Business promotion expenditure incurred during the course of business is allowable expenditure

Finesse International Design Pvt. Limited Vs DCIT (ITAT Delhi)

ITAT Delhi held that business promotion expenditure incurred for improving the visibility of the brand and sale of the products is routine expenses incurred during the course of the business. Accordingly, the same is allowable expenditure.

Facts- Post search operation and recording of statement, AO sought an explanation from the assessee as to why an amount of Rs. 16,25,825/- for payment of salaries, incentives paid to drivers, helpers and guards excluding office expense be not disallowed u/s 37 of the Act.

Post reply, AO observed that as per Tally Data seized from premises of the appellant that total expenditure of personal nature was Rs. 18,46,149/- whereas the assessee had surrendered only a sum of Rs. 17,28,439/- towards personal in nature, thereby leading to difference Rs. 1,17,710/-. This was treated as expenditure incurred for personal purpose and accordingly, disallowed in the assessment.

CIT(A) upheld the action of AO. Being aggrieved, the present appeal is filed.

Another issue relates to disallowance of business promotion expenditure.

Conclusion- We find that out of the total expense towards salaries, incentive paid to drivers, helpers and guard which are reflected in the Tally Data seized, of Rs.18,46,149/-, a sum of Rs.17,28,439/- had been identified by the assessee and disallowed in the return filed in response to notice u/s 153A of the Act as meant for personal purposes of the assessee. In fact, a surrender had been made in the hands of the company for not including the same as ‘perquisites’ in the hands of the Directors. This goes to prove that the remaining sum of Rs. 1,17,710/- is meant wholly and exclusively for the purposes of the business of the assessee company. Hence, it became allowable expenditure u/s 37 of the Act.

We find that there are numerous entries entered by the assessee on account of business promotion and these are to be incurred by the assessee for improving the visibility of its brand and sale of its products, to the various customers / clients and business associates for the business purposes and also for entertaining the customers /clients in various restaurants and clubs and these are routine expenses incurred by the assessee in the normal course of business. The employees and Directors of the assessee company would incur the expenditure in their credit cards and later on the same were reimbursed by the assessee company to the Directors and employees. In any case, there cannot be any element of personal expenditure in the hands of the company.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals)-23, New Delhi, [hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.CIT(A), Delhi-23/10242/2017-18 dated 10/08/202 1 against the order passed by Ld. Assistant Commissioner of Income Tax, Central Circle-04, New Delhi (hereinafter referred to as the ‘Ld. AO’) u/s 153A r.w.s. 143(3) of the Income Tax Act (hereinafter referred to as ‘the Act’) on 19/02/2021 for the Assessment Year 2018-19.

2. The assessee has raised the following grounds of appeal:

“1. That the order dated 10.08.2021 passed u/s 250 of the Income-tax Act, 1961 (hereinafter called “the Act”) by the Ld. Commissioner of Income-tax (Appeals)-24, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Ld. Deputy Commissioner of Income Tax, Central Circle-4, New Delhi in adding back a sum of Rs. 1,17,710/- on account of expenditure incurred u/s 37 of the Act for payment of salaries, incentives etc. to the helpers and guards.

2. That the order dated 10.08.2021 passed u/s 250 of the Act by the Ld. Commissioner of Income-tax (Appeals)-24, New Delhi is against law and facts on the file in as much as he was not justified to party uphold the action of the Ld. Deputy Commissioner of Income Tax, Central Circle-4, New Delhi by restricting the addition on account of disallowances in respect of Business Promotion Expenditure incurred by the Appellant Company by applying the provisions of section 37 of the Act to Rs.5,39,598/- being 50% of total disallowance made by Ld. Assessing Officer (However the same inadvertently mentioned in appeal order by Ld. CIT(Appeals) as Rs.58,855/-).”

3. The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in confirming the disallowance of expenditure in the sum of Rs. 1,17,710 / – incurred for payment of salaries, incentives etc. to the helpers and guards.

4. We have heard the rival submissions and perused the material available on record. The assessee company is engaged in the business of manufacturing and sale of high end designer garments through company owned /franchise store under the name and style of “M/s Shantanu & Nikhil”. The assessee had filed its original return of income u/s 139(1) of the Act on 30/10/2018 declaring total income of Rs.2, 11,07,390/- which was further revised on 31/10/2018 declaring the same income. A search and seizure action u/s 132 of the Act was carried out in “Shantanu & Nikhil Group” and associates on 29/05/20 18. The premises of the assessee was also covered in the search and seizure and search warrant was also issued in the name of the assessee company. A notice u/s 153A of the Act was issued on 05/02/2020, in response thereto, a return of income was filed by the assessee company on 29/02/2020 declaring total income of Rs.2,23,37,390/-.

5. The Ld. AO observed that during the course of search operation, the statement of Mr. Pankaj Kumar, Manager of Finance and Accounts of the assessee was recorded u/s 132(4) of the IT Act wherein he admitted that 9 employees work at the residence of the Directors but on verification of bio metric data, it was noticed that 15 employees were working at the residence of the Directors. Accordingly, the Ld. AO sought to consider the entire list of Drivers, helpers and guards working with the Directors of the company at their residence. The ld. AO also sought an explanation from the assessee as to why an amount of Rs. 16,25,825/- for payment of salaries, incentives paid to drivers, helpers and guards excluding office expense be not disallowed u/s 37 of the Act. The assessee gave a reply that it had already disallowed a sum of Rs. 17,28,439/- on account of personal expenditure in the return filed in response to notice u/s 153A of the Act. The Ld. AO observed that as per Tally Data seized from premises of the appellant that total expenditure of personal nature was Rs. 18,46,149/- whereas the assessee had surrendered only a sum of Rs. 17,28,439/- towards personal in nature, thereby leading to difference Rs. 1,17,710/-. This was treated as expenditure incurred for personal purpose and accordingly, disallowed in the assessment.

6. Before the Ld. CIT(A), the assessee had not made any specific arguments with regard to this issue. The ld. CIT(A) observed that the assessee itself had disallowed substantial part of these personal expenses which reinforces correctness regarding entries in the Tally Data seized, accordingly, he upheld the action of the Ld. AO. We find that out of the total expense towards salaries, incentive paid to drivers, helpers and guard which are reflected in the Tally Data seized, of Rs.18,46,149/-, a sum of Rs.17,28,439/- had been identified by the assessee and disallowed in the return filed in response to notice u/s 153A of the Act as meant for personal purposes of the assessee. In fact, a surrender had been made in the hands of the company for not including the same as ‘perquisites’ in the hands of the Directors. This goes to prove that the remaining sum of Rs. 1,17,710/- is meant wholly and exclusively for the purposes of the business of the assessee company. Hence, it became allowable expenditure u/s 37 of the Act. Accordingly, ground No.1 raised by the assessee is allowed.

7. The next issue to be decided in appeal is as to whether Ld. CIT(A) was justified in upholding the disallowance of business promotion expenditure to the extent of 50% as against 100% made by the Ld. AO in the facts and circumstances of the instant case.

8. We have heard the rival submissions and perused the material available on record. The Ld. AO had analysed Tally Data seized during the course of search. He observed that assessee company had booked various expenses under the head business promotion expenses. The details of the same are as under:

The Ld. AO show caused the assessee as to why the same should not be treated as personal nature and disallowed u/s 37 of the Act. The assessee submitted that the amount spent were on account of membership fees, hotel/restaurant expenses, PVR payments, invite cards which are incurred for the purposes of business of the assessee company and that these expenses were incurred to promote the visibility of sale of fashion garments sold by the assessee company. Accordingly, the Directors and employees and other members of the staff of the company had to entertain their guests/customer in Hotel/Restaurant. The Invite Cards were printed for a fashion show depicting various fashion garments manufactured by the assessee. The Ld. AO did not heed to the contention of the assessee and proceeded to treat the same as personal in nature and disallowed the entire sum of Rs. 10,79,175/- in the assessment. This was reduced to 50% by the Ld. CIT(A). We find that the details of the business promotion expenses have been given by the assessee company in page 51 to 74 of the Paper Book comprising the ledger account with due narration. From the perusal of the same, we find that there are numerous entries entered by the assessee on account of business promotion and these are to be incurred by the assessee for improving the visibility of its brand and sale of its products, to the various customers / clients and business associates for the business purposes and also for entertaining the customers /clients in various restaurants and clubs and these are routine expenses incurred by the assessee in the normal course of business. The employees and Directors of the assessee company would incur the expenditure in their credit cards and later on the same were reimbursed by the assessee company to the Directors and employees. In any case, there cannot be any element of personal expenditure in the hands of the company. Reliance in this regard is placed on the decision of Hon’ble Gujarat High Court in the case of Sayaji Iron And Engg. Co. Vs. CIT reported in 253 ITR 749 (Guj.). Hence, we direct the Ld. AO to delete the disallowance made on account of business promotion expenses. Accordingly, ground No.2 is also allowed.

9. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 10^th May, 2023.