1998 (8) TMI 67 - HC - Income Tax

Summary

Issues: Interpretation of entertainment expenditure deduction under sections 37(2A) and 35B of the Income-tax Act, 1961.

Analysis:
The High Court addressed a reference under section 256(1) of the Income-tax Act, 1961, for the assessment years 1976-77 and 1977-78. The main issue revolved around the correctness of the Tribunal's decision in confirming the Commissioner of Income-tax (Appeals) order regarding the deduction of entertainment expenses incurred outside India. Initially, the question posed by the Revenue was deemed incorrect due to an error and was reformulated to focus on whether the Tribunal was correct in law in upholding the reduction of entertainment expenditure under section 37(2A) by Rs. 1,05,604, considering it for deduction under section 35B of the Act. The assessee, a subsidiary of General Insurance Corporation of India, had claimed Rs. 8,99,429 as a deduction for entertainment expenses, out of which Rs. 8,69,429 was disallowed, and only Rs. 30,000 was accepted.

The matter was appealed to the Commissioner of Income-tax (Appeals), who upheld the disallowance but allowed a deduction of Rs. 1,05,604 for entertainment expenditure incurred outside India under section 35B. Both parties then appealed to the Income-tax Appellate Tribunal, which upheld the Commissioner's decision, including the modification of the assessment as directed. However, the High Court clarified that entertainment expenditure on the assessee's employees, even if incurred outside India, is not eligible for weighted deduction under section 35B. The Court referenced previous Supreme Court decisions, such as CIT v. Stepwell Industries Ltd. and CIT v. Hero Cycles Pvt. Ltd., to support this conclusion.

Ultimately, the High Court ruled in favor of the Revenue and against the assessee, emphasizing that the benefit of section 35B is not applicable when computing profits and gains of an insurance business. The judgment was specific to the assessment year 1977-78, and the Court directed the records of the cases to be treated as disposed of accordingly.