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Issues: Allowability of expenditure on tea, refreshments, and lunch during meetings under section 37(1) or section 37(2A) of the Income-tax Act, 1961.
Analysis: The case revolved around the question of whether expenses incurred on serving tea, refreshments, or lunch during meetings of directors of a company could be considered as allowable expenditure under section 37(1) or as entertainment expenditure covered by section 37(2A) of the Income-tax Act, 1961. The Haryana Financial Corporation Ltd. claimed expenses for providing lunch and refreshments to its directors and others during meetings for the assessment year 1974-75. The Income-tax Officer disallowed a portion of the claimed expenses, considering them as entertainment expenses not connected to the business. The Appellate Assistant Commissioner partially allowed the expenses, while the Income-tax Appellate Tribunal upheld the decision. The Tribunal referred the question of whether the expenses should be considered as entertainment expenses to the High Court. The Tribunal raised a point regarding whether directors, even if employees of the Corporation, could be considered as employees when served tea, refreshments, or lunch during meetings. The Tribunal referred the question of the correct treatment of such expenses under section 37(2A) of the Act to the High Court. The Full Bench of the High Court cited precedent and held that expenses incurred on refreshments for customers or directors, even during the course of business, would fall under section 37(2A) and not be fully allowable as a deduction. The High Court emphasized that the expenses should be subject to the limit permissible by section 37(2A) based on the binding Full Bench decision. The High Court rejected the argument that if a director is also an employee, refreshment expenses during business activities would be allowable under section 37(1). The Court referred to a Supreme Court decision to distinguish between the roles of directors and employees during meetings. It was noted that there was no policy to provide eatables to employees, and the expenses on refreshments during board meetings were sought to be excluded. The Court held that the expenses incurred for providing refreshments at director meetings would be covered by section 37(2A), regardless of the dual role of directors as employees. The High Court found that the statutory authorities had not considered the case in line with the correct legal position and ruled in favor of the Revenue, affirming that the expenses were covered by section 37(2A). In conclusion, the High Court ruled in favor of the Revenue, holding that expenses on refreshments during director meetings would be covered by section 37(2A) of the Income-tax Act, even if the directors were also employees of the Corporation. The Court emphasized the importance of adhering to the statutory provisions and set aside the Tribunal's decision, leaving the parties to bear their own costs.
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