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:
