Deduction u/s 37 allowable towards gifts given to business associates and executives

R.K. Trading Company Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that gift items given to business associates and executives qualifies as sales promotion expenditure allowable under section 37 of the Income Tax Act.

Facts-

The assessee has debited an amount of Rs.47,04,385/- under the head ‘sales promotion expenses’. Details were filed before the Ld. AO in regard to such expenses. It was stated that these gift items were given to the business associates and executives. However, the Ld. AO disallowed expenditure of Rs.43,87,742/- on the ground that the same are not made for business purposes.

Conclusion-

Co-ordinate bench in the case of ACIT vs. Armee Infotech has held that it is case of the assessee that in order to maintain secrecy of its line of business, it is not incumbent upon him to disclose personal details of recipients. It has shown bills and vouchers for the purchases. All the details have been maintained scientifically. An estimation of disallowance could only be made, if there are some lapses in the detailed maintained by the assessee. The reasoning given by the AO is altogether different which did not meet approval of the CIT(A). Thereafter, the ld.CIT(A) ought to have not made adhoc disallowance. The ld.CIT(A) was not justified in partially confirming the disallowance. After perusal of the finding of the ld.CIT(A), we do not find any error in it to the extent the ld.CIT(A) has deleted the disallowance. There is no justification to interfere in his order.

Under these circumstances, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench as we find that the expenses are allowable under Section 37 of the Act, and thus, respectfully relying upon the same, we allow this ground of appeal preferred by the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The instant appeal at the instance of the assessee is directed against the order dated 20.10.2017 passed by the Ld. Commissioner of Income Tax (Appeals), Ahmedabad – 5 (in short ‘CIT(A)’) arising out of the assessment order dated 27.12.2016 passed by the Learned ACIT, Circle-5(3), Ahmedabad under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2014-15.

2. Ground Nos. 1 to 3 relates to disallowance of donation given by the assessee to M/s. Herbicure Healthcare Bio-Herbal Research Foundation, Kolkata. At the very threshold of the matter, Ld. Advocate appearing for the assessee submitted before us that the issue is squarely covered by the judgment passed by the Co-ordinate Bench in ITA No. 2888/Ahd/2017, on 20.09.2019 in favour of the assessee, whereas, Ld. DR relied upon the orders passed by the authorities below.

3. Factually, the assessee made donation of Rs.25 Lakhs to the Institute in the 2014 and claimed weighted deduction of Rs.43.75 Lakhs, but subsequently, the registration of the said Institutions were withdrawn on 26.09.2016 w.e.f. 01.04.2007. However, it appears that when the donation was made by the assessee to the Institute, at the material point of time, the donor was an approved Institution under Section 35(1)(iii) of the Act. There was no lacuna found by the authorities below against the said Institute and neither there was any embargo imposed during the relevant point of time against the said institution. On this identical issue, we have further considered the judgment relied upon by the assessee passed by the Co-ordinate Bench in ITA No. 2888/Ahd/2017, wherein relying upon the ratio laid down by the Hon’ble Gujarat High Court in the matter of PCIT vs. M/s. Thakkar Govindbhai Ganpatlal HUF in Tax Appeal No. 881 of 2019, relief has been granted to the assessee. While granting relief, the Co-ordinate Bench was pleased to observe as follows:

“3.  Ld. Counsel appearing for the assessee also brought this fact into our notice that the issue is squarely covered by and under several judgments passed by the Co­ordinate Bench including one of dated 17.07.2019 passed in ITA 2318/Ahd/2017 for A.Y. 2014-15 in the matter of (ACIT vs. M/s. Thakkar Govindbhai Ganpatlal HUF) The said appeal preferred by the Revenue was rejected on the basis of the judgment passed in the matter of S. G. Vat Care Pvt. Ltd. vs. ITO passed by the Co-ordinate Bench in the identical issue. In that view of the matter he prays for similar relief before us.

4. Heard the parties, perused the relevant materials available on record including the order passed by the Co-ordinate Bench in ITA No. 2318/Ahd/2017 for A.Y. 2014-15 the relevant paragraph whereof is as follows:-

“3. Brief facts of the case are that the assessee has filed its return of income on 9.9.2014 declaring total income at Rs.31,23,870/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed deduction under section 35(1)(ii) at Rs.96,25,000/- on the ground that it has incurred this expenditure towards donation. He observed that donations were given to Herbicure Health Care Bio-herbal Research Foundation (“Herbicure” for short). According to the AO a survey under section 133A was conducted by the DDIT(Investigation) Unit-1 & 2, Kolkatta on 27.1.2015 at “Herbicure” foundation. During the course of survey, it was found that donors/ beneficiaries in connivance with donee and with active help of certain brokers, entry operators/bogus billers were engaged in arranging these entries of bogus donation. According to the AO after an inquiry, “Herbicure” was prohibited from receiving donation. On the strength of this report of survey team, the AO has treated this donation as bogus and disallowed the claim of donation made by the assessee. On appeal, the ld.CIT(A) has deleted the disallowance.

4. Before us, the ld.counsel for the assessee at the very outset submitted that similar donations were given by S.G. Vat Care P.Ltd. It was disallowed to the assessee, but the Tribunal has deleted the disallowance. He placed on record copy of the Tribunal’s order passed in ITA No.1943/Ahd/2017. According to the ld.counsel for the assessee, the issue in dispute is squarely covered in favour of the assessee. On the other hand, the ld.DR was unable to controvert this contention of the ld.counsel for the assessee.

5. We have duly considered rival contentions and gone through the record carefully. In the case of S.G.Vat care P.Ltd. (supra), the Tribunal has recorded the following finding:

2. In the first ground of appeal, the grievance of the assessee is that the ld.CIT(A) has erred in confirming addition of Rs.8,75,000/- on account of alleged bogus donation to Herbicure Healthcare Bio-Herbal Research Foundation.

3. Brief facts of the case are that the assessee has filed return of income on 20.11.2014 declaring total income at Rs.4,47,910/-. On scrutiny of the accounts, it revealed that the assessee-company has given donation to Herbicure Healthcare Bio-Herbal Research Foundation, Calcutta. A survey action was carried out at the premises of the donee wherein it revealed to the Revenue that this concern was misusing the benefit of notification issued by the Income Tax Department. It has been getting donations from various sources, and after deducting certain amount of commission, these donations were refunded in cash. On the basis of that survey report registration granted to its favour was cancelled. On the basis of the outcome of that survey report, the ld.AO construed the donation given by the assessee as bogus. Appeal to the ld.CIT(A) did not bring any relief to the assessee.

4. Before us, the ld.counsel for the assessee contended that donations were given on 25.3.2014. At that point of time, donee was notified as eligible institution and fall within the statutory eligibilit criterion. Certificate for receiving donation was cancelled on 5.9.2016. There is no mechanism with the assessee to verify whether such donee was a genuine institute or not, which can avail donation from the society.

5. The ld.DR, on the other hand, contended that in the investigation it came to know about bogus affairs conducted by the donee. Hence, these donations are rightly been treated as bogus, and addition is rightly made.

6. We have duly considered rival contentions and gone through the record carefully. The AO is harping upon an information supplied by the survey tem of Calcutta. He has not specifically recorded statement of representatives of the donee. He has not brought on record a specific evidence wherein donee has deposed that donations received from the assessee was paid back in cash after deducting commission. On the basis of a general information collected from the donee, the donation made by the assessee cannot be doubted. Neither representatives of the donee have been put to cross-examination, nor any specific reply deposing that such donation was not received, or if received the same was repaid in cash, has been brought on record. In the absence of such circumstances, donation given by the assessee to the donee, on which the assessee no mechanism to check the veracity, can be doubted, more particularly, when certificate to obtain donation has been cancelled after two years of the payment of donation. It is fact which has been unearthed subsequent to the donations. Therefore, there cannot be any disallowance on this issue. We allow this ground.”

6. There is no disparity on the facts. On the basis same survey report, the genuineness of the donation has been doubted in the case of the assessee also. Therefore, the issue in dispute is squarely covered in favour of the assessee. Respectfully following the order of the ITAT in the case of S.G.Vat care P.Ltd., we do not find any merit in the appeal of the Revenue. It is dismissed.

7. In the result, appeal of the Revenue is dismissed.”

5. Since the donation has not been doubted by the Revenue in the case of the assessee, in the absence of any changed circumstances, respectfully relying upon the judgment passed by the Co-ordinate Bench we allow the appeal preferred by the assessee. Consequentially, the addition made by the authorities below is deleted.”

In the absence of any changed circumstances, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench and, thus, respectfully relying upon the same, we allow this ground of appeal preferred by the assessee.

4. The next ground relates to disallowance on sales promotion expenses. The assessee has debited an amount of Rs.47,04,385/- under the head ‘sales promotion expenses’. Details were filed before the Ld. AO in regard to such expenses. However, the Ld. AO disallowed expenditure of Rs.43,87,742/- on the ground that the same are not made for business purposes. These gift items were given to the business associates and executives. Similar expense is made every year by the assessee as the case made out by it. The same are wholly and exclusively for business purposes and allowable under Section 37 of the Act as contended by the Ld. AR. The Ld. AR further submitted that the issue is also covered by the judgment passed by the ITAT in case of ACIT vs. Armee Infotech, reported in [2022] 136 com 128 (Ahmedabad-Trib.) in favour of the assessee, which has been failed to be controverted by the Ld. DR. However, the Ld. DR relied upon the order passed by the authorities below.

5. We have heard the respective parties and perused the relevant materials available on record and case laws relied upon by the Ld. Counsel.

6. We have also gone through the reply given to the ACIT by the assessee in support of the sales promotion expenses of Rs.43,87,742/-. The contention of the assessee is as follows:

“With reference to the above referred show cause notice, we hereby submit the following details/explanations as required by you:

1. As regards your observation, that Ledger Account of Sales Promotion expenses shows an amount of Rs 35,91,147/- only while expenses of Rs. 47,04,385/- have been claimed, we have to submit as under:

Assessee has maintained 3 Ledger accounts of Sales Promotion Expenses as follows:

However, it seems that while submitting the. details,” ledger account of only “Sales Promotion Expenses (NIL TDS)” has been submitted. We are hereby submitting herewith the copy of Ledger of all the 3 accounts for your record

Annexure -1

We are submitting herewith copy of bill of expense booked in sales promotion expenses as follows:

Annexure -2

Apart from the above referred bills, assessee also incurred certain expenditure for various visitors (i.e. Customers, suppliers, .consultants etc) who visit its office from time to time for holding business meetings with the partners and employees of the firm. Sometimes these meetings go on for a very long time and hence, assessee provides tea, snacks, refreshments etc. at the time of their visit. The said expenses are also in the nature of Sales promotion expenses and have been incurred in cash. The total of these expenses is less than Rs. 2.5 Lakhs which is a very small fraction of the assessee’s Total Turnover of Rs. 280 Crores.

In view of the above evidences, facts and explanations, the difference of Rs, 11,13,238/- should not be treated as unexplained expenditure and not added to the income of the assessee.

2. Assessee Firm is engaged in the business of Trading in Chemicals and has a turnover of more than Rs. 280 Crores. As part of its Sales Promotion Activities, it incurs various expenditure from time to time to incentivise and motivate its customers, suppliers and employees. As part of its promotional activity, assessee had assessee firm had bought Blackberry Mobile Phones to be distributed amongst its customers, suppliers and employees. A copy of bill for the purchase of mobile expenses is being submitted as Annexure -1 of this letter.

3. Assessee Firm has been carrying on its business of trading in chemicals for past more than 25 years. It has a customer list of more than 1000 customers and suppliers with whom it carries on its business from time to time. Every year on the auspicious festival of Diwali and Dev Diwali, assessee firm distributes various gifts and sweets to its business associates, employees, suppliers, consultants etc. Even in the year under consideration, assessee had purchased gold coins and silver articles to be distributed on the occasion of Diwali and Dev Diwali which was celebrated on 3rd November 2013 and 17th November 2013 respectively. These expenses are essential for maintaining a healthy business relationship and advancement of the business objectives of the firm. During the year assessee had purchased gold coins and silver articles of Rs. 23,91,895/-. The amount of expenditure incurred is not even 0.1% of the Turnover of the assessee. Further, assessee firm has been incurring these expenses year on year since the start of its business and distributing gifts on this auspicious occasion is a common practice across businesses in India.

A copy of the bills for purchase of Gold Coins and Silver Articles is being submitted as Annexure -1 of this letter.

We would further, like to draw you attention to the instructions issued by the CBDT vide its letter 13/A/20/68 dated 03/10/1968 wherein the CBDT has said that the expenses incurred on the occasion of Diwali and Mahurat are in the nature of business expenditure.

4. During the year under consideration, assessee firm had organized a meeting for its customers at Golden Glory Hall, Karnavati Club in the month of December 2013: Assessee had invited a number of customers and executives of the supplier companies for a meeting” which was followed by dinner. All the invitees to this meeting had been invited over the phone by the Firm’s Partners and their employees. The primary objective of this meeting was to be able to communicate and meet the customers one on one, thereby keeping in touch with the customers and develop a personal rapport with them. The suppliers of the firm had also been invited to this meeting wherein they were able to interact with the End Consumers, Traders etc. to understand the business requirements of these customers and also get feedback which would help them in preparing business forecast for the future. Assessee Firm has been holding such business meeting for the past many years wherein the customers and suppliers are invited for a one on one meeting to develop business relationships.

Hence, such business meetings, helps the assessee in interacting with customers and suppliers, thereby helping the assessee in taking future business decisions, business forecasting, policy making etc.

We are also enclosing herewith a list of parties invited for the business meeting.

Annexure -3”

7. We find that on identical issue the Co-ordinate bench in case of ACIT vs. Armee Infotech (supra), has been pleased to pass order with the following observation:

“18.  We take facts first from the Asstt.Year 2012-13. In this assessment year, the assessee has debited a sum of Rs.1,29,93,438/- towards sales promotion expenses, and claimed the same in the profit & loss account. The ld.AO found that it has given costly gifts to certain parties. He worked out such amount at Rs.1,17,40,918/-. The AO disallowed this amount out of total claim made by the assessee. The reasons assigned by him is that the assessee failed to give list of persons to whom such valuable gifts have been made for business promotion. On appeal, the ld.CIT(A) has restricted this disallowance to Rs.9.50 lakhs.

19. In the Asstt.Year 2014-15, the assessee has debited a sum of Rs.1,15,86,601/- as sales promotion expenses. The ld.AO found that Rs.30,52,101/- were debited by the assessee against trading business and Rs.85,34,500/- against commission income. The AO has disallowed a sum of Rs.85,34,500/- and this disallowance has been confirmed by the ld.CIT(A).

20. With the assistance of the ld.representatives, we have gone through the record carefully. The ld.CIT(A) while partly confirming the disallowance made by the AO has recorded the following finding (Asstt.Year 2012-13):

“1.  Decision : I had given thoughtful consideration to the appellant’s submission reproduced hereinabove. I had also carefully perused the relevant paragraphs of the Assessment Order under appeal. I find that there is considerable force of merit in the , Appellant’s submission on this point which merits acceptance as much as the similar expenditure has been incurred and allowed in A.Y.2010-11 & 2011-12. In other words, it is not the new issue, the principle of consistency desired to be followed as has been held in various below mentioned case laws:

(i) DCIT Vs. Sulabh International Social Service Organisation [350ITR 189 (Patna)]

(ii) CIT Vs. Ranganathar& Co. [316 ITR 252 (Mad)]

(iii) Gopal Purohit Vs. Jt. CIT [334 ITR 308 (SC]

The appellant has furnished before the AO complete details in respect of the expenditure in question and has also furnished copies of the bills/vouchers. Therefore, it emerges from the records of proceedings that the expenditure in question had been incurred in the normal course of the business of the appellant and the same had been incurred for the purpose of business of the appellant. The expenditure has not been proved to be bogus through some independent inquiry. However, at the same time, it is not open and shut case for appellant because the perusal of the Assessment Order indicates that the appellant had not furnished the names of the persons to whom the gift/presentation articles had been given. In the course of the appellant proceedings, the AR of the appellant submitted that disclosure of name of the parties would adversely affect the business of the appellant and in order to keep the business secret, the appellant was compelled to withhold the names. The AR further pleaded that nondisclosure of the name would not operate to disentitle the appellant’s legitimate claim of expenditure which has been genuinely incurred on account of sales promotion which is directly related to the business of the appellant. On the other hand, it would also not entitle the appellant to get relief in total.

5.1.1 Taking into consideration the totality of the facts and circumstances of the case including the dynamics of business involved as contained in submission of the appellant, I am inclined to hold that the AO is not justified in making the impugned addition toto and is against the principle of natural justice. The truth lies somewhere down the line wherein sense of proportion and principle of natural justice would be met. In the facts and circumstances of the case, it is decided that a lump sum addition of Rs.9,50,000/- would serve the ends of justice. Accordingly, addition to the extent of Rs.9,50,000/- is confirmed and the balance amounting to Rs.1,07,90,918/- is hereby directed to be deleted. The appellant gets relief of Rs.1,07,90,918/-. The ground No.3 is allowed.”

21. Stand of the assessee is that it was in the business of trading in computer spares and peripheral. It was also providing maintenance services. There are many suppliers in the area of business, in which the assessee was engaged. In order to remain in the market, and also to maintain assessee’s hold in the market, it is essential to incur expenditure on sale promotion. The assessee further contended that it has achieved a turnover of Rs.102.32 crores, and against which it has incurred expenditure of Rs.1,29,93,438/-, which is just 1.14% of the total turnover. The expenditure cannot be said to be excessive or unreasonable. Only reason assigned by the AO is that it failed to give list of recipients of the gifts.

22. After going through well reasoned finding of the ld.CIT(A), we are of the view that there is no justification to interfere in it. The ld.CIT(A) found as a matter of fact that similar expenditure incurred by the assessee in the Asstt.Year 2010-11 and 2011-12, and those ITA No.1778/Ahd/2016 & 2 Others ACIT Vs. Armee Infotech 13 expenditure were allowed to it. The ld.CIT(A) followed decision of the Hon’ble Patna High Court and Hon’ble Madras High Court as well as of Hon’ble Supreme Court to follow the proposition of consistency in the finding extracted (supra). The ld.CIT(A) has partially confirmed disallowance of Rs.9.50 lakhs; but there is no justification for such disallowance also. The assessee is a well organized business house, who has achieved turnover of more than Rs.102 crores; meaning thereby, its affairs must have been managed in professional manner, where complete details might have been maintained. The assessee has given no details to whom such gift items were given. It is case of the assessee that in order to maintain secrecy of its line of business, it is not incumbent upon him to disclose personal details of recipients. It has shown bills and vouchers for the purchases. All the details have been maintained scientifically. An estimation of disallowance could only be made, if there are some lapses in the detailed maintained by the assessee. The reasoning given by the AO is altogether different which did not meet approval of the CIT(A). Thereafter, the ld.CIT(A) ought to have not made adhoc disallowance. The ld.CIT(A) was not justified in partially confirming the disallowance. After perusal of the finding of the ld.CIT(A), we do not find any error in it to the extent the ld.CIT(A) has deleted the disallowance. There is no justification to interfere in his order.”

Under these circumstances, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench as we find that the expenses are allowable under Section 37 of the Act, and thus, respectfully relying upon the same, we allow this ground of appeal preferred by the assessee.

8. In the result, assessee’s appeal is allowed.