1998 (4) TMI 101 - HC - Income Tax

Business Expenditure, Entertainment Expenditure, Deduction, Capital Expenditure, Revenue Expenditure, Trade Mark

Summary

Issues:
1. Whether the expenditure incurred by the assessee for entertainment should be disallowed under section 37(2B) of the Income-tax Act, 1961?
2. Whether the assessee was entitled to deduction in respect of service fees paid for the trade mark 'Tebilized'?

Issue 1: Expenditure on Entertainment:
The case involved a dispute regarding the disallowance of Rs. 9,675 claimed as expenditure on refreshment by the assessee for the assessment year 1977-78. The Income-tax Officer disallowed the deduction, but the Commissioner of Income-tax (Appeals) allowed it, a decision upheld by the Tribunal. However, the court referred to Explanation 2 of section 37(2A) inserted retrospectively from April 1, 1976, which broadened the definition of "entertainment expenditure." The court emphasized that expenditure on hospitality to any person, excluding employees, falls under entertainment expenditure and should be disallowed. It differentiated between expenses on employees and others, following the decision in Saraspur Mills v. CIT. The court held that the Tribunal erred in not disallowing the entertainment expenditure under section 37(2B) without considering the impact of Explanation 2 and the Supreme Court's decision in CIT v. Patel Brothers. Thus, the court answered Question No. 1 accordingly, directing the Tribunal to reconsider the matter.

Issue 2: Deduction for Trade Mark 'Tebilized':
Regarding the deduction for payments made by the assessee to Mettur Beardsell Limited for using the trade mark 'Tebilized,' the Income-tax Officer initially disallowed the claim. However, the Commissioner of Income-tax (Appeals) and the Tribunal allowed the deduction based on the agreement terms. The court referred to a similar case, CIT v. Ashoka Mills Ltd., where it was held that payments made for using the trade mark were deductible as revenue expenditure. The court emphasized that the agreement did not create any permanent asset or right for the assessee but facilitated better product quality and marketability. Following the precedent, the court upheld the Tribunal's decision, concluding that the assessee was entitled to deduction for using the trade mark 'Tebilized.' Thus, Question No. 2 was answered in favor of the assessee against the Revenue.

In conclusion, the High Court of Gujarat addressed the issues related to entertainment expenditure disallowance and deduction for using the trade mark 'Tebilized.' The judgment clarified the application of relevant provisions and past decisions to determine the tax implications for the assessee.