Proportionate Disallowance of Exhibition Expenses Upheld: Indirect Benefits to Assessee-Partner Justify Partial Allocation

Issue:

Whether the Commissioner (Appeals) took a reasonable approach in allowing only 25% of exhibition expenses incurred by an assessee (a partner in a firm) on behalf of that firm as business promotion expenses, when the Assessing Officer (AO) had disallowed the entire amount, arguing that the expenses were not incurred “wholly and exclusively” for the assessee’s own business, but for a third party firm.

Facts:

For the assessment year 2018-19, the assessee was a partner in a firm. The assessee incurred exhibition expenses on behalf of this firm. The Assessing Officer (AO) disallowed the entire amount claimed as business promotion expenses. The AO’s rationale was that these exhibition and promotion expenses were not connected to any actual or foreseeable business activity of the assessee directly and therefore failed to meet the requirement of being incurred “wholly and exclusively” for the assessee’s own business purposes under Section 37(1) of the Income-tax Act, 1961. The expenses were incurred for a third-party firm. The assessee had a 10% share in the profits of this firm.

Decision:

Yes, the court held that since the determination of the quantum of indirect benefits is a subjective matter, which would depend on the facts of each case, and the expenses were incurred for a third-party firm in which the assessee had a 10% share in profits, the Commissioner (Appeals) had taken a reasonable approach in allowing 25% of the expenses in the hands of the assessee. Therefore, there was no infirmity in the order of the Commissioner (Appeals) so as to call for any interference. The decision was in favor of the revenue (meaning the revenue’s partial disallowance, as affirmed by CIT(A), was upheld).

Key Takeaways:

“Wholly and Exclusively” for Business (Section 37(1)): Section 37(1) requires that an expenditure must be incurred “wholly and exclusively” for the purposes of the assessee’s own business. This means there must be a direct nexus between the expenditure and the assessee’s business activity.
Expenditure for Third Party: Generally, an assessee cannot claim a deduction for expenses incurred for the business of a third party, even if there might be some indirect benefit. Such expenses are typically not considered “wholly and exclusively” for the assessee’s own business.
Indirect Benefit and Commercial Expediency: While commercial expediency is a broad concept, it must still demonstrate a direct and primary benefit to the assessee’s own business. When expenses are incurred for a separate legal entity (even if a partnership where the assessee is a partner), the benefit to the assessee’s own business needs to be clearly established.
Subjectivity in Quantum of Indirect Benefits: The court acknowledged that quantifying “indirect benefits” is a subjective matter. This opens the door for reasonable estimation or proportionate allocation by tax authorities.
Reasonable Approach by CIT(A): The Commissioner (Appeals)’s decision to allow 25% of the expenses implies a recognition that while the expenses were primarily for the firm, there might have been some discernible, albeit indirect, benefit flowing to the assessee’s personal business (e.g., brand promotion that indirectly helped the partner) due to his 10% profit share. This partial allowance indicates a balancing act.
No Interference with Reasonable Factual Findings: If the Commissioner (Appeals) has taken a “reasonable approach” based on the facts and the subjective nature of the benefit, higher courts are generally reluctant to interfere with such findings unless they are perverse or arbitrary.
In Favor of Revenue (Partial Disallowance Upheld): The outcome is in favor of the revenue because the complete deduction claimed by the assessee was not allowed, and the partial disallowance made by the CIT(A) (which was a disallowance of 75% of the claimed expense) was upheld. This indicates that while 100% disallowance was not fully justified, the assessee also could not claim 100% deduction.

IN THE ITAT AHMEDABAD BENCH ‘SMC’

Parshwanath Realty (P.) Ltd.

ADDL/JT/DY/ACIT/Income-tax Officer, National e-Assessment Centre, Delhi

DR. BRR KUMAR, Vice President
and Siddhartha Nautiyal, Judicial Member

IT Appeal No. 322 (Ahd.) of 2025
[Assessment year 2018-19]

MAY 28, 2025

Sanjay R. Shah, AR for the Appellant. Ms. Bhavnasingh Gupta, Sr. DR for the Respondent.

ORDER

Siddhartha Nautiyal, Judicial Member.- This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeal), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 17.12.2024 passed for A.Y. 2018-19.

2. The Assessee has taken the following grounds of appeal:-

“1. The Hon’ble CIT(A) erred in law and facts of the case by upholding an addition of Rs.27,46,312/-, being 75% of the exhibition expenditure, without appreciating the fact that the entire exhibition expenditure has been laid out wholly and exclusively for the purpose of the business. It is submitted that the entire exhibition expenditure should have been allowed to the appellant and hence disallowance confirmed by learned CIT(A) at Rs. 27,46,312/- be deleted.

2. The Appellant reserves the right to add, alter, amend and / or withdraw any of the above Grounds of Appeal. “

3. The brief facts of the case are that the assessee is in the business of building construction and civil contracting. For the impugned year under consideration, the AO observed that the assessee had incurred exhibition expenses amounting to Rs. 36,61,750/- which the assessee had incurred on behalf of another firm viz. “Parshwanath Corporation” in which the assessee was a partner. The said firm “Parshwanath Corporation” had hosted an event “Gihed Credia Converse” on 05.11.2017 and such business promotion expenses had been incurred by the assessee in this event. During the course of assessment, the assessee submitted that the expenses were incurred to boost the business of “Parshwanath Group” as a whole. The assessee placed reliance on the principle of business expediency and argued that expenses can be allowable even if direct benefit does not accrue, provided the business interest is ultimately served. The assessee’s contention was this expense was incurred in the view to build the overall image of “Parshwanath Corporation” wherein the assessee is a partner and was entitled to share in profits of this firm. However, the Assessing Officer did not accept the contention of the assessee and held that the exhibition and promotion expenses were not connected to any actual or foreseeable business activity and failed to meet the requirement of being incurred “wholly and exclusively” for business purposes under section 37 of the Income Tax Act (Act). The assessee also failed to substantiate the business motive behind incurring such substantial expenditure or demonstrate any projected revenue outcomes from the same. During assessment proceedings, the assessee submitted that the assessee was a partner in Shree Parshwanath Corporation, and the expenditure was incurred to enhance the visibility of the group’s projects, particularly through an event called ‘Gihed Credai Converse’ held on 5^th November 2017. However, the AO rejected the explanation given by the assessee by observing that Shree Parshwanath Corporation, the partnership firm, is a separate legal entity for tax purposes. Any expenditure incurred on it’s behalf cannot be treated as a business expense of the assessee company. Furthermore, even assuming the assessee indirectly benefited from such expenditure, the benefit would have been shared with other partners, making it impossible to consider the expenses as incurred wholly and exclusively for the assessee’s business. The AO also held that the judicial precedents cited by the assessee were not applicable to the present facts, as they did not address the core issue of whether expenses incurred for a third party can qualify as allowable business expenditure for the assessee. Therefore, the AO disallowed the entire amount of Rs. 36,61,750/- claimed as business promotion expenses and added it back to the total income.

4. In appeal, CIT(Appeals) restricted the disallowance to 75% of the expenditure, with the following observations:

“Findings & Decision :

4.1 After carefully considering the entire written submissions of the assessee and the existing position of Law on the impugned issues, my findings & decision groundwise are as under:

4.2 Findings & Decision wrt Ground Nos 1 to 3 :

These grounds are against the disallowance of business promotion expenses of Rs 36,61,750/-, on an exhibition held, called Credai Converse Exhibition. Brief facts are that the exhibition was actually an event organized by another Realty firm called Shree Parswanath Corporation. It was actually not an event of the assessee company. However, the assessee company bore the entire expenditure and claimed it. Here, it has to be hurriedly added that the assessee company is also a 10% partner in the said firm. That has given it the confidence and authority to organize the entire event for the said firm. The AO, however, did not agree and disallowed it. AO is technically right to an extent, as the expenditure to be allowed u/s 37 should be the business carried on by the assessee itself and not some other business. However, to be fair, the company has a 10%o stake in that other firm. To that extent, a portion of this expenditure may be allowable. However, to be extremely fair to the assessee company, 25% of the entire expenditure can at best be ascribed to it for furthering its own business and investment, we can see that, as apart from being a 10% stakeholder, it also shares the same nature of business and it can be said that in such types of events, every one participating does get benefited, to an extent. That being so, the disallowance is restricted to Rs 27,46,312/-. Balance disallowance is deleted. This ground is partly allowed.

CONCLUSION:

In the result, the appeal is partly allowed.”

5. Before us, the Counsel for the assessee placed reliance on judicial precedents on the principles of business expediency and argued that expenses can be allowable even if direct benefit does not accrue to the assessee, provided the business interest is ultimately served. The Counsel for the assessee also placed reliance on judicial precedents which have held that how and in what manner the expenses have to be incurred should be decided by the businessman i.e. the assessee, in the best interests of the business. In response, the Ld. DR placed reliance on the observations made by Ld. CIT(Appeals) his appellate order.

6. We have heard the rival contentions and perused the material on record. It would be useful to reproduce the relevant extracts of section 37 of the Act, for ready reference:

“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”

7. Now in case of business expenses covered under section 37 of the Act, the natural presumption would be that the expenses have been incurred by the assessee for it’s own business and not business of a third party entity in which the assessee may be having a shareholding or partnership interest or any other commercial interest or commercial or business relationship, from which any indirect benefit may accrue to the assessee. Now, admittedly in this case the expenses were incurred for a third party firm, in which the assessee had a 10 percent share in profits. The claim of the assessee is that since “brand promotion” was involved, therefore substantial benefit accrued to the assessee as well and the entire expenditure was claimed by the assessee in it’s books. In our considered view, such a proposition cannot be accepted since this would disturb the concept of separate entity structure itself, and different entities would start claiming expenditure incurred on third party businesses on the grounds of commercial expediency and accrual of indirect benefit to the business of the assessee. In the case of Union Cold Storage Ltd v. Jones [1924] 8 TC 725 (CA), it was held that in order to ascertain whether the expenditure has been incurred wholly and exclusively for the purpose of the business, one must look to the direct concern and direct purpose, for which money is laid out and not to the remote on indirect results which may possibly motivate or flow from the expenditure. The determination of the quantum of indirect benefits is a subjective matter, which would depend on facts of each case, looking into the nature of expenditure and the foreseeable benefit to the assessee’s business. Notably, in this facts, we are not looking at a case where the assessee has incurred expenses for it’s own business and incidental benefits accrued to a third party. Considering the facts of the assessee’s case, in our considered view, CIT(Appeals) has taken a reasonable approach in allowing 25% of expenses in the hands of the assessee, even though the assessee was only eligible for a 10% share in profits of the third party firm. Accordingly, we find no infirmity in the order of Ld. CIT (Appeals) so as to call for any interference.

8. In the result, appeal of the assessee is dismissed.