1991 (1) TMI 50 - HC - Income Tax

Summary

Issues Involved:
1. Whether expenses on 'Hotel bills', 'Travelling and taxi expenses' and 'Presentation items' for the assessee's guests, suppliers, and customers fall outside the purview of section 37(2B) of the Income-tax Act, 1961.
2. Whether expenditure on eating facilities provided to customers constitutes entertainment expenditure within the meaning of section 37(2B).

Summary:

Issue 1: Expenses on 'Hotel bills', 'Travelling and taxi expenses' and 'Presentation items'
The Tribunal held that expenses amounting to Rs. 49,750 under the heads 'Hotel bills', 'Travelling and taxi expenses' and 'Presentation items' for the assessee's guests, suppliers, and customers fell outside the purview of section 37(2B) of the Income-tax Act, 1961. The Tribunal's decision was based on the view that these expenses were not in the nature of entertainment expenditure as defined by the Act. The High Court, however, disagreed with this interpretation, emphasizing that the phrase "expenditure in the nature of entertainment expenditure" is broad and includes various types of hospitality extended by the assessee. The Court relied on the legislative history and the introduction of Explanation 2 to section 37(2A) by the Finance Act of 1983, which clarified that entertainment expenditure includes hospitality of every kind. Consequently, the High Court answered the question in the negative, favoring the Revenue.

Issue 2: Expenditure on eating facilities for customers
The Tribunal also held that Rs. 25,250 spent on eating facilities for customers did not constitute entertainment expenditure within the meaning of section 37(2B). The Tribunal relied on the Gujarat High Court's decision in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, which suggested that not all hospitality expenses qualify as entertainment expenditure. The High Court, however, found this reasoning flawed, noting that the legislative intent was to curb all forms of hospitality expenses that could be construed as entertainment. The Court emphasized that the term "expenditure in the nature of entertainment expenditure" should be interpreted broadly to include such expenses. Thus, the High Court answered this question in the negative as well, siding with the Revenue.

Conclusion:
The High Court concluded that both the expenses on 'Hotel bills', 'Travelling and taxi expenses' and 'Presentation items', and the expenditure on eating facilities for customers, fall within the purview of "entertainment expenditure" as defined u/s 37(2B) of the Income-tax Act, 1961. The Court's decision was based on a comprehensive analysis of the legislative history and the broad interpretation of the term "entertainment expenditure." The questions were answered in the negative, in favor of the Revenue and against the assessee. No costs were awarded.