2006 (8) TMI 151 - HC - Income Tax

Disallowance u/s 37 - festival expenses - expenditure incurred with a view to generate goodwill and to facilitate the conduct of business - whether the expenses incurred on purchase of gifts for distribution on occasion of festival would amount to entertainment or not to be dealt with u/s 37(2) Or the same is in the nature of expenditure made for the purpose of business - Commercial expediency - Interest on the interest-free advance - HELD THAT - As is evident from the facts of the present case, the expenditure of the kind claimed by the assessee as a deduction, has not been incurred in its premises. The expenses have not been incurred on a hospitality provided by the assessee to any guest or any other person. All that has been claimed is that certain gifts have been distributed on festival which are for the business expediency. We cannot lose sight of the fact that certain festivals in this area like Diwali are celebrated with much fanfare and not only in the business circles but even in friend circles, gifts and sweets are distributed. This cannot in any way may be held to be an expenses in the nature of hospitality. We have examined the facts of the present case and keeping in view the nature of business, scale thereof, the amount of expenditure claimed on account of purchase of articles for distribution as gifts on festivals, cannot be held to be excessive or not being for business purposes. Accordingly, the first question raised by the Revenue is decided against the Revenue and in favour of the assessee and the appeal on that count is dismissed. Interest on the interest-free advance - As we have already held in Abhishek Industries' case 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT when the assessee itself was incurring liability to interest on the amount raised as loan, there was no justification for advancing interest-free loans to sister concerns for the purpose of business. Accordingly, following the same, the claim of interest on the amount of interest-free loan advanced to sister concerns for non-business purpose, as calculated in the assessment order, to the extent of ₹ 55,24,250 is disallowed and appeal to that extent is allowed and the order of the Tribunal is set aside. Receipts Of sales tax subsidy - capital or revenue - HELD THAT - We have examined the nature of the receipt in the case of Abhishek Industries, where the same type of sales tax subsidy was involved and held that to be revenue in nature. Following the judgment, we hold that the sales tax subsidy received by the assessee be treated as revenue receipt. Accordingly, question No.(iii) is decided in favour of the Revenue and against the assessee and the appeal of the Revenue to that extent is allowed and the order of the Tribunal is set aside. The appeal is disposed of in the manner indicated above.

Summary

Issues:
1. Disallowance of festival expenses
2. Disallowance of interest on interest-free advances
3. Disallowance of sales tax exemption claimed

Issue 1: Disallowance of Festival Expenses
The appellant, engaged in fertilizer and paper manufacture, claimed festival expenses as business-related. The Assessing Officer disallowed the claim, treating it as entertainment expenditure under section 37(2A) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal, referencing a previous order, ruled in favor of the assessee. The Tribunal emphasized that the festival gifts were not hospitality expenses and were justified for business purposes. The court cited a Calcutta High Court case supporting this view and rejected a contrary opinion from the Rajasthan High Court. The judgment favored the assessee, dismissing the Revenue's appeal on this count.

Issue 2: Disallowance of Interest on Interest-Free Advances
The appellant advanced funds interest-free to sister concerns for non-business purposes. The Assessing Officer disallowed interest on these advances, totaling Rs. 55,24,250. The court, relying on a previous judgment, held that interest-free loans to sister concerns were unjustified when the appellant was incurring interest liability on its own loans. Consequently, the disallowance of interest on interest-free advances was upheld, setting aside the Tribunal's order on this issue.

Issue 3: Disallowance of Sales Tax Exemption Claimed
Initially claimed as a revenue receipt, the appellant later argued that a sales tax subsidy of Rs. 1,28,16,694 was a capital receipt. The Assessing Officer disallowed this claim, but the Tribunal accepted it as a capital receipt. Referencing a previous case, the court held that the sales tax subsidy should be treated as a revenue receipt, contrary to the Tribunal's decision. Therefore, the Revenue's appeal on this issue was allowed, and the Tribunal's order was set aside.

In conclusion, the judgment addressed the issues of disallowance of festival expenses, interest on interest-free advances, and sales tax exemption claimed, providing detailed analysis and legal interpretations for each issue.