1999 (12) TMI 47 - HC - Income Tax

Summary

Issues:
- Deduction of expenditure on foreign customers under section 37(2B) of the Income Tax Act, 1961.

Analysis:
1. Facts and Background:
- The assessee, an exporter of brassware goods, claimed a deduction of Rs. 31,864 for expenses on foreign customers.
- The Income Tax Officer disallowed the expenditure as entertainment expenses.
- The Commissioner allowed only Rs. 1,864 as customary expenditure and disallowed Rs. 30,000 under section 37(2B).
- The Tribunal observed that the expenses incurred on foreign customers were for business purposes and not lavish entertainment.

2. Legal Position:
- Section 37(2B) disallowed entertainment expenses incurred in India until April 1977.
- The Apex Court in CIT v. Patel Bros. and Co. Ltd. clarified the definition of "entertainment expenditure" pre-1976.
- The Court emphasized that ordinary meals provided as hospitality are not entertainment expenditure.
- The purpose of section 37(2A) is to disallow lavish business expenditure.

3. Judgment:
- The High Court held that the expenditure on foreign customers' living expenses was necessary hospitality for business purposes.
- The nature of an exporter's business justifies providing hospitality and living accommodation to foreign customers.
- The Tribunal correctly allowed the deduction as the expenses were customary and necessary for the business, not entertainment expenses.
- The Court affirmed that the expenses were for business purposes and not hit by section 37(2B) as entertainment expenses.

In conclusion, the High Court ruled in favor of the assessee, allowing the deduction of expenditure on foreign customers as necessary hospitality for business, not entertainment expenses under section 37(2B) of the Income Tax Act, 1961.