ITAT allows Deduction incurred for Expensive Gifts to Public Sector Employees [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has recently allowed income tax deduction towards the expenses incurred for gifts to people including the public sector employees for the business promotion.

“It is also an accepted business practice in India that customary gifts are usually handed out during festive occasions. Although, handing out gold items or semi-precious items may be frowned upon by the revenue authorities, all the same it cannot 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.”

The assessee is engaged in the business of trading, testing, and installation of scientific instruments with respect to measuring of energy, pollution control, measurement of energy flow, etc. The Assessing Officer, while completing the assessment proceedings against the assessee, observed that the business promotion expenses the assessee incurred expenses for purchasing expensive gifts and claimed deduction towards business expenditure.

The assessee explained that due to plenty of competition in his line of business, the assessee has 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 Commissioner of Income Tax (Appeals) upheld the disallowance pertaining to jewelry items and semi-precious items on the ground that the reasonableness of expenditure could not be established and offering expensive gifts was a way to bribe of the employees of public sector undertakings. Thus, the Ld. CIT (A) has tried to add an altogether new dimension to the entire dispute.

Allowing the deduction, the Tribunal observed that “a perusal of the records would show that there is no denying that the gross turnover of the assessee has been increasing. Even the profit returned by the assessee has shown the corresponding proportional increase. The only failure on the part of the assessee has been that he could not establish the business nexus of the impugned expenditure to the satisfaction of the lower authorities. It is the opinion of the lower authorities that the assessee could not establish a link between the gifts given and the sales orders received. However, 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. In the present case, there is no denial b the department that the assessee has been carrying on business regularly, the department also does not allege that there is any personal element involved in the impugned expenditure. It is also an accepted business practice in India that customary gifts are usually handed out during festive occasions. Although handing out gold items or semi-precious items may be frowned upon by the revenue authorities, all the same, it cannot 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, we also feel that the reasonableness of quantum of expenditure vis a vis the turnover would have to be justifiable. Accordingly, it is our considered opinion that interest of justice would be served if the disallowance is restricted to 40% of the initial total disallowance of Rs. 50,32,880/-,” the Tribunal said.