Income Tax Deduction Available On Distribution Of Gifts For Sales Promotion Even If Assessee Refuses To Share List Of Recipients: ITAT

The assessee/respondent is in the business of installing computers and providing after-sale services, including the sale of computers and peripherals, and collecting from government departments on behalf of suppliers of computers. The assessee filed the return of income electronically, declaring the total income.

The assessee has debited a sum of Rs. 1,29,93,438 towards sales promotion expenses, and claimed the same in the profit and loss account. The AO found that it has given costly gifts to certain parties. The AO disallowed the amount claimed as part of the total claim made by the assessee. The reason assigned by the AO was that the assessee failed to provide a list of persons to whom such valuable gifts have been made for business promotion.

Aggrieved by the order of the AO, the assessee appealed before the CIT (A). The CIT (A), while partly confirming the disallowance made by the AO, has held that the AO was not justified in making the addition and it was against the principle of natural justice. The truth lies somewhere down the line wherein a sense of proportion and principle of natural justice would be met. In the facts and circumstances of the case, it is decided that a lump sum addition of Rs. 9,50,000 would serve the ends of justice. Accordingly, addition to the extent of Rs. 9,50,000 was confirmed and the balance amounting to Rs. 1,07,90,918 was directed to be deleted. The appellant got relief of Rs. 1,07,90,918/-.

Aggrieved by the order of the CIT(A), the department appealed before the ITAT on the grounds that assessee was not entitled to deduction on the grounds that the assessee failed to provide a list of persons to whom valuable gifts have been made for business promotion.

Counsel for the assessee contended that the assessee was in the business of trading in computer spares and peripherals. It was also providing maintenance services. There were many suppliers in the area of business in which the assessee was engaged. In order to remain in the market and also to maintain the assessee's hold in the market, it was essential to incur expenditure on sales promotion.

Counsel for the assessee further contended that it has achieved a turnover of Rs.102.32 crores and against which it has incurred an expenditure of Rs.1,29,93,438/-, which is just 1.14% of the total turnover. The expenditure cannot be said to be excessive or unreasonable. The only reason assigned by the AO is that it failed to provide a list of recipients of the gifts.

The ITAT noted that CIT (A) found as a matter of fact that similar expenditure was incurred by the assessee in the assessment years 2010–11 and 2011–12, and those expenditures were allowed to it.

The ITAT has also observed that ​​the CIT (A) has partially confirmed the disallowance of Rs. 9.50 lakhs, but there is no justification for such a disallowance either.

The tribunal has observed that the assessee was a well organised business house, who has achieved a turnover of more than Rs.102 crores and its affairs must have been managed in a professional manner, where complete details might have been maintained. The assessee has given no details as to whom such gift items were given. It was the case of the assessee that in order to maintain secrecy in its line of business, it was not incumbent upon him to disclose personal details of recipients. It has shown bills and vouchers for the purchases. All the details have been maintained scientifically. An estimation of disallowance could only be made if there are some lapses in the details maintained by the assessee. The reasoning given by the AO is altogether different from that which did not meet the approval of the CIT (A).

The Tribunal has held that the CIT (A) ought to have made an adhoc disallowance. The CIT (A) was not justified in partially confirming the disallowance.

The ITAT deleted the disallowance as there was no justification for disallowing the sales promotion expenditure.

Case Title: ACIT Versus Armee Infotech

Citation: ITA No.1778/Ahd/2016

Counsel For Assessee: Advocate Hardik Vora

Counsel For Department: Sr. DR Mukesh Kumar Sharma

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