1987 (3) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of expenses incurred on foreign guests and visitors u/s 37(1) of the Income-tax Act, 1961.
2. Addition of salary and interest paid to partners u/s 40(b) for assessment years 1970-71 and 1971-72.
3. Addition of interest paid to partners u/s 40(b) for assessment year 1972-73.

Summary:

Issue 1: Deductibility of Expenses on Foreign Guests and Visitors
The primary issue was whether expenses incurred on foreign guests and visitors could be allowed as a deduction u/s 37(1) of the Income-tax Act, notwithstanding the provisions of sub-sections (2A) and (2B). The assessee claimed these expenses were not lavish or extravagant and should be deductible. However, the court held that the term "expenditure in the nature of entertainment expenditure" in sections 37(2A) and (2B) is broad and includes all types of hospitality expenses, irrespective of their scale. The court cited several precedents, including CIT v. Veeriah Reddiar and Brij Raman Dass and Sons v. CIT, to support its view. The court disagreed with the narrower interpretation of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. and similar cases. Consequently, the court ruled that the expenses incurred by the assessee on foreign guests and visitors fall within the ambit of "entertainment expenditure" and are not deductible u/s 37(1).

Issue 2: Addition of Salary and Interest Paid to Partners u/s 40(b) for Assessment Years 1970-71 and 1971-72
The second issue concerned the addition of salary and interest paid to partners Ram Ratan Lal Rajgarhia and Manik Lal Rajgarhia while computing the income of the assessee firm for the assessment years 1970-71 and 1971-72. The court noted that an identical question had been previously addressed in Chandmul Rajgarhia v. CIT, where it was decided against the assessee. Therefore, the court upheld the Tribunal's decision to disallow the deduction of salary and interest paid to the partners.

Issue 3: Addition of Interest Paid to Partners u/s 40(b) for Assessment Year 1972-73
The third issue was similar to the second but pertained only to the interest paid to the partners for the assessment year 1972-73. The court again referred to the precedent set in Chandmul Rajgarhia v. CIT and upheld the Tribunal's decision to disallow the interest deduction.

Conclusion:
All three questions referred to the court were answered in favor of the Revenue and against the assessee. The references were disposed of with costs, and a hearing fee of Rs. 250 was imposed on the assessee for each of the three years.