2003 (1) TMI 44 - HC - Income Tax

Whether, Tribunal was justified in law in holding that part of sales promotion expenses or sales seminar expenses of Rs. 2,03,846 including, inter alia, on account of supply of food and drinks to employees and customers, was business expenditure and an allowable deduction from the assessee s business income and not in the nature of entertainment expenditure disallowable under section 37(2A) of the Income-tax Act? - Whether, Tribunal correctly applied the provisions of section 36(1)(iii) in confirming the disallowance of interest on borrowed capital in the amount of Rs. 3,05,444? - we remand the case before the learned Tribunal to look into both the questions once again and reassess the same in the light of the answer given hereby and make a fresh assessment on both the questions.

Summary

Issues Involved:
1. Whether the sales promotion expenses for food and drinks provided to employees during a seminar are allowable as business expenditure or disallowable as entertainment expenditure under section 37(2A) of the Income-tax Act.
2. Whether the disallowance of interest on borrowed capital under section 36(1)(iii) was correctly applied by the Tribunal.

Issue-wise Detailed Analysis:

1. Sales Promotion Expenses (Food and Drinks):
The first issue revolves around whether the expenditure on food and drinks provided to employees during a sales seminar qualifies as business expenditure or is disallowable as entertainment expenditure under section 37(2A) of the Income-tax Act. The assessee claimed the expenses for the seminar and the food and drinks supplied to the employees, excluding customers or other persons.

Legal Provisions and Interpretations:
- Section 37(2A) specifies that no allowance shall be made for entertainment expenditure incurred by the assessee, except for food and drinks provided to employees in the office, factory, or other place of their work.
- Explanation 2 to section 37(2A) clarifies that entertainment expenditure includes hospitality provided to any person other than employees, but excludes food and drinks provided to employees at their place of work.

Court Analysis:
- The court examined whether the seminar location qualifies as "other place of their work" for employees.
- The court rejected the narrow interpretation that "other place of their work" excludes seminar locations outside the office or factory.
- It was held that if employees are deputed to work at a seminar, that location becomes their place of work for the time being.
- The court referenced CIT v. Green Roadways and other cases to support the view that food and drinks provided to employees at such seminars are business expenses, not entertainment expenses.

Conclusion:
The court concluded that the expenses for food and drinks provided to employees during the seminar are business expenditures and not disallowable under section 37(2A). The first question was answered in the affirmative, favoring the assessee.

2. Disallowance of Interest on Borrowed Capital:
The second issue concerns whether the Tribunal correctly applied section 36(1)(iii) in disallowing interest on borrowed capital amounting to Rs. 3,05,444. The assessee argued that the borrowed funds were used to acquire a fixed asset (a plot of land) for setting up a project related to its existing business.

Legal Provisions and Interpretations:
- Section 36(1)(iii) allows a deduction for interest on borrowed capital used for business purposes.
- The court considered whether the advance payment for acquiring the land, which was later adjusted against supplies and lease agreements, qualifies as a business expense.

Court Analysis:
- The court noted that the negotiation for the lease was ongoing during the previous year, and the advances were made in connection with acquiring the land for business purposes.
- The court emphasized that the timing of the lease execution (after the previous year) does not negate the business purpose of the advance.
- Citing various precedents, the court held that interest on borrowed capital used for acquiring a fixed asset for business purposes is allowable, even if the asset is not utilized in the relevant year.

Conclusion:
The court concluded that if the assessee proves the advance was for acquiring a fixed asset and was part of ongoing negotiations, the interest on borrowed capital should be allowable under section 36(1)(iii). The second question was answered in favor of the assessee, subject to verification of facts.

Conclusion:
The court remanded the case to the Tribunal to reassess both issues based on the principles enunciated in the judgment. The Tribunal is to re-evaluate the material facts and make a fresh assessment in light of the court's answers to the questions.

Order:
The case is remanded to the Tribunal for reassessment. All parties are to act on a xerox signed copy of this dictated order on the usual undertaking.