ITAT Ahmedabad Allows Full Sales Promotion Expense – Rejects AO’s Restriction as Arbitrary

Dahyabhai Laljibhai Patel Vs ITO (ITAT Ahmedabad)

Facts

• Assessee, engaged in pharmaceutical distribution, filed return for AY 2018-19.
• During scrutiny, AO noticed sales promotion/distribution expenses paid to Welable Pharma at 13.5% of sales, which he held excessive.
• AO restricted it to 5% of sales, disallowing ₹25,88,504/-, terming the excess “beyond market limits.”
• CIT(A)/NFAC confirmed the restriction, leading to the present appeal before ITAT.

Assessee’s Submission

• Assessee furnished comparative data of sales, purchase values & credit-note compensations for preceding years (FYs 2014-15 to 2017-18), demonstrating that:
• The overall gross margins after accounting for compensation remained stable.
• The pattern of compensation had been consistently followed in all years, varying between 20–28% of sales.
• No part of the expenditure was shown to be bogus or for non-business purposes.

Tribunal’s Observations /Decision

• Bench noted that AO failed to produce any evidence of inflation, personal benefit, or non-genuineness.
• It observed that Assessee’s accounting pattern & gross margin trend were consistent year after year.
• When business results are in line with past trends & Department accepted them earlier, arbitrary estimation or restriction without concrete evidence cannot be sustained.
• Tribunal held there was no justification for restricting sales promotion expense from 13.5% to 5%.
• Disallowance of ₹25.88 lakh was deleted & the appeal was allowed in full.

Where the method of accounting & trade practices are consistent, & profits remain stable, the AO cannot substitute his subjective estimate for the businessman’s judgment. Genuine sales promotion & distribution expenses incurred in the ordinary course of trade are fully deductible.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi, vide order dated 23.07.2025 relevant to the Assessment Year 2018-19.

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

1. The Ld. CIT(A) has erred in law and on facts of the case, in sustaining the disallowance of Rs.25,88,504/- made by way of restriction of sales promotion/distribution expenses paid to Welable Pharma, from 13.5% to 5% of sales.

2. The appellant craves leave to add, amend alter or delete the grounds of appeal at the time of hearing, if need arise.

3. The Assessing Officer disallowed the expenditure incurred by the assessee on the ground that the same was beyond the market limit. We have examined the details of the compensation paid to Welable Pharma, the particulars of which are as under:

Compensation given to Welable Pharma

4. Considering the consistent method followed by the assessee, we find no reason to interfere with the profit declared. Accordingly, the appeal of the assessee is allowed.

5. In the result, the appeal of the assessee is allowed.

The order is pronounced in the open Court on 08.10.2025.