It is impossible to maintain list of gifts given and demonstrate that a particular sales order was received as a result of a particular gift
ABCAUS Case Law Citation:
ABCAUS 3330 (2020) (07) ITAT
In the instant case, appeal had been preferred by the assessee against order passed by the CIT(A) in confirming addition of business promotion expenses.
The assessee return of income of the assessee was processed u/s 143(1) of the Income Tax Act, 1961 (the Act) and subsequently the case was selected for scrutiny under CASS guidelines.
During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had incurred business promotion expenses. The assessee was asked to furnish detailed ledger account of these expenses.
From the perusal of the ledger account it was observed that the major part of the expenditure was towards purchase of precious items, gold items and cash payments for various gift items.
The AO required the assessee to further explain as to how these business promotion expenses had helped in promotion of the business as many of the payments were in cash or were for purchase of jewellery and other precious items.
In response, the assessee submitted before the AO that due to plenty of competition in his line of business, the assessee had to promote his business to maintain the existing business as well as to get fresh business and new customers and that such expenditure had helped in increasing its turnover as well as increasing the net profit.
The assessee also submitted a chart depicting the turnover and the net profit for three years to demonstrate that the turnover and the net profit had been consistently increasing and had almost doubled.
However, the AO was not satisfied with the submissions of the assessee. The AO also pointed out some discrepancies in the serial number of the bills and their corresponding dates and, thereafter, disallowed majority of expenses and added the same to the income of the assessee.
Aggrieved, the assessee approached the First Appellate Authority who partly allowed the assessee’s appeal by restricting the disallowance.
Still aggrieved, the assessee approached the Tribunal.
It is impossible to maintain list of gifts given and link it with a sales order
The Revenue contended that one has to not only consider the increase in turnover but also whether expenditure was genuine or not. That the nature and quantum of the expenditure has to be considered and the assessee can not be permitted to simply debit any kind of expenditure of any amount under the business promotion expenditure without establishing its nexus with the assessee’s business.
The Tribunal observed that both the lower authorities had upheld the disallowance pertaining to jewellery items and semi precious items on the ground that the reasonableness of expenditure could not be established. The CIT (A) also went to the extent of inferring that offering expensive gifts was nothing but bribe to the staff of public sector undertakings.
The Tribunal noted that there was no denying that the gross turn-over of the assessee had been increasing. Even the profit returned by the assessee had shown the corresponding proportional increase. The only failure on the part of the assessee had been that he could not establish the business nexus of the impugned expenditure to the satisfaction of the lower authorities.
It was the opinion of the lower authorities that the assessee could not establish a link between the gifts given and the sales orders received.
The Tribunal stated that it may not be practically possible for all businesses to maintain a complete list of the gifts given to their various customers and demonstrate that a particular sales order was received as a result of a particular gift. The Act also does not prescribe demonstrating such live linkage.
The Tribunal noted that there was no denial by the department that the assessee had been carrying on business regularly, the department also did not allege that there was any personal element involved in the impugned expenditure.
The Tribunal stated that it is an accepted business practice in India that customary gifts are usually handed out during festive occasions.
The Tribunal opined that although, handing out gold items or semi-precious items may be frowned upon by the revenue authorities, all the same it could not be a reason for disallowing the expenditure, especially when it is settled law that the revenue cannot step into the shoes of a businessman and direct how the business should be conducted.
However, the Tribunal said that the reasonableness of quantum of expenditure vis a vis the turnover would have to be justifiable. Accordingly, it restricted the disallowance to 40% of the initial total disallowance.
Download Full Judgment Click Here >>
- Further extension of due date for filing of Form No. 10A/10AB to 30.06.2024 – CBDT Circular
- Revisionary order purportedly passed earlier but dispatched after written Submissions quashed
- Assessment u/s 147 based on seized material found during search of third party void ab-initio
- TDS deductors given relief for non deduction of TDS at higher rate for inoperative PANs
- Reassessment order quashed due to error in personal hearing video conferencing link
