroi Taluka Co-operative Purchase & Sales Union Ltd. ’s case (supra) runs parallel to the aforesaid legal positron and does not appear to be erroneous from any angle. Consequently, there remains no occasion to reconsider the said decision.

In the instant case, it was the contention of the assessee- society that those presents were given to the members to keep them in good humour as it was an occasion of celebration of its silver jubilee and in order to see that the members continue to supply their cotton for the purpose of ginning and pressing to the assessee- society and for getting if marketed through it, such presents were found necessary for augmenting and maintaining the business prospects of the society. The assessee- society further submitted that in the days of keen competition, it was absolutely necessary for the assessee to maintain goodwill among st its members and to lure them to continue to do their business with the society. The assessee also argued that income from the work of ginning and pressing the cotton of the members and from marketing the same was the only source of income for the society and for earning this income and for ensuring the some over future years, this type of expenditure was found to be a prudent act of management on the part of the asses society, and, therefore, this expenditure must be treated to be incurred solely and exclusively for the purpose of business of the society. There was considerable force in these contentions. The expenditure was incurred with view to bringing profits or monetary advantage either today or tomorrow and it was also expenditure incurred as a wise, prudent, pragmatic, ethical man of the world of business would consciously incur with an eye on promoting his business prospects, subject to the expenditure being genuine and within reasonable limits. It was not the revenue’s contention that this expenditure was not genuine or was not within reasonable limits. So far as the disputed expenditure was concerned, it would, therefore, remain permissible deductible expenditure under section 37.

The stand of the revenue that expenditure incurred by the society on giving presents to as own members would amount to expenditure on itself or application of its income to its members also could not be countenanced as the society was entirely a separate entity functioning under the provisions of the Gujarat Co-operative Societies Act, 1961 and was distinct from its members. As per section 96 of the said Act, disputes can be contemplated even between the society, on the one hand, and its members, on the other. Thus, a society is a separate legal entity having its own business and business income. In the course of augmenting its business and maintaining it, if the society as a corporate body decided to give presents to its members and to commemorate Silver Jubilee Celebrations, it could not be said that the society was not doing something as a prudent businessman.