1980 (10) TMI 11 - HC - Income Tax

Summary

Issues:
- Whether entertainment allowance paid to the directors by the assessee-company could be allowed as a deductible revenue expense in the computation of income for the assessment years 1961-62 to 1967-68.

Analysis:
The case involved a private limited company paying substantial sums as "entertainment allowance" to its directors over several years. The central question was whether this allowance could be considered a deductible expense under s. 37(2) of the Income Tax Act, 1961. Section 37(2) allows deduction for all expenditure laid out wholly and exclusively for business purposes, with an exception for entertainment expenditure. Before 1967, a deduction of 1% on profits or Rs. 5,000, whichever was higher, was allowed for entertainment expenditure. The Income Tax Officer (ITO) took the higher figure of Rs. 5,000 as the limit for allowing entertainment expenditure due to the company's lower profits. However, the Tribunal held that the allowances paid to the directors were part of their salary and not entertainment expenditure of the company itself. This interpretation was supported by the provisions of the Act, particularly s. 17, which defines salary to include various payments made to employees.

The Tribunal's decision was bolstered by an Explanation added to the section, which broadened the definition of entertainment expenditure to include allowances paid after February 29, 1968. The department argued that this was a clarificatory amendment, but the court disagreed, stating that entertainment allowance paid to employees did not constitute entertainment expenditure per se. A reference was made to a Bombay High Court decision supporting the view that limits on entertainment expenses under s. 37(2) applied to expenses incurred by the company itself, not to amounts considered part of employees' salaries.

In line with the precedent and legal interpretation, the court ruled in favor of the assessee, determining that the entertainment allowance paid to the directors was part of their salary and not entertainment expenditure of the company. The court awarded costs and counsel's fee to the assessee, concluding the judgment in their favor.