INTERNATINAL STEEL TRADING, MUMBAI v. ADDL CIT RG 20(1),

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI B.R. MITTAL JUDICIAL MEMBER AND SHRI P.M.JAGTAP ACCOUNTANT MEMBER I.T.A. NO. 3972 /MUM/2010. ASSESS MENT YEAR : 2006-07. INTERNATIONAL STEEL TRADING ADDL. COMMISSIONER OF ANAND A-WING FLAT NO.52 VS. INCOME TAX ANAND JUHU LANE CHS LTD. RANGE-21 MUMBAI. 17 JUHU ROAD ANDHERI (W) MUMBAI 400 058. PAN : AAAFI0583Q APPELLANT. RESPONDENT. APPELLANT BY : SHR I D.V. LAKHANI. RESPONDENT BY : SHRI O.A. MAO. DATE OF HEA RING : 03-11-2011. DATE OF PRONO UNCEMENT : 18-11-2011. O R D E R PER P.M. JAGTAP A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED CIT(APPEALS)-31 MUMBAI DATED 25-03-2010 AND THE SO LITARY ISSUE ARISING OUT OF THE SAME RELATES TO THE ADDITION OF RS.4 61 417/- M ADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) BY WAY OF DISALLOWANCE OF EXPENSES CLAIMED BY THE ASSESSEE ON DISTRIBUTION OF GIFTS. 2. THE ASSESSEE IN THE PRESENT CASE IS A PARTNERSHI P FIRM WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING BUSINESS CONSULTANCY SERVICES . IT CLAIMS TO HAVE EXTENSIVE 2 ITA NO. 3972/MUM/2010 ASSESSMENT YEAR:2006-07 KNOWLEDGE AND EXPERTISE IN RESPECT OF DIFFERENT POT ENTIAL OF INDIAN MARKET AND THE SAME IS PROVIDED BY IT TO VARIOUS OVERSEAS CLIENTS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY THE ASSESSEE ON 24-07-2006 DECLARING TOTAL INCOME OF RS.2 01 43 461/-. DURING THE COURSE OF AS SESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF RS.4 89 847/- UNDER THE HEAD GIFT & SOUVENIR EXPENSES. HE ALSO NOTED FROM THE DETAILS OF THE SAID EXPENSES FURNISHED BY THE ASSESSEE THAT THE SA ID EXPENSES TO THE EXTENT OF RS.4 61 417/- WERE INCURRED BY THE ASSESSEE ON DIST RIBUTING GIFTS OF GOLD ITEMS. THE ASSESSEE HOWEVER COULD NOT FURNISH THE DETAILS OF PERSONS OR CLIENTS TO WHOM THE SAID GOLD ITEMS WERE GIVEN AS GIFTS IN ORDER TO EST ABLISH THE BUSINESS EXPEDIENCY THEREOF. THE ASSESSEE ALSO COULD NOT EXPLAIN AS TO HOW THE DISTRIBUTION OF THE SAID GIFTS HAD PROMOTED ITS BUSINESS. THE AO THEREFORE DISALLOWED THE GIFT EXPENSES CLAIMED BY THE ASSESSEE TO THE EXTENT OF RS.4 61 41 7/-. ON APPEAL THE LEARNED CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE HOLDIN G THAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH THAT THE EXPENSES ON DISTRIBU TION OF GOLD ITEMS AS GIFTS WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS AND THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DISCHARGE TH E SAID ONUS SATISFACTORILY. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEALS) THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 3. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTS ET TOOK US THROUGH THE WRITTEN NOTE PREPARED AND FURNISHED BY HIM TO EXPLA IN THE EXACT NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE. HE SUBMITTED THAT KEEPI NG IN VIEW THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE DEVELOPING O NE TO ONE RELATIONSHIP WITH IMPORTANT PERSONS IN VARIOUS INDIAN ORGANIZATIONS I S NECESSARY AND FOR THIS PURPOSE GOLD ORNAMENTS WERE DISTRIBUTED AS GIFTS TO SUCH IM PORTANT PERSONS DURING FESTIVAL SEASON TO DEVELOP AND MAINTAIN GOOD RELATIONS WITH THEM. HE INVITED OUR ATTENTION 3 ITA NO. 3972/MUM/2010 ASSESSMENT YEAR:2006-07 TO THE DETAILS OF GIFTS GIVEN ON PAGE NO. 1 OF HIS PAPER BOOK AND POINTED OUT THAT THE VALUE OF EACH ITEM GIVEN AS GIFT NEVER EXCEEDED RS.8 000/-. HE SUBMITTED THAT SMALL ITEMS OF GOLD WITH THE VALUE IN THE RANGE OF RS. 4 000/- TO RS.8 000/- WERE DISTRIBUTED TO THE BUSINESS ASSOCIATES AS SMALL SOU VENIRS. HE SUBMITTED THAT PROFIT OF RS.1.91 CRORES WAS DECLARED BY THE ASSESSEE ON THE GROSS CONSULTANCY FEES OF RS.2.39 CRORS GIVING A VERY HIGH NET PROFIT RATE OF MORE THAN 80% AND THE EXPENSES CLAIMED BY THE ASSESSEE INCLUDING THE EXPENSES INCU RRED ON DISTRIBUTION OF GIFTS WERE QUITE FAIR AND REASONABLE IF COMPARED WITH THE FIGURES OF GROSS CONSULTANCY FEES AS WELL AS NET PROFIT DECLARED BY THE ASSESSEE . HE CONTENDED THAT THE REASONABLENESS OF THE EXPENDITURE INCURRED ON GIFTS AS WELL AS COMMERCIAL EXPEDIENCY THEREOF THUS WAS DULY ESTABLISHED BY THE ASSESSEE AND THERE WAS NO REASON FOR THE AUTHORITIES BELOW TO DISALLOW THE SA ID EXPENDITURE MERELY BECAUSE THE ASSESSEE COULD NOT FURNISH THE DETAILS OF PERSO NS TO WHOM THE GIFTS WERE DISTRIBUTED. 4. THE LEARNED DR ON THE OTHER HAND STRONGLY RELI ED ON THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE THAT THE DISALLOWANCE ON ACCOUNT OF EXPENSES INCURRED ON DISTRIBUTION OF GIF TS IS FULLY JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT MATERIAL ON RECORD. KEEPING IN VIEW THE FACTS AND FIGURES GI VEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WE ARE OF THE VIEW THAT THE EXPENDITU RE OF RS.4 61 417/- INCURRED BY THE ASSESSEE ON DISTRIBUTION OF GIFTS IS QUITE FAIR AND REASONABLE HAVING REGARD TO THE GROSS CONSULTANCY FEES RECEIVED BY THE ASSESSEE AS WELL AS THE NET PROFIT DECLARED BY IT WHICH IS ABOUT 90% OF THE GROSS RECEIPTS. MOREOV ER THE NATURE OF ACTIVITY OF THE ASSESSEE IS SUCH THAT DISTRIBUTION OF GIFTS TO THE CONCERNED KEY PERSONS ON FESTIVE OCCASIONS IS NECESSARY FROM THE POINT OF VIEW OF DE VELOPING AND MAINTAINING ONE TO 4 ITA NO. 3972/MUM/2010 ASSESSMENT YEAR:2006-07 ONE RELATIONSHIP. IN OUR OPINION THE EXPENDITURE I NCURRED ON DISTRIBUTION OF GIFTS THUS WAS FOR THE PURPOSE OF THE BUSINESS OF THE ASS ESSEE AND THERE WAS NO JUSTIFIABLE REASON FOR THE AUTHORITIES BELOW TO DISALLOW THE SA ID EXPENDITURE MERELY BECAUSE THE ASSESSEE COULD NOT GIVE THE DETAILS OF PERSONS TO WHOM THE SAID GIFTS WERE GIVEN. AS SUCH CONSIDERING ALL THE FACTS OF THE CA SE WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LE ARNED CIT(APPEALS) ON ACCOUNT OF EXPENSES INCURRED BY THE ASSESSEE ON DIS TRIBUTION OF GIFTS IS NOT SUSTAINABLE AND DELETING THE SAME WE ALLOW THIS AP PEAL OF THE ASSESSEE. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED ON THIS 18 TH DAY OF NOV. 2011. SD/- SD/- (B.R. MITTAL) ( P.M. JAGTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI DATED: 18 TH NOV. 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR I-BENCH. (TRUE COPY) BY ORDE R ASSTT. REGISTRAR ITAT MUMBAI BEN CHES MUMBAI