1993 (9) TMI 81 - HC - Income Tax

Business Expenditure, Disallowance, Entertainment Expenditure, Export Market Development Allowance, Weighted Deduction

Issues Involved:
1. Eligibility of premium paid to the Export Credit Guarantee Corporation for weighted deduction under section 35B.
2. Classification of expenses incurred in presenting curios and providing lodging to foreign buyers as entertainment expenditure under section 37(2).

Detailed Analysis:

Issue 1: Eligibility of Premium Paid to Export Credit Guarantee Corporation for Weighted Deduction Under Section 35B

The primary question was whether the premium paid to the Export Credit Guarantee Corporation (ECGC) qualifies for weighted deduction under section 35B of the Income-tax Act. The assessee, a limited company engaged in manufacturing coir mats and mattings, claimed weighted deductions for premiums paid to ECGC during the assessment years 1977-78 and 1978-79.

The Income-tax Officer initially disallowed these claims. However, upon appeal, the Commissioner of Income-tax (Appeals) partially allowed the deduction, treating 50% of the premium as eligible. The Appellate Tribunal, relying on the Special Bench decision in G and Co. v. ITO [1983] 3 ITD 566, ruled that the entire premium was eligible for deduction under section 35B(1)(b)(ii), which pertains to obtaining information regarding markets outside India.

The High Court upheld the Tribunal's decision, emphasizing that the services provided by ECGC, including information about the creditworthiness and reputation of foreign buyers, fall within the scope of section 35B(1)(b)(ii). The court noted that the expenditure was incurred for obtaining crucial market information, which is essential for the assessee's business operations.

Conclusion: The premium paid to ECGC is eligible for weighted deduction under section 35B, as it pertains to obtaining information about foreign markets, including buyer creditworthiness and reputation.

Issue 2: Classification of Expenses Incurred in Presenting Curios and Providing Lodging to Foreign Buyers as Entertainment Expenditure

The second question addressed whether expenses incurred in presenting curios and providing lodging to foreign buyers should be classified as entertainment expenditure under section 37(2). For the assessment year 1978-79, the assessee incurred Rs. 2,693 for curios and Rs. 8,782 for lodging expenses. The Income-tax Officer disallowed these expenses, categorizing them as entertainment expenditure. The Commissioner of Income-tax (Appeals) upheld this view, citing the Full Bench decision in CIT v. Veeriah Reddiar [1977] 106 ITR 610.

The Appellate Tribunal, however, ruled that these expenses were not entertainment expenditure and allowed the deductions. The High Court, upon review, referenced Explanation 2 to section 37(2A), inserted by the Finance Act of 1983 with retrospective effect from April 1, 1976. This explanation broadly defines "entertainment expenditure" to include hospitality of any kind, thereby aligning with the Full Bench's interpretation in Veeriah Reddiar's case.

The High Court concluded that the expenses for presenting curios and providing lodging facilities to foreign buyers indeed constitute entertainment expenditure under section 37(2). The Tribunal's failure to consider the retrospective amendment led to an erroneous conclusion.

Conclusion: The expenses incurred for presenting curios and providing lodging to foreign buyers are classified as entertainment expenditure under section 37(2), following the broad definition provided by Explanation 2 and the Full Bench's interpretation.

Summary:
1. Premium to ECGC: The premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under section 35B, as it pertains to obtaining market information about foreign buyers.
2. Curios and Lodging Expenses: Expenses incurred in presenting curios and providing lodging to foreign buyers are classified as entertainment expenditure under section 37(2), in line with the broad definition of hospitality provided by Explanation 2 and the Full Bench decision in Veeriah Reddiar's case.

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