9911796707
|
Home
Issues Involved:
1. Whether the messing expenses claimed by the assessee were in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Income-tax Act, 1961. 2. Whether the Tribunal was justified in restoring the disallowance of messing expenses for the assessment years in question. 3. The applicability of Explanation 2 to Section 37(2A) of the Act, inserted with effect from April 1, 1976, to the assessments completed prior to this date. Issue-Wise Detailed Analysis: 1. Nature of Messing Expenses: The primary issue was whether the messing expenses claimed by the assessee for the assessment years 1972-73, 1973-74, and 1974-75 were in the nature of entertainment expenditure as per Section 37(2B) of the Income-tax Act, 1961. The Tribunal had opined that expenses incurred for providing food and soft drinks like coca cola, coffee, tea, etc., to constituents or entertaining them were in the nature of entertainment expenditure. However, the court noted a divergence of judicial opinion among various High Courts on this matter. The court referred to the Gujarat High Court's decision in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, which laid down four tests to determine the nature of entertainment expenditure: 1. Lavish and extravagant provision of food or drinks is entertainment per se. 2. Provision of food or drinks as a bare necessity, ordinary courtesy, or as an express or implied term of the contract does not amount to entertainment. 3. Liberal and friendly provision of food or drinks may amount to entertainment depending on the place, item, and cost. 4. Provision of amusement to clients or customers is always entertainment. The court found these tests to be correct and noted that the Tribunal had not considered decisions that took a contrary view to the one it adopted. The court agreed with the view that ordinary courtesies shown to customers, such as providing food and drinks, do not amount to entertainment expenditure. 2. Justification of Disallowance: The Tribunal had restored the disallowance of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively, claiming these as entertainment expenditure. However, the court held that the messing expenses claimed by the assessee were not in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act. The court directed the Tribunal to reconsider the quantum of allowable messing expenses, taking into account the AAC's finding that such expenses were not entertainment expenditure. 3. Applicability of Explanation 2 to Section 37(2A): The Revenue argued that Explanation 2 to Section 37(2A), inserted with effect from April 1, 1976, should be deemed to have been inserted from April 1, 1970, and thus applicable to the assessment years in question. However, the court held that Explanation 2, which clarifies that "entertainment expenditure" includes hospitality of every kind, was effective from April 1, 1976, and therefore not applicable to assessments completed before this date. The court decided that the questions referred by the Tribunal should be answered based on Section 37(2B) as it existed during the assessment years 1972-73, 1973-74, and 1974-75. Conclusion: - For Reference No. 9 of 1977, the court answered both questions in the negative, in favor of the assessee and against the Revenue. The court held that the messing expenses were not entertainment expenditure, and the Tribunal should determine the allowable quantum based on the AAC's findings. - For Reference No. 42 of 1977, the court similarly answered both questions in the negative, in favor of the assessee and against the Revenue, concluding that the expenses incurred for providing food to outside constituents were not in the nature of entertainment expenditure. The parties were directed to bear their own costs, and the answers were to be returned to the Tribunal in accordance with Section 260(2) of the Act.
|
