ITAT Deletes Sales Promotion Disallowance for Consistent Business Practice

ITAT Ahmedabad Deletes Disallowance on Sales Promotion Expenses – Upholds Consistent Business Practice

Summary: The ITAT Ahmedabad deleted the disallowance of ₹25,88,504 related to sales promotion expenses claimed by Dahyabhai Laljibhai Patel vs ITO, a pharmaceutical trader. The disallowance was originally made by the AO and confirmed by the CIT(A) on the grounds that the 13.5% commission paid to Welable Pharma was excessive and unreasonable, restricting the claim arbitrarily to 5% of sales. The Tribunal, however, found that the entire expenditure was genuine and incurred in the ordinary course of business. Reviewing the historical data, the ITAT observed that while the method of recording compensation (via credit notes) varied, the assessee’s overall gross margin pattern and total effective compensation remained consistent across multiple years. Crucially, the Revenue failed to adduce any comparable industry data or concrete evidence to prove the expenditure was fictitious, non-genuine, or excessive. Reaffirming the principle of commercial expediency, the Tribunal held that the Department cannot substitute its own estimation for the businessman’s judgment when a consistent accounting and trade pattern is established, and thus deleted the entire disallowance under Section 37(1).

The case concerned Assessee, a trader in pharmaceutical products, who filed his return of income for A.Y. 2018-19. During the scrutiny assessment, AO observed that Assessee had debited sales promotion & distribution expenses in favour of Welable Pharma at 13.5% of sales, which he considered excessive & not in line with market practice.

AO held that only 5% of sales could be considered reasonable for such expenditure & restricted the claim accordingly, thereby disallowing ₹25,88,504 as excessive sales promotion expenses. CIT(A)/NFAC, Delhi, upheld the disallowance, leading to the present appeal before ITAT.

Assessee submitted before the Tribunal that the expenditure in question was fully genuine, incurred in the ordinary course of business & consistent with the accounting pattern of earlier years. The sales & compensation data for the preceding years were furnished as under:

It was argued that while the mode of accounting or method of recording credit notes may have varied slightly over the years, the overall margin pattern remained consistent, showing no sign of abnormality or artificial inflation. Therefore, the AO’s arbitrary restriction of the claim to 5% lacked any factual basis or comparative industry data.

Assessee emphasized that he had followed a uniform practice of compensating Welable Pharma for distribution activities, & such payments directly contributed to sales growth. Hence, the entire expenditure was allowable u/s 37(1).

Tribunal, after carefully examining the details, observed that:

• The method of accounting & pattern of trade relationship between the Assessee & Welable Pharma had been consistent over several assessment years.
• AO did not bring any evidence to show that part of the expenditure was fictitious, non-genuine, or made for non-business purposes.
• There was no finding that Assessee derived any personal or extraneous benefit from the payment, nor was any comparable data cited by the Department to justify the 5% ceiling.
• The Bench further noted that where the business pattern & overall gross margin have remained uniform & stable, the Department cannot question the commercial expediency of expenditure or substitute its own estimation for that of the businessman.
• Holding that the expenditure was incurred in the normal course of business & the accounting method was consistently followed, the Tribunal found no justification for the AO’s interference. It therefore deleted the disallowance of ₹25,88,504, & allowed the appeal in full.

The Ahmedabad Tribunal reaffirmed a key principle of tax jurisprudence — that consistent accounting practices & reasonable business decisions should not be disturbed unless the Revenue brings concrete evidence of non-genuineness or manipulation. In the absence of such findings, sales promotion or trade compensation expenses incurred under a consistent trade pattern cannot be curtailed merely on estimation or assumption.