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.