1998 (7) TMI 29 - HC - Income Tax

Business Expenditure Accounting Bonus Mercantile System Law Applicable Entertainment Expenditure

Summary

Issues involved:
1. Claiming excess amount for bonus provision as expenditure.
2. Entitlement to expenditure on food and drinks provided to customers.

Analysis:

Issue 1: Claiming excess amount for bonus provision as expenditure
The case involves an assessee following the mercantile system of accounting, making a provision for bonus lower than the actual payment made after the accounting year. The Revenue questioned the allowance of the excess amount as expenditure. The Commissioner held the claim valid, stating that the assessee could deduct the liability to pay bonus based on accrual, even if the payment occurred later. The Tribunal supported this view, emphasizing that the assessee, under the mercantile system, could substitute the actual liability for the estimated one, as long as the information was available before assessment. The Tribunal cited legal precedents, including the Kedarnath Jute case, to support the assessee's right to claim the excess amount as a statutory liability for tax deduction purposes.

Issue 2: Entitlement to expenditure on food and drinks provided to customers
The second question pertains to the expenditure on hospitality incurred by the assessee for the relevant years. The Tribunal found that the expenditure was on hospitality, not entertainment, and thus not subject to the amended provision of section 37(2A) that came into effect later. Consequently, the Tribunal ruled in favor of the assessee on this issue as well. The judgment favored the assessee on both questions, rejecting the Revenue's contentions and awarding costs to the assessee for the legal proceedings.

In conclusion, the judgment upheld the assessee's right to claim the excess amount for bonus provision as expenditure under the mercantile system of accounting and affirmed the entitlement to expenditure on hospitality for the specified years.