This article specifically focuses on gift expenses incurred by businesses for its clients on festive occasions and other such occasions, etc., and its treatment with respect to the allowance under the Income Tax Act, 1961.
Businesses generally offer gifts to their clients to set up long-lasting and durable relationship with them, and these serve as an expense to expand and earn income for the business which in turn lead to deduction of these expenses from the income so as to pay less tax[1]. The important principle to understand here is that the expenses that are incurred should be in the nature of business promotion and not in the nature of capital expenditure and personal expenses of the assesse.
Case Laws Dealing with Such Expenses
- Jaikisan Agarwal vs. Assistant commissioner of Income tax[2]
In relation to determining the genuineness of gift. It is only the fact of the donor having transferred the money into the hands of donee and the availability of the funds at that time in the case of donor which are the material factors to be proved in evidence for holding the genuineness of the gift.
- Agfa India private Ltd. Vs. Assistant commissioner of Income tax[3]
In this case, the Assessing officer and Commissioner, Income tax had made a disallowance of gift expenses merely because confirmation from the third-party could not be furnished, but on appeal, this decision of AO/commissioner was not accepted and gift expenses were allowed for deduction and it was held that since assesse produced the required expenditure documents, confirmation from the third-party or receiver need not be the reason to disallow the gift expenses for deduction. Thereby, all expenses made for promotion of business except capital expenditure and personal expense be allowed for deduction against income to determine the tax liability under Sec 37(1) of Income Tax Act, 1961.
There are various expenses that can be incurred by business on clients with the objective to expand the customer base and achieve the objective of high profits. These expenses can be in form of giving gifts on the wedding of the client, entertainment, travel and excursions etc. but, it must be noted that the Income Tax Act only provides for these deductions when the gift expenses are for the exclusive benefit of the client and is extendable to the relatives of the client if it is not detrimental to the very principle for which the deduction is allowed. In terms of Sec 123 of the Transfer of Property Act, 1882, a gift of immovable property, which is not registered is bad in law and can‘t pass any title to the decree.
Deductions for the Business
These deductions are to be examined by the assessing officer because they may have the character of tax evasion and money laundering.
Various forms of the gift qualifying for such deduction are as follows:-
- Gift can be in form of cash;
- Gift can be in the form of movable property;
- Gift can be in the form of immovable property
Businesses have to keep in mind that these deductions don’t exceed the income and completely offset any income liable to be taxed.
For example, a real estate agent might give a client, who purchases a house a Rs. 10000, a gift card from a home improvement store or a Rs. 1000 bottle of wine. The agent attaches a note with the gift asking for future business and referrals accompanied by three business cards.
Further, the said expenditure should be justifiable and reasonable considering the size and processes of the Company.
For example, the CBDT has issued a circular stating that any expense incurred in providing freebies to medical practitioners by pharmaceutical companies in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Section 37(1) of the Income Tax Act[4], being an expense prohibited by the law. The sum equivalent to value of freebies enjoyed by the medical practitioner shall be taxable as business income or income from other sources depending on the facts of the case.
Deduction for the Client
Any gift to a public servant is strictly prohibited by law and can invite serious punishment as it is considered to be a bribe.
Under Section 56(ii)[5], deduction for donee (receiver) or income from gift is subjected to certain conditions like:-
- Gift value should not be more than Rs. 50,000 to claim deduction and over and above it will be liable to taxation for the receiver of gift;
- Gift over the value of Rs. 50,000 may be allowed deduction if it is given on the wedding of the receiver or if it is given by a relative (definition and limit provided in Income Tax Act) of the receiver.
Conclusion
It is customary in India to give gifts to clients on various festive occasions like Diwali, Christmas, etc. These gifts serve as business promotional expenses. They can be claimed as an offset against the income and deduction can be claimed on that, subject to business size and operations. The Government allows these deductions to improve the business climate among people, but it should be kept in mind that these deductions are prohibited if they are presumptive of tax evasion by business and to carry money laundering activities. These promotional expenses are very important for businesses to improve their brand image and to increase the customer base by alluring with attractive gifts the prospective client.
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