1996 (10) TMI 51 - HC - Income Tax

Business Expenditure, Entertainment Expenditure, Expenditure Incurred, Income Tax, Wholly And Exclusively

Summary

Issues:
1. Deduction of interest paid to the Income-tax Department under section 220(2).
2. Classification of expenses incurred for supplying tea, coffee, etc., as entertainment expenditure under section 37(2B) of the Income-tax Act, 1961.

Analysis:
1. The first issue pertains to the deduction of interest paid to the Income-tax Department under section 220(2). The court examined whether the interest on late tax payment qualifies as a business expense. The court cited precedents to establish that interest on personal income tax liability is not part of business expenditure. The court differentiated between interest on liabilities like sales tax or excise duty, which are deductible, and interest on personal income tax, which is not allowable. The court emphasized that interest on capital borrowed for tax payment is not an allowable expenditure unless specifically provided for. Consequently, the court ruled in favor of the Revenue, disallowing the deduction of interest paid for delayed tax payment.

2. The second issue involves determining whether expenses incurred for supplying tea, coffee, etc., constitute entertainment expenditure under section 37(2B) of the Income-tax Act. The court referred to a Supreme Court judgment, which clarified that entertainment expenses for employees' basic needs are deductible, while expenses for non-employee individuals are not considered entertainment expenditure. The court directed the Tribunal to re-examine this issue in light of the Supreme Court's ruling and applicable law. Therefore, the court referred question No. 2 back to the Tribunal for further consideration based on the legal principles outlined in the Supreme Court judgment.

In conclusion, the High Court ruled in favor of the Revenue regarding the deduction of interest paid to the Income-tax Department under section 220(2) and referred the issue of classifying expenses for supplying tea, coffee, etc., as entertainment expenditure back to the Tribunal for reevaluation.