2014 (6) TMI 225 - HC - Income Tax

Deletion of disallowance of entertainment expenses Held that - The Tribunal has correctly come to the conclusion that the expenditure claimed by the assessee on tea, coffee, cold drinks, pan, cigarette, biscuits, crockery are not in the nature of entertainment and looking to the turnover of the assessee, the expenditure is a routine expenditure and customary in nature - Expenditure incurred are for the business considerations and cannot be said to be in the nature of entertainment Relying upon CIT v. Patel Brothers and Co. Ltd. 1995 (5) TMI 2 - SUPREME Court - the expenditure for commercial and business expediency, which is normal and not lavish, cannot be said to be falling within the meaning of entertainment expenditure the order of the Tribunal is upheld - Decided against Revenue. Business income or income from speculation business Held that - The assessee has been able to satisfactorily prove that he was able to receive the damages for the breach of the contract and the contract was for supply of goods, it was a business transaction - the damages received was certainly in the nature of business profits and not speculative in nature - there was no question of settling the contract as the cause of action was no longer based on the contract itself but on the breach and settlement of the damages arising from the breach of the transaction does not result from the contract but from the breach - A contract can be settled during the subsistence of the contract and if a breach occurred by the non-performance of the contract or by the actual delivery, a party to the contract settled the amount of damages by paying the difference between the contract price and the market price on the due date of performance that would not amount in law to settling a contract - What has been settled is settling the damages consequent to the breach. Relying upon CIT v. Shantilal P. Ltd. 1983 (7) TMI 1 - SUPREME Court - The Tribunal was of the view that the assessee received damages for non-performance of the contract and that non-performance of the contract was for reasons beyond the control of the assessee, and the Tribunal was justified in coming to the conclusion that the amount is to be treated as business income and not the income by way of speculative transaction Decided against Revenue.

Summary

Issues Involved:

1. Whether the Tribunal was justified in deleting the disallowance of Rs. 4,250 made by the Income-tax Officer on account of entertainment expenditure.
2. Whether the Tribunal was justified in holding that the receipt of Rs. 1,67,189 is to be treated as 'business income' instead of income from speculation business.

Detailed Analysis:

Issue 1: Disallowance of Entertainment Expenditure

The respondent-assessee claimed that Rs. 4,250 was spent on items such as crockery, tea, coffee, dry fruits, snacks, cold drinks, pan, and cigarettes, arguing that these were business expenditures for guests and customers. The Assessing Officer disallowed this amount, categorizing it as entertainment expenditure. The Appellate Assistant Commissioner upheld this view. However, the Tribunal allowed the expenditure, deeming it nominal, reasonable, routine, and customary, thus not in the nature of entertainment.

The Revenue's counsel argued that the Tribunal erred in its judgment, asserting that the expenditure was purely entertainment and disallowable. The High Court, after hearing the counsel and reviewing the case, upheld the Tribunal's decision, stating that such expenditures are routine and customary in business and do not constitute entertainment. The Court referenced the Supreme Court's decision in CIT v. Patel Brothers and Co. Ltd. [1995] 215 ITR 165 (SC), which held that normal, non-lavish expenditures for commercial and business expediency do not fall under entertainment expenditure.

Issue 2: Classification of Receipt as Business Income or Speculative Income

The respondent-assessee received Rs. 1,67,189 as damages for breach of contract by sellers. The assessee claimed this as business income, but the Assessing Officer classified it as speculative income under section 43(5) of the Income-tax Act, which defines speculative transactions as those settled otherwise than by actual delivery. The Appellate Assistant Commissioner agreed with the Assessing Officer.

The Tribunal, however, sided with the assessee, stating that the damages were received due to breach of contract, not speculative transactions. The Tribunal referenced various judgments, including CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 (Cal) and CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 (Bom), which supported the view that damages for breach of contract do not constitute speculative transactions.

The Revenue's counsel argued that section 43(5) clearly defines non-delivery transactions as speculative. However, the Court noted that the payment was for damages due to breach, not for settling the contract, thereby distinguishing it from speculative transactions. The Court cited the Supreme Court's decision in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 (SC), which clarified that damages for breach do not equate to speculative transactions.

The High Court concluded that the Tribunal was correct in treating the amount as business income, not speculative income, and referenced multiple supporting judgments, including CIT v. Rajasthan Wool Agencies [1986] 160 ITR 358 (Raj) and CIT v. Hans Machoo and Co. [2001] 247 ITR 79 (Delhi).

Conclusion:

The High Court dismissed the income-tax reference, affirming the Tribunal's decisions on both issues and ruling in favor of the respondent-assessee. No order was made as to costs.