1999 (8) TMI 42 - HC - Income Tax

Business Expenditure Entertainment Expenditure Interpretation Of Taxing Statutes Reference Question Of Law Question Of Fact

Summary

Issues Involved:

1. Whether the provision for expenses on foreign tours of the dealer amounting to Rs. 3,41,043 is an allowable business expenditure.
2. Whether such expenditure is in the nature of entertainment expenditure whose allowability is restricted as per sub-section (2A) of section 37 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Allowability of Business Expenditure

The court examined whether the expenses on foreign tours for dealers, amounting to Rs. 3,41,043, constituted allowable business expenditure. The assessee claimed these expenses as sales promotion incentives provided to dealers based on their sales performance. The Deputy Commissioner of Income-tax disallowed the claim, arguing that the incentive scheme was not uniformly applicable to all dealers and that part of the payment was made after the assessment year.

The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld the assessee's claim, finding the expenditure to be an ascertained liability, not contingent, and thus allowable as business expenditure. The Tribunal noted that the liability accrued when dealers achieved pre-determined sales targets, even if payments were made later. The court agreed with this assessment, affirming that the expenditure was wholly and exclusively for business purposes and thus allowable under section 37(1) of the Income-tax Act.

Issue 2: Nature of Expenditure as Entertainment

The second issue was whether the expenditure on foreign tours constituted entertainment expenditure, which is subject to restrictions under section 37(2A) of the Income-tax Act. The Revenue argued that such expenditure should be restricted as entertainment expenditure. The court reviewed relevant legal provisions and case law, including the definitions and interpretations of "entertainment expenditure" and the legislative intent behind section 37(2A).

The court distinguished the nature of the incentive scheme from typical entertainment expenses. It found that the foreign tours were rewards for dealers achieving sales targets, akin to commissions or bonuses, rather than hospitality or entertainment. The court emphasized that the expenditure lacked elements of hospitality or entertainment and was instead a business incentive directly linked to sales performance.

The court referred to the Supreme Court's interpretation in CIT v. Patel Brothers and Co. Ltd., which held that ordinary business necessities, such as providing meals to customers, do not constitute entertainment expenditure. Applying this principle, the court concluded that the foreign tour expenses were not entertainment expenditure and thus not subject to the restrictions of section 37(2A).

Conclusion:

The court answered both questions in favor of the assessee. It affirmed that the expenses on foreign tours were allowable business expenditure and not restricted as entertainment expenditure under section 37(2A). The disallowance by the assessing authority was rightly deleted by the Commissioner of Income-tax (Appeals) and upheld by the Tribunal. The court emphasized that the term "entertainment expenditure" should be construed restrictively and not expansively in the context of section 37(2A).