1983 (2) TMI 22 - HC - Income Tax

Summary

Issues:
1. Interpretation of provisions of section 37(2B) regarding disallowance of sales promotion expenses.
2. Justification of disallowance of the balance of actual payment made in respect of bonus.

Analysis:
Issue 1: Interpretation of provisions of section 37(2B) regarding disallowance of sales promotion expenses
The case involved a limited company engaged in the manufacture and sale of insecticides and paints. The company claimed a deduction of Rs. 50,962 under "Sales Promotion Expenses" for the assessment year 1974-75. The Income Tax Officer (ITO) disallowed the entire amount, which was partially upheld by the Commissioner (Appeals) and further confirmed by the Tribunal. The key contention was whether the disallowed amount of Rs. 14,462, incurred on entertaining customers and business constituents at posh hotels, could be considered as entertainment expenses under section 37(2B) of the Income Tax Act. The court held that the expenses were not routine working refreshments but rather hospitality expenses, thus justifying the disallowance. The court relied on the Tribunal's findings and rejected the applicability of a previous case law cited by the assessee. The answer to the first question was in the affirmative, against the assessee.

Issue 2: Justification of disallowance of the balance of actual payment made in respect of bonus
Regarding the disallowance of Rs. 37,206 representing the balance of actual payment made in respect of bonus, the ITO allowed bonus on an actual payment basis but disallowed the said amount. The Commissioner (Appeals) allowed the claim, observing that the amount was paid during the relevant accounting year and debited to the provision account. However, the Tribunal reversed this decision, stating that the company should have chosen either accrual or actual payment basis consistently. The court disagreed with the Tribunal's reasoning, noting that the amount was actually paid by the assessee in the relevant year, and there was no claim made on accrual basis in previous years. Therefore, the Tribunal was not justified in disallowing the amount, and the answer to the second question was in the negative, in favor of the assessee.

In conclusion, the court answered both questions raised in the reference, affirming the disallowance of sales promotion expenses and overturning the disallowance of the balance of actual payment made in respect of bonus. The parties were directed to bear their own costs in the matter.